The week began in an encouraging fashion as Asian stockmarkets were boosted by a liquidity injection from the People’s Bank of China, although China and US trade tensions remained firmly in focus. The US stockmarket continued to flirt with its all-time high early in the week and eventually closed above this level on Wednesday, which marked the fastest ever return to a record high after a drop of at least 20%. The recovery took six months, with the previous high reached on 19 February; the market stood 51.5% higher than its March low at the close of play on Tuesday. While negotiations between Republicans and Democrats remain stalled over a new fiscal stimulus package, Nancy Pelosi has said that Democrats may be willing to cut their demand for US$3.5trn in fiscal stimulus. The intention would be to strike a relatively short-term deal, then return after the November elections with fresh terms. Minutes from the US Federal Reserve (Fed) disappointed some by failing to immediately commit to further forms of unconventional monetary policy, such as yield curve control, or more specific guidance on the future path of interest rates. This prompted a mild pull-back in prices during the middle of the week. Equity markets, however, quickly regained their poise and were again led higher by technology stocks but were also driven by encouraging coronavirus vaccine news with Pfizer and BioNTech reporting that the vaccine they are jointly developing may be submitted for regulatory review by October. Phase 1 trials in the US and Germany are still being analysed, so it is still very early days, but it is encouraging that fewer than 20% of participants experienced anything more than mild to moderate fever. Phase 2/3 trials with up to 30,000 participants are underway, for which they have enrolled more than 11,000. The S&P 500 closed the week at a new all-time high of 3,397, having now recouped all of the losses delivered in February and March. Other equity markets, however, have not enjoyed such a strong recovery – the FTSE All Share, for example, remains 18.3% lower than its end of 2019 level. |
Tuesday: German ifo survey Our thoughts This survey is often one of the best gauges of economic growth in the German economy. The figures released last month reported a strong rebound, following the sharp slowdown in activity at the height of the coronavirus pandemic. At the time, German businesses were growing increasingly optimistic that government support would foster an economic recovery later in the year, and subsequently business expectations rose to their highest level since 2018. On this occasion, the link between the survey results and subsequent growth may not be as strong; diffusion indices (which this survey is) often fail to capture the full extent of declines or recoveries during inflection points. While indicators such as mobility data are suggestive of a stronger recovery than other parts of Europe, it is likely that the pace of the rebound is moderating after its initial V-shaped bounce. Thursday: China industrial profits Our thoughts It is a light week for data releases across most of the world, and Asia in particular. One of the few announcements of note will come from China, when the profit growth of industrial enterprises is released. It is likely that the year on year growth in profits will continue to accelerate from June’s 11.5% figure, primarily supported by easing producer price deflation. The producer price index fell 2.4% year on year, which is below June’s 3% figure, and is a positive for profit margins. Exports also surged, while industrial production figures have been broadly neutral. Thursday: Economic Policy Symposium Our thoughts Better known as the Jackson Hole Economic Symposium, this Kansas City Fed hosted event has been held every year since 1978. It brings together a high-profile mix of central bankers, academics and economists from across the world and focuses on important economic issues that face the US and global economy. This year’s theme is ‘Navigating the decade ahead: implications for monetary policy’ and the headline speaker will be Federal Reserve Chairman Jerome Powell, who will deliver a speech on the Federal Reserve’s long awaited monetary policy framework review. This review has focused on the possibility of introducing a new inflation strategy. While it is premature to expect any change in policy to be announced, there are growing expectations that the Fed may well look to adjust its approach to inflation and could, in future, target a long-term average rate, rather than a specific current target. Chairman Powell’s speech will be closely analysed for any hints with regard to the FOMC’s thinking in this regard. |
The week ahead |
The numbers for the week |
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No change in policy…yet Minutes for the US Federal Reserve meeting of 28 – 29 July were released; the most notable comments surrounded hopes for more precise guidance on the path of future interest rates and/or some form of formal yield curve control. It seems that there isn’t a great appetite for yield curve control – “most judged that yield caps and targets would likely provide only modest benefits in the current environment”. This will be kept under review, but with Treasury yields close to all-time lows, there is no rush to implement any sort of policy. In terms of trying to provide greater clarity on future interest rates moves, some members felt that greater guidance would be appropriate “at some point”. In essence, policymakers are of the view that, as the pandemic is having such a pronounced impact, it is inconceivable that interest rates will be raised any time soon. There is therefore little point in providing more specific guidance. While there was a hesitancy to alter their guidance, there were discussions around the conditions that would merit eventual changes to policy. These included waiting for inflation or unemployment to reach desired levels before raising rates. There was also a general tone of expecting a less robust recovery, with risks surrounding economic activity, employment and inflation and it is clear that the Fed will be perfectly happy with a mild inflation overshoot over the longer term. ECB minutes from its 15 – 16 July meeting were released which indicated that members remain extremely uncertain about the strength and longevity of the economic recovery and that September may be a better time to make judgements about inflation and what further action may be needed. Some policymakers, and chief economist Philip Lane, were cautious about reading too much into the strong economic data as it provided no indication on how long or sustained the recovery might be. Lane also characterised the recovery as uneven and partial. In essence, ECB officials are biding their time before deciding whether they need to introduce more stimulus and the size of asset purchases will be determined by the inflation outlook. That said, the probability of a “severe” contraction in the future were seen as substantially reduced. There seems to be some disagreement on the scope of the policy support which may be needed – some felt that the ECB may not need to spend the full €1.35trn earmarked for asset purchases and that this should be seen as a ceiling, rather than a target. Others felt that the current presumption was that it would need to be used in full. |
Central banks/fiscal policy |
United States |
A stop-start recovery Surveys: the New York Empire State Manufacturing Survey reported that manufacturing expanded in August at a slower pace than expected, as more factories reported declining orders. The general business conditions index dropped to 3.7, from 17.2 a month earlier, which was the strongest reading since November 2018. A figure above zero indicates expansion and while the figure came in below expectations, it should be recognised that it stood at -78.2 in April. 34% of respondents said business conditions were improving; 30% declining. New orders fell to -1.7 from 13.9 while optimism for the next six months fell to 34.3 from 38.4. The US Philadelphia Fed Business outlook fell to 17.2 from 24.1 last month and 20.8 expected. There were strong PMI figures from the US, which showed that business activity expanded in August at the strongest pace since early last year. The composite PMI rose to an 18-month high of 54.7, with both services and manufacturing contributing. Services rose to 54.8 from 50, and manufacturing rose to 53.6 from 50.9. Both orders and employment sub-components also showed encouraging rises. Order backlogs jumped to their highest level since October 2009. Housing: US housing starts increased in July by more than expected and applications to build rose by the most in three decades, suggesting that the US will benefit from sustained home construction. Residential starts rose 22.6% month on month, the highest reading since October 2016, to reach a 1.5 million annualised rate. Applications to build increased 18.8%, which was the largest monthly gain since January 1990. The US housing market remains a firm positive for the US economy, boosted by record low interest rates. It was therefore unsurprising that US homebuilder optimism had earlier been reported to stand at its highest level since 1998. The NAHB Index rose to 78, 6 points higher than July. The demand for new housing is strong, partly because the inventory of existing homes is low. Issues which will need to be overcome moving forwards include Congressional delay in passing a new stimulus package, higher unemployment and higher home prices which may deter potential buyers. Lumber prices have also doubled since mid-April. Employment: initial claims for unemployment unexpectedly rose by 135,000 to 1.1 million, although ongoing claims fell to 14.8 million, which was the lowest reading since early April. The figures show that the improvement in the labour market is not going to unfold in a straight line and is very much beholden to the progress of the pandemic. New Jersey and Iowa saw the biggest increases in initial claims. In addition, States reported over 540,000 initial claims for Pandemic Unemployment Assistance – this is the Federal program extending unemployment benefits for those not typically eligible, such as the self-employed. Continuing claims under the Pandemic Emergency Unemployment Compensation program had reached almost 1.3m at the beginning of August. The downward trend in continuing claims is good news; the figure peaked at nearly 25 million in May and has fallen by 10 million since. However, companies are going bankrupt at a record pace. There were 80,000 small companies which closed between 1 March and 25 July; about 60,000 were local businesses or firms with fewer than five locations. Firms with fewer than 500 employees account for 44% of US economic activity and employ almost half of US workers. As at July, 58% of small business owners reported that they were worried about closing permanently. Only about half the jobs lost in March and April have been recovered, and unemployment is around three times the level at which it stood in April. This is why the additional fiscal stimulus package which the Republicans and Democrats can’t agree on is so important. It is also worth remembering that if schools don’t reopen in September, this is going to make it difficult for many parents to return to work. |
United Kingdom |
Higher inflation, retail sales and housing activity. PMI recovery. Inflation: surprised to the upside. Headline CPI rose to 1% year on year, compared to the 0.6% reading which was expected. Prices were led by fuel and the absence of the usual summer clothing sales; clothes prices fell 0.8% but had dropped 2.9% at the same time last year. Fuel prices rose 4.2% having dropped 1.1% this time 12-months ago. The general consensus is that this will be a temporary phenomenon and that next month inflation may turn negative due to lower energy prices and some of the government’s policies, such as the sales tax cut for hospitality firms (20% to 5%) and the ‘eat out to help out’ scheme. However, the higher readings this month may mean that inflation doesn’t turn negative next month, albeit the figures should be meaningfully lower than we saw for July. Core CPI, jumped to 1.8%, which is the highest reading since July 2019. Retail sales: UK retail sales figures were released which were better than expected. Sales were up 2% month on month; non-food sales were up 10%. These figures do run slightly contrary to the GfK survey on consumer confidence which remained extremely weak, coming in at -27, which has been driven by employment concerns. With furlough schemes ending this month, it is difficult to envisage the consumer becoming significantly more optimistic in the weeks ahead. Survey: the housing market saw a big increase in activity last month, following the suspension of stamp duty on home sales. Rightmove reported that agreed sales reached £37bn, which is the highest figure since this index began 10 years ago. Prices rose at their fastest annual rate (+4.6%) since after the Brexit referendum. Countryside areas like Devon and Cornwall both saw record high sales as they appear to be benefitting from remote working and a migration away from cities. On Friday, it was revealed that the UK economy continued to recover from the record slump evidenced in the second quarter, with IHS Markit reporting that its composite PMI had risen to 60.3, from a previous reading of 57. Services, the most important part of the economy, showed an acceleration to 60.1, although manufacturing also remained above the critical threshold of 50, coming in at 55.3. The composite reading was the highest in almost seven years. On the downside, it needs to be remembered that the pickup in activity is being supported by massive government stimulus, which may well diminish in the weeks ahead. Job losses may increase, and businesses remain concerned about the sustainability of the recovery. |
Europe |
Not much joy from PMI figures Survey: growth in the eurozone stumbled in August, as a resurgence in coronavirus cases forced governments to impose new restrictions, which have hindered the chances of maintaining the previous growth trajectory. The Eurozone Composite PMI slipped to 51.6, from 54.9 previously and below the 55.0 level projected. This slowdown in growth was led by the services sector, with the Services PMI dropping to 50.1, only barely above the growth/contraction threshold of 50 and indicative of stagnation. It appears that the ECB’s reluctance to draw firm conclusions from July’s strong rebound are well-founded. Employment has declined for six straight months and while reports for France and Germany suggested continued growth in both regions, it appears that Spain and Italy were the economies which were hardest hit. |
China/India/Japan/Asia |
Chinese liquidity injection China: at the beginning of the week the People’s Bank of China injected fresh liquidity into the financial system of 700 bn yuan (US$101bn) to support banks, which helped boost Hong Kong and Chinese stocks and raised hopes of more supportive monetary policy. With the economy recovering slowly, the central bank is attempting to provide enough funding to purchase government bonds and issue loans, but without further fostering financial risks and instability, or increasing the country’s leverage ratio. Earlier during the weekend, China’s banking regulator Guo Shuqing warned about financial risks and rising debt. Japan: Japanese GDP figures released at the beginning of the week were predictably dire, with the economy contracting at a record -27.8% annualised pace in the second quarter. This was even worse than the slump experienced during the global financial crisis of 2008/2009 (-18% annualised rate). After three quarters of contraction, the size of the Japanese economy has fallen back to where it was in 2011 following the tsunami and nuclear disasters. Private consumption fell an annualised 28.9%, accounting for around 60% of the slide in GDP; business investment (-5.8%) was marginally better than expected. While the overall reading was grim, this GDP performance is actually better than other major economies on a like for like basis; the US economy contracted by almost one-third, the EU by -39% and the UK by 60% on an annualised basis. While a recovery is expected in Q3, there are growing risks that this may be undermined by another wave of COVID-19 infections. Exports fell 19.2% year on year, which was smaller than expected and the least negative year on year decline since March. Figures were helped by an increase in shipments to China (+8.2%) but offset by the containment measures seen in the US and Europe. Car exports fell 30%; shipments to Europe were down 30.5% while those to the US fell 19.5%. Japanese CPI (ex-fresh food) remained unchanged in July from a year ago, with falling energy prices offset by higher costs for housing and travel. With coronavirus cases surging in Japan once again, there has been a reluctance to venture out which is depressing demand, although the Bank of Japan is less concerned about inflation readings at present and more preoccupied with ensuring that credit continues to flow to businesses. The Bank of Japan forecasts that consumer prices will fall 0.5% this fiscal year. Meanwhile, Japanese manufacturing continues to contract, albeit at a slower pace, according to the Jibun Bank Japan PMI. The manufacturing reading rose to 46.6 but remains below the expansion / contraction threshold of 50. The index of service sector activity fell to 45. |
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