Markets last week |
Equities fell for the fourth week in a row, despite a last-minute rally on Friday afternoon in the US. There were many reasons, other than simply the momentum of the sell-off:
The risk-off backdrop broadened to include other asset classes, with the US dollar rising, the Japanese yen one of the strongest currencies, government bond yields easing but, unusually, gold correcting in line with industrial commodities like copper.
At the end of the week, US equities were the most resilient and European equities fared worst. |
The week ahead |
Tuesday: UK M4 money supply, 3 months annualised Our thoughts: prior to COVID-19, the 3-month money supply growth in the UK was in the 5% range. It soared to over 30% in May, as the Bank of England was pumping liquidity into the economy to help offset the pandemic lockdown. Since then, the growth has moderated to 17.7%. In the current fragile state of the UK economy, strong money supply growth would be a positive and help the Chancellor’s wage support package. Tuesday: US Conference Board consumer confidence survey for September Our thoughts: the US Conference Board consumer confidence survey is a bellwether for consumer spending but also the political mindset of the American people. A strong, increasing survey would favour Trump’s re-election, whereas a weaker reading would point in the direction of Biden. Before COVID-19, the survey was around 130, having risen from 50 at the beginning of the cycle. The latest showing is 84.8. A level above 90 would be positive for the economy and Trump’s chances of re-election. Wednesday: Japanese machine tool orders, year-on-year growth Our thoughts: Japanese machine tool orders are the perfect barometer for global industrial activity. The stronger manufacturing is worldwide, the more machine tools companies need to buy, and Japan is one of the top producers. At the peak of the industrial cycle in 2018, Japanese machine tool orders were up 48% year-on-year. They fell to -52.8% in May and have already recovered sharply to -23.3%. Any further improvement will show that, despite second waves of the virus, manufacturing is still leading the recovery globally. |
The numbers for the week |
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Central banks/fiscal policy |
Bank of England not keen on negative rates. Chancellor Sunak replaces furloughs with support At a press conference with the US Federal Reserve (Fed), Fed Chair Jay Powell was questioned and he clarified that it would take a long time for inflation to reach, let alone breach, the 2% target, due to the huge unemployment level. His previous comment that rates won’t go up until 2023 may therefore be modest. The Bank of England isn’t close to negative interest rates despite the resurgence of the coronavirus reinforcing downside risks to the UK economy, according to Governor Andrew Bailey. While negative rates are in the toolbox, “it doesn’t imply anything about the probability of us using negative interest rates at the moment”, Bailey said. Chancellor Rishi Sunak set out his plan to rescue millions of jobs and businesses as the virus pandemic threatens to derail the economy again. The measures include fresh support for the self-employed and pay subsidies for part-time workers. The furlough plan expires on 31 October and will be replaced by a German-style 6-month wage subsidy scheme, to top up the pay of people who can only work part-time. 2 to 4 million part-time workers might be supported through the scheme. Also, restaurants, hotels and cinemas will continue on their 5% VAT for 6 months, rather than 20%. Altogether, this is likely to cost less than £10bn and may not move the needle much on the economy, but the FTSE and sterling seemed to like it. |
United States |
Employment stalling but housing on a tear Surveys: the Markit manufacturing PMI rose from 53.1 to 53.5 and the services PMI was a little down from 55.0 to 54.6. The regional Fed surveys were mixed; the Chicago National Activity Index fell from 2.54 to 0.79, the Richmond Fed Manufacturing Index rose from 18 to 21 and the Kansas City Fed Manufacturing Activity Index fell from 14 to 11. Employment: jobless claims have stopped falling. Initial claims rose marginally to 870K, above the 840K estimate and continuing claims fell a little to 12.58 million, a full 300,000 above estimates. Housing: still doing well. New home sales soared to 1,011K, above the 870K estimate. Existing home sales were a little less buoyant, rising from 5.86 million to 6.0 million. MBA mortgage applications surged 6.8% for the week of 18 September. |
United Kingdom |
PMIs still looking good even as CBI surveys are less buoyant Surveys: the CBI Trends surveys were mixed – the total orders survey was down from -44 to -48 and the selling prices were up from -5 to -1. CBI reported retail sales improved from -6 to +11 but the GfK consumer confidence index was barely better at -25 vs. -27. The PMIs eased – manufacturing slightly, from 55.2 to 54.3 – but the services PMI more, from 58.8 to 55.1. Both are still high readings though, and don’t indicate any immediate economic slowdown. Public finances: unsurprisingly, the public sector borrowing requirement ballooned in August, with the ‘eat-out-to-help-out’ scheme. It rose from £14.7bn to £35.2bn. |
Europe |
Stark difference between bullish manufacturing and stuttering services Confidence: eurozone consumer confidence was marginally better at -13.9 vs. -14.7. The German IFO business climate survey improved but stalled below expectations at 93.4 vs. 93.8 and the GfK consumer confidence survey edged up to -1.6 from -1.7. French business confidence was better at 92 vs. 90 and manufacturing confidence at 96 vs. 92.
PMI surveys: the difference between manufacturing and services was starker in the eurozone, with the manufacturing PMI up from 51.7 to 53.7 and services down from 50.5 to 47.6, doubtless reflecting the second wave of COVID-19 infections.
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China/India/Japan/Asia |
China: no meaningful statistics. Japan: the Jibun Bank Japan PMI manufacturing was almost unchanged at 47.3 vs. 47.2. The services PMI edged up from to 45.0 to 45.6. The PPI (producer price index) services fell from 1.1% to 1.0% year-on-year in August. |
Oil/Commodities/Emerging Markets |
Gold corrected in line with other commodities like copper, despite its reputation for being a risk-off investment. |
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