This week growth fears hit financial markets with stock market volatility picking up, bond yields and commodity prices falling and the USD strengthening. This is broadly in line with the playbook for financial markets when the business cycle peaks, that we outlined in Strategy: Peak performance in assets and the end of reflation, 2 July 2021. For financial markets momentum in activity and inflation is what matters the most rather than the level. And momentum is coming down for both economic activity as well as inflation.
On the economic front worsening Chinese data and a sharp drop in US consumer confidence for August have fuelled concerns that global growth will disappoint, and the spread of the Covid delta variant will create new headwinds for the global economy going into the autumn and winter, when temperatures drop. Chinese industrial production and retail sales both disappointed again in July adding to the downside risks for the world’s second largest economy, see China Macro Monitor – Intensifying slowdown puts drag on global cycle, 18 August 2021. In the US some areas are already seeing severe pressure on hospitals from the latest Covid-19 wave. US retail sales this week also dropped 1% m/m although the level is still very high.
When it comes to inflation a decline in commodity prices lately is set to push down headline inflation in US and the euro area soon. This week copper prices dropped close to 10% and oil prices declined to the lowest level since in three months. However, freight rates have shot higher again lately after a the third-largest port in the world, the Ningbo-Zhoushan port in China, was partially closed after a person tested positive for Covid-19. For more on inflation trends see Global Inflation Watch – Commodity pressure eases further but freight rates leap again, 19 August 2021.
The minutes from the July FOMC meeting showed that most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year”. This is in line with our expectations that the Fed will announce a plan for tapering in September and begin gradual tapering in December. The Fed has met its’ inflation goal and expects to have achieved “substantial progress” towards its’ employment goal soon. A tapering announcement could challenge risk sentiment further if global economic indicators soften more than expected during the fall. This is a risk that needs monitoring in coming months.
Over the coming week we get more information on the state of the global economy with US and euro flash PMI’s as well as the German ifo business survey. We look for a small decline in all the surveys. The Fed Jackson Hole conference will also be watched closely for any signals regarding tapering of asset purchases. The US also releases durable goods orders, the best investment indicator for the country. Orders have been on a steep rising path for over a year now but with tentative signs of losing momentum lately. US personal spending will add more information on goods vs service consumption. The question is if service consumption is dampened by the recent rise in infections as have been indicated in some high-frequency data. Goods consumption will likely decline in line with what we saw in the retail sales number this week. US core PCE inflation will also be in focus to see if the monthly momentum comes down as was the case in the CPI release.
