Economic Outlook – 13 September 2020

US

• Economists are revising higher their expectations for US growth in the year’s third quarter. Goldman Sachs recently upped its Q3 forecast to a 35.0% annual rate while Bank of America revised its view up to 27.0%. Strong consumer spending and the rebuilding of depleted inventories are the main drivers in the positive outlook. The Federal Reserve Bank of Atlanta’s GDP model forecast a 30.8% growth rate while the Federal Reserve Bank of New York’s Nowcast predicted a more modest 15.6% rebound.

• Democratic lawmakers in the US Senate blocked a “skinny” coronavirus relief package worth approximately USD$500 billion from coming to a vote on Thursday. Negotiations over a larger package remain stalled, with Republican and Democratic lawmakers nearly USD$1 trillion apart on the total price tags of their competing proposals. Any further economic aid may have to wait until after the US general election on 3^rd November.

• The Labor Department reported that initial jobless claims remained steady at 884,000 for the week ended 5^th September, defying consensus expectations for a decline. Continuing claims also rose unexpectedly, moving higher for the first time since mid-July. On the bright side, July job openings beat expectations, and early reports suggested healthy retail sales over the holiday weekend. A gauge of small business optimism also rose unexpectedly in August after July’s drop.

• Inflation data released Friday also surprised on the upside, with both core (less food and energy costs) and headline consumer prices rising 0.4% from July to August. A jump in used car prices (the largest in over five decades) was partly responsible for the uptick as Americans shunned public transportation and air travel.

• As of last Friday, the Real Clear Politics average of presidential polls shows former Vice President Joe Biden maintaining a 7.5% lead over President Donald Trump nationally and a lead of 3.9% in the battleground states of Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin. Biden’s odds of election have increased to 53% this week while Trumps odds of reelection have fallen to 46.2%, according to the Real Clear Politics average of betting odds. The first debate between the two candidates is scheduled for 29^th September.

• Stocks pulled back further from recent highs in a shortened but highly volatile trading week. The technology-heavy Nasdaq Composite Index fared worst and ended the week in correction territory, or down more than 10.0% from the all-time high it reached on 2^nd September. Tech shares were also among the weakest within the S&P 500 Index, while energy stocks suffered as domestic oil prices sank below USD$ 40 per barrel for the first time since July, in part because of Saudi Arabia cutting oil prices for some customers. The small materials sector outperformed, and industrials shares also proved resilient. The market was closed Monday in observance of Labor Day.

• The yield on the benchmark 10-year Treasury note ended modestly lower for the week, pulled down in part by the news of the pause in the AstraZeneca trials.

• On Wednesday, the FOMC will convene. The meeting should evoke some calm. The key focus is how FOMC will manage after its decision to embark on average inflation targeting. A change of forward guidance is possible by stating that ‘the Committee expects to maintain this target range until it is confident that inflation will run above 2.0% for some time’ and to increase QE buying. The Fed may recognize the importance of building up credibility right away, especially as inflation expectations remain subdued.

UK

• The big number released last week was the GDP for July. The UK releases a monthly GDP figure, which came in at 6.6%, against a consensus forecast of 6.7% and up from the 8.7% gain last month. Annualised, the figure was -11.7%. The recovery is likely to occur in two stages: a rapid recovery from the depths of the downturn; and, a more gradual (or wobbly) second stage, as the economy copes with changes that have come about as a result of COVID-19. There remains some way to go in that first stage, and the recovery remaining more or less on track should be seen as positive. Looking into the data, the UK’s dominant services sector still has some way to go, with nearly ever sector’s output remaining below pre-coronavirus levels (only public admin and wholesale trade are at February 2020 levels), with the accommodation and food services sector lagging badly, at less than two fifths of its February 2020 levels. That said, there has been some very strong growth on a month-on-month basis, with food services up by 140.8%, which took overall services up by 6.1%, and this was before the Chancellor’s “Eat Out to Help Out” came into effect in August.

• The post-lockdown surge in Britain’s housing market intensified in August, and prices hit a four-year high, as buyers sought properties with gardens, according to a survey that also sent a warning signal that the recovery could run out of steam. The monthly gauge of house prices from the Royal Institution of Chartered Surveyors (RICS) shot up to +44 in August from +13 in July, hitting its level since February 2016. A Reuters poll of economists had pointed to a reading of +25. Prices rose across the country except for London where they have remained more or less flat over the past two months.

• British firms hired temporary staff in August at the fastest pace since the end of 2018 as they tried to recover from the COVID-19 lockdown but remained wary of the pandemic and the Brexit impasse. There was also a jump in the availability of candidates which rose at the second-steepest rate in over 20 years, reflecting redundancies announced by many companies in Britain. Billings from temporary hirings rose for the first time in seven months, according to the Recruitment & Employment Confederation and accountants KPMG.

• A proposed law working its way through the British Parliament to govern internal markets is the latest stumbling block that negotiators need to overcome as the clock ticks down on efforts to secure a trade deal between the United Kingdom and the European Union before the end of the year. According to MFS European Rates Strategist Annalisa Piazza, contained in the bill is a provision that gives UK ministers, should there be no trade deal, the unilateral power to “disapply” rules previously agreed to in the Withdrawal Agreement concerning how customs checks are to be carried out between Northern Ireland and Great Britain. Piazza also said the proposed law would end the requirement that Brussels be informed of policies concerning state aid for goods intended for Northern Ireland. The bill has been heavily criticized because its passage would allow for breaches of international law. Further complicating matters, US Speaker of the House Nancy Pelosi said that the US Congress will not pass a US-UK trade deal if Brexit violates international law.

EU

• The European Central Bank (ECB) kept its policy stance unchanged. Rates remained on hold, with the marginal lending facility and the deposit facility remaining unchanged at 0.00%, 0.25% and -0.50% respectively. Furthermore, it reiterated its forward guidance that it expects key rates to remain “at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2.0% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.” The statement from the Governing Council noted that purchases under the pandemic emergency purchase programme (PEPP) will continue with a total envelope of EUR€ 1.35 trillion until “least the end of June 2021”, and in a “flexible manner over time, across asset classes and among jurisdictions.” Principal repayments from PEPP will be reinvested until at least the end of 2022. Net purchases under the asset purchase programme (APP) will continue, at EUR€ 20 billion per month, together with the additional EUR€ 120 billion temporary envelope, until the end of the year, and further details relating to the programme remained unchanged from the previous meeting statement. Similar to its previous meeting, the press release included a reference to a “very high take-up of funds” in the latest TLTRO-III operation, “supporting bank lending to firms and households.”

• Stocks in Europe rose on the continuing economic recovery, shaking off disappointment that the ECB did not announce additional stimulus, as well as renewed fears of a hard Brexit. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.67% higher. Germany’s Xetra DAX Index rose 2.80%, France’s CAC 40 added 1.39%, and Italy’s FTSE MIB advanced 2.21%.

• The September ZEW will be released on Tuesday and final HICP figures for August on Thursday. ZEW will set the tone for the September PMIs in the following week. High frequency data suggests that the euro recovery has continued in September but at a slower pace. ZEW expectations have already shown a stellar rebound in recent months, so a small setback here would not be surprising.

China

• Consumer inflation slid to a below-forecast 2.4% in August from a year ago, a three-month low, according to China’s statistics office. Excluding food and energy, the core inflation rate was unchanged from July. The headline number, however, belied a steep increase in food costs, driven by surging pork prices and a coronavirus-driven slowdown in imports. The uptick in pork prices explains Beijing’s “Clean Plate” campaign aimed at curbing food waste and improving long-term food security, a matter of growing concern amid China’s worsening relations with key import sources such as the US and Australia. Prices for eggs, another food staple, also jumped in August amid a decline in the number of egg-laying hens following greater demand for chicken instead of pork.

• China’s exports rose a greater-than-expected 9.5% in August from a year earlier (the latest sign of recovery as its trading partners emerge from lockdowns) while imports declined. China’s trade balance totaled roughly USD$ 58.9 billion in August. Exports to the US surged 20%, presenting a potential thorn in upcoming trade negotiations. China’s bilateral surplus with the US totaled USD$ 34.2 billion, accounting for 58.0% of its overall trade surplus in August.

• Mainland Chinese A-shares shed roughly 3.0%, taking their cue from the US sell-off. In addition to the US tech stock downturn, news that the Trump administration was considering adding Semiconductor Manufacturing International Corporation (SMIC), China’s top chip foundry, to a list of US-sanctioned companies dealt a blow to investor sentiment. Shares of many Chinese technology companies fell on the news, reflecting SMIC’s importance as a key semiconductor supplier to the domestic market and the company’s close ties to Beijing and the defense industry.

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