Markets last week |
Events moved the markets day to day last week but could not stop the juggernaut of expectations that a Biden victory in the US elections will be good for investors. Literally hours after the US Federal Reserve Chair clamoured for fiscal support for the economy, President Trump threw a spanner in the works and decided to abandon negotiations with the Democrats on the fiscal stimulus. Later, he tweeted that he wanted help for airlines and the PPP (Paycheck Protection Program). Eventually, he threw his weight behind more negotiations between House of Representatives Speaker Nancy Pelosi and Treasury Secretary Mnuchin, which raised hopes in markets for more fiscal stimulus. Time is running out for a large fiscal bill, however, with the election three weeks away. Markets now seem to be resigned to spending coming after the election only. Trump has been hit by a wave of bad polls in marginal states: Florida, Pennsylvania, Wisconsin, Nevada, even Iowa and Ohio. Markets seem to be warming up to a Biden presidency, generally valuing the higher stimulus more than the higher marginal taxes. Presumably, also, the prospect of a clear-cut outcome, without weeks of wrangling and Supreme Court fights, is a positive for risk appetite. The Vice-Presidential debate between Mike Pence and Kamala Harris showed skilled politicians adept at sidestepping difficult questions and looking more presidential than their bosses but may not have altered much in the electorate’s mind. At the end of the week, we saw equities rising further, with UK small capitalisation shares doing best and Japan lagging. Government bond yields rose, notably in the US, mostly due to the government financing the deficit ahead of the election by issuing Treasury bonds. Oil prices bounced back and gold recaptured the US$1,900 handle. The US dollar resumed its downward trend. The market is now full-on in election-forecasting mode and is likely to move with opinion polls, Trump’s health condition, the next debate (which is now only next week) and any other harbingers of the final outcome. |
The week ahead |
Tuesday: UK employment data Our thoughts: as furloughs fade and the economy goes into another set of restrictions and partial lockdowns, how will employment be affected? The Chancellor has been clever at using fiscal policy to stop the plight of jobs disappearing. The September claimant count rate and jobless claims change will obviously be more relevant for markets than the August ILO unemployment rate and average weekly earnings. It’s hard to see how the situation could improve at this stage but the magnitude of any change will determine how much more work fiscal and monetary policy may still have to do. Tuesday: US CPI and US CPI ex food and energy Our thoughts: inflation is unlikely to disturb the early part of this cycle, but there is a risk of unpredictable short-term spikes. The Fed follows a different gauge (the core PCE – Personal Consumption Expenditures) but the CPI (Consumer Price Index) is the most visible inflation number in everyone’s mind. The Core CPI (ex food and energy), although less volatile than the headline CPI, fell from the mid 2’s to barely above 1% due to COVID-19. It has since recovered to 1.7% but could be quite volatile if rents move sharply. A recovery towards 2% would bring it back into “normal” territory but we could see spikes and troughs before the level stabilises. The headline reading dropped from 2.5% to almost 0% and bounced back to 1.3%. In the absence of massive oil price shifts, it should have similar movements to the core number. Friday: US University of Michigan sentiment index Our thoughts: sentiment indices and regional Fed surveys are always a good bellwether of how the US economy is faring and how consumers may be behaving. At this particular juncture, they also have the added insight of guiding us toward the election outcome. The Michigan index has been stuck around 80 after falling from 100 with COVID-19. It will not just matter whether it rises much further but also how the current assessment vs. the expectations play. A significant rise in expectations would be positive for Trump with a drop pointing to a Biden win. |
The numbers for the week |
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Central banks/fiscal policy |
The Fed still wants fiscal policy to take over from monetary policy US Federal Reserve (Fed) Chair Powell spoke last week, saying that “too little support would lead to a weak recovery”, that the economic recovery was “far from complete” and the “risks of policy intervention are still asymmetric”. Shortly afterwards, President Trump asked his team to stop negotiating with the Democratic Party on further stimulus, which took markets by surprise. Although he changed his mind later, the stimulus discussions are still ongoing without any guarantee of success before the election. The Fed’s minutes for the last meeting were published. There is open-mindedness to changing the Fed’s asset purchase programme; the virus is the top datapoint for the Fed to assess policy; and there are concerns about small bank exposure to commercial real estate. Nothing that should (or did) worry the markets. |
United States |
Services PMIs looking very strong but jobs recovery stalling Surveys: the ISM (Institute for Supply Management) services PMI surged from 56.9 to 57.8, whereas the less volatile Markit services PMI was unchanged at 54.6. All these numbers are very strong for a part of the economy which is massively challenged right now due to the sharp rise in unemployment. Trade: the US trade deficit widened in August to the largest since 2006. The surplus in services also shrank to the lowest since 2012. Jobs: unemployment was a little better, with initial jobless claims stuck at 840,000, vs. 849,000 last week. The report continued to exclude California, as the state is revamping its technology system. Continuing claims, though, fell by another million from almost 12 million to almost 11 million, but that may be because a lot of unemployed have exhausted the 26 weeks of benefits (it is 29 weeks since the first pandemic-induced layoffs in March). |
United Kingdom |
Actual growth not as buoyant as surveys Surveys: the UK services PMI rose from 55.1 to 56.1, above estimates. Growth: UK growth in August disappointed, up 2.1% vs. 4.6% estimates, meaning that GDP was still more than 10% below pre-COVID-19. Construction led the growth, whereas manufacturing lagged. Services only rose 2.4% vs. 5% expected. The trade deficit rose from £7.8bn to £9bn. Housing and autos: the Royal Institution of Chartered Surveyors’ measure of house price movements over the past three months climbed to the highest since 2002 in September. New car registrations year-on-year fell 4.4% vs. -5.8% the previous month, an improvement. |
Europe |
Mixed data Surveys: in the eurozone, the Sentix investor confidence survey fell a smidge from -8.0 to -8.3. Sales: retail sales for the eurozone were strong, up 4.4%. Industry: German factory orders rose 4.5%, above estimates and up from 3.3% last month. German industrial output fell 0.2% following three consecutive gains, against expectations of +1.5%. French industrial production also disappointed in August, up 1.3% vs. 1.7% estimate.
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China/India/Japan/Asia |
Strong Chinese surveys continue China: the country was closed most of the week for Golden Week in China and re-opened on Friday with a bang and a stronger currency. Chinese foreign exchange reserves were a little lower, at $3.14trn vs. $3.16trn. The unofficial Caixin services PMI rose from 54.0 to 54.8, which added to the string of very strong PMIs in China. |
Oil/Commodities/Emerging Markets |
Output increases from the Organisation of the Petroleum Exporting Countries Plus (OPEC+), may not quite materialise as expected, which helped crude prices stage a meaningful rally during the week. It looks like Saudi Arabia is trying to reduce global inventories before adding to production at some point in the future. |
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