Economic Outlook – 18 October 2020


  • The latest inflation report should quiet the stagflation chatter that had emerged after a couple of hot months for core inflation. Both headline and core CPI rose a middling 0.2% in the month of September. However, re­moving an outsized 6.7% month-on-month increase in used vehicle prices leaves core inflation flat on the month. During the pandemic, the prices of many goods have risen sharply. But services inflation has ebbed from 3.0% year-on-year in February to 1.9% in September, as demand has been hard hit by social distancing. Services account for 63.0% of the CPI basket, so the cooling heavily influences the overall trend.
  • Consumers ramped up their spending at retailers in September. Retail sales rose 1.9% on the month, driven by a big jump up in clothing purchases (+11% month-on-month), department stores (+9.7% month-on-month), sporting goods, hobby, book and music stores (+5.7% month-on-month) and vehicle sales (+3.6% month-on-month). There is some speculation that the strength in clothing may be due to the delayed back-to-school in many parts of the country.
  • The University of Michigan’s preliminary gauge of October consumer sentiment also surprised moderately on the upside. However, weekly jobless claims disappointed, rising to 898,000, a two-month high. Continuing claims again offered a more hopeful picture, however, falling from a revised 11.2 million to 10.1 million.
  • The trend in retail sales also tells the tale of pandemic life. The hardest hit area is res­taurants and bars, which have faced closures and restric­tions. Since most consumers are staying home a lot more, there is also less of a need to get dressed up to go out, and even with September’s jump, clothing sales are below their pre-crisis level, as are department stores which would in­clude a fair amount of clothing purchases. The strongest areas, apart from online shopping in general, are for things that make staying home a bit more appealing, such as new gym equipment or other hobbies and materials for home and garden improvement projects.
  • Talks continue between US Secretary of the Treasury Steven Mnuchin and Speaker of the House of Representatives Nancy Pelosi over a fifth coronavirus relief package, but a gap of around $400 billion dollars separates the two sides, with Pelosi seeking a total of $2.2 trillion while the While House has offered $1.8 trillion. Complicating matters further is reluctance on the part of Senate Republicans to back a plan approaching anything like what is being negotiated by Pelosi and Mnuchin. Senate Majority Leader Mitch McConnell backs a more limited package with a price tag of around $500 billion. Markets anticipate a large package if Democrats sweep both houses of Congress and the White House in November.
  • 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 edging down to 8.9% nationally from 9.7% last week while his lead in the battleground states of Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin dipped to 4.5% from 4.6%. Biden’s odds of election were little changed at 64.8% against Trump’s odds of reelection at 35.5%, according to the Real Clear Politics average of betting odds. A final debate between the major party nominees is scheduled for 29 October.
  • The large-cap benchmarks narrowly managed a third consecutive week of gains, while small-cap shares lagged slightly after a recent streak of outperformance. Within the S&P 500 Index, industrials and utilities shares outperformed, while financials recorded losses as investors gave a lukewarm reception to bank earnings reports. The small real estate sector was also weak. The S&P 500 reached its high point for the week on Monday afternoon, guided higher by mega-cap technology stocks. Apple shares recorded solid gains ahead of the company’s unveiling of new iPhones on Tuesday, and shares were also strong in advance of its annual Prime Day, scheduled this year over 13 and 14 October.
  • Treasury yields rose after the retail sales report but decreased through most of the week, driven in part by the Federal Reserve’s purchases of US government debt, concerns surrounding vaccine trials, and softness in key components of the latest consumer price index data.


  • An eagerly anticipated European Commission summit ended with few, if any, fireworks. Over the preceding few months, observers had expected the meeting to be a pivotal moment in the drive toward a trade deal between the United Kingdom and the European Union. However, the two sides remain at loggerheads over fisheries and state subsidies within the UK, among other issues. British Prime Minister Boris Johnson warned that without a fundamental change in the EU’s approach his government is willing to end the transition period with no trade deal. Markets continue to anticipate that a barebones agreement will be reached in the coming weeks. The one noteworthy event from the summit was news that European Commission President Ursula von der Leyen was forced to leave the meeting and to self-quarantine after coming in contact with COVID-19.
  • Britain should do more to help the unemployed find work, and fixing the huge hole in its public finances can wait until a recovery from the COVID-19 pandemic is well under way, the Organisation for Economic Co-operation and Development said. The world’s sixth-biggest economy was at “a critical juncture” as the crisis threatens to worsen its productivity and inequality problems, and Brexit could also deal a major blow, the watchdog said in an annual report. Decisions made now about management of the COVID-19 crisis and future trade relationships will have a lasting impact on the country’s economic trajectory for the years to come.
  • British grocery sales growth accelerated in September as shoppers geared up for new restrictions to stem the spread of COVID-19, though there was limited evidence of a new wave of stockpiling, industry data showed. Market researcher Kantar said sales rose 10.6% year-on-year in the four weeks to 4 October as shoppers moved a greater proportion of their eating and drinking back into the home. This is likely a response to rising COVID-19 infection rates, greater restrictions on opening hours in the hospitality sector, and the end of the government’s ‘Eat Out to Help Out’ scheme.
  • Governor Andrew Bailey said last week that the Bank of England is not ready to implement negative rates. Analysts expect the BoE to deploy additional quantitative easing before experimenting with them.


  • European Central Bank Chief Economist Philip Lane said in an interview with The Wall Street Journal that the next phase is going to be tougher for the EU economic recovery. Although the pickup in business activity would continue in the fourth quarter and next year, much would depend on the extent of localized lockdowns.
  • The big question, and this is why there is so much uncertainty, is: how quickly can the current dynamic, with rising cases, be stabilized? He played down expectations for fresh stimulus as soon as next month, saying policymakers will wait for information on 2021 budgets, the exchange rate, and oil prices, among other factors, before deciding on a policy response.
  • Lane also said the ECB is considering a Fed-style inflation target, which would allow price levels to overshoot the central bank’s 2.0% target to offset lengthy periods during which inflation has undershot that level.
  • The EU is drawing up a hit list of up to 20 big internet companies that would face tougher rules aimed at curbing their market power, the Financial Times reported, citing people familiar with the discussions. Under the plans, which could include efforts to break up some of these behemoths, the targeted companies would have to comply with new rules forcing them to share data with competitors and to be more transparent on how they gather information. The list will likely include big US technology companies.
  • Stocks in Europe fell on burgeoning coronavirus infections, Brexit-related uncertainty, and the dissipating prospects of US fiscal stimulus before the 3 November presidential and congressional elections. A rally in German debt pushed yields on these haven securities to the lowest level since the market swoon in March. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.78% lower. Major indexes lost ground: Germany’s Xetra DAX Index slid 1.09%, Italy’s FTSE MIB dropped 1.05%, and France’s CAC 40 gave up 0.22%.


  • Exports last month beat market forecasts and grew for the fourth straight month, jumping 9.9% year-on-year in US dollar terms, according to preliminary official data. Exports to regions that were lagging until recently showed signs of improvement. Imports, which have so far trailed exports in the recovery, jumped in September, offering evidence of a pickup in domestic demand. As a result, many expect China’s trade surplus to shrink in the coming months.
  • The International Monetary Fund raised its full-year gross domestic product (GDP) forecast for China to 1.9%, up from its June forecast of 1.0%, in its October World Economic Outlook. The upward revision makes it likely that China will be the sole G-20 country to record positive growth in 2020. Longer term, China is on track to overtake the US as the world’s largest economy in 2030 in current US dollars, even if the country generates slower-trend growth of 4.5% over the next decade, according to Oxford Economics.
  • Chinese stocks rallied after investors returned from the national Golden Week holiday. The benchmark Shanghai Composite Index rose 2.0% and the blue chip CSI 300 Index advanced 2.4% in its third weekly gain. In fixed income markets, the yield on China’s 10-year sovereign bond rose four basis points to 3.25%, as strong September trade data reinforced hopes for a sustained recovery. Last month marked another strong month for foreign purchases of Chinese bonds, with foreign investors buying USD 20.2 billion in September. At a monthly press conference, People’s Bank of China (PBoC) officials appeared to show little appetite for cutting interest rates. The central bank injected RMB 500 billion into the financial system via its one-year medium-term lending facility, although the added liquidity was seen by market participants as not particularly generous, given upcoming tax payments.

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