Markets last week |
Equity markets began the Asian week on a firm footing, on optimism that stimulus talks in Washington were making some progress. Discussions continued between Speaker of the House, Nancy Pelosi and Treasury Secretary Steven Mnuchin, with an initial Tuesday 20 October deadline subsequently extended to the weekend in an attempt to get a bill passed before the US election. For much of the week, markets ebbed and flowed in-line with the prevailing sentiment on the likelihood of a deal being struck. On Thursday, Nancy Pelosi revealed that she and Treasury Secretary Steven Mnuchin were ’just about there‘ and nearing agreement on how to allocate money for testing and tracing to safely reopen schools and the economy. She said they still hadn’t settled three of the main sticking points: Democrats’ demands for aid to state and local governments, school funding and Republican insistence on a liability shield for employers. Despite this optimism, the chances of the bill passing the US Senate appears slim given the opposition of Republican senators, and the fact that Senate Majority leader Mitch McConnell has pressed ahead with his own, more targeted, plan. Market sentiment was further depressed by fears that Europe’s economy could be slipping towards a double-dip recession, as several European countries reported record new daily infection figures. German infections have jumped to a record and Spain’s health minister said the spread of coronavirus is out of control in certain parts of the country. So too in the US, hospitalisations for COVID-19 reached a two-month high. Germany, France, the UK, Italy, Spain and the Netherlands have all announced new controls and further government restrictions on movement and socialisation, which will further curb the economic recovery. The final presidential debate before the US election took place in Nashville on Thursday. There is little that can be gleaned from events such as this and history would suggest that it makes very little impact on voting intentions. |
The week ahead |
Thursday: US GDP Our thoughts The coronavirus pandemic inflicted the deepest US recession since World War II, with GDP contracting at an annual rate of 31.4% in the second quarter. Consensus estimates point to an annualised 30% rebound in the third quarter, which would also be a record. The recovery has been spurred both by an end to the wholesale economic shutdowns which were implemented across many states, together with the unprecedented relief provided by fiscal and monetary policy. If policymakers hadn’t stepped up to the plate, the economic catastrophe would have been unimaginable. Most impressive has been the strength of the housing market, fuelled by record low mortgage rates and an increasing desire to move away from crowded city centres and into more spacious single-family dwellings. Thursday: ECB rate decision Our thoughts The backdrop appears to be darkening for the euro area and it is highly likely that ECB President Christine Lagarde will be markedly less optimistic than she was in September. It is likely that there will be a firm indication that the ECB is ready to increase the size of its asset purchase programmes, and not an insignificant probability that the decision may actually be taken at this meeting. We would expect the statement to indicate that risks to the downside have intensified, and the next round of macroeconomic projections, which will be published in December, will reflect this new reality. Friday: European GDP figures Our thoughts France, Germany, Spain and Italy, amongst others, report GDP figures for the third quarter on Friday. The extent of the summer recovery, as lockdown restrictions were being eased, will be gauged and these figures are likely to reveal a broad, synchronised expansion. Sadly, however, this is likely to be as good as it gets for now, as the tighter restrictions which are being reimposed will constrain future output. France is likely to be shown to have operated around 7% below normal in the third quarter, a significant improvement on the 19% below normal figure of the second quarter. Germany received plaudits for its initial handling of the pandemic, with summer activity plateauing around 5% below normal. However, as with most European regions, the risk is that rising infections stall the economic recovery. |
The numbers for the week |
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Central banks/fiscal policy |
Expect more stimulus if needed In a quiet week for central bank meetings, ECB President Christine Lagarde warned last week that the increase in coronavirus infections is a ‘clear risk‘ to the economic outlook, signaling that further monetary stimulus will be forthcoming if needed. Hours earlier, ECB Chief Economist Philip Lane stated that “we have to prepare for the worst scenarios” if the virus cannot be contained. While the ECB meets on the 29 October, it is expected to wait until December before expanding its asset purchase programme, although recent events have increased the possibility of an earlier move. Similarly, the Bank of England may increase its bond buying early in November. |
United States |
More “energizer bunny” than “Wile E. Coyote” Housing: US new home starts increased in September on the back of a sharp rise in single-family house construction. Residential starts increased 1.9%, to a 1.42 million annualised rate; applications to build, which is a proxy for future construction, rose 5.2%. Similarly, sales of previously owned US homes rose more than expected in September, to the highest level in 14 years. There are clear indications that a desire for more space and record low mortgage rates are charging demand and the housing market is a clear source of strength for the US economy. Single family housing starts are at their highest since 2007, and homebuilder sentiment is at a record high. Employment: data showed a drop in initial jobless claims for the third time in four weeks, suggesting the labour market continues to recover gradually, albeit its health is still far from pre-pandemic levels. Initial jobless claims declined by 73,000 to 787,000 (expected 870,000), without adjustments for seasonal fluctuations, in the week ended 17 October. Initial filings for the week before were also revised down to 842,000 from 898,000. The progress was broad-based across most states, with California resuming its reporting following a pause for two weeks to whittle down a massive backlog and improve fraud prevention. Indeed, California’s reported claims fell the most, to 158,877 on an unadjusted basis, and was followed by Florida, Georgia, New York and Michigan. Surveys: US business activity grew in October at its strongest pace since February 2019; the IHS PMI composite index increased to 55.5, from 54.3 and business optimism surged higher. The services index rose to 56, also a 20-month high, while the manufacturing index inched up to 53.3, the fourth straight month of expansion and the highest reading since January 2019. Measures of employment growth, however, moderated for both service providers and manufacturers. |
United Kingdom |
Low inflation and spiraling government debt Inflation: UK inflation accelerated from its weakest level in five years in September after the ’Eat Out to Help Out‘ subsidised dining scheme came to an end; 100 million meals were claimed in the last week of this scheme. Prices rose 0.5% year-on-year in September, from 0.2% in August. Transport costs and restaurant and cafe prices had the biggest impact in pushing inflation up between August and September. The core rate, which excludes volatile energy and food prices, increased 1.3%. Despite the increase in the headline rate, inflation has been running at less than half the Bank of England’s 2% target since April and this inflation reading, which was lower than expected, increases the chance of the Bank of England expanding its asset purchase programme. UK budget deficit: the budget deficit climbed to a record £208.5bn in the first six months of the fiscal year, while businesses and workers continue to call for further assistance. As a consequence, Chancellor of the Exchequer, Rishi Sunak cut a planned spending review from three years to one, as the ’unprecedented uncertainty‘ prompted a revised approach. Government spending in September stood at £36.1bn, compared to £7.7bn a year ago. Total debt has now exceeded £2trn, with debt/GDP standing at 104%. Surveys: the GfK consumer confidence figure for October came in below expectations and fell by the most in six months, with concerns growing about personal finances and the economy as a whole. Optimism had been rising for most of the summer, with all five sub-indices declining and the willingness to make major purchases dropping to the lowest level since the virus struck the UK in the spring. This data was collected before the additional lockdown restrictions were reintroduced in parts of the economy. Meanwhile the IHS Markit PMI gauge of activity slipped to 52.9, from 56.5 a month earlier. While the index remains in expansionary territory, it is the poorest reading since June. The slowdown would have been worse without a boost to exports as overseas firms scrambled to secure orders before Brexit. The dominant services component slipped to 52.3 from 56.1. Retail sales: there was better news on retail sales which were much stronger in September over August and came in ahead of expectations. Sales were 5.5% higher than in February, before the pandemic struck, led by home improvement items and garden centres. Online sales were particularly strong, rising to 27.5% of the total. Again, it must be considered that these figures were reported before the additional lockdowns were put in place. |
Europe |
Not much joy from PMI figures Survey: the PMI survey data for October did not make for great reading and indicated that the recovery in the euro area may stall in the fourth quarter of this year. We could well see ECB President Christine Lagarde adopt a markedly less optimistic tone at her press conference this week. The composite reading fell to 49.4 in October, from 50.4 a month ago, and unsurprisingly the headline index was driven by a further contraction in the services sector. The reading in this component fell to 46.2, from 48, whereas the manufacturing figure rose to 54.4, from 53.7. |
China/India/Japan/Asia |
China likely to be alone in growing its economy in 2020 China: the Chinese economy expanded 4.9% year-on-year in the third quarter, boosted by industrial production, as the recovery from the coronavirus pandemic maintained momentum within the economy. While the GDP figure came in below the 5.5% rate expected, it was still a significant improvement on the 3.2% pace of the second quarter. China is likely to be the only major economy in the world to register positive economic growth in 2020. Industrial production surged 6.9% in September, the highest level this year and retail sales, which have lagged the broader recovery, rose 3.3% year-on-year. China is a clearly benefitting from its containment of the pandemic, with new recorded cases remaining low. Japan: Japan’s exports fell by the smallest margin in seven months in September, signaling that the pandemic hit to global trade may be easing. The value of exports fell 4.9% from a year earlier; a substantial improvement on the 14.8% drop in August. The September reading was supported by the biggest rise in exports to China in two and a half years, which was driven by a surge in chip making equipment, and a jump in car shipments to the US. Meanwhile, consumer prices fell at a slightly slower pace in September, but still failed to register a gain for the sixth straight month. CPI ex fresh food fell 0.3% from a year earlier, following a 0.4% drop in the previous month. It is reported that the Bank of Japan is considering adjusting its inflation forecasts. |
Oil/Commodities/Emerging Markets |
Neither oil nor gold prices moved significantly despite an industry report pointing to an unexpected increase in American crude stockpiles, and an uptick in US Treasury bond yields. |
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