After a few volatile weeks, equity markets stabilised this week on the back of Chinese authorities cutting stamp duties on stock trades in half. The VIX volatility index was back at the lowest levels since early August. US job openings took a sharp decline in July and the jobs plentiful index declined indicating more people have a hard time finding a job. Consumer sentiment also took a turn for the worse, which all weighed on the dollar and took US yields lower.
European yields moved lower as well, fuelled by some small promising signs that core inflation is moving lower in the euro area. ECB pricing went a couple of basis points lower as this could be the first signs that the decline in activity we have seen so far in Q3 is feeding through to companies’ price setting. Headline inflation was unchanged at 5.3%, though, which remains a big headwind to consumers.
July German retail sales confirmed service sector weakness with a 0.8% MoM decline, much worse than expected. Germans are being compensated for lost purchasing power, though, and wages increased at a record annual pace of 6.6% in Q2, giving a much-needed boost to consumers’ spending power but also fuelling inflation concerns. The unemployment rate in the euro area did not budge in July and remained at 6.4%, a record low. Strong data for the labour market in Q3 is not much of a surprise, though. Labour markets should be the last to react to the slowdown in activity.
In Japan, the labour market surprisingly loosened somewhat in July with an increase in the unemployment rate to 2.7% from 2.5% in June. This looks like a bump on the road and does not change the fact that the Japanese labour market remains tight. Even so, it will probably only trigger an even more cautious Bank of Japan (BoJ) at the policy meeting later this month.
Elsewhere in Asia, Chinese data is watched closely by financial markets these days considering the recent weakness in the economy. Overall, both private and national PMIs were better than expected indicating the economy has not fallen completely out of the bed. Authorities came with a range of stimulating measures to the economy this week with a reduction of the required down payment for home-buyers as particularly important given the increasing risk stemming from the housing market.
Next week brings more important data from the euro area ahead of the ECB meeting with compensation per employee for Q2. We already saw negotiated wage growth spike, but the data next week is ECB’s preferred measure of labour costs.
In China the most important event will be whether the developer Country Garden defaults. This might cause renewed stress in Chinese markets. We also get trade balance figures where weak exports have caught attention lately. In Japan, we will look out for July wage growth, which is important information ahead of the next BoJ meeting. In the US, we will look out for ISM services. Leading data indicates they will be on the weak side.
In Danske Bank we publish our Nordic Outlook on Tuesday with an update of our views on the Nordics and the global economy.