Economic Outlook – 11 October 2020


  • The Federal Reserve Chair Powell made a strong case for additional fiscal support in a speech last week. He noted that despite the rebound seen so far, the economy is still in a precarious state. Any slowing in the pace of recovery at this stage risks triggering “typical recessionary dynamics, as weakness feeds on weakness.” It would also exacerbate inequalities, a tragedy in the Fed chair’s view, “especially in light of our country’s progress on these issues in the years leading up to the pandemic”.
  • In pressing for additional fiscal supports, the Fed Chair noted that there is little risk of doing too much in the cur­rent environment. With interest rates falling to record lows, the cost of servicing the federal debt is shrinking even as the stock grows. The time will come for hard decisions on the longstanding mismatch between what the federal government takes in revenue and what it spends. However, the near and present risk of cascading bankruptcies and permanent job losses is clearly much big­ger than the risk of a future debt crisis.
  • President Trump reversed course on coronavirus relief talks, which he called off until after the US election only hours earlier, dangling new $USD 1,200 stimulus checks and relief for airlines. Democrats have supported a multi-trillion-dollar relief package while Republicans appear to prefer a series of smaller packages on mutually agreed-upon items. House Speaker Nancy Pelosi rejected the idea of a standalone bill for airline carriers without a larger coronavirus stimulus package. Absent more aid, jobless Americans will be living off their current allotment of benefits from the state or federal government that, in some cases, could amount to just $USD 5 a week. Meanwhile, US Federal Reserve officials are concerned that a lack of further fiscal stimulus would jeopardize and economic recovery that is moving faster than expected, according to the minutes of the central bank’s September meeting.
  • First-time claims for US unemployment benefits totaled 840,000 last week, higher than the 825,000 new claims expected, in another sign that this summer’s spike in job growth is moderating as we head into the final part of the year.
  • US mortgage rates set another record low as refinance application volume jumped 8.0% for the week and was 50.0% higher than a year ago, according to the Mortgage Bankers Association.
  • As of last week, the Real Clear Politics average of US presidential polls showed former Vice President Joe Biden’s lead over President Donald Trump surging to 9.7% nationally from 7.2% last week while his lead in the battleground states of Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin grew to 4.6% from 3.5%. Biden’s odds of election continued to strengthen at 64.6% against Trump’s odds reelection at 35.0%, according to the Real Clear Politics average of betting odds. The next two scheduled debates (15 October in Miami and 22 October in Nashville) appear to be in jeopardy. The 15 October event was changed to a virtual event before the president commented “I’m not going to waste my time” and then the Biden campaign booked a town-hall style event in its place.
  • The S&P 500 Index had its best weekly gain in three months, as investors seemed to grow more optimistic about a new round of fiscal stimulus, as well as treatments for the coronavirus. The small-cap Russell 2000 Index surged over 6.0%, pulling it out of correction territory, or within 10.0% of its 2018 peak. Utilities and energy stocks outperformed, with the latter boosted by a rise in oil prices after OPEC Secretary General Mohammed Barkindo claimed that “the worst is over” for producers. Communication services shares lagged, weighed down by weakness in video gaming and cable stocks.
  • The yield on the benchmark 10-year Treasury note surged and hit its highest level in four months. It is likely that rising stimulus hopes were partly behind the increase.


  • The monthly GDP number released last week at 2.1% (consensus 4.6%, previously 6.6%) was disappointing, and while the recovery held up throughout August, it was not as strong as expected. This is surprising as the Chancellors popular Eat Out to Help Out scheme came into effect with restrictions curtailing travel abroad, and many tourists staying closer to home and thus spending in the UK. The economy is now around 10.0% smaller than at the onset of the pandemic. September figures are expected to be somewhat less robust, and as the autumn progresses, the latest regional lockdowns will start to take their toll. The real work is expected to begin from this point: not only unemployment is likely to rise and consumers to become increasingly cautious as a result, but businesses will have to figure out how consumption habits have changed and alter their offering accordingly.
  • Bank of England Governor Andrew Bailey told an online webinar hosted by the European Commission that the UK economic recovery was uneven, that third-quarter output was probably 7.0% to 10.0% below pre-COVID-19 levels, and that the risks to the economy were “very much on the downside” because of the growing number of coronavirus infections in Britain.
  • Financial services firms in Britain turned more optimistic for the first time this year as a drop in business bottomed out, but big uncertainties remained about COVID-19 and a post-Brexit trade deal, according to a survey published on Thursday. A drop in profits for banks, finance companies and building societies was partly offset by growth in earnings from insurance and investment management, the quarterly survey by the Confederation of British Industry showed. “While it is reassuring to see business volumes begin to stabilise in a sector so vital for the UK’s recovery, financial services isn’t out of the woods just yet,” Rain Newton-Smith, the CBI’s chief economist, said. Staff numbers fell less severely than in the previous three-month period and the decline was expected to slow again.
  • A post-lockdown boom in Britain’s housing market pushed a gauge of house prices to an 18-year high last month but the outlook is darkening fast ahead of an expected jump in unemployment, a survey showed on Thursday. The Royal Institution of Chartered Surveyors (RICS) said its house price index shot up unexpectedly to +61 from +44 in August, the highest reading since June 2002. A Reuters poll of economists had pointed to a reading of +40. The survey, which is based on the findings of surveyors across the UK, added to widespread evidence of a surge in housing market activity, spurred by a release of pent-up demand following the coronavirus lockdown, people seeking bigger homes and a temporary cut to property sales tax.
  • The UK and European Union (EU) stepped up meetings on a post-Brexit relationship ahead of a summit of EU leaders in Brussels next week. A senior EU diplomat cited by the Reuters news agency said the EU’s chief Brexit negotiator Michel Barnier wants a few more concessions before entering the “tunnel,” or the last phase of negotiations. Last week, UK Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen agreed to carry on discussions for another month.


  • The French economy rebounded 16.0% in the third quarter from an almost 14.0% contraction in the previous three months, the French central bank said. Business activity has picked up since the national lockdown was lifted early in May.
  • Service PMIs showed a mixed picture in September and there are clear links between the domestic virus situation and service activity. Italy and Germany sustained a positive momentum, while Spain saw headwinds.
  • The German manufacturing sector gave mixed signals. Factory orders continued its uptrend, down only 2.2% year-on-year in August, while industrial production declined slightly. The strong Chinese rebound has been the wind behind the German comeback, as China is seeing a solid rebound in its economy, with the coronavirus almost absent. This bodes well for a continued German recovery in the autumn.
  • European shares rose on hopes that the US government would pass additional measures to stimulate the economy. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.11% higher, while Germany’s DAX Index rose 2.85%, France’s CAC 40 advanced 2.53%, and Italy’s FTSE MIB added 2.79%.


  • The PBOC’s more hawkish stance, along with the relatively higher yields on Chinese bonds, added to the carry appeal of the renminbi over other currencies. The US dollar/renminbi exchange rate rose 1.3% on Friday to close at 6.702. The dollar’s relative weakness against other Asian currencies has reduced concerns that the renminbi has become stretched. However, many analysts believe that the PBOC wants to support the currency ahead of US elections in early November, which is expected to spur heightened volatility in foreign exchange market.
  • The private Caixin Services PMI rose to 54.8 in September from 54.0 in August, indicating the fifth straight month of improvement for the services sector and the latest evidence of China’s strong, post-COVID-19 recovery. In the coming weeks, September and third-quarter data are expected to show a broadening of the recovery. During the Golden Week holiday, high-frequency data were mixed: Tourism revenue fell 30% from the prior-year period, and holiday passengers and road traffic fell steeply from a year ago. However, daily consumer spending during the holiday rose 4.7% from a year earlier.
  • The Fifth Plenum of the 19th Communist Party Congress starting 26 October will also be of interest to investors, who will look for more details regarding China’s “dual circulation” development model recently touted in numerous forums by President Xi Jinping. Under the plan, Beijing is believed to want to pivot from export-led growth in favor of an economy more strongly driven by domestic drivers as the US and other Western countries become more vocal against China’s practices in Hong Kong and other controversial areas. Foreign flows into Chinese stocks have yet to resume on a substantial scale, and the Fifth Plenum could act as a catalyst if President Xi commits China to further economic and financial reforms.
  • China’s stock markets rose Friday after being closed from 1 to 8 October for the national Golden Week holiday. The Shanghai Composite A-share Index rose 1.7% and the large-cap CSI 300 Index gained 2.0%. Bonds sold off after the People’s Bank of China (PBOC) set out to drain a net RMB 560 billion of liquidity from money markets via open market operations.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Danske Bank, Handelsbanken Capital Markets, M Cassar Derjavets.