China on road to recovery, but exports fragile
China released official Manufacturing and Non-Manufacturing PMI’s this morning, with Manufacturing flatlining at 51.0, but Non-Manufacturing PMI continued to power ahead, rising to 55.2. The data further reinforces the line of thought that suggests China’s recovery remains on track, but is domestic consumption-led, with export markets still fragile as Covid-19 rampages across the globe. Poor results from China’s mega-banks and oil refiners last week, though, suggest the road will be a bumpy one. Nevertheless, the data should be enough to ensure that Chinese equities jump on the bullish train that left New York on Friday and is winding its way through Asia this morning.
Fridays’ New York trading session finished on a positive note, as US Personal Consumption and Expenditure remained in positive territory and the Michigan Consumer Sentiment for August climbed to 74.1 from 72.5. With Hurricane Laura leaving Texas oil infrastructure relatively intact, the collective sigh of relief in New York was palpable. That left the buy-everything FOMO-gnomes of Wall Street in full control as the week ended, equities rising and the US dollar in retreat.
The short-lived US dollar correction I had predicted on Friday after Fed Chairman Powell’s Jackson Hole address was even shorter than I anticipated. US yields fell on Friday, as the market realised that the Fed’s overshoot inflation target of the future. It was outweighed by the lower for longer interest rates in the here and now. The challenge for the world’s central banks is not setting inflation targets; it’s generating the inflation to get them there. Predictably, the US dollar resumed its descent versus the G-10 and EM universe.
Yen climbs as Abe resigns
Japan’s Prime Minister Shinzo Abe announced his resignation on Friday due to ill health. The Japanese yen rallied aggressively and Japan equities sank. US dollar weakness may well leave USD/JPY’s recent rally a distant memory, but equity markets appear to be unwinding the reactionary sell-off as quickly as it began. Whoever emerges from the new leader bunfight is unlikely to change the trajectory of Abe’s “three arrows” dramatically.
Across the region, Malaysia’s trade surplus hit a record MYR 25 billion in July on Friday. Energy continued to underperform, but electronic and palm oil exports are firing on all cylinders. The data is flattered, though, by a continued fall in imports hinting that domestic demand remains at the first-aid station. With the US dollar lower, though, the data should see Malaysian ringgit appreciation continue this week.
South Korean Industrial and Manufacturing Production disappointed this morning, with Retail Sales also collapsing by 6.0% in July MoM. Like the China data, it hints that international demand on the export front remains fragile. Domestically, retail sales have been affected by South Korea’s continued efforts to stamp out its second wave of Covid-19. That is muting the tone on South Korean equities today and perhaps highlights the uneven and fragility of the world’s post-COVID economic recovery.
As we move into the first day of a new month tomorrow, the data calendar is naturally thick with data for the week. Tomorrow will see the usual dump of PMI data from across the world, which should give hints about the trajectory of the world’s recovery, and the possible effects of Covid-19 part two on many developed nations. I anticipate the data, though, to show a continuation of the tentative, if uneven, recovery. South-East Asia and Europe will outperform in general, although modestly so. If Covid-19 continues its worrying comeback in Europe, though, the going may be much harder for Europe in September. Sitting here in Jakarta, it appears nations around the world are starting to follow Indonesia’s modus operandi, going all-in on a vaccine by the end of the year, and keeping a lid on Covid-19 until that happens. Let’s all hope the dice roll comes up double six.
The week’s data highlight, though in a noisy week, will be the US Non-Farm Payrolls for August. Jobs added is expected to retreat to 1.5 million, still positive, but at a slowing rate. US data has yet to reflect, to any significant degree, the effects of Covid-19 across the sunbelt states. Unemployment, though, will remain at around 10%, and with no fiscal stimulus from Washington DC in sight, the US recovery could be running on empty by the end of this month. Short of a blowout number, it should still be positive for equities and negative for the US dollar. A low print equals lower rates for longer, equals sell the dollar and buy equities. A higher print equals a US recovery, diversify into other currencies as the US lifts economies globally. Oh, and buy equities. Such is the world we live in, behavioural economics nirvana.
