The highlight of this week is the start of the Jackson Hole annual symposium, which late last Friday went from a limited in-person programme to a fully virtual event, due to the “recently elevated Covid-19 health risk in Teton County, Wyoming.” The main focus is likely to be on whether we get any detail on discussions on the tapering of asset purchases as we look towards the back half of 2021.
Last week European stocks saw their biggest weekly decline since February, despite a Friday rebound that was prompted by comments from the Dallas Federal Reserve president, Robert Kaplan, who suggested any Delta setbacks would mean he might adjust his views on a taper. A large part of the reason behind last week’s change in sentiment was increasing concerns over a slowing global economy, as well as increasing angst over rising infection rates and vaccine durability. We also had to contend with China looking to pour sand in the wheels of its own recovery story, with a crackdown on various sectors including tech and luxury.
While it’s been accepted wisdom that discussions on a taper are likely to start soon, with a slowdown in purchases starting sometime in Q4, it's hard to imagine that the Fed would start down that road if the economic outlook deteriorated. Furthermore, talking about a taper is one thing, it certainly doesn’t mean that we’re about to see the start of one, as Kaplan’s Friday comments illustrate. With US treasury yields also subdued, bond markets certainly aren’t expecting an imminent move in that regard, with today’s European open expected to be a positive one after Friday’s decent US close, and a positive start to the week in Asia this morning.
It’s quite likely that we’ve seen peak PMI for both France and Germany despite last month’s strong readings from both countries. Germany rather surprisingly saw strong readings in both services and manufacturing, despite the disruptions caused by the flooding, as well as the slowdown in the Chinese economy. Both of these are likely to impact economic output and business confidence in August. In July, German manufacturing rose to 65.9, and services jumped sharply to 61.8. It would be a surprise if either of these came in anywhere close this month given the various shutdowns of production announced by businesses because of supply chain disruptions and parts shortages. Forecasts are for a slowdown to 65 and 61 respectively, both of which come across as a tad optimistic.
Likewise, in France there has been increasing evidence that business activity has been declining with both manufacturing and services both slipping back in July from their June levels, and set to do so again in August to 57.2 and 56.3 respectively.
In the UK, the 'pingdemic' has already caused a slowdown in services in July, from the May peaks of 62.9, falling back to 59.6 in July, largely because of staff shortages, and various business disruptions. It’s also important to remember that while services have seen a decent rebound in the last few months, certain sectors are still struggling as a result of consumer behaviour, which is much more cautious than it would have been pre-pandemic, which suggests we could see another softer reading of 59.1. One other trend to keep a close eye on will be higher cost prices being reported by businesses, as they struggle to source the necessary materials for their various goods and services.
As far as manufacturing is concerned there’s been an increasing disconnect between what the PMI numbers are telling us and what is happening in the ONS numbers when it comes to manufacturing and industrial production, as well as construction output. The PMI numbers do appear to be starting to reflect some of that weakness, however they are still coming in at fairly decent levels, well above 50. Manufacturing activity did slow in July coming in at 60.4, down from 63.9 in June, and is expected to weaken further to 59.5. We can also expect to see similar slowdowns in the latest US flash PMIs for manufacturing and services.
Bitcoin prices appear to be on the rise again, moving above $50,000 for the first time since May, pulling other cryptocurrencies along too, with ethereum also trading at a three-month high.
EUR/USD – found some support at 1.1660 last week but needs to overcome the 1.1720 level to reduce the risk of a move towards 1.1600, and last November’s lows. A break above the1.1720 level retargets the 1.1830 area.
GBP/USD – while below the 1.3670 area the July lows are the next key support at 1.3570. We need to move beyond 1.3670 to retarget the 1.3725 level, which was 61.8% retrace of the 1.3570/1.3985 up move.
EUR/GBP – the pound has continued to lose ground, edging above the 0.8580 area, with the potential for a move back towards the July peaks above 0.8640. We now have support back at the 0.8530 area as well as the 0.8500 level.
USD/JPY – having failed at the 110.80 level last week we found some support at the 109.10 area, which has seen us move back to the 110.20 area. While below 110.20, risk is for a move back to the recent lows at 109.00.