Markets last week |
Equities had a better week on the back of encouraging vaccine news, a strong corporate reporting season and the expectation that the US Congress would finally approve a stimulus extension deal. At the end of the week, the Congress talks reached an impasse and President Trump stepped in with four Executive Orders to extend the enhanced unemployment benefits but only for US$400 per week, vs. US$600 previously, an order stopping evictions, a cut in the payroll tax and a deferral of student loan payments, thus avoiding an instant “fiscal cliff”. On the other hand, President Trump banned not only Tik Tok but also WeChat, revving up his campaign against China as a challenge to Democratic candidate Biden. So far more than 80% of US companies reporting have beaten estimates, led by technology and defensive sectors, with more than 60% of European firms also doing better than expected. Economic data were mixed and the US jobs picture was somewhat murky based on conflicting numbers, but markets took the numbers positively. The Bank of England sounded less negative than expected and hence supported sterling for a couple of days. At the end of the week, equities had risen sharply, with the FTSE 250 leading and emerging markets lagging. Sterling’s strong run was clipped somewhat by an incipient US dollar rally and gold continued to shine. |
The week ahead |
Tuesday: UK Employment Report Our thoughts: on Tuesday we will be able to see the UK’s employment report for July. June’s report surprised on the upside, with the unemployment rate remaining at 3.9%, despite forecasts for it to jump to 4.2%. Employment dropped by 125,000, compared with consensus estimates of a fall of 275,000. There are two key reasons for the unemployment rate remaining so low. First, many people who have lost their jobs have largely become inactive in their search for a new job – indeed, to be defined as ‘unemployed’ you need to be actively searching for a job within the last month. The second reason is clearly furlough, of which 9.4 million people are estimated to have benefitted. For these reasons, we wouldn’t expect a rapid rise in the unemployment rate for July – this will likely happen in the latter stages of the year as the scheme terminates – but we do expect it to begin to rise more gradually. The historical link between job vacancies and the unemployment rate suggests June’s true jobless rate would have been c.8.5% if it weren’t for furlough. Wednesday: UK Q2 GDP Growth Our thoughts: first thing on Wednesday morning we receive the first estimates of the UK’s second-quarter GDP growth – or rather, deterioration. At the time of writing, there aren’t many estimates provided, however the Bank of England forecasts output to have fallen by 21% in the second quarter. It also stated that, although the economic slowdown had not been as bad as previously expected, it didn’t expect GDP to exceed pre-pandemic levels until the end of 2021 – for comparison, Bloomberg doesn’t expect this to happen for another year, at the end of 2022. If the central bank’s forecasts end up being overly-optimistic then we would expect it to implement further stimulus, probably in the form of quantitative easing as opposed to a shift to negative interest rates. Friday: US Retail Sales Our thoughts: Friday will provide the ever-important US retail sales figures for July. As the world’s largest economy began re-opening, it has resulted in two huge consecutive months for retail sales growth. In fact, following June’s growth of 7.5%, well ahead of forecasts, it has brought the value of retail sales roughly in line with pre-pandemic levels. What has certainly boosted consumer spending to some degree has of course been the expanded jobless benefits. Early estimates for July are for the growth to slow, but remain positive at 1.3%. |
The numbers for the week |
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Central banks/fiscal policy |
Bank of England not as bearish? The Bank of England (BoE) kept rates and asset purchases unchanged and said they have no plans to tighten policy until there is clear evidence of “significant progress” toward eliminating slack in the economy and “achieving the 2% inflation target sustainably.” The BoE’s new projections see inflation getting back to the 2% target within its forecast horizon, hinting that it may not need to ease further. They also stated that the downturn will be less severe than forecast in May and that UK bank losses would be ‘somewhat less’ than expected, altogether a slightly bullish tone. |
United States |
Unclear jobs data despite good surveys Surveys: the ISM (Institute of Supply Management) manufacturing PMI rose to 54.2, up 1.6 over last month, strengthening. New orders (61.5) and production (62.1) led the index. Customer inventories are quite low at 41.6 which is positive. The ISM non-manufacturing PMI was also strong, expanding at the fastest pace since February 2019, at 58.1, driven by new orders, which showed the highest reading since 1997. The problem was services employment. The trend in services PMI for employment is still worrisome, below 45. Industry: factory orders and durable goods orders were better than expected, at 6.2% and 7.6%, respectively. Consumer: consumer spending is still down 6.2% from January. Employment: jobless claims were less bad than expected at 1186K vs. 1400K expected with continuing claims at 16.1 million, 800,000 below estimates. Non-farm payrolls added 1,763K jobs, better than estimates of 1,480K. Unemployment (U-3) fell from 11.1% to 10.2% but there was still a potential 1% discrepancy in the data. Underemployment (U-6) fell more decisively from 18% to 16.5%, but the labour force participation rate ticked down to 61.4% from 61.5% (for prime age workers 25-54 participation fell from 81.5% to 81.3%). Average hourly earnings, up 0.2% for the month and average weekly hours were all better than expected. |
United Kingdom |
Improvement in construction and autos Surveys: the manufacturing PMI was a smidge off at 53.3 from 53.6, whereas the services PMI was almost unchanged and in line with estimates, at 56.5, a good number. The Markit/CIPS construction PMI surged from 55.3 to 58.1. Autos: new car registrations in July rose 11.3% vs. one year ago to 175,000 and improved from -34.9% year-on-year last month. |
Europe |
Better manufacturing surveys Surveys: European manufacturing PMIs showed improvements in Spain, Italy, France and Germany. The eurozone manufacturing PMI edged up from 51.1 to 51.8, above expectations. The eurozone services PMI eased from 55.1 to 54.7, with Germany down from 56.7 to 55.6 and France from 57.8 to 57. Consumer: eurozone retail sales rose 5.7% in June, a little below estimates. Industry: German factory orders were very strong, up 27.9% in June, way above expectations. French June industrial production rose 12.7%, above estimates Trade: the German trade surplus more than doubled from €7bn to €15.6bn in June. |
China/India/Japan/Asia |
Chinese trade and prices looking better China: the Caixin services PMI fell from 58.4 to 54.1, below estimates. The Chinese trade surplus also increased from US$44.4bn to US$62.3bn. Foreign exchange reserves rose from US$3.11trn to US$3.15trn. Inflation was slightly higher: the CPI (consumer price index) increased from 2.5% to 2.7% year-on-year and the PPI (producer price index) from -3.0% to -2.4%, indicating an industrial sector improvement. Japan: the Jibun Bank services PMI edged up from 45.2 to 45.4. Cash earnings and household spending were both negative year-on-year but better than expected. The leading index and coincident index both improved, from 78.4 to 85.0 and 73.4 to 76.4, respectively. |
Oil/Commodities/Emerging Markets |
Gold was again in the spotlight, rising 3% over the week. Crude oil inventories fell 7.37 million barrels, according to the EIA, which was supportive of oil prices. |
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