The key economic event to start the week was the release of the August manufacturing PMIs. The reports largely confirmed what investors already knew, though there will be some tweaks in the understanding of the macro picture.
Here are the five takeaways:
1. Following the dismal household spending and soft industrial output reports last week, Japan followed up with some mixed economic data. The August PMI rose to 52.2 from 50.5 in July. Capex was weaker than assumed in Q2, rising only 3.0% rather than more than 4.0%, and auto sales fell 5% year-over-year last month after a 0.6% rise in July. The BOJ meets this week, but no change in its stance is expected. Given the soft economic backdrop into the July-Sept quarter, a debate over whether the BOJ should do more may intensify.
Midweek, Prime Minister Abe will announce the details of a cabinet shuffle. Finance Minister Aso and Economic Minister Amari will remain in their posts, according to local press reports. The purpose of the reshuffle is to strengthen the Abe government. This fall will see the Diet debate controversial bills about expanding the Special-Defense Forces (SDF). Abe is likely to boost the number of women represented in his cabinet from the current two. Watch Yuko Obuchi, daughter of the late Prime Minister. She could be the next LDP Secretary General, which is a very senior post. Ishiba, the current Secretary General, and potential challenger to Abe at the next party conference, may be given a new post (to bolster regional economies) after turning down a position that tied him to the expansion of the SDF.
2. China's manufacturing softened in August. The HSBC measure slipped to 50.2 from the 50.3 flash reading, while the official version fell to 51.1 from 51.7 in July, which was an 18-month high. The softness of recent reports and the dramatic fall in lending have spurred talk of additional stimulative measures. This has been one of the factors underpinning the recent outperformance of Chinese equities.
3. The euro area August manufacturing PMI was in line with the flash reading (50.7 vs. 50.8). Germany's PMI was revised down to 51.4, an 11-month low from 52.0 in the flash and 52.4 in July. The French flash was at 46.5, but this was revised up to 46.9, but it is hardly anything to write home about. Spain has softened more than expected to 52.8 from 53.9 in July. The consensus was for 53.1. Italy's report was dismal. The manufacturing PMI cratered to 49.8 from 51.9. New orders were the weakest since November 2013 and unemployment contracted for the first time since last October.
This can only encourage speculation ahead of the ECB meeting later this week. France joined Germany and the Netherlands, within the euro area, to see their benchmark two-year rates move below zero. The two-year yield in Switzerland is also below zero.
4. The UK manufacturing PMI saw its biggest decline in two years. The headline fell to 52.5 from 54.8 in July, which had initially been reported at 55.4. It is the lowest reading since April 2013. Export orders fell below the 50 boom/bust level for the first time since early 2013. Manufacturing is a small part (~10%) of the UK economy, and the service PMI is more important. That said, the UK economy had a strong first half and is seeing some moderation here in Q3.
5. The Scandi-bloc continues to diverge, with Norway doing appreciably better than Sweden. Sweden reported a lousy retail sales last week (-0.7% vs. +0.4% consensus). It followed it up with the weakest manufacturing PMI since April 2013 (51.5 vs. 55.0 consensus). The Riksbank meets this week. Given the surprise 50 bp cut at the last meeting, a modest tweak in the forward repo rate path may be the most that reasonably can be expected. In contrast, Norway's manufacturing PMI rose to 51.8 from a revised 50.8 reading in July (initially was 50.6). The consensus had warned of a decline to 50.2.
There have been several important political developments to note, as well. We cite these not to grind a partisan ax, but because we think they could shape the policy framework that impacts the investment climate.
A. Poland's Tusk will become the next EU President. This may leave a bit of a power vacuum in Poland, which holds its national election next year. The current Parliamentary Speaker, Ewa Kopacz, and the Defense Minister Siemoniak are tipped as the front runners to replace Tusk. Under Tusk, there has been a strong element of political stability since 2007, and Poland was the only EU country to have avoided a recession.
B. Germany's AfD party secured membership in its first state government by garnering 9.7% of the vote in Saxony. The AfD campaigned to the right of Merkel's CDU, and marks the further demise of the Free Democrats that did not meet the threshold for representation. Still, the AfD are not going to be in the government, which will likely continue to be a grand coalition between the CDU and SPD.
C. The selection of Tusk as the next EU President was enthusiastically supported by the UK's Cameron, who sees in Tusk a reformer. However, Cameron has his hands full with UKIP. Last week, the popular Tory Douglas Carswell switched to the UKIP, which will trigger a byelection in his district Clacton. The UKIP will likely win the seat, according to polls. Cameron's pledge of a referendum on EU-membership was conditioned on winning the next general election outright. This does not seem to be a sure thing, by any stretch of the imagination. Reports suggest Cameron faces a large revolt by the anti-EU wing of the Tory Party. The Scottish referendum looms on the near-term horizon (September 18).
D. A new poll put Podemos just behind the Socialist opposition in Spain. It is an anti-austerity, but not anti-EU party. Podemos won five seats in the EU Parliament election in May. The party was founded in March, and the weekend polls gave 21.2% support, 1.1% less than the Socialists. The governing People's Party has seen its support slump to 30.1%, down a third from the last general election in November 2011.
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