Hot streak
It’s been a red hot week. Temperatures soared around the globe, sparking forest fires in the Arctic Circle and Brits to long for winter.
Red hot US GDP growth rocketed to an annualised 4.1% in the second quarter (it’s running at 2.8% for the past 12 months).
Households splurged more than expected, while business investment shot up 7.3% on a year ago. The tax cut has encouraged a flurry of spending and investment, just as US President Donald Trump predicted. It has also lit a fire under inflation. US CPI growth has been rising steadily this year and currently sits at 2.9%.
All of this is perfectly timed for the mid-term elections in November. Americans will go to the polls with the economy flying, nominally rising wages and the president promising even more. More than half of voters believe Mr Trump is doing well with the economy, which could lead them to give Republicans an even stronger hold over the two chambers of Congress.
We think the US is booming because, like everything in economics, confidence is the key. If people are happy and optimistic, they’ll spend and invest, creating spill-over and multiplier effects that ripple outward, reinforcing the optimism. That’s why we aren’t worried about the potential for recession this year. However, the situation isn’t sustainable in the longer term. The US federal deficit is ballooning into a monster and it would take fantasyland GDP growth to get it under control without a sharp tax hike and spending cuts – neither of which appear likely in the next couple of years.
But that’s ages down the road. Today things are going very well indeed. The quarterly earnings season is rolling along nicely, with just more than half of S&P 500 companies having reported. It can only help that a transatlantic trade war has been dragged back from the brink after Mr Trump came to loose terms with his EU counterpart, Jean-Claude Juncker. There will be no tariffs on EU cars and the currency bloc has promised to buy more soybeans and natural gas from the US.
Almost 85% of those businesses reporting so far have beaten earnings expectations, according to FactSet, which would be a record high if it stays that way till the whole index has released figures. The average earnings beat of 2.5% is below the five-year average, but about three-quarters of reported businesses (and all industry sectors) have sales growth above the long-term average (9.3% vs 9%). Year-on-year earnings growth is flying at 21.3%.
Source: FE Analytics, data sterling total return to 27 July
Taking a hike
The Bank of England (BoE) is expected to raise interest rates by 25 basis points to 0.75% on Thursday. Bloomberg calculates a 90% probability despite inflation remaining flat at 2.4% last week. It was the third consecutive month when it had been forecast to rise but didn’t (it was expected to rise to 2.6%). BoE Governor Mark Carney has history with touting an increase only to abandon it at the last minute. We’ll believe this move when we see it.
Tomorrow is the GfK UK Consumer Confidence survey, which is expected to be flat at -9 (this is actually a relatively high reading – a nation of pessimists and all that). UK PMIs will be released later in the week.
It was an underwhelming week for Brexit news. Following the EU’s flat rejection of the UK government’s financial services plan Deutsche Bank announced it was moving half of its interest rate clearing operations from London to Frankfurt. Jobs won’t be lost, but the direction of travel and loss of business is damaging for the City. This week starts with a bit of a boon: China has said it’s open to talking to the UK about a trade deal following Brexit. Of course, this would be dependent on Britain dropping the pesky insistence of democratic development for Hong Kong. The carefully worded handover agreement, signed when Tony Blair passed the island nation back to Chinese control in 1997, doesn’t explicitly mention democracy but the UK has continued to lobby for it since. Expect that to stop post-Brexit.
The Bank of Japan (BoJ) and US Federal Reserve (Fed) are also meeting this week. Today and tomorrow the BoJ will discuss whether to tweak its quantitative easing programme. Bond markets were riled early last week by the potential of a cut in the astronomical amount of its monthly bond purchases. No change in rates is expected from the Fed.
Newly installed Fed Chair Jay Powell has been slightly more hawkish than his predecessor, which has raised the ire of Mr Trump. The President lambasted the Fed’s interest tightening in a TV interview. He qualified the comment by saying he is letting Mr Powell do what he thinks is best and that he thinks he’s a “good man”. To be clear, Mr Powell tightening rates at a time of fiscal profligacy and almost 3% inflation is textbook economics. We don’t think it will cause a financial meltdown anytime soon.
Bonds
UK 10-Year yield @ 1.28%
US 10-Year yield @ 2.95%
Germany 10-Year yield @ 0.40%
Italy 10-Year yield @ 2.74%
Spain 10-Year yield @ 1.37%
Economic data and companies reporting for week commencing 30 July
Monday 30 July
UK: Consumer Credit, M4 Money Supply, Mortgage Approvals
US: Pending Homes Sales
EU: Business Climate Indicator, Consumer Confidence, Economic Sentiment Indicator, Industrial Confidence, Services Confidence
Interim results: Forterra, Foxtons Group, Keller Group, Reach, Senior
Trading update: Cranswick, CYBG, Fuller Smith & Turner, IQE
Tuesday 31 July
UK: GfK Consumer Confidence
US: Personal Consumption Expenditures, Personal Income, Personal Spending, Chicago PMI
EU: Consumer Price Index, GDP (Preliminary), Unemployment Rate; GER: Retail Sales, Unemployment Rate
Final results: Games Workshop Group, NWF Group
Interim results: BP, Centrica, Elementis, 4Imprint Group, Greggs, Just Eat, Provident Financial, Rentokil Initial, Sabre Insurance Group, Shire, Standard Chartered, Travis Perkins, Taylor Wimpey, Weir Group
Quarterly results: Shire
Trading update: River and Mercantile Group, Thomas Cook Group
Wednesday 1 August
UK: BRC Shop Price Index, PMI Manufacturing
EU: PMI Manufacturing; GER: PMI Manufacturing
US: MBA Mortgage Applications, PMI Manufacturing, Construction Spending, ISM Prices Paid, Crude Oil Inventories, Auto Sales
Interim results: Aggreko, BAE Systems, BBA Aviation, Capita, Direct Line Insurance Group, Dignity, Man Group, Lloyds Banking Group, Rio Tinto, Smurfit Kappa Group, StatPro Group, St James's Place
Trading update: Barr, Next
Thursday 2 August
UK: PMI Construction, BoE Interest Rate Decision
US: Continuing Claims, Initial Jobless Claims, Factory Orders
EU: Producer Price Index
Final results: Clipper Logistics
Interim results: Aviva,Barclays, Ferrexpo, London Stock Exchange Group, Merlin Entertainments, Rolls-Royce Holdings, RSA Insurance Group, Serco Group
Trading update: Gattaca, Mitchells & Butlers, Sage Group
Friday 3 August
Interim results: International Consolidated Airlines Group, Millennium & Copthorne Hotels, Mondi, Royal Bank of Scotland Group, William Hill
Quarterly results: Royal Bank of Scotland Group