Weekly View – 6 September 2021
The US economy has been disrupted by Delta, with non-farm payrolls coming in lower than expected for August, when only 235,000 jobs were created compared to 1.1mn the previous month. The combination of average hourly earnings (up +4.3% year-over-year) and low productivity (0.6% versus the 1.6% expected) drove bond yields up despite the poor employment numbers as the markets come to grips with a potential labour supply, rather than demand, problem for the first time in a decade. Euro-area flash estimate HICP headline inflation jumped to 3.0% y-o-y in August, above expectations. Euro area HICP inflation is expected to accelerate strongly over the coming months due to multiple factors. This week, the European Central Bank could give guidance on reducing its Q4 2021 PEPP (Pandemic emergency purchase programme) purchases. We are underweight government bonds.
Chinese purchasing manager indices (PMI) for August recorded their lowest levels in the last two years, confirming that the combination of Covid and the government’s regulatory tightening measures are hitting economic activity in the world’s second-largest economy. Given the rapidity of this deterioration, it is reasonable to expect some easing measures to follow. To that end, China is reported to be planning a massive 400-gigawatt wind and solar project that would redraw its global energy map, adding about as much renewable capacity as there is currently in all of Europe. While this news is yet to be officially confirmed, this would be an interesting example of China’s economic rebalancing to new and strategic sectors and would play well to our Green Marshall Plan investment theme.
Amidst plummeting popularity around his handling of the pandemic and after forging ahead with the locally unpopular Summer Olympics, Japanese prime minister Yoshihide Suga unexpectedly resigned. Japanese stock markets rose last week on the announcement as it potentially clears the path for new fiscal spending. We are positive on Japanese equities. In politics elsewhere, markets are concerned that if the centre-right CDU fails to secure a ruling position in any coalition after the German elections this month, fiscal discipline at home and in Europe at large will wane.