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Markets started the week on a hesitant footing as geopolitical concerns resurfaced once again. China responded to earlier US sanctions, by imposing its own injunctions on 11 prominent US citizens, which undermined global stockmarkets as tension between the two countries was seen to be escalating once again. Unsurprisingly, Democrats railed against President Trump’s decision to bypass lawmakers and issue executive orders aimed at softening the blow from the coronavirus crisis. Moves to extend enhanced unemployment insurance, evictions, payroll tax and student loans, were cited as ‘weak and unconstitutional’. These orders followed the collapse of talks on the size and shape of a further congressional led rescue package. Democrats are pushing for a figure of US$3.4trn, whereas Republicans are aiming for a figure closer to ‘just’ US$1trn. The President’s actions may have been an attempt to force their hand towards a deal, but concerns remain that US lawmakers will not quickly overcome this gridlock, although there is still hope that further stimulus will, eventually, be forthcoming. A boost for US stocks was provided following comments from President Trump suggesting a potential tax cut for capital gains, while strong Chinese economic data and falling coronavirus related hospitalisations in California and New York also helped underpin markets. Consequently, by mid-week and on a total return basis, US stocks surpassed their all-time closing high, which was reached in February, with the market continuing to be led higher by the technology sector. On Tuesday, Russia gave the go-ahead to begin mass production of a new COVID-19 vaccine developed by its own researchers, which caused a brief flurry of excitement. This was quickly replaced by concerns regarding the efficacy and safety of the vaccine given just how quickly it was developed. Meanwhile, the US has committed to buy 100 million doses of a vaccine being developed by Moderna, even though it remains in an experimental stage and currently in phase 3 clinical trials At the end of the week, European stocks dropped as fresh quarantine rules for UK arrivals hit travel and leisure shares, but on the whole, this was another positive week for equity markets. |
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The week ahead |
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Wednesday: UK Inflation
Our thoughts: the year-on-year increase in CPI inflation is expected to moderate slightly, to 0.5% from 0.6% in June, while the core rate (ex-energy, food, alcohol and tobacco) is expected to show a similar decline, falling to a 1.3% year-on-year rise, compared to 1.4% in June. Recreation and culture prices are likely to be the subject of continued downward pressure, although this may be offset by rising fuel costs. Central banks, including the Bank of England, are unlikely to be too fixated on the inflation figures for the foreseeable future, but will be more focussed on fighting any deflationary forces, rather than concerned about any acceleration in the inflation rate. The temporary sales tax cuts for hospitality and attractions, combined with the ‘eat out to help out’ scheme, may drag down prices. This latter program expires at the end of August, so September will likely see a reversal of the trend.
Wednesday: FOMC Minutes
Our thoughts: as ever, the US Federal Reserve minutes will be closely scrutinised for any further clarity which they can offer on policymakers’ views on growth, inflation and the future course of monetary policy. The minutes cover the 28 – 29 July meeting and may provide some insight on any discussions regarding forward guidance and any changes in language which might accompany the September decision. The minutes are likely to emphasise the need for continued fiscal stimulus to support the Federal Reserve’s monetary efforts, given the importance of supporting consumer spending, and keeping many small businesses afloat.
Friday: UK retail sales
Our thoughts: a slow return to some sort of normality on the UK high street is likely to be reflected by an improvement in UK retail sales, although there will still be a long way to go until full recovery, with weekly footfall still down by around 45% on a year-on-year basis. Consumers remain cautious and, when combined with a lack of tourism and the headwind provided by continued homeworking, the UK high street will continue to operate well below capacity. In addition, there is a stark difference between different retail sectors – food sales remain well above pre-pandemic levels; non-food stores were down by about one-third from their pre-coronavirus levels in June. While the national rate of coronavirus infections and fatalities has continued to moderate, localised outbreaks are likely to keep the consumer cautious, and with a tendency to keep a higher savings buffer. Consequently, retail sales activity is likely to be constrained for the remainder of the year. |
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The numbers for the week |
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Central banks/fiscal policy |
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Further support will be forthcoming if necessary
There were no notable central bank policy meetings this week, although in an interview with the Times newspaper, deputy governor of the Bank of England, Dave Ramsden, suggested that the central bank would increase its quantitative easing programme if the economy showed signs of slowing down. In a similar vein, Federal Reserve Bank of Richmond president, Thomas Barkin highlighted the lost momentum within the US economy as a result of the coronavirus resurgence and outlined that this may require further sustained fiscal support in order to soften the impact. So too, Mary Daly, the president of the San Francisco Federal Reserve, warned that some parts of the US economy may never fully recover, and that a large number of workers might not be able to go back to the same jobs as they had previously, with the effects likely to be felt most by those with the least education. |
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United States |
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Disinflationary pressures may be easing
Inflation: producer prices excluding food and energy increased 0.3% from a year ago, compared to a 0.1% year-on-year rise in the previous month, suggesting a slight recovery in pricing power. However, it appears that any movement towards the US Federal Reserve’s 2% target will be a long, slow process. The cost of goods increased 0.8% from a month earlier, as energy prices advanced 5.3%. Constrained price pressures within the production chain are expected to restrain consumer price inflation, although the July release of CPI figures reported prices rising by more than expected. This was led by auto and apparel costs. The headline CPI rose 0.6% from a month earlier (above the median forecast of 0.3%) and registered a 1% year-on-year rise. Core CPI (excluding volatile food and fuel) and the measure favoured by policymakers, rose 0.6% compared to the previous month, which was the largest month-on-month gain since 1991, but remains 1.6% on a year-on-year comparison, a four-month high.
Retail sales: the rebound in retail sales faltered in July, although June’s figures were revised higher. A renewed surge in COVID-19 cases, and still high unemployment, were likely behind the monthly increase of just 1.2%, compared to the 2.1% expectation, with the prior month revised higher to 8.4%, from the 7.5% initially reported. Nonetheless, the total value of retail sales now stands above pre-pandemic levels, with July purchases up 2.7% from a year earlier. The slowdown was led by declines in the sales of autos and building materials, together with restaurants and clothing.
Surveys: the University of Michigan sentiment index remains near the pandemic low, indicating that consumers remain concerned about the state of the economy given the high number of COVID-19 infections, and elevated unemployment. The headline sentiment index rose 0.3 points, to 72.8, still close to April’s low of 71.8 which was the worst reading since 2011. The measure of current conditions fell to 82.5, while the expectations component ticked higher by 0.6, to 66.5. Confidence in the 5-year economic outlook fell to the lowest since 2014. There is also a reported gap in inflation expectations between high- and low-income households. Those with lower income are being hurt more by rising food prices and consequently those in the bottom third of incomes expect prices to rise 3.5% in the year ahead, compared to 2.5% for those in the top third.
Employment: job openings unexpectedly increased in June, with hiring efforts continuing as various US States maintained their reopening efforts. The number of available positions, according to the JOLTS survey, climbed to 5.89 million from a revised 5.37 million in May. While job hiring slipped back to 6.7 million in June, compared to a record 7.2 million a month earlier, this was still the second largest figure on record. Meanwhile the number of people voluntarily leaving their job increased by 522,000 in June. Competition from those looking for work remains elevated – nearly 18 million were jobless during the month, leaving 3 unemployed workers competing for every job opening. Real average hourly earnings fell 0.4% month-on-month in July, to post a 3.7% year on year increase. In a separate report, unit labour costs surged 12.2% and productivity rose by the most in 11 years as hours worked fell by more than output. Nonfarm employee output per hour increased at a 7.3% annualised rate in the three months to June, the fastest pace since Q1 2009.
Meanwhile, initial jobless claims dropped below 1 million for the first time since the pandemic began. Claims fell to 963,000, down 228,000 and continuing claims decreased to 15.5 million for the week ending 1 August. These figures were better than expected, although they remain well above the highs reached during the previous downturn. The drop will likely be used by Republicans to argue that the US$600 weekly supplemental jobless benefit, which expired in July, disincentivized people from returning to work
Politics: Democratic presidential nominee Joe Biden selected Kamala Harris as his vice-presidential nominee. Typically, VP nominees have limited impact and, often, are selected on the basis that they probably won’t harm the presidential nominee’s chances. On this occasion however, given Joe Biden is already 77 years of age and may not serve two terms if elected, the VP nomination may be more important than usual, but ultimately, while bringing some short-term attention to the campaign, this remains a race between Joe Biden and Donald Trump. According to the RealClearPolitics polling average, as of 25 July, Biden led Trump by 9% nationally. |
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United Kingdom |
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“A very difficult and uncertain time” says Chancellor as economy shrinks by a fifth
Economy: the UK economy was reported to have suffered a larger slump than any other major European nation in the second quarter. Data showed that GDP fell 20.4% quarter-on-quarter, the steepest decline since records began in 1955, and the first recession since 2009. While there was a rebound in June, with UK output increasing by a record 8.7%, high frequency data such as credit card spending, and electricity use, are all still well below pre-pandemic levels. A continued recovery is expected for July, when a wider range of service-related businesses were permitted to open. The decline in UK GDP since the end of 2019 is almost double that of the US, and only behind Spain amongst its European peers, with activity suffering both due to the length of the UK’s lockdown, as well as the fact that the consumer facing services sector, most vulnerable to social distancing measures, accounts for a far larger proportion of the economy than other nations. GDP has risen 11.3% since the April low, but sits 17.2% below its February level.
Jobs market: employment fell by the most since the global financial crisis, with 220,000 fewer employed between April and June, while the Office for National Statistics has indicated that the number of employees on payrolls is down by around 730,000 in July compared to March. Meanwhile, the number of hours worked hit a record low last month. While the unemployment rate remained steady at 3.9%, this reflects the large number of people who gave up looking for work and it may be that the true cost of the global pandemic on the UK labour market will only truly be revealed once the government’s furlough scheme ends in October. The furlough program has supported 9.6 million jobs, with beneficiaries still being classed as employed. Separately it was reported that one in three UK businesses are planning job cuts. |
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Europe |
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Significant job losses but hopes for the future
GDP: the eurozone economy was confirmed as having contracted by 12.1% in the second quarter, confirming the late July estimate. This is the deepest contraction on record and has reduced output to 2005 levels.
ZEW: investors unexpectedly raised their expectations for Germany’s recovery from the COVID-19 induced plunge in activity, with a gauge measuring the prospects for the next six months rising to 71.5 in August. “Hopes for a speedy economic recovery have continued to grow” according to the ZEW President, “but the assessment of the situation is improving only slowly”. The German Bundesbank expects the German economy will continue to recover in the second half of the year, aided by the government’s fiscal stimulus measures, but that it will still take a considerable time to return to pre-pandemic levels.
Employment: the steepest drop in employment on record was reported for the second quarter across the euro area, with 2.8% of jobs eliminated in the three months to the end of June. Approximately half of the 12 million jobs created since the eurozone debt crisis have now been wiped out and while furlough programs have helped, and ensured the rise in unemployment is far less than that seen in the US, weakness in the labour market remains one of the key risks to the euro area recovery.
Industrial production: output rose 9.1%, although this was still below the 10% consensus forecasts in a poll by Reuters. Production remains over 12.3% lower than a year ago, highlighting that factories are still struggling to recover. |
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China/India/Japan/Asia |
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China’s trade and prices looking better
China: consumer price inflation accelerated during July, although this may be short-lived and driven by temporary forces. Food prices were pushed higher as pork prices rose sharply (+85.7% over the year; 10.3% over the month) due to an outbreak of swine fever, and as damage and transportation disruptions were caused by floods in central and southern china. Core inflation (ex food and energy) was 0.5% higher year-on-year, compared to 0.9% in June. Factory price deflation eased due to higher commodity and industrial product prices, which is positive for corporate profits.
At the end of the week, data was released which confirms that China’s economic recovery continued in July, although it may be an uneven rebound. Industrial output rose 4.8% from a year earlier, while consumption lagged, with overall retail sales registering a fall of 1.1%, compared to projections of a 0.1% increase. China needs to be able to demonstrate a strong rebound in private consumption if the recovery is to remain intact.
Japan: the Japan Centre for Economic Research forecast that Japan’s economy won’t recover the ground it lost during the pandemic until 2024. A 6.8% contraction in the economy is expected in the current fiscal year ending March 2021, which is below the 5.1% decline expected by economists and the Bank of Japan’s 4.7% projected slide. Growth will be constrained by the necessity for the government to increase taxes to manage higher levels of debt, companies pare back capital spending and wage growth, and consumers spend less. Japan’s GDP has contracted every quarter since the sales tax was increased last October. |
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Oil/Commodities/Emerging Markets |
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Gold succumbed to profit taking following its record-breaking run, with prices easing by 4.4% during the week, to finish at US$1,945 oz. Oil prices rose following Saudi Arabia’s state energy group stating it was experiencing a partial recovery in the energy market. |
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