Another risk-off week with many different factors moving markets. Consumer spending, business activity, travel, mobility and restaurant bookings have flattened in the US in the last few weeks after an initial bounce. New virus outbreaks are now everywhere: northern England, Japan, Texas, California, Xinjiang, Australia, Spain, not to mention emerging markets. This is feeding into the economic stalling scenario. Q2 GDP numbers for the US and European countries shocked even seasoned market observers but these are old numbers now and the concerns are more about the rising US jobless data. Against that backdrop, the US Federal Reserve revved up its rhetoric on the economy being dependent on the virus, reiterating the full extent of its liquidity policies and calming nerves. The Republican and Democratic members of the US Congress did not manage to reach an agreement on extending the unemployment and pandemic benefits, some of which have just expired. During the week, the US dollar was the worst currency, settling around 7% lower than in April-May. Sterling took over as the strongest currency, ending the week near US$1.31 and €1.11. Gold prices soared, heading for US$2,000. Government bond yields kept falling, reaching 0.07% for the 10-year gilt before recovering to 0.10% and hitting an all-time low of 0.52% for the US 10-year treasury bond. We are now halfway through the Q2 reporting season and 50% of US and European companies have reported earnings. We are seeing the highest level of companies beating estimates in 10 years, although many firms are still withholding guidance on future profits. The CEOs of some of the largest US technology companies were grilled by the US Congress shortly before announcing banner profits. At the end of the week, equities were down, in particular for sterling-based investors, with US shares doing better after a Friday recovery and Europe and Japan doing worse. |
The week ahead |
Wednesday: European Services PMI (purchasing managers index) (July, Final) Our thoughts: Europe is a continent with positive momentum very much in its favour. The recently agreed recovery fund finally brings Europe’s politicians into line, promoting a more sustainable future for the euro and providing another level of support for an economy previously propped up solely by monetary policy. On the ground, there are also reasons to be optimistic, as evidenced by the preliminary services PMI for July which came through at 55.1, a large increase from 48.3 the previous month. It was only a quarter ago that we were forecasting the depth of Europe’s contraction and now, we are thinking about how materially the economy could rebound. It is important to remain balanced though. Whilst much of this uplift in sentiment has been driven by stronger data from Germany and France, there remains cause for concern around Southern European nations, Spain and Italy. Thursday: Bank of England (BoE) monetary policy meeting Our thoughts: the BoE’s response to the virus outbreak has been significant, and on a par with the reaction from its developed market central bank peers. Interest rates now sit at 0.10% from 0.65% back in March. It has engaged in a new round of quantitative easing (QE) which increased its total stock of assets to £745bn, almost double where it was pre-COVID-19. The BoE anticipates completing the asset purchase plan by the end of the year but investors suspect that there may be more to come. This would help explain why UK government bond yields have pushed lower while their US and German counterparts have remained range-bound over the past couple of months. Whilst we expect this meeting to come too early for another announcement of QE, we think it might hint at the possibility. Friday: US Unemployment, Non-Farm Payrolls (July) Our thoughts: assessing the longer-term picture for jobs in the US will remain difficult for some time, as much of the current data is still distorted by fiscal policy packages put in motion by Congress in the immediate aftermath of lockdown. We have seen the heavy falls in employment and there has been a pick-up since, indeed June data actually surprised on the upside. The biggest improvement has been felt in industries most impacted by the virus, namely leisure and hospitality. Under the surface, however, was the weakening trend for average hourly earnings. With personal income falling, the knock-on effect for consumer spending could be material. |
The numbers for the week |
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Central banks/fiscal policy |
Fed doing all it can but Congress still fighting over fiscal package The US Federal Reserve (Fed) extended most of its emergency lending programs by three months, through the remainder of 2020, to help an economy still struggling with the coronavirus pandemic. Fed Chair Jay Powell reiterated that he’s “not even thinking about thinking about raising rates”, and made it very clear that it was the virus surge that was weighing on economic activity, but as the Fed has “lending powers, not spending powers”, they cannot replace the lost income. Only fiscal policy can do it and this is what we are now waiting for: a package of some US$1-1.5trn from Congress, but the wrangling is still going on between the sides. In the meantime, many Americans will lose the US$600 a week unemployment benefit. The European Central Bank (ECB) has urged banks to pause shareholder payouts for longer (at least until January). The banks have been lobbying to resume dividend payments. |
United States |
Jobless and consumer confidence weighed on markets Surveys: the Dallas Fed manufacturing activity index improved as well at -3.0 vs -6.1. The Richmond Fed manufacturing index rose from 0 to +10, above estimates. The Conference Board consumer confidence index fell from 98.3 to 92.6. The MNI Chicago PMI soared from 36.6 to 51.9, above estimates. The bellwether University of Michigan sentiment index fell a little from 73.2 to 72.5, driven mostly by weaker current conditions but with expectations holding up well. Housing: housing is still doing well with pending home sales up 16.6% in June. The Case-Shiller house price index eased somewhat from 4.61% year-on-year to 4.46% but the narrower 20-city price index fell more from 3.91% to 3.69%. Employment: for the second week jobless claims are rising, albeit only by 18K, but continuing claims are up almost 900,000 at 17 million. Income and prices: personal income fell 1.1% in June, but personal spending rose 5.2%. Inflation, as measured by the PCE (personal consumption expenditures) rose from 0.5% to 0.8%, but the core reading (ex food and energy) fell from 1.0% to 0.9%. Core PCE is the Federal Reserve’s inflation gauge with a target of 2%. Growth: the annualised GDP number for Q2 was an eye-popping -32.9%, down from -5.0% in Q1, but annualising such a huge drop is not realistic. The non-annualised number was -9.5% and compares better with the European GDP numbers. US durable goods orders were up 7.3% in June, a little better than expected but most of it coming from the transportation sector. |
United Kingdom |
Housing is improving Surveys: the Lloyds business barometer marginally better at -22 vs -30, though still very depressed. The survey was +20 before COVID-19 and is now in the same ballpark as in 2008-2009. Sales: the CBI retailing reported sales bounced back from -37 to +4 with the total distribution reported sales also up from -55 to -3. The BRC shop price index in July edged up from -1.6% to -1.3% year-on-year. Money supply: not rising quite as fast, up 1% in June, up 13.1% year-on-year and for the last three months up 19.8% annualised, but that’s down from 31.2% last month. Housing: mortgage approvals went up to 40K from 9.3K previously (but the number was over 70K before COVID-19) with net lending on dwellings rising from £1.3bn to £1.9bn (but the number was £5bn before COVID-19). The Nationwide house price index rose 1.7% in July, much better than expected with the year-on-year number now positive at 1.5%. |
Europe |
Horrible Q2 GDP but improving surveys Surveys: the bellwether IFO in Germany went from 86.2 to 90.5 with expectations from 91.4 to 97.0 and current assessment from 81.3 to 84.5. Eurozone economic confidence, industrial confidence and services confidence were all better, although still at depressed levels, but consumer confidence was unchanged at -15. Money supply: eurozone M3 money supply rose from 8.9% year-on-year to 9.2%. Growth: eurozone GDP was down 12.1% in Q2 after -3.6% in Q1. French GDP was down 13.8% in Q2 after -5.9% in Q1, slightly better than expected but still eye-popping and -18.5% in Spain, the worst in Europe. Other economic data: the eurozone unemployment rate rose a little from 7.7% to 7.8%. German retail sales fell 1.6% in June and French consumer spending rose 9.0% in June, both above estimates. |
China/India/Japan/Asia |
China is the closest to a V-shaped recovery there is China: the PMIs, both manufacturing and non-manufacturing, were almost unchanged at 51.1 and 54.2, respectively, which together with strong industrial profits, is keeping China in a V-shaped recovery bubble. The unofficial Caixin manufacturing PMI was also buoyant, rising from 51.2 to 52.8. Japan: industrial production rose 2.7% in June, though housing starts year-on-year were down 12.8% and construction orders 13.4%. The consumer confidence index was barely improved at 29.5 vs 28.4. The Jibun Bank Japan manufacturing PMI improved from 42.6 to 45.2 but remained in contraction territory. |
Oil/Commodities/Emerging Markets |
Gold prices soared again with the yellow metal approaching US$2,000/oz. Despite a huge drop in US shale oil production, crude prices are having difficulty rallying due to the ongoing output glut. |
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