Strategy & economics
Summer wrap: the macro and markets news you might have missed
With no sign of a summer lull this year, here’s a brief summary of the key events from July and August that matter to investors.
July and August have been busy months for investors. Escalating global trade tensions remained in the headlines, US GDP growth accelerated to 4.2%, while sharp falls in the Turkish lira raised concerns over broader market contagion.
Data released over the summer showed that the US economy accelerated to 4.2% on an annualised quarterly basis in Q2, its fastest pace in nearly four years. Strong household spending was the key driver of the pick-up in growth, supported by the US administration’s drive to lower taxes and increase spending. A surge in the volume of exports from the US ahead of the scheduled implementation of new tariffs also helped.
US GDP growth data for the first quarter of 2018 was also revised up marginally to 2.2%. However, there were signs of a weaker start to Q3, particularly from a weaker-than-expected July jobs report (the US non-farm payrolls).
Macroeconomic indicators remained broadly supportive of the policy path that the Federal Reserve (Fed) is taking. The Fed is expected to increase interest rates by 25 basis points (ie 0.25%) in September and December this year. Speaking at the annual Jackson Hole Symposium in August, Fed chair Jerome Powell struck a relatively accommodative tone. He indicated that the current gradual path to increasing interest rates addresses the risks of curtailing the economic cycle unnecessarily by raising rates too quickly, and the opposite risk of the economy overheating. Overheating can occur after a prolonged period of growth, can lead to high inflation and be a precursor to a recession.
Against this backdrop, the S&P 500 stock market index continued to perform well, also supported by a slew of strong corporate earnings results. The index’s current bull run – broadly defined as a rise over time without falling more than 20% from its peak during the period – became the longest in history on 21 August.
The US imposed $50 billion of tariffs on imports of Chinese goods, in two stages, with Beijing responding with tariffs of equal measure. President Trump also threatened tariffs on all imports from China. Meanwhile, the US administration announced a subsidy programme to compensate farmers for lost export revenue as a result of tariffs. Despite further US-China trade talks in August, no resolution was reached.
An initial second quarter eurozone GDP growth print of 0.3% quarter-on-quarter (QoQ) was later upgraded to 0.4% QoQ, in line with the pace seen in the first three months of the year. This was supported by a rebound in economic activity in Germany as well as the Netherlands and Portugal. By contrast, economic growth in Italy was weaker relative to the first quarter.
The European Central Bank had previously confirmed plans to wind-down its quantitative easing (QE) programme by the end of December. It continued to provide guidance for interest rates to remain on hold until the third quarter of 2019, unless there is a major change in economic conditions. The key risks it is monitoring are the worsening external environment, and the potential impact on the eurozone economy, as well as the Italian political situation. In Italy, the new government intends to stimulate the economy via spending and tax cuts, but there is concern that its bolder spending plans could result in a conflict with the European Union (EU).
From a trade perspective, an apparent agreement between EU President Jean-Claude Juncker and US President Donald Trump saw both sides agree to work towards zero-tariffs on non-auto industrial goods, while new auto tariffs were put on hold.
The UK economy recovered from the slowdown seen in the first quarter, GDP growth in the second quarter rose to 0.4% quarter-on-quarter. The pick-up came from a combination of household spending and investment. However, the headline improvement masked concerns over weak domestic demand and poor external performance.
The Bank of England increased interest rates by 25 basis points to 0.75%, its highest level since March 2009. It restated its intention for slow and limited interest rate rises, with three rate hikes in three years broadly expected.
In July the government published its long-awaited white paper outlining its approach to Brexit. While “softer” than expected, the white paper is still harder than what most consider as a “soft Brexit”, and is harder than European Economic Area (EEA) membership.
In Japan, lower than expected inflation led the central bank to make only small tweaks to its policy, contrary to previous speculation that it could effectively tighten policy (ie remove some of its stimulus measures). The Bank of Japan stated that the current low rate policy would be maintained for “an extended period of time”.
Japanese second quarter GDP growth was estimated to be 0.5% (QoQ), rebounding from a contraction of 0.2% in Q1. The rebound was underpinned by strong domestic demand, specifically consumption and investment.
In politics, the ruling Liberal Democratic Party confirmed that it would hold a leadership election on 20 September. It is expected to be contested by the incumbent Prime Minister Shinzo Abe and former defence minister Shigeru Ishiba.
It was an eventful summer in emerging markets. China’s economy saw a marginal year-on-year slowdown to 6.7% in the second quarter, although more recent data produced pointed to further weakness in Q3.
Amid ongoing external concerns, stemming from the escalating trade dispute with the US, the Chinese government announced a range of targeted economic support measures. These included increased fiscal spending and credit easing (ie increasing banks’ ability to lend). Weakness in China’s currency, the yuan, led to speculation that the authorities were weakening it in response to tariffs. The central bank subsequently took measures to stabilise the currency in August.
Although it has since eased somewhat, a strengthening in the US dollar also served to shine a light on those emerging market economies that are most susceptible to global liquidity tightening. Turkey saw a sharp sell off in its currency amid rising geopolitical tensions with the US and concern over domestic policy. This contributed to an increase in volatility in other emerging market assets, in part due to concern over wider contagion. The announcement of limited new US sanctions on Russia, implemented on 27 August, also contributed to uncertainty. The agreement of a bilateral trade deal between Mexico and the US in late August was positive, however.
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