Last week, Thursday’s brutal sell-off in technology stocks, which drove the NASDAQ index 4.96% lower on the day, continued on Friday although markets recovered off the day’s lows. This pushed most major equity indices returns into negative territory for the week: the NASDAQ fell 3.3% wow and the S&P500 fell 2.3%. This reversal follows stellar gains in August which saw the S&P500 gain 7% with the technology sector a notable outperformer. The sell-off came despite US economic data generally pointing to a continued economic recovery including Friday’s non-farm payroll data. In August, the US economy added 1.371m jobs against expectations of 1.35m jobs added. The unemployment rate fell to 8.4% from 10.2% in July which exceeded expectations of 9.8%. Average hourly earnings rose more than expected: +0.4% mom versus expectations of 0%. Earlier in the week, the US manufacturing ISM exceeded expectations and the ISM services remained robust at 56.9 although down from the prior month’s reading of 58.1. UST curve bear steepened on Friday following the NFPR data but the yield on the UST 10-year while rising 8bps on Friday was unchanged on the week at 0.72%. The UST 30-year yield was up 11bps on Friday to 1.47%, but tightened 3bps wow.
The week starts on a quiet note with the US market shut for the Labor Day holiday. US-China relations have started the week in focus with reports over the weekend suggesting that the Trump administration is considering adding the Chinese chipmaker SMIC to the Commerce Department’s entity list, potentially restricting US exports to it. China’s August trade data, released today, showed exports (in US dollar terms) gaining 9.5% yoy, exceeding expectations of 7.5% yoy, helped by a low base effect, trading partners’ economic recovery and strong growth in medical-related exports. Imports fell 2.1% yoy and China posted a trade surplus of USD58.93bn in August.
In the week ahead, developments on the Covid-19 front will continue to be monitored as Europe in particular contends with an increase in infections, although with hospitalisations and deaths currently low, national lockdowns have so far been avoided. With the Fed in communications blackout ahead of its meeting on September 15-16th, the US CPI data at the end of the week is likely to be a focus along with developments on the Republicans and Democrats agreeing a further relief package and the US Presidential campaign. The US Treasury has a heavy issuance schedule for this week and is due to sell USD50bn of 3-year notes on Tuesday, USD35bn of 10-year notes on Wednesday and USD23bn of 30-year bonds on Thursday. In terms of central bank meetings, the ECB meeting and press conference commentary will be the main focus on Thursday given inflation fell into deflationary territory in August, the recent strength of the euro and the Fed’s shift to let inflation and employment ‘run hotter’. The ECB’s updated forecasts for growth and inflation will be of interest in light of this, particularly given the increase in Covid-19 infections and some signs that the recovery is slowing. Data wise the industrial production data for Germany, France and Italy is due to be released and are expected to show a continued recovery into July.
Elsewhere, in Japan, the focus remains on a successor to Prime Minister Shinzo Abe in the September 14th election: Chief Cabinet Secretary Yoshihide Suga is seen as the front runner and continuity of monetary and fiscal policy is expected if he is elected. In the UK, Friday’s GDP data for July will be monitored to try and gauge the strength of the economic recovery: July benefited from the reopening of the hospitality sector and Bloomberg is estimating growth at 7.5% mom. Brexit talks with the EU resume this week, with Dominic Raab, the Foreign Secretary, describing it as a “moment of reckoning” but that he thought there is a deal to be done but at the same time saying the UK will not give ground on state aid and fisheries.