Macroeconomic data continued to show signs that the global economy is cruising along nicely. Last week, a fresh set of PMI data – leading indicators that market watchers track closely – was released. While the data for July were broadly lower than the month before, they were still consistent with still-healthy growth momentum in the global economy. For example in the US, both July manufacturing and non-manufacturing ISM surveys declined from the month before (more so for the non-manufacturing survey). But levels remain comfortably in expansion territory (more than 50). Europe’s final manufacturing and composite PMI disappointed very slightly and remained firmly above 55. In the UK, both manufacturing and services PMI surprised modestly on the upside. In China, the official manufacturing and services PMIs moderated, but the Caixin manufacturing PMI exceeded expectations to hit a four-month high. In India, July manufacturing PMI dipped into contraction territory. But that was due to the kick-off of GST implementation, and we do not expect the weakness in PMI to sustain.
Beyond PMI numbers, the US labour market continued to exhibit strength. Non-farm pay-roll numbers exceeded market expectations to come in at 209k in July, with growth seen across industries. The US unemployment rate ticked down to 4.3% from 4.4%.
On inflation, the US June PCE data and Europe’s July HICP inflation data released last week still reflect subdued price pressures. Year-on-year core inflation rates on these measures were 1.5% and 1.2% for the US and Europe respectively, comfortably below the 2% level that most developed market central banks set as a target. This week, the US July CPI data will yet provide another data point. Expectations are for core inflation on this measure to stay unchanged at 1.7% y/y from the month before. While this should provide some reminder that inflation is not all that low on all measures, many market observers are still likely to be comfortable with the slow pace at which it is climbing in many parts of the world.
This leads on to central bank actions/commentary, which took on a slight dovish surprise in the developed world last week. Bank of England’s monetary policy committee voted 6-2 to leave policy rates unchanged, against some expectation in the market for the vote to be 5-3 (i.e. it turned out to be 2 votes instead of 3 for a rate hike). The Reserve Bank of Australia kept policy rates unchanged as well, but added language noting the rise of the AUD, and noted gently that this would weigh on inflation, output and employment.
Putting it all together, the macro environment appears to remain sanguine, on signs of steady global growth, subdued inflation and benign central bank policy. Coupled with the strong US and Europe earnings season that is currently unfolding, it all looks good for risk assets for now. That said, it may be prudent to remind ourselves that valuations of many asset classes are high, optimistic sentiment seems prevalent, while we head towards the tricky period of Fed balance sheet normalisation and an increasingly tight US labour market.