After global markets were rocked last week as both the UK and US yield curves inverted, the beginning of the week saw stock markets start their recovery. This was because it had emerged that major nations would look at ways to prop up their respective ailing economies with fresh stimulus packages.
Chinese central bank
Government bonds and other ‘safe havens’ such as the Japanese Yen saw their demand falter as the Chinese central bank unveiled interest rate reforms expected to lower corporate borrowing costs on Monday. The new policy will reduce borrowing costs with the aim of supporting businesses and in turn stimulating a slowing Chinese economy. The news was taken very well with the Shanghai stock exchange rising 2.1% on the day – the best daily performance since 1 July.
The good news also spread to Europe as the region’s largest economy, Germany, saw the prospect of its ruling coalition ditching their balanced budget rule to take on new debt. Over the weekend, it was announced that Berlin would make up to €50bn available to be spent on kick starting the German economy. Finance Minister Olaf Scholz commented that Germany has the fiscal strength to counter a future economic crisis “with full force”.
More good news was to come for Europe on Thursday as both French and German Services and Manufacturing PMI came in ahead of consensus forecasts. Although the data showed that the all-important German Manufacturing was still in contraction, it was not as bad as many economists had predicted.
The news flow continued out of Germany as later in the day Chancellor Angela Merkel commented that a no deal Brexit could be avoided. Sterling soared against the Euro and the US dollar on the back of the optimistic tone set after her meeting with new UK PM, Boris Johnson.
The ongoing bitter trade war between the US and China escalated on Friday, as Beijing announced tit-for-tat tariffs of between 5% and 10% on $75bn of US goods from 1 September. However, just like the Trump administration who had gone with a September deadline, and then delayed half those products till December, the Chinese followed suit with a separate list of products that will have tariffs applicable from the end of the year.
Whilst most of Britain starts the week off by celebrating the Summer Bank Holiday, across the pond markets will be open as normal, with a relatively busy week on the economic data front.
US Durable Goods orders
Monday sees the release of data on US Durable Goods orders. With the ongoing trade war between the world’s two largest economies having been going for over a year now, the report will be closely watched because it details changes in the total value of new purchase orders placed with manufacturers for durable goods (lasting more than three years). Rising purchase orders usually signal that not only is there a greater demand in the economy but also that manufacturers will increase activity as they work to fill their growing order book.
On domestic shores, with Brexit stuck in a limbo and two months till the divorce deadline which has led to a slowdown in the economy, Nationwide’s House Price Index will be closely scrutinised. With a house usually being the largest component of a household’s wealth, rising house prices boost consumer confidence, encourage consumer spending and can subsequently lead to higher economic growth.
The week draws to a close with the focus moving across the continent to the Eurozone where CPI figures are released. The data will take prominence as the European Central Bank (ECB) is due to meet on the 12 September, when the market expects the central bank to announce some sort of fresh stimulus package to boost the ailing Eurozone economy. For nearly a year, inflation in the euro area has been on a downtrend, and recently decreased to 1% in July, the lowest since November 2016, well below the ECB’s 2% target.