Markets last week |
Market volatility was ever present last week, with equities up one day, down the next. Under the surface, though, it appears that the current moves are more likely to be a correction than a change in sentiment, as risk-on areas are still performing well (small companies, consumer discretionary sectors, copper, cyclical shares, inflation expectations). The US dollar and equities seem to be directionless amid the more solid backdrop. The meeting of the US Federal Reserve (Fed) on Wednesday provided more confirmation of the average inflation target policy planned by the Fed with the crucial statement that rates would remain unchanged until at least 2023. Sterling recovered due to positive noises from the EU on Brexit and UK equities did better including the currency movement. Oil bounced back on Chinese industrial data and Hurricane Sally. At the end of the week, equities were mixed with the best returns in Japan and the worst in European and US shares. Government bond yields and gold were mostly stable, oil was the standout asset, soaring more than 8%, sterling rose almost 1% vs. both the US dollar and euro with the US dollar returning to weakness. |
The week ahead |
Wednesday: Markit UK Manufacturing PMI and Markit/CIPS UK Services PMI Our thoughts: PMIs always matter for markets but in the extreme uncertainty of the lockdown recovery period, they can give a strong indication of how well the economy is coping. The manufacturing PMI has recovered to the levels of 2018-early 2019 (latest reading 54.0), but the question is whether it is sustainable in light of a potential no-deal Brexit and an increase in customs paperwork. The Services PMI soared to close to decade highs at 58.8 and has subsided somewhat to 55.9. If it settles lower but consistently above 52-53 it would be a sign that the UK economy, which is 80% services, is truly on the mend. Thursday: IFO Business Climate Survey, Germany Our thoughts: the IFO is a bellwether for the German economy, covering 7,000 companies in manufacturing, trade and construction. It is also meaningful for the direction of the eurozone. It is expected to rise, both in terms of the current assessment and the expectations. At the current level of 92.6, it is still below the 95 pre-COVID-19 level and the cycle high above 100, but could it get closer to 95 which would signal a V-shaped recovery for Europe’s leading manufacturing economy? Thursday: Jobless claims, USA Our thoughts: although watched very carefully every week by the markets, jobless claims don’t cease to matter from week to week. The initial claims reading is still expected in the same ballpark, at 840K vs. 860K previously. Continuing claims fell to 12.6 million most recently but still have a long way to go to get back to the pre-COVID-19 levels of below 2 million. As the support package extension from the US Congress seems to be stalled in negotiations between the Republicans and Democrats, the evolving claims data matter for economic growth, consumer sentiment and, of course, the presidential election. |
The numbers for the week |
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Central banks/fiscal policy |
The Fed confirms rates to stay at zero until 2023 There were no changes in interest rates or asset purchases from the US Federal Reserve (Fed). The Fed’s statement said “the Committee decided to keep the target range for the federal funds rate at 0% to 0.25% and expects it will be appropriate to maintain this target range until labour market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.” Fed Chair Powell called this “strong policy guidance”. There were two dissenting members, one dovish, one hawkish. Rates should be unchanged until 2023. Chair Powell noted that economic activity has picked up since the Q2 lockdown. He stressed that the pandemic is still a key factor for the economy. The question of how the Fed is going to interpret its “average inflation target” mandate is causing a lot of ink to be spilled. When will they set the starting point for the inflation count and how often will they review it and potentially change policy? Although this uncertainty will keep markets agog, the promise of no rate rises until 2023 should reassure most. No change from the Bank of Japan either in asset purchases or in yield targets. The Bank of England did not change rates or its purchase programme. The European Central Bank (ECB) offered banks more capital relief to deal with the pandemic. |
United States |
Mixed economic numbers – jobless falling but very slowly Industry flagging: industrial production disappointed, down from 3.5% to 0.4% in August. Capacity utilisation edged up from 71.1% to 71.4%. We were upwards of 77% before COVID-19, so there is quite a way to go. Sales missed: retail sales rose +0.6% in August, though the retail control group declined -0.1% with downward revisions to the prior month. Sales are still recovering, but at a slower speed. Housing mixed: the NAHB homebuilders index continued its surge, rising from 78 to 83 in September. Housing starts and building permits disappointed. Housing starts fell 5.1% and building permits 0.9%, way below expectations. Employment improving: initial jobless claims down from 893K to 860K with continuing claims down from 13.5 million to 12.6 million. Good drop but slow trend. Surveys generally better: the Empire Manufacturing survey rose from 3.7 to 17. 0 but the Philadelphia Fed business outlook survey eased from 17.2 to 15.0. The bellwether University of Michigan sentiment index rose from 74.1 to 78.9, above expectations, with both current conditions and expectations contributing to the increase. |
United Kingdom |
Retail sales and housing give a misleading picture of economic health Joblessness: August unemployment rose from 7.4% to 7.6% (claimant count rate) with jobless claims going from 70K to almost 74K. The number of paid employees in the UK has fallen 695,000 since March with the number of people claiming for jobless benefits up to 2.7 million, up 121% since March. Inflation: the CPI (consumer price index) fell from 1.0% to 0.2%. This was the biggest drop since 2008. It was above the 0% estimate but at a 5-year low, with core CPI slumping from 1.9% to 0.8%. The eat-out-to-help-out scheme and the cut in VAT for hospitality businesses obviously distorted prices. The RPI (retail price index) went from 1.6% to 0.5% and PPI (producer price index) input was -5.8%, almost unchanged. The downward pressure on prices was in restaurants, airfares, with a small increase in clothing and footwear. Housing: the house price index for June rose to 3.4% year-on-year from 1.1%. Retail sales: up 4.3% year-on-year in August ex auto fuel, or 2.8% including auto fuel, in line with estimates. It’s the fourth month in a row of sales growth. |
Europe |
Better surveys but inflation still negative Industry and construction: the eurozone industrial production rose 4.1% in July, down from 9.5% the previous month. Construction output was up a small 0.2% in July vs. 5.1% previously. Surveys: the German ZEW economic sentiment index was very strong. Expectations rose from 71.5 to 77.4 and the current situation from -81.3 to -66.2, both above estimates. They also publish a eurozone expectations index which rose from 64.0 to 73.9. Trades and autos: the eurozone trade balance rose from €16bn to €20.3bn. The eurozone CPI (consumer price index) fell -0.2% and core CPI rose 0.4%, both unchanged. European (EU 27) car sales fell 18.9% in August after a three-month run of recovery. |
China/India/Japan/Asia |
Chinese numbers show healthier economy China: retail sales are growing for the first time since the outbreak, 0.5% first growth in 2020, better than estimates. Industrial production year-on-year was up 5.6%, from 4.8% previously, fixed assets ex rural (i.e. investment) were -0.3% vs. -1.6% and property investment rose from 3.4% to 4.6%, plus the surveyed jobless rate fell from 5.7% to 5.6%. Unemployment has come down slowly from the peak of 6.2% in February (it was 5.2- 5.3% before COVID-19). All of these are good numbers, showing cyclical recovery ahead of all other countries and a rebalancing of the economy toward the consumer. Japan: the CPI (consumer price index) was down from 0.3% to 0.2% with the core number, ex fresh food and energy in negative territory, -0.1% down from 0.4%. |
Oil/Commodities/Emerging Markets |
Oil prices recovered as Chinese economic numbers looked stronger and Hurricane Sally was hitting the Gulf of Mexico. |
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