August flash PMIs are the main event today

• Japan’s preliminary (or flash) PMI data showed a deterioration in business conditions in August with the composite PMI falling to 45.9 from 48.8 in July, the lowest reading since August 2020. Services contracted at a sharper rate than in July as covid-19 restrictions were extended. The manufacturing sector PMI slipped to 52.4 in August from 53.0 in July. Preliminary PMI data for the eurozone, UK and US will be released later today, with consensus estimates forecasting a slight decline from July. 
• The focus this week will be on Jerome Powell’s speech at the Jackson Hole Economic Symposium, which starts on Thursday.  While the minutes of the July FOMC meeting showed that policy makers expected to be able to taper asset purchases before the end of this year, recent softer-than-expected data and the spread of the Delta variant has weighed on market sentiment and increased uncertainty.  Powell’s comments may offer further clues about how the FOMC is thinking about monetary policy and the risks to the economic outlook at this juncture.  
• Treasury Secretary Yellen has reportedly told White House staff that she would support the reappointment of Jerome Powell as Fed Chairman, according to Bloomberg. President Joe Biden is expected to announce his choice for Fed Chair next month, with Powell’s term set to end in February 2022. Biden will also need to fill a vacant position on the Fed board and nominate replacements for the vice chair and the vice chair for supervision.
• Retail sales in the UK were weaker than expected in July, rising by just 2.4% y/y against consensus estimates of a 5.9% gain and also much weaker than the June reading of 9.2% y/y.  Excluding autos and fuel, retail sales declined -2.4% m/m and grew just 1.8% y/y.  The data supports the view that UK growth is likely to slow in Q3 2021. 
• In the UAE, the Emirates Tourism Council approved a plan of action to boost the number of international tourists to the UAE through bigger promotional campaigns and targeting new markets. New long-term and multiple entry visas are also expected to support the industry’s growth. Separately, Dubai announced six new tourism projects to develop the Hatta region, including new hotels and holiday homes as well as leisure facilities.
• Fuel prices in Lebanon are set to rise substantially as the central bank stops supporting imports at the subsidised exchange rate of LBP 3,900/USD. Instead it will move to the market rate which has fallen as low as LBP 16,500/USD, compared to the official rate of 1,507/USD that held until March last year. Some of the immediate pressure will be alleviated by a government announcement that it will subsidise fuel imports at LBP 8,000/USD, but this still leaves a substantial proportion passed on to the Lebanese consumer. Households in Lebanon were already under pressure as inflation has averaged 133.8% so far this year and 84.3% in 2020.

Today’s Economic Data and Events

12:00 Eurozone flash composite PMI (Aug) forecast 59.6 prev. 60.2

12:30 UK flash composite PMI (Aug) forecast 58.7 prev. 59.2

17:45 US flash composite PMI (Aug) n/f prev. 59.9

18:00 US existing home sales (Jul) forecast 5.83mn prev. 5.86mn

Fixed Income

• Despite the FOMC minutes seeming pointing towards a sooner rather than later start to tapering of asset purchases in the US, yields on benchmark USTs were little changed over the week, suggesting this was already priced in.
• Yields at the longer end are indeed higher than they started the month despite last week’s fall. The 10-yr UST yield edged higher on Friday but still ended the week down 2bps at 1.2550%. The 2-yr added 2bps to 0.2241%.
• While the FOMC minutes were taken as a fairly hawkish signal, one of the most prominent advocates of tapering has sounded a more cautious note over the weekend. Dallas Fed President Robert Kaplan has said that he is watching the Delta variant’s spread closely and might have to adjust his view.
• The virtual Jackson Hole symposium is being held this week, and any news from there will be parsed closely for what it means for rates and monetary policy over the coming year.

FX

• Despite losing -0.1% on Friday, the Dollar Index managed a 1.1% gain against its basket last week. This saw it close at 93.496, its highest close since November 2020. The prospect of tapering by the Fed has combined with the dollar’s haven status as concerns about the global growth recovery rise to see the greenback strengthen against rival currencies.
• Sterling has been one of the biggest losers, dropping -1.8% over the week to 1.3623. The currency is trading at levels last seen in January. The Euro dropped -0.8% against the dollar last week despite a 0.2% gain on Friday and is currently at 1.1698 to the greenback.
• Commodity currencies were especially badly hit by the risk-off sentiment seen across the board last week. The AUD lost -3.2% while the NZD dropped -2.9%. Both currencies are also being hit by local Covid-19 developments, with an incipient build of cases in New Zealand prompting a new lockdown and an unexpected decision to keep the policy rate unchanged.

Equities

• Global equities had a difficult week last week as risk-off sentiment rose on the back of tapering talk and an apparent slowdown in the economic recovery as the Delta variant spread. Some losses were pared on Friday, but the general trend over the period was downward.
• In the US all three benchmark indices gained on Friday but that was insufficient to offset losses over the preceding days as the record-beating rally that had been in play ran out of steam. The Dow Jones was the biggest loser, dropping -1.1% w/w, followed by the NASDAQ (-0.7%) and the S&P 500 (-0.6%).
• The biggest losses of the week were seen in Asia, where a combination of government regulation, disappointing data, and high-profile exits from the market weighed on Chinese shares in particular. The Shanghai Composite lost -2.5%, and the Hang Seng -1.9%. In Japan, the Delta variant’s spread is weighing on sentiment, driving the Nikkei down -3.5% w/w.
• Indian markets were something of an outlier, as sentiment has improved in recent weeks as the severe wave of infections the country suffered several months ago has waned. The Sensex closed up 0.9% w/w.
• Within the region, the ADX gained 0.3% w/w and the DFM 0.8%. The Tadawul lost -1.1%.

Commodities

• Global oil prices saw their longest run of daily price declines since 2019 last week as a host of bearish factors for the commodity combined. Brent futures ended the week -7.7% lower at USD 65.2/b, while WTI dropped-9.2% to USD 62.1/b.
• Bearish demand indicators out of China fueled the fall at the start of the week, exacerbated in the following days by the FOMC minutes and resultant dollar strength as the prospect of tapering edged closer.
• The weak data out of China has weighed on most commodities, and the Bloomberg industrial metals index ended the week down -4.3%.

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