Markets last week 23/07/2020
A somewhat bipolar market caused higher volatility last week. On the one hand, positive noises about COVID-19 vaccines and possible therapies helped support equities. On the other hand, concerns about the plateauing US economy and the US-China feud weighed on sentiment. In addition, the Chinese retail sales numbers also spooked markets, confirming that manufacturing is recovering smartly everywhere but services and consumption are stalling.
Over the weekend a summit was held within the 27 EU countries to negotiate an agreement on issuing joint bonds to provide grants and loans for the most affected countries. After strong opposition from the so-called “frugal 4” nations (Sweden, Denmark, the Netherlands and Austria), Chancellor Merkel of Germany appears to have succeeded in getting an agreement in principle whereby €700bn in a combination of grants and low-interest rate loans would be issued jointly to help the countries most affected by COVID-19. During the week, the euro and European equities had a bid in anticipation of the outcome.
UK markets were not particularly helped by the announcement of a further relaxation in the shutdown rules.
At the end of the week, equities were generally higher, with Europe leading and emerging markets lagging. Sterling corrected after a strong previous week, on growth concerns. Government bond yields were mostly stable. Within equities, there was a recovery in cyclical sectors, such as energy, industrials and financials, whereas information technology was the laggard. In fact, the vaccine news boosted some of the social-distancing victims (airlines, cruise operators) for a few days.
The week ahead
Thursday: US Initial Jobless Claims
Our thoughts: the weekly US initial jobless claims figure continues to subside from its peak of 6.9 million in March but is still at a damagingly high level. The unemployment rate in the US has shot up to 13%. There are some signs of a stabilising labour market, and the optimistic among us will hope to see a V-shaped recovery with employment rebounding to pre-pandemic levels. However, this does seem unlikely. According to the FT, around one third of US job losses have arisen from companies that have ceased entirely. These businesses will largely be in declining industries that may not pick up again to previous levels, meaning a significant chunk of the unemployed will need to re-train and move industries – a shift that will take some time.
Friday: UK Retail Sales
Our thoughts: on Friday, we will get a look at UK retail sales figures for June and how the gradual easing of lockdown has impacted consumer spending habits. We received the unemployment report for May last week on 16 July, which indicated a stronger-than-expected labour market, including the unemployment rate remaining at 3.9%, despite forecasts for 4.2%. This unexpected strength should only help retail sales. The British Retail Consortium has already released its data for June’s retail sales, which indicates a continued strong rebound by British shoppers, as sales grew 3.4% in June compared with the same month last year. As expected, e-commerce was the driver, with growth for online non-food items of 48.2%.
Friday: UK Purchasing Manager Indices (PMIs)
Our thoughts: as well as getting a look into the health of the UK consumer on Friday (discussed above), we will also see the health of the services and manufacturing sectors in the form of preliminary PMIs for July. Both sectors’ declines have dissipated somewhat, with the manufacturing sector even rebounding into growth, indicated by June’s PMI reading of 50.1, marginally above the crucial 50 barrier. At the time of writing, Bloomberg does not have a consensus of forecasts for the July preliminary reading, however as lockdown has gradually eased over the past month, we would expect further improvements in both industries’ readings.
Central banks/fiscal policy
The European Central Bank (ECB) left its rates unchanged. In her commentary President Christine Lagarde confirmed that the ECB would use the entire envelope of €1.35bn of the bond buying programme and that there was a high take-up of funds borrowed by banks from the ECB to support bank lending to the economy.
Employment appears to be stuck despite better retail sales and housing.
Surveys: the NFIB small business optimism survey rose from 94.4 to 100.6, above estimates. The Empire State Manufacturing survey rose to 17.2 vs. 10.0 estimated. The Philadelphia Fed Business outlook survey fell from 27.4 to 24.1 but was still above expectations. The University of Michigan sentiment index disappointed, falling from 78.1 to 73.2, driven mostly by the expectations component rather than the current situation.
Prices: the CPI (consumer price index) surprised on the upside, rising 0.6% in June and 0.6% year-on-year, while the CPI ex food and energy rose 0.2% for June and 1.2% year-on-year. The import price index rose 1.4% in June and ex petroleum 0.3%. Year-on-year the number is still heavily negative, though.
Production and sales: industrial production was up 5.4% in June, much better than expected. Capacity utilisation recovered from 65.1% to 68.6%, but it was in the mid-70s before COVID-19, so it has a long way to go before inflationary pressures can be felt in the industry. Retail sales rose 7.5% in June with the sales ex auto and gasoline up 6.7%.
Employment: manpower said hiring intentions for Q3 were at a 20-year low. Initial jobless claims showed a slowing labour market recovery, at 1.3 million for the week, only down 10,000 from the previous week. Continuing claims decreased to 17.3 million, a marginal fall from 17.8 million previously. The largest increase in jobless claims came from Florida, due to the virus resurgence. Benefits under the PUA (Pandemic Unemployment Assistance) rose to 14.3 million people from 13.9 million.
Housing: 30-year fixed mortgage rates fell to 2.98%, the lowest level ever. The NAHB housing market index surged from 58 to 72. Housing starts rose 17.3%, slightly below expectations and building permits rose 2.1% vs. 6.3% estimated.
Growth: May GDP rose 1.8% below estimates of 5.5% and fell 19.1% for the 3-month period. Industrial production was in line with estimates at 6%, construction missed at 8.2% vs. 15% estimated but services really disappointed, up 0.9% vs. 4.8% expected. This weighed on sterling which fell against both USD and EUR.
Prices: the CPI (consumer price index) was a little higher than expected at 0.6% year-on-year and 1.4% for core CPI (ex food, energy, alcohol and tobacco), with the RPI (retail price index) at 1.1%.
Employment: looking a bit better, but numbers have to be taken with a pinch of salt due to the furlough schemes (9 million are on the scheme): the claimant count rate was down from 7.4% to 7.3%, jobless claims fell 28K after rising 566K last month and the employment change 3months/3months was down 125K, better than estimates.
The trade balance improved for May (£649m in the black vs. £3bn deficit estimated).
Recovery in autos and construction
The French Finance Minister said an August fiscal package will have a massive spend on jobs support, following the government reshuffle. This follows huge similar packages in Germany and Italy.
In the 27 EU countries, new car registrations were down 22.3% in June but that’s better than May which was down 52.3%. The eurozone construction output rose 27.9% in May after an 18.3% drop the previous month.
Chinese retail sales disappointed and hit Far-Eastern markets.
China: the trade balance fell in June from US$62.9bn to US$46.4bn as imports rose faster than exports. Q2 GDP was up 11.5% but in China the recession took place mostly during Q1 which was down 10%. Year-to-date GDP growth was -1.6%, better than the -2.4% estimate. For June, industrial production was up 4.8%, retail sales down 1.8%, fixed assets ex rural (which means investment) fell 3.1% and property investment rose 1.9%. Foreign direct investment was 7.1% higher year-on-year, down from 7.5% the previous month.
Japan: the Tertiary Industry index (i.e. services) did better than expected, down -2.1% for the month in May vs. -7.7%. Industrial production was down 8.9% in May year-on-year, lower than the previous month.
Copper continues to be on a tear, together with other industrial metals (tin, nickel, zinc and aluminium) also on the same upward trend, whereas oil prices seem to be stuck in a range due to concerns about output disciplin