ISM manufacturing PMI for the month of August set new highs coming in at 56 vs 54.8 as expected. The reading is the highest in almost two years and it was led by huge jump in new orders (67.6, which is the highest since 2004) and production 63.3. New export orders returned to expansion territory, however employment sub index puts a dent into the report as it rose only to 46.4 from 44.3 the previous month. ISM non-manufacturing PMI came in at 56.9 vs 57 as expected, a decline from 58.1 in July but still at the very healthy level. Business activity and new orders declined from previous month, although they are still very high, 62.4 and 56.8 respectively. The biggest concern with the report is the employment sub index which is below 50 level for the sixth consecutive month.
NFP headline number for August came in at 1371k vs 1350k as expected. The main reading from the report is the unemployment rate which fell to 8.4% from 10.2% the previous month. This is a staggering drop in the unemployment rate considering that participation rate rose to 61.7% from 61.4% the previous month. The underemployment rate, referring to a situation in which individuals are forced to work in low paying or low skill jobs, also continued to decline coming in at 14.2%. The drop in the unemployment rate may persuade Republicans that new stimulus is not needed which can further undermine already fragile consumer. Number of private jobs was 1027k meaning that temporary government jobs made a significant contribution to the headline number. Out of those government jobs 238k are scheduled to be laid off at the end of the September.
Initial jobless claims for the week ending August 29 dropped below 1 million mark coming in at 881k. Continuing claims for the week ending August 22 fell to 13 254k from 14 492k previously. There were 2 million more workers collecting unemployment benefits in August than in July. This suggests that fewer businesses are reopening than expected and more importantly those that are reopening are doing so at reduced capacity using smaller labour forces than before the pandemic.
This week we will have inflation data.
Important news for USD:
Final manufacturing PMI for August came in at 51.7 as preliminary reported but there were revisions between countries. German dropped to 52.2 while French improved to 49.8, so close to the 50 level. Markit notes that readings so far point to sharp rebound in production in Q3. Final services reading improved to 50.5 from 50.1 as preliminary reported on upward revision to German services which pushed composite to 51.9 from 51.6 preliminary. Markit notes that recovery started to wane mid-Q3 and it is attributed to resurgence in Covid-19 cases.
Preliminary inflation data for August see the headline number show deflation coming in at -0.2% y/y vs 0.2% y/y as expected. Core CPI came in at 0.4% y/y vs 0.8% y/y as expected. Both readings heavily missed expectations and although the drop can be attributed to pandemic conditions if the drop persists for some time it will cause concern at the ECB. The fall in inflation can also be attributed to the late start of the sales season.
EURUSD briefly crossed the 1.20 level after it was pulled down on comments from ECB chief economist Philip Lane. He stated that while ECB does not target the exchange rate, the euro-dollar exchange rate matters which was interpreted as ECB expressing concern regarding EUR strength. EUR strength led to deflation as reported in preliminary August inflation report.
This week we will have final Q2 GDP reading as well as ECB meeting. No change in the rate is expected but further comments on EUR strength will be monitored. Additionally, investors will look for any change in inflation targets, that is, will ECB allow inflation to go over 2% level as Fed announced.
Important news for EUR:
Final manufacturing PMI for August was slightly revised to 55.2 from 55.3 as preliminary reported but still a very healthy reading, best level since February 2018, with output rising at fastest pace in six years led by an upturn in domestic demand. Services had a bigger downgrade. They came in at 58.8 vs 60.1 as preliminary reported which pushed composite to 59.3 vs 60.3 as preliminary reported. Markit notes that economy is enjoying “mini boom” due to the reopening and that numbers are skewed due to furlough scheme that will be in place until October and “Eat out to help out” scheme.
This week we will have July GDP figures.
Important news for GBP:
RBA has left the cash rate unchanged at 0.25% as was widely expected. They will maintain their 0.25% target for 3-year bond yields until progress is made in employment and inflation. They will increase the size of term funding facility and make the facility available for longer. Board members have acknowledged Aussie strength in the recent months but it was attributed to the falling USD and it does not warrant any intervention.
Q2 GDP data posted historically bad numbers coming in at -7% q/q and -6.3% y/y. Both readings came worse than expected and after negative readings from Q1 it affirms that Australia is in technical recession, measured as two consecutive quarters of negative GDP, for the first time in almost 30 years. Household consumption dropped -12.1% q/q. Government consumption was the only positive with 2.9% q/q. Retail sales in July came in at 3.2% m/m. Another positive reading, but trouble will be seen in August reading due to the increased harshness of lockdown measures in Melbourne.
Official PMI data from China for the month of August show small decline in manufacturing (51 vs 51.1 the previous month) and nice increase in the non-manufacturing (55.2 vs 54.2 the previous month) which led to composite rising to 54.5 from 54.1 the previous month. Caixin manufacturing PMI came in at 53.1 thus marking fourth consecutive month in expansion territory. The reading is highest since 2011, new export orders recorded their first growth this year as overseas demand increased while employment moved closest to 50 level this year. Caixin services slipped to 54 but composite improved on the back of manufacturing reading to 55.1.
This week we will have trade balance and inflation data from China.
Important news for AUD:
ANZ business confidence, closely followed metric by RBNZ, came in at -41.8 thus returning to the value from May. ANZ stated that survey is recessionary and that the retail sector, which drove the rebound in recent months, is losing rapidly losing steam. GDT price index posted a fourth consecutive decline coming in at -1% indicating that we can expect weaker contribution from net exports to Q3 GDP.
The employment change in August came in at 245.8k. The report is full of great signs starting with the unemployment rate dropping to 10.2% from 10.9% the previous month while participation rate rose to 64.6% from 64.3% the previous month. Full-time employment came in at 205.8k while part-time employment came in at 40k. The fact that great majority of employment gains are in full-time employment is a great sign for the economy. Employment is now within 1.1 million from the pre-pandemic levels.
This week we will have BOC interest rate decision which may show some changes in the existing stimulus program since data continues to show positive signs.
Important news for CAD:
Preliminary industrial production data for July came in at 8% m/m and -16.1% y/y. Both readings came better than expected and better than previous month prompting government to lift their assessment. Retail sales went into the other direction coming in at -3.3% m/m vs -2.5% m/m as expected and -2.8% y/y vs -1.7% y/y as expected. Q2 Capex data completely disappointed coming in at -11.3% y/y vs –4% y/y as expected. Company profits plunged astonishing -46.6% y/y. The big drop in global demand caused by virus outbreak hurt Japanese exporters much worse than it was expected.
Yoshihide Suga will stand for LDP leadership election and deputy prime minister Aso, which was at first seen as the main contender, stated he will support him. The winner of LDP leadership race will be the next prime minister since the party has the majority in the House of Representatives. The leadership vote will be held on September 14.
This week we will have final Q2 GDP reading, spending and earnings data as well as core machinery orders data.
Important news for JPY:
Retail sales for July showed a strong rebound coming in at 4.1% y/y. Positive revision to previous month’s reading from 1.1% y/y to 3.3% y/y made the reading shine even brighter. SNB total sight deposits for the week ending August 28 came in at CHF701.6bn vs CHF700bn the previous week. SNB’s intervention aim was most likely to lift USDCHF from the 0.90 level. CPI for August came in line with expectations, headline at -0.9% y/y and core at -0.4% y/y. Headline number is in deflation since February and core since March.
This week we will have employment data.
Important news for CHF:
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