Weekly View - Jackson Hole Time

Fixed-asset investment, retail sales and credit data indicate that the targeted covid lockdowns and mortgage payment strikes continue to negatively affect the Chinese economy. Chinese bank property loans have declined for the first time in a decade. Of some concern is the labour market, with youth employment rising for the 10th consecutive month to 19.9% in July, despite overall unemployment falling to 5.4%. We hold our 3.2% Chinese growth forecast for 2022 unchanged. In Chinese equity markets, tech took a hit on Tencent’s plans to divest from food delivery company, Meituan. Elsewhere in emerging markets, Turkey’s central bank cut interest rates, going against the global central bank tide, even as it contends with ballooning inflation.

In the US, the latest Federal Reserve meeting minutes revealed that members expected the pace of policy tightening to slow at some point, even though rates will need to hold at levels that constrain the economy for some time. This came as a surprise given recent Fed officials’ speeches have delivered hawkish messaging. This week, we will be watching for Chairman Jerome Powell’s speech at the Fed’s annual Jackson Hole summit. For now, the US economy shows little sign of recession. The US consumer remains strong, as shown by higher-than-expected July retail sales. Large US retailers Target and Walmart reported conflicting results, with the former missing earnings expectations and the latter delivering strong sales. US long-term yields rose again on the week, very nearly touching 3% once more. This week, purchasing manager indexes, durable goods and personal income and spending will give a clearer indication of the US economic growth outlook.  

Europe’s economy is in a different boat, given that the Rhine, Europe’s key waterway for moving goods, has closed in some places due to low water levels. Corporations are now asking themselves whether it’s worth continuing to produce on the European continent, given both high energy and transport costs. European growth is back to the centre of market worries, with Italy in the spotlight, given upcoming elections. Italian sovereign yields rose considerably last week. Meanwhile, the euro area’s deteriorating economic outlook led to slightly weaker equity markets, especially as price pressures remain. German producer prices jumped by an annual 37% in July, the highest rate ever since 1949. This will force the ECB to accelerate interest rate hikes, driving European yields to spike last week. We are underweight peripheral European bonds. In the UK, inflation reached its highest in 40 years. This week we will be looking at German business sentiment (Ifo Institute).