Have US manufacturers caught China's cold?

US manufacturing contraction is a worry given the likely fallout of the yuan rise, while the BoE could hike rates despite disinflation.

Shenzhen stock exchange
Source: Bloomberg

Never doubt the positivity of the Americans. The US markets have dragged their European counterparts higher following yet another downbeat European session today. Despite seeing a US manufacturing survey highlight inherent weaknesses in the US recovery, this spike could point to a noticeably more positive session in the US as the main bourses push to a new Monday high.

Overnight data from Japan showed that despite ongoing Bank of Japan stimulus, Japanese GDP still shrank -0.4% for Q2 to further contribute to the notion that Asia is slowing down as a whole.

US manufacturing has unexpectedly jolted back into the limelight as the Empire State manufacturing index fell to the lowest level since 2009. It seems it’s not only the Chinese manufacturers that are slowing down, with today’s survey showing contraction within the US manufacturing sector adding food for thought at the Federal Open Market Committee.

With Chinese imports representing 20% of all US inbound trade, it’s clear the Federal Reserve will have a tough time knowing exactly how much US inflation expectations will be impacted. Today’s contraction in US manufacturing will no doubt be impacted by falling Chinese demand; something which will only get worse given the fallout of last week’s yuan depreciation.

The Bank of England’s Kristin Forbes highlighted the clear dilemma of both the Fed and BoE today, as strong economic indicators are unusually pared with clear and persistent disinflation. The decision to raise rates has been the hot topic for far too long and while we are nearer to a hike, it always feels like something gets in the way. Ultimately what Forbes highlights is that there could be a time when a rate hike is desired in the face of low or negative inflation, which flies in the face of the BoE’s core price stability mandate.

UK house prices enjoyed their best August in eight years, falling only 0.8% in a typically weak month. The constricted market supply, coupled with relatively easy credit means that buyers are having to stretch their budget creating a clear sellers' market. A lack of supply means that estate agents will offer stretched valuations to gain business, which further inflates prices during a typically drab month.

This will no doubt act as a further incentive for investors in homebuilders like Persimmon and Barratt Developments who are expected to enjoy yet another buoyant year.

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