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All major APAC, European, and US equity indices closed lower on
Friday. US government bonds closed higher, while benchmark European
bonds were mixed. CDX-NA and European iTraxx closed wider across IG
and high yield. The US dollar and oil closed higher, while natural
gas, gold, silver, and copper closed lower.
Please note that we are now including a link to the profiles of
contributing authors who are available for one-on-one discussions
through our newly launched Experts
by IHS Markit platform.
Americas
All major US equity indices closed lower; DJIA -0.4%, S&P
500 -0.5%, Russell 2000 -0.6%, and Nasdaq -0.7%.
10yr US govt bonds closed -4bp/1.23% yield and -3bps/1.90%
yield.
CDX-NAIG +1bp/50bps and CDX-NAHY +7bps/293bps, which is +1bp
and +12bps week-over-week, respectively.
DXY US dollar index closed +0.3%/92.17.
Gold closed -1.0%/$1,817 per troy oz, silver -0.9%/$25.55 per
troy oz, and copper -0.9%/$4.48 per pound.
Crude oil closed +0.4%/$73.95 per barrel and natural gas closed
-3.6%/$3.91 per mmbtu.
US personal income edged up by 0.1% in June and real disposable
personal income (DPI) decreased by 0.5%. A strong 0.8% increase in
wage and salary income was roughly offset by fewer economic impact
payments (stimulus checks) and declining payments from the Pandemic
Unemployment Compensation program, the latter of which partially
reflects the early termination of the enhanced benefits in several
states beginning in June. (IHS Markit Economists James
Bohnaker and David
Deull)
Real personal consumption expenditures (PCE) increased 0.5% in
June, but the monthly profile suggests a lower-than-expected
jumping off point for the third quarter. We revised down our
estimate for third-quarter growth in real PCE 0.7 percentage point
to 2.1%. Real PCE for durable goods declined 2.5%, primarily due to
a 7.7% plunge in spending on motor vehicles and parts as supply
constraints and high prices likely discouraged purchases. Real PCE
for services increased 0.8% to get within 3.0% of the pre-pandemic
level; sectors such as childcare services, recreation and
entertainment, public transportation, and accommodations remain
depressed amid ongoing health concerns.
The core PCE price index increased 0.4% in June, a deceleration
from the prior two months. We expect recent price pressures,
particularly for certain goods where supply-chain disruptions have
resulted in higher consumer prices, will ease over the next several
quarters.
The levels of personal income and outlays were revised down in
each of the last five years. In 2020, the level of DPI was revised
down 0.5% and the level of outlays was revised down 0.7%, resulting
in a higher personal saving rate than previously estimated. The
saving rate averaged 16.6% in 2020.
The Employment Cost Index (ECI) increased 0.7% in the
three-month period ending in June 2021 (the sample is from monthly
payroll records that include 12 June). (IHS Markit Economist Patrick
Newport)
Year-over-year (y/y) growth moved up from 2.6% in March to 2.9%
in June; year-over-year real growth was -2.4% (the Bureau of Labor
Statistics [BLS] calculates real ECI growth using the consumer
price index for all urban consumers).
Wages and salaries (about 70% of compensation costs) rose 0.9%
for the three-month period and 3.2% y/y; benefits (about 30% of
compensation) increased 0.4% for the three-month period and 2.2%
y/y.
Private industry compensation grew 3.1% y/y, wages and salaries
(about 70% of compensation costs) rose 3.5%, and benefits (about
30% of compensation) climbed 2.0%.
State and local government compensation increased 2.0% y/y; for
this sector, wages and salaries (about 62% of compensation costs)
rose 1.6% and benefits (about 38% of compensation) grew 2.6%.
The University of Michigan Consumer Sentiment Index fell 4.3
points (5.0%) from its June level to 81.2 in the final July
reading. This was a marginal 0.4 point above the preliminary
reading for the month and left the July level at a five-month low.
(IHS Markit Economists James
Bohnaker and David
Deull)
The decrease was split between expectations, the index for
which fell 4.5 points to 79.0, and views on the present situation,
which fell 4.1 points to 84.5. Relative to the preliminary July
reading, the entirety of the uptick over the latter half of the
month was driven by consumer expectations.
The decline in sentiment was mainly expressed by upper-income
households. The index of sentiment for households earning more than
$100,000 a year fell 7.4 points to 84.3, while sentiment for
households earning less than $100,000 a year fell only 0.9 point to
79.4.
The expected one-year inflation rate in the University of
Michigan survey rose 0.5 percentage point to 4.7%, the highest
monthly reading since the summer of 2008, but 0.1 point lower than
recorded earlier in July. Consumers continue to regard inflation as
principally a short-term phenomenon; the expected 5-to-10-year
inflation rate remained unchanged in July at 2.8%.
Views on buying conditions for big-ticket items moved deeper
into negative territory in July, although the decline moderated in
the second half of the month. The index of buying conditions for
large household durable goods fell 10 points to 102, while that for
vehicles fell 6 points to 81, the lowest since 1981. The index of
buying conditions for homes fell 8 points to 66, the lowest since
1982.
Respondents were increasingly bullish on their own prospects.
The mean expected probability of an increase in personal income
rose 1.5 percentage points to 54.3%, matching the highest
pandemic-era reading.
The new sodium reduction requirements that are set to go into
effect for US schools in 2022 have stirred deep concerns for dairy
makers, who fear the requirements will lead to a sharp decline in
school offerings of dairy products such as cheese and milk. (IHS
Markit Food and Agricultural Policy's Margarita Raycheva)
The dairy industry is particularly concerned about the
requirements' impact on cheese - a school lunch staple that is a
kids' favorite but presents tremendous challenges for sodium
reduction.
With stricter sodium reduction limits, cheese will be either
severely restricted or fully removed as a school meal offering in
both breakfast and lunch - a development that could have
wide-reaching implications for industry, warned speakers at the
International Dairy Foods Association (IDFA's) Regulatory RoundUp
on Wednesday (July 28).
The changes could affect a variety of stakeholders in the food
industry, as a significant reduction of cheese offerings at US
schools would raise costs, while also increasing the time for
product development in the dairy sector and presenting a slew of
technological and food safety challenges, said Cheryl Isberner,
K-12 program team leader at Land O'Lakes Inc.
Most importantly, there is no technology currently available to
allow cheese-makers to reduce sodium in cheese to Target 3 sodium
levels without either increasing food safety risks, or adding
undesirable and potentially harmful ingredients that the industry
has been working to keep out of cheese, Isberner warned
participants at the meeting.
Eli Lilly's (US) Loxo Oncology unit and privately owned Kumquat
Biosciences have announced that they have entered into an exclusive
collaboration focused on the discovery, development, and
commercialization of potential novel small molecules that stimulate
tumor-specific immune responses. Under the deal, Kumquat will use
its small-molecule immuno-oncology (IO) platform to discover novel
clinical candidates, while Lilly will have the option to select an
(unspecified) number of drug candidates for further development and
commercialization worldwide, excluding mainland China, Hong Kong
SAR, Macao SAR, and Taiwan, where Kumquat will retain rights but
Lilly will have an option to co-commercialize. Kumquat also has the
option to co-develop and co-commercialize an (unspecified) number
of the drug candidates selected by Lilly in the United States. (IHS
Markit Life Sciences' Milena
Izmirlieva)
TuSimple will work with Ryder Truck on TuSimple's autonomous
freight network (AFN), according to a joint statement. Select Ryder
fleet maintenance facilities will serve as terminals on TuSimple's
AFN. The facilities will serve as secure start and end facilities
for autonomous driving missions. The companies will collaboratively
determine which Ryder facilities will serve as terminals. These are
already facilities that can have multiple heavy-duty trucks and
trailers come and go 24 hours a day, 365 days a year, TuSimple
said. With more terminals in the AFN, shippers and fleets have
greater access to autonomous freight operations, TuSimple notes. In
addition, by leveraging Ryder's existing freight trucking
facilities, TuSimple will be able to quickly scale across the
country. (IHS Markit AutoIntelligence's Stephanie
Brinley)
Optimus Ride has been selected by the US Department of Energy
(DOE) to deploy autonomous shuttle fleets at Clemson University in
South Carolina. Optimus Ride will receive up to USD4.3 million from
the DOE to carry out the deployment. Optimus Ride will collaborate
with Clemson University, the University of California, Berkeley,
and Argonne National Laboratory to study rider behavior and
adoption, as well as the potential impact that electric autonomous
shuttles can have on the environment when deployed at scale.
Optimus Ride will also examine its routes, vehicle performance,
sustainability benchmarks, and other information to enhance its
mobility service and autonomous technology. (IHS Markit Automotive
Mobility's Surabhi Rajpal)
Matching initial expectations, Canada's real GDP by industry
output declined 0.3% month on month (m/m) in May, following a
revised-down 0.5% m/m decrease in April. (IHS Markit Economist Arlene
Kish)
The negative impact from the pandemic's third wave and
supply-chain shortages hit output in the goods-producing industries
(down 0.4% m/m) as well as the services-producing industries (down
0.2% m/m). Industrial production advanced 0.2% m/m as manufacturing
was the only industry that suffered a setback.
Statistics Canada estimates June's real GDP by industry output
will rebound 0.7% m/m, which is aligned with July's forecast.
May marks Canada's probable industry-output low of the year as
most of the pandemic's metrics remain low for now.
Data from Mexico's National Statistics Office (INEGI) show that
consumer prices increased by 0.37% during the first half of July
compared with the second half of June; annual inflation remains at
5.8%. (IHS Markit Economist Rafael
Amiel)
Food and energy prices remain the major drivers of inflation,
but services related to hospitality and tourism are also showing
increases in prices as the sector progressively reopens. Average
prices in restaurants and hotels went up by 0.48%, while in the
recreation and culture category, they increased by 0.53% (comparing
the first half of July with the second half of June)
Food prices have increased by 7.0 % while energy and related
products have jumped by 14.5% to date in 2021. International oil
prices explain, in part, the higher energy prices. A severe drought
affected Mexico in the second quarter of 2021, but the situation
seems to be improving. The Bank of Mexico (Banco de México:
Banxico) nevertheless still cites it as an upward risk for
inflation as the northern states are still grappling with a severe
lack of rain.
At its June 24 policy meeting, Banxico increased the policy
rate from 4.00% to 4.25%. The bank targets inflation at 3.0% +/- 1
percentage point but it is clearly above the upper bound of the
targeted band.
Europe/Middle East/Africa
All major European equity indices closed lower; France -0.3%,
Italy/Germany -0.6%, UK -0.7%, and Spain -1.3%.
10yr European govt bonds closed mixed; Germany/Spain/UK -1bp,
France flat, and Italy +1bp.
iTraxx-Europe closed +1bp/47bps and iTraxx-Xover +3bps/236bps,
which is +1bp and +5bps week-over-week, respectively.
Brent crude closed +0.4%/$75.41 per barrel.
Plans for a new electric vehicle (EV) battery plant to supply
Nissan's Sunderland (UK) facility have been submitted by Envision
AESC, reports Sunderland Echo. According to the documents, the
facility will be built at the International Advanced Manufacturing
Park (IAMP) in the city. It added that if approved, construction is
due to begin in 2022, with the aim of starting battery production
in 2024. It was announced earlier this month that Sunderland is to
benefit from GBP1-billion-worth of investment related to Nissan
over the next few years. (IHS Markit AutoIntelligence's Ian
Fletcher)
According to Eurostat's initial preliminary 'flash' estimate,
eurozone GDP rose by 2.0% quarter on quarter (q/q) in the second
quarter, above the market consensus expectation of 1.5% q/q
(according to Reuters's survey). IHS Markit's forecast was a
slightly stronger 1.7% q/q. (IHS Markit Economist Ken
Wattret)
On a year-on-year (y/y) basis, eurozone GDP surged by almost
14%, although with y/y rates of change distorted by huge base
effects related to the early 2020 extreme COVID-19-driven declines,
levels of GDP are a better reference point.
Despite the second quarter's upward surprise, eurozone GDP
remained 3% below its pre-pandemic level in the fourth quarter of
2019.
Across the member states that have published the data for the
second quarter to date, there were marked variations in
performance.
Portugal and Austria experienced the largest q/q increases
(4.9% and 4.3%, respectively), with the lowest q/q increases in
Lithuania and France (0.4% and 0.9%, respectively).
Eurozone Harmonised Index of Consumer Prices (HICP) inflation
rose from 1.9% in June to 2.2% in July, according to Eurostat's
"flash" estimate, a little above the market consensus expectation
(of 2.0%, based on Reuters' survey). (IHS Markit Economist Ken
Wattret)
Headline inflation is running at the highest rate since October
2018, with energy inflation primarily responsible for July's
acceleration.
After a short-lived moderation in June, the year-on-year (y/y)
rate of change in energy prices has risen to a new high in July of
14.1%.
Unlike in prior months, the acceleration reflects a strong
month-on-month (m/m) rise (of 1.8%, due to higher crude oil prices)
rather than base effects.
Food inflation has jumped from 0.5% to 1.6%, its highest
increase since November 2020.
July's core HICP inflation rates remain low and broadly stable
(again, see table below). The rate excluding food, energy, alcohol,
and tobacco prices has actually ticked down from 0.9% in June to
0.7%, a tad below the market consensus expectation.
Splitting this rate into its two key elements, non-energy
industrial goods inflation has reversed June's acceleration,
slipping from 1.2% back down to 0.7%. However, July's rate remains
well above its level at the end of 2020 (-0.5%), with further
upward pressure to come.
Prices for European cattle have nudged upwards again over the
past week, as the market's focus shifts back to low levels of
supply. (IHS Markit Food and Agricultural Commodities' Chris
Horseman)
Following a dip in the previous week - the first week-on-week
fall for more than two months - prices have now regained their
upward trajectory.
This trend has been led in particular by Germany and Italy,
where supplies of slaughter-ready cattle, and especially young
bulls, remain low enough to prompt some nervousness on the part of
buyers. Average prices in both countries have risen by more than 1%
over the past week.
However, levels of consumption are generally low, despite the
ongoing reopening of the restaurant and foodservice sectors in many
member states. and this is likely to prevent prices rising too much
higher.
'Flash' data released by the Federal Statistical Office (FSO)
show that German real GDP rebounded by 1.5% quarter on quarter
(q/q) in the second quarter, which recoups only part of its
first-quarter decline by 2.1% q/q (revised down from -1.8%). Growth
in the second half of 2020 was moderately revised upwards, however,
ensuring that the GDP level in the second quarter is very close to
our prediction. Thus, we are not changing our forecast of 3.8% for
average growth in 2021. As of the second quarter, German GDP was
still about 3% below pre-pandemic (end-2019) levels. (IHS Markit
Economist Timo
Klein)
Information gleaned from recent monthly frequency indicators
has signaled that the staggered loosening of lockdown restrictions
since mid-May has clearly helped retail sales and the labor market,
accompanied by improving consumer confidence.
The manufacturing sector, which had suffered far less than
services from administrative restrictions during December-May, has
increasingly been burdened by supply-chain bottlenecks (notably
affecting semiconductors and shipping capacity), thus hurting
especially the automotive industry in recent months. Industrial
production excluding construction remained broadly flat in the
second quarter, and manufacturing orders in May (latest month
available) suffered a setback of -3.7% month on month (m/m).
President Cyril Ramaphosa announced on 25 July a series of
measures to assist people and businesses affected by several days
of looting, damage to property, and arson following the
imprisonment of former president Jacob Zuma on 7 July. Violent
protests began with the blocking of the two key N2 and N3 national
roads on 9 July, and later resulted in the looting of large retail
stores in the Durban and Johannesburg inner city areas and
surrounding neighborhoods. The protests largely have stopped
following the deployment of 25,000 soldiers by Ramaphosa on 14
July. Zuma was arrested after the Constitutional Court on 29 June
ordered his imprisonment for reportedly refusing to appear before
the Commission of Inquiry into Allegations of State Capture. Zuma
has denied all allegations of wrongdoing. (IHS Markit Country
Risk's Thea
Fourie and Langelihle
Malimela)
Military deployment is likely to be scaled down only after the
Constitutional Court rules on Zuma's appeal against his 15-month
jail sentence. On 12 July, the Constitutional Court heard an
application by Zuma seeking rescission of his 15-month jail
sentence and is very likely to announce its ruling during August.
If Zuma's application is rejected, which is very likely, a
resumption of protests is likely in his home province of
KwaZulu-Natal, especially in low-income neighborhoods surrounding
Durban and Pietermaritzburg.
New social measures to reduce future unrest will increase
fiscal spending during fiscal year (FY) 2021/22. The reintroduction
of the Social Relief of Distress Grant, providing a monthly payment
of ZAR350/month (USD24/month) to unemployed South Africans until
March 2022, will cost approximately ZAR27 billion, while a further
ZAR9 billion will be disbursed via several mechanisms aimed at
alleviating the effect of the unrest on small businesses, including
those that are uninsured.
High global commodity prices should permit a significant
government revenue overrun during FY 2021/22. Despite the higher
outlays, a tax windfall from the mining industry during the first
quarter of FY 2021/22 suggests that a significant government
revenue overrun of ZAR80 billion could be achieved for the whole
FY.
Debt sustainability risk remains elevated beyond FY 2021/22.
The 2021 increase in fiscal capture from the mining sector and
resulting revenue overrun are unlikely to be repeated and may well
be reversed once recovery from the COVID-19 pandemic runs its
course and pent-up global commodity demand is satisfied. Even with
the mining windfall, the country's fiscal deficit is unsustainably
high and could rise even further if global commodity prices move
sideways or decline and South Africa's GDP returns to its potential
longer-term projected growth path of 1.5-2.0%.
The International Monetary Fund (IMF) has approved a
USD689.5-million loan under the Extended Credit Facility (ECF) and
the Extended Fund Facility (EFF) for Cameroon, according to a press
release on 29 July. (IHS Markit Economist Archbold
Macheka)
The USD689.5-million three-year arrangement, which accounts for
about 175% of Cameroon's IMF Special Drawing Rights (SDR) quota, is
intended to support the country's economic and financial reform
program. Approval of the ECF/EFF enables immediate disbursement of
about USD177.2 million, which can be used for budget support if the
government so chooses.
The IMF noted that the COVID-19 pandemic has worsened
Cameroon's development challenges and has elevated concerns about
the country's growth prospects and external and fiscal positions.
In addition, "security risks in parts of the country persist. The
pandemic could reverse improvements in poverty reduction and
development outcomes and jeopardize the implementation of
reforms".
Asia-Pacific
All major APAC equity indices closed lower; India -0.1%,
Australia -0.3%, Mainland China -0.4%, South Korea -1.2%, Hong Kong
-1.4%, and Japan -1.8%.
Ride-hailing company Didi Chuxing (DiDi) has denied a media
report that it was considering going private to appease Chinese
regulators and repay investors for losses suffered since its
initial public offering (IPO) in the United States, reports
Reuters. According to the media reports, DiDi has been considering
delisting plans as China tightens its scrutiny levels on technology
firms, gaining support from cybersecurity officials. (IHS Markit
Automotive Mobility's Surabhi Rajpal)
Japan's retail sales rose by 3.1% month on month (m/m) in June
following two consecutive months of declines. A decline in new
daily infections during the month and progress in vaccine rollouts
helped lift a broad range of retail sales, particularly for general
merchandise and fabrics apparel and accessories. That said, retail
sales for the second quarter of 2021 declined by 2.1% from the
previous quarter for the first drop in five quarters. (IHS Markit
Economist Harumi
Taguchi)
Improved business prospects also helped labor demand. The
unemployment rate notched down to 2.9% thanks to an increase the
number of employees (largely regular employees) while the job
participation rate rose.
Accordingly, the ratio of active job openings to active job
applications rose to 1.13 in June from 1.09 in May, reflecting a
decline in active job applications.
Japan's index of industrial production (IIP) rose by 6.2% month
on month (m/m) in June following a 6.5% m/m drop in the previous
month. A softer rise in manufacturers' shipments than production
(even solid at 5.5%) led to an increase in inventories (up 2.3%)
for the first time in three months, but the index of inventory
ratio declined slightly by 0.3% m/m. (IHS Markit Economist Harumi
Taguchi)
The solid rise in the IIP was due largely to a 22.6% m/m
increase in production of autos and an 8.9% rise in production of
production machinery (driven by semiconductor and flat panel
display production equipment), while production in 11 out of 15
industries increased from a month ago.
Although semiconductor shortages led to temporary shutdowns of
production lines at several auto manufacturers, increases in
inventories were largely driven by growth in inventories of autos
and electric parts and devices (such as liquid crystal panels).
Inventory growth partially reflected efforts to counter
supply-chain disruptions and demand to lock in stock before further
rises for material costs while external demand remained strong.
Toyota Kirloskar Motor (TKM) has announced battery-warranty
extensions for its Self-charging Hybrid Electric Vehicles (SHEVs),
including the Camry and Vellfire, in India, according to company
sources. The warranty is being extended from the existing three
years or 100,000 kilometers to eight years or 160,000 kilometers
for vehicles sold from 1 August onwards. For customers who
purchased SHEVs January 2019 onwards, the automaker is offering
similar warranty benefits at a special offer price. (IHS Markit
AutoIntelligence's Tarun Thakur)
LG Electronics and Magna International have signed a
transaction agreement that establishes a joint venture (JV) between
the two companies. According to a press release issued by Magna,
the new company, to be called LG Magna e-Powertrain, is
headquartered in Incheon (South Korea). The JV will manufacture
e-motors, inverters, and onboard chargers and, for certain
automakers, related e-drive systems. Leading the new firm will be
CEO Cheong Won-suk, who was most recently the VP and head of LG
Vehicle component Solutions company's green business. The new
company will develop powertrain components that offer automakers a
scalable portfolio, from complete solutions enabling
electrification and functionality to integrating intelligent
operating software and controls in new e-drive systems. (IHS Markit
AutoIntelligence's Jamal Amir)
South Korean tower supplier CS Wind is buying a 60 percent
stake in Portuguese tower and foundation manufacturer ASM
Industries. ASM Industries, established in 2007, is part of the A.
Silva Matos Group. The company builds both onshore and offshore
wind turbine towers and has production facilities in the Port of
Aveiro and Sever do Vouga, both in Portugal. Besides towers, the
company is also able to build floating and fixed foundations,
having participated in the early designs of the WindFloat project.
CS Wind, with the purchase of ASM Industries, hopes to establish a
core production base to serve the Europe market. The company has
plans to expand tower production volume and increase its market
share within the next two to three years. In June this year, CS
Wind acquired Vestas' US tower plant, and expanded its production
in Turkey. The company currently has presence in Europe through CS
Wind UK, which was established in 2016, through CS Wind's purchase
of the former Wind Towers Scotland. CS Wind UK however has been
struggling to secure projects over the last couple of years and has
had to lay off the majority of its workforce. (IHS Markit Upstream
Costs and Technology's Melvin Leong)
The Bank of Mongolia (BOM), the country's central bank,
announced on 29 July that it has granted the Transport and
Development Bank (TransBank) and Credit Bank permission to merge.
The merger reportedly follows the suspension of operations at
Credit Bank and the transfer of "rights, duties and
responsibilities" to TransBank. The BOM has highlighted that the
merger aims to ensure further financial stability, and that the
"governance, joint control system, capital risk tolerance and the
ability to serve the interests of customers and depositors will
improve". (IHS Markit Banking Risk's Natasha
McSwiggan)
Aiming to enhance stability, an amended Banking Law was adopted
in early 2021 to reduce the risk of sector concentration and to
support banking supervision independence. The amendments apply
restrictions to the size of shareholdings, clarify liquidation
procedures, and identify "influential" banks, highlighting the
BOM's vision for enhanced financial supervision to facilitate
improved stability in the sector.
The newly combined entity will hold 1.7% of total sector assets
based on 2020 asset value data for the sector, in which TransBank
and Credit Bank were the seventh- and ninth-largest banks,
respectively.
Posted 30 July 2021 by Ana Moreno, Director, Product Development, IHS Markit and
Chris Fenske, Head of Fixed Income Research, Americas
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
