Market report: China’s factory activity drops again, UK business confidence rises, inflation reports in focus
- China’s factory output contracted for a fifth month in a row in August as manufacturers are hit by falling domestic and overseas demand.
- The Manufacturing Purchasing Managers’ Index came in at 49.7, below 50 indicates contraction, however it wasn’t quite as low as forecasts.
- FTSE 100 set for a lacklustre end to the week, with the index down almost 3% on the month.
- As bets rise that pause button will be pressed on rate hikes in US, the pound holds onto gains, hovering above $1.27.
- UK business confidence rises according to Lloyds Bank business barometer to highest level since before the invasion of Ukraine.
- Investors wait for key US data including inflation reading today and non-farm payrolls jobs report out tomorrow.
Susannah Streeter , head of money and markets, Hargreaves Lansdown:
‘’China’s economic weakness has again been exposed in the latest manufacturing data, indicating attempts to stimulate consumption have fallen short. Factories have been churning out fewer goods again in August as demand wanes, marking the fifth month in a row of contraction. Warnings from the Chinese property giant Country Garden that it may default on its mountain of debt isn’t helping sentiment, amid worries problems in real estate will cause contagion in the financial sector. The FTSE 100 is trading lower, rounding off a disappointing month, as concerns about China have weighed on commodities while the cost-of-living crisis and housing market woes haven’t given much respite to domestically focused stocks.
Given the headwinds whipping around the Chinese economy right now in particular the slumping property sector, it’s little surprise consumers are showing less appetite to spend, but there is also less demand for Chinese manufactured goods in key markets abroad. As the cost-of-living crisis continues in Western economies due to elevated inflation and high borrowing costs, shoppers have been tightening their belts. The manufacturing data is gloomy, reinforcing a picture of China’s slowing economy; however, there was still a tiny room for optimism as the pace of contraction did ease off a little compared to July. There will be hopes that a softer landing in the United States, which still looks a possibility will cushion the blow for Chinese factories ahead, particularly as the domestic demand is looking hard to revive right now. Attempts to stimulate spending by Beijing so far has underwhelmed and investors are waiting for more significant support measures to help give manufacturing activity a boost. Brent crude is trading around $85 dollars a barrel, broadly hanging onto gains of previous sessions amid a drop in US crude stocks and the expectation that OPEC+ nations will maintain measures to keep supply tighter.
The pound has stayed elevated against the dollar – after a jump yesterday, hovering above $1.27. Bets have risen that the Federal Reserve will keep interest rates on hold when policymakers meet in September, given signs that the employers are becoming more cautious about hiring, reducing worries about hot wage growth preventing the price spiral coming down. Investors are waiting for the all-important non-farm payrolls figure to drop tomorrow, which is expected to add another big piece to the picture of a cooling labour market.
Another interest rate hike in the UK is still widely expected in September but after that the picture looks muddy, especially given data from the Bank of England showing growth in the amount of money washing around the economy – the money supply – stalled in July, another indicator that growth may remain highly elusive in the months to come. But the pound strengthened given that the Bank still looks set to raise rates in September whereas the Fed looks set to press the pause button.
Businesses in the UK appear to be taking a glass half full attitude and are more optimistic than they have been for 18 months. Business confidence as measured by the Lloyds Bank business Barometer has jumped by 10 points to 41% – the highest level since the invasion of Ukraine. It’s partly because many expected the Bank of England might super-size the interest rate rise in August, and there’s been relief that a more cautious approach is being taken. However, there are also still signs of pay pressures coming through in this survey with around one in three companies expecting to expand their workforce and 83% expecting an average increase in the wages of their staff. Hot wage inflation continues to be a worry for the Bank of England, and this forward looking report might signal further pressure down the line.
Any signs of more stubborn inflation are still very much guiding market sentiment, so key data from the US and the Eurozone will be pored over today. In the States the Fed’s preferred measure – the US personal consumption data – is out later and the preliminary eurozone CPI data will also be closely watched given that a snapshot out yesterday showed inflation in Germany and Spain not cooling as fast as hoped. Inflationary pressures are still staying stubborn even though the downturn is intensifying especially in Germany. That’s posing a big headache for the European Central Bank and if the eurozone wide inflation reading comes in hotter than expected, it is set to increase the chances of a rate hike in September, despite the risks of recession.’’
