US economic data, although mixed overnight, showed gradual improvement, especially in the manufacturing sector which has lagged. China’s flash HSBC manufacturing PMI surprised many on the upside when most economists expected a further contraction; eurozone’s flash manufacturing PMI increased to its highest level in two years.
The FOMC minutes revealed the consensus was nothing new was revealed in regards to timeline, which means the next focal point will be economic data leading to September. Yesterday’s US data was mixed, raising the question of how and whether the Fed will taper. Bernanke made it clear in his previous comment in July that the US economy “still needs Fed stimulus”.
The economic data suggests patchy growth: initial jobless claims were higher than expected at 336,000 versus. 320,000 previously. Smoothing out this data reveals a gradual downward trend. Continuing claims rose more than expected at 2,999,000 versus 2,969,000 previously. Smoothing out the curve using the four-week moving average shows the June to August data looking rather flat.
Tapering priced in
The focus of yesterday’s data seems to be the leading indicator index which rose in July to 0.6% from being unchanged previously. The gauge for the outlook for the next three to six months was due to a drop in firing and households feeling wealthier from rising home prices and stocks. The Markit US PMI preliminary is often overlooked; it showed manufacturing activity slowed.
Despite this, the bond market has clearly priced in September tapering, translating it with 10-year treasury yields spiking close to 3% at 2.93%, the level from 2011. US equities recovered slightly, the S&P 500 closing up by 0.86% while the NASDAQ halted trading for three hours due to technical issues.
While the US markets priced in the eventual removal of QE, foreign investors sold $1.3 billion of equities in India, Indonesia, South Korea, the Philippines, Taiwan, Thailand and Vietnam in the week to Wednesday, compared with net sales of $590 million in the previous week, according to Bloomberg.
The rout in Asian markets could be stemmed after investors digest positive data from Europe and China. The HSBC flash PMI showed China’s manufacturing surprised on the upside, jumping to 50.1 in August, an expansion mode from 47.7 in July, contraction mode.
Europe is looking in better shape with Germany’s manufacturing PMI reading rising to 52 in August from 50.7 in July, although France defied forecasts with manufacturing PMI unchanged at 49.7. Germany’s expansion pushed the eurozone flash PMI to 51.7, its highest level in two years.
Next week’s key events include GDP releases from India and Philippines, and industrial production from Japan. Economists are expecting growth in the Philippines and India to have slowed. The Fed tapering is expected to have cooled some investments in the Philippines, while exports and remittances are expected to be steady. India on the other hand is facing uphill battles with the rupee.
The rupee’s free fall would have increased the cost of imports of oil, and FDI is expected to have fallen 45% year on year in Q2.