Your weekly economic update from the team at FXD Capital
On Tuesday, UK house prices by Nationwide building society were released showing a considerable rise in monthly prices in August of +2.1% on the month, following on from an increase by 0.6% in July. House prices have been forecasted to increase each month by 0.2% and year-on-year growth of 8.6%. August house prices were the second highest in over 15 years, and this comes as a surprise since stamp duty holiday phased out from July onwards. The main effect of stamp duty holiday has been on the number of properties with new ownership rather than prices, as data shows that transaction volume and mortgage lending figures have slowed significantly. Due to the imbalance between the demand for housing and properties available, it will take time for the demand to eventually decrease and hopefully the full end of the stamp duty holiday in late September will contribute to a decreased level of demand.
The impact of driver shortages and Brexit costs are being echoed through increased UK shop prices as data from the British Retail Consortium displayed a 0.4% rise in prices in August. The rising prices in the UK indicate inflation across the eurozone as the mounting costs of energy, goods and services hitting household spending have surged to their highest level in a decade.
In response to Fed Chair Jerome Powell’s ‘dovish’ speech last Friday, the US dollar weakened, short rates and bond yields declined, and equity markets rallied. The main takeaways from his speech is that the US economy is recovering at a pace that has exceeded expectations as the unemployment rate has decreased to 5.4%. As schools reopen and the number of people receiving vaccinations increase, the Fed stated that the prospects look ideal to reaching maximum employment. Inflation is a cause for concern as in July inflation rose by 4.2% with prices rising dramatically, however Powell remains confident as this inflation pop is said to be ‘transitory’. Tapering could potentially start by the end of 2021, but the process depends on how the US economy recovers which will be observed again in Autumn. Despite the inevitable tapering process, rates are not expected to increase with rate hikes only predicted to occur in Q1 2023.
Stronger net exports to provide small support to GDP growth in the US. The narrowing in the trade deficit to $70.1bn in July suggests that the net trade will look positive in Q3 as exports rose by 1.3% and imports fell by 0.2%. There was an increase in autos trade in both directions and exports of industrial supplies, capital, and consumer goods. As the fiscal boost faded, the fall of 3.4% of consumer goods import is consistent with the sharp slowdown of consumption growth. Despite an increase in service exports of 6%, they are still being held down due to strict US controls on international arrivals. In real terms, good exports are to increase by 2% over Q3. As real good imports fell by 1.4% in July, this suggests that overall import growth will be weaker in Q3, making a small positive contribution to GDP growth. The renewed spread of coronavirus could pose issues across trade over the next few months however there is evidence to suggest that with export growth continuing to outperform the US is on track with their economic recovery.
Non-farm payroll numbers will be released today and as Powell is yet to announce when the tapering process will actually occur, these numbers are important. The NFP report could inform whether businesses are having greater success hiring after months of limited labour supply, but the Delta variant effects could mean a softer-than-expected payrolls print and this will complicated the Fed’s tapering decisions.
Eurostat has estimated that the euro area inflation is to be at 3% in August, an increase of 0.8% compared to July and the highest level of inflation since 2011. As the inflation level moves away from the European central Bank’s (ECB) target of 2%, the ECB need to reconsider their Pandemic Emergency Purchase Programme (PEPP). It will be interesting to see whether at next week’s Governing Council meeting, there will be talks regarding possible reductions to bond-buying under the PEPP programme.
German retail sales fell significantly by 5.1% after two months of gradual increases. For Eurozone’s largest economy their consumer-driven recovery could impede growth during Q3.
Unemployment levels have continued to decrease as the Eurostat reported the number of people unemployed has decreased to 12.3 million, adjusting the unemployment rate down to 7.6%.
Looking ahead to next week, on Monday a manifesto-busting 1p increase in national insurance contributions for workers and employees could be used for a post-Covid boost for the NHS to address the long-term social care funding, could be announced. The NHS have asked for £10bn however could receive £5bn which would not be enough.
Have a great week ahead.
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