Kashkari is very much at the more dovish end of the FOMC spectrum. These comments are not indicating he is swinging towards a more hawkish outlook.
“July data illustrates that recovery speed across the UK economy has slowed in comparison to the second quarter of 2021. More businesses are experiencing growth constraints from supply shortages of labour and materials, while on the demand side we’ve already seen the peak phase of pent up consumer spending.
“The full easing of pandemic restrictions appears to have helped limit the overall loss of momentum towards the end of July. At 59.6, the PMI reading for services output was much stronger than our earlier ‘flash’ figure of 57.8 in July, largely due to the final index covering an extra five working days since ‘freedom day’.
“Any re-acceleration of growth in August looks unlikely, however, as new orders increased at a much-reduced pace at the start of the third quarter. Moreover, business expectations softened again during July, with UK firms the least optimistic about the growth outlook since January. Survey respondents cited worries about recruiting staff to meet business expansion plans and some suggested that escalating costs would hinder the recovery.”
“Europe’s service sector is springing back into life. Easing virus restrictions and further vaccination progress are boosting demand for a wide variety of activities, especially in the tourism, travel and hospitality sector. It’s not just the consumer sector that is booming, however, with business and financial service providers also enjoying a growth spurt as broader economic recovery hopes build.
“Alongside the sustained elevated growth recorded in the manufacturing sector, the impressive strength of the service sector’s expansion in July means the eurozone should see GDP growth accelerate in the third quarter.
“Worries about the Delta variant have become more widespread, however, subduing activity in some instances and raising concerns about the possibility of virus restrictions being tightened again. Hence services growth in July was slightly less marked than the earlier flash estimate and future expectations cooled to the lowest since March, presenting a significant downside risk to the outlook and hinting that growth could begin to slow again as we head toward the autumn.
“Furthermore, up to now companies have generally seen little resistance from customers to higher prices, but this could change after the current rebound from lockdown restrictions has passed.”
The latest services and manufacturing PMI’s from China show a slow down in growth that doesn’t bode well for Q3 and Q4. The official PMI print came in at 50.4 for July, which was a drop from the previous month’s reading of 50.9. Of concern was that new orders fell 0.6 points and new export orders fell too. The services came in at 53.3 which was a fall from 53.5 in June. Furthermore, Iris Pang, the chief economist for ING on China has noted a drop in investment on equipment. Pang thinks that hints at two things. Firstly, is it that the chip shortage is holding back availability?Secondly, is it that companies sense lower growth prospects, so they are holding back investments? Either way Pang notes a mood of slower growth that is starting to emerge from China.
Why is this happening now?
The reason for the slowing growth prospects can be attributed to a number of factors: the global shortage of semiconductor chips, the rising delta variant, slowing real estate activity in China as regulators tighten purchase polices and mortgage limits, as well as increasing tensions between the US and China and the ‘tech war . Furthermore, President XI, has announced further policy moves from China and they could end up sacrificing short term growth for longer tern policy aims. China is trying to navigate some domestic reforms including the deleveraging of the the real estate sector, reforming data privacy and micro lending. So, there are a handful of issues to potentially further slow down growth.
More stimulus from China
China has promised more stimulus, so the recovery should find support from China. There is nothing to particularly note here apart from it is worth keeping on eye on China’s growth metrics from here. China cabinet said in July that China will “use monetary policy tools, including RRR cuts, in a timely way to further step up financial support for the real economy, especially small firms”. The RRR cut is the cash requirement that banks are required to keep. By cutting the RRR this means banks have more money to lend because they don’t need to hold so much cash. A further RRR cut could well be a first port of call and should boost China’s stocks.
Hang Seng support.
Key support for the Hang Seng is marked below and any sharp falls lower should find buyers on a first test.
