Economic Outlook – 16 August 2020


  • Inflation, as measured by the Consumer Price Index, rebounded more sharply than ex­pected. Core inflation rose 0.6% month-over-month, the largest jump since 1991. The move was largely due to price hikes in areas that had seen significant discounting earlier in the pandemic, like motor vehicle insurance and airline fares. The acceleration in price growth has led some to raise the specter of stagflation, where higher inflation takes hold despite low growth. Core inflation was up a modest 1.6% year-on-year in July, so there is still room for prices to nor­malize further before inflation gets anywhere near a level that is concerning for the Federal Reserve.
  • Retail sales continued to improve in July, rising 1.2% on the month. They came in below what markets were expecting, but even in the face of surging infections in many areas of the country, retailers continued to make progress. Many of the major categories are very close to or even above their pre-pandemic level of sales. The hardest hit cat­egories are clothing, restaurants and bars and department stores. Restaurants and bars among the later businesses to open, and in some areas face renewed shutdowns. And de­mand for clothing is likely low, given many people are stay­ing home in their sweatpants.
  • First-time claims for unemployment insurance were at 963,000 last week, which was below the 1.1 millionclaim estimate of economists surveyed by Dow Jones. First-time claims have not fallen below the one million mark since March. The drop represented a decline of 228,000 from the previous week’s total. Jobless claims were above one million for 20 consecutive weeks before the US economy went into lockdown.
  • President Trump took executive action to extend extra jobless benefits at USD$300 a week instead of the previous USD$600 a week. The move is also meant to promote eviction protections, sustain existing student loan relief and create a payroll tax holiday. However, the measure could fall apart in court, where Democrats are contesting it, because it attempts to usurp the role of Congress as the appropriator of federal funds and because it could take outdated state unemployment systems weeks to adjust to the new rules and payout benefits. The two parties were still far apart on a relief deal and Congress has adjourned until after Labor Day, which could put many people at risk of falling into poverty.
  • Former US vice president and presumptive presidential nominee Joe Biden selected Senator Kamala Harris (D-CA) to join him on the Democratic ticket, which made Harris the first black woman, and the first Asian-American woman, to appear on a major party ticket. Harris’ background reflects the image of the US as a nation of immigrants: Her mother was a widely respected breast cancer researcher who immigrated to the United States from India in the 1960s, and her father is a Stanford University economist who emigrated from Jamaica.
  • Senior US and Chinese officials reviewed the implementation of their Phase 1 trade deal and discuss other issues or areas of conflict between the two countries. President Trump’s economic advisor Larry Kudlow said that the trade deal is “fine” and China is “substantially” increasing purchases of American goods.
  • The major indexes registered gains for the week, helping the S&P 500 Index to briefly move within roughly 0.2% of its February all-time high. Slower-growing value stocks outperformed for the second consecutive week, suggesting to some that a market rotation was underway after the dramatic outperformance of large-cap growth shares in recent months. Industrials shares outperformed within the S&P 500, helped by strong gains in package delivery firms FedEx and United Parcel Service. The small utilities and real estate sectors lagged as increasing longer-term Treasury bond yields made their typically high dividend payments less attractive in comparison.
  • On Friday, the PMI data will be available, which are expected to show a continued gradual uptrend in August, although at a slightly slower pace to reflect the catch-up in activity of previous prints.


  • The UK fell into a recession in the second quarter, when the economy shrank by a record 20.4% sequentially. Consumption, government spending, exports, imports, and business investment declined significantly. However, there were signs of a recovery in June, when GDP rose 8.7% from May. Official data showed that the UK shed 730,000 jobs between March and July, likely because companies froze hiring during the coronavirus lockdown. More than a quarter of the workforce is still inactive at home. Some fear further losses as the government winds down its job retention scheme and companies lay off workers. The National Statistics office estimated that about five million workers are still on furlough. Bank of England Deputy Governor Dave Ramsden indicated to The Times newspaper that unemployment would be a big factor in any decision to expand the central bank’s bond purchases. Meanwhile, the Chancellor of the Exchequer, Rishi Sunak, is considering whether to shelve his fall budget if the UK is hit by a second wave of coronavirus infections.
  • Almost one in three businesses in the UK has operating costs that are greater or equal to their turnover, Britain’s statistics office said in an update on the impact of the coronavirus pandemic on the economy. Companies in the arts, entertainment and recreation sector reported the largest percentage of businesses with operating costs exceeding turnover at 42.0%, followed by the accommodation and food service activities sector at 29.0%. Manufacturing and real estate reported the largest percentage of businesses indicating that turnover exceeded operating costs, at 54.0% and 53.0% respectively.
  • The rebound in Britain’s housing market gathered more pace in July with a measure of property prices turning positive for the first time since the coronavirus crisis engulfed the country. But the Royal Institution of Chartered Surveyors (RICS) said its members were worried the mini-boom could turn into a bust once the government’s jobs subsidy programme closes in less than three months’ time and a tax cut expires at the end of March. The RICS monthly house price balance rose to +12 from June’s -13, above all forecasts in a Reuters poll of economists. London was the only region to show price falls last month and even there the pace of decline slowed.


  • The monthly ZEW survey of economic sentiment leapt to 71.5 from 59.3 in July, signaling that investors’ outlook for the German economy has improved significantly. Although hopes of a quick recovery continued to grow, experts at the economic research institute noted that progress has been slow, with the indicator for the current economic situation in Germany falling to -81.3 from -80.9 in July.
  • There has been a rise in European yields, which notably sent 10-year Bunds 10bp higher and are now approaching the upper end of the range since early July. The drivers are the US (which has risen some 15bp this year) and lower ECB purchases. The rise in yields is not expected to be more persistent, as it is more related to flow dynamics given the solid increase in issuance of US Treasuries in Q3, as well as a more modest pace of ECB buying at the start of August.
  • Equities in Europe ended the week higher on signs of progress in developing a vaccine against COVID‑19, the disease caused by the coronavirus, and hopes that major economies could pursue additional stimulus measures to bolster a nascent recovery. The strong rally at the start of the week stalled on rising fears of a potential second wave of coronavirus infections in Europe, a risk that prompted the UK to impose more travel restrictions. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.24% higher, Germany’s DAX Index rose 1.79%, France’s CAC-40 ticked up 1.50%, and Italy’s FTSE MIB gained 2.62%
  • On Thursday, the ECB minutes will be made available.


  • July economic readings released during the week were mixed. Consumer inflation rose for the second straight month driven by higher food prices, while retail sales and industrial output were both less than expected. Overall, the latest month’s data showed that China’s economic activity slowed in July as devastating floods in much of the country damaged agricultural output and disrupted industry.
  • However, the data also suggested a sluggish recovery in demand amid elevated inventory levels. Surprisingly, China’s export-focused sectors fared the best, with the auto sector recording its best output growth since 2016. However, the urban unemployment rate stayed at a relatively high 5.7%, with a sharp increase in the 20 to 24 age bracket (a worrying data point for Beijing) which has put a high priority on stabilizing employment. In other economic news, credit data released by the People’s Bank of China showed that growth in new lending slowed following a coronavirus-driven spike, indicating that credit growth was returning to normalized levels.
  • Mainland Chinese stock markets ended the week broadly unchanged as investors stayed on the sidelines ahead of US-China trade talks. Many analysts see the talks (which are intended to review the progress of the Phase 1 trade deal mentioned above) as a potential risk to markets, though President Trump is believed to want the deal upheld ahead of the November presidential election. However, US import targets for 2020, to which China has committed, already appear out of reach.

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