Economic Outlook – 20 September 2020


  • The Federal Reserve indicated that there will be no interest rate increase until at least end of 2023 and will not tighten policy until inflation is higher than 2% for “some time”, a move away from its previous policy goal of “maximum employment” and “symmetric 2% inflation”. This announcement makes the Fed’s desire to make up for past inflation underper­formance more explicit. However, the Fed continued to remain vague on the period over which it seeks to achieve higher inflation. Despite the dovish stance, markets thought it was not dovish enough. Equities slid, as investors were hoping for the Fed to magnify its QE by announcing the purchase of more government bonds.
  • Retail sales strengthened for the fourth straight month in August with many of the major categories being very close to or even above their pre-pan­demic level of sales. However, the momentum is fading as sales grew by a meagre 0.6% month-on-month in August, down from 0.9% in July. Cooling pent-up de­mand and a decline in income for a significant share of the population (due to CARES Act payments being stopped in end-July) may be responsible for this slowdown. However, the strength in retail has been uneven as it masks the continued weakness seen in clothing, restaurants and bars, and department stores. It is important to keep in mind that some of the hardest-hit areas, especially high-touch services (recreation, childcare and haircuts etc.) are not in­cluded in these data.
  • About the housing market, starts weakened by 5.1% month-on-month. The decline was primarily driven by the multi-family segment, which fell by 23.0% on the month, reversing much of the gains seen during the summer. Single-family starts, on the other hand, jumped by 4.1%. Construction for single family homes is continuing at a solid pace on the back of perceived health risks posed by dense living as well as more permanent work from home policies. The housing market is likely to see slower gains in the coming months as economic recovery slows and pandemic-induced uncertainty abounds.
  • The labor market recovery has slowed down. Initial jobless claims (860k) were broadly around consensus, down 33k from last week. Continu­ing claims came in at 12.6 million, beating the consensus of 13 million and down 1 million. Moreover, the number of people collecting unemployment benefits edged higher in late August. At almost 30 million people, the total re­mains incredibly high. Job growth is expected to be slower through the remainder of the year, with a full labor market recovery not taking months, or quarters, but years.
  • The US government released a snapshot of the 2019 Census that revealed an increase in median income and a reduction in poverty. The US Census Bureau said that median household income was $68,703 compared with $64,324 the prior year, a 6.8% increase, which was the biggest jump since the agency began tracking the data in 1967. It also found that the nation’s poverty rate fell to 10.5% last year from 11.8% in 2018. In addition, 29.6 million people did not have health insurance for at least part of the year compared with 28.6 million the year before.
  • As of Friday morning, the Real Clear Politics average of US presidential polls showed former Vice President Joe Biden’s lead over President Donald Trump sliding to 5.9% nationally from 7.5% last week; he also continued to maintain a 3.9% advantage in the battleground states of Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin. Biden’s odds of election held at 53.0% this week while the odds of Trump’s reelection fell to 45.8%, according to the Real Clear Politics average of betting odds. The first debate between the two candidates is scheduled for 29 September.
  • Equities were mixed, with merger news and some renewed COVID-19 vaccine optimism seemingly offset by worries that the Federal Reserve’s monetary policy was becoming less effective in supporting the recovery. Value stocks and small-caps outperformed, as investors continued to reduce bets on some of the internet and information technology giants that have led the market in recent months. Energy stocks led the gains within the S&P 500 Index, helped by a large and unexpected drawdown in domestic oil inventories and Saudi Arabia’s efforts to force production cuts by other major oil exporters. Communication services stocks were among the worst performers, dragged down by Facebook shares following reports that the Federal Trade Commission was preparing antitrust action against the company. Trading volatility was heightened Friday by the quarterly phenomenon known as “quadruple witching,” when four types of stock options and futures expire simultaneously
  • The yield on the benchmark 10-year US Treasury note ended modestly higher, which could be attributed in part to the Fed’s failure to provide guidance about the average duration of its asset purchases as part of its QE program.


  • Inflation for August was 0.2% year-on-year, slightly above consensus of 0. % but well down compared with last month’s 1.0%. On a month-on-month basis, it was -0.4%, again above consensus of -0.6%, but in line with last month’s -0.4%. The Bank of England’s MPC (Monetary Policy Committee) will not be worried by these numbers (although there are obviously plenty of other things to fuel its discussions). More importantly for the MPC, the continuation of very subdued inflation should clear the way for further quantitative easing, if and when it becomes necessary but possibly this autumn, depending on how wider events develop.
  • Around 5 million British jobs remained fully or partly on furlough at the end of July, down from a peak of just under 9 million but still leaving millions of workers facing uncertainty with the scheme due to be wound up at the end of next month. Provisional tax data released on Friday showed employers had registered 4.8 million jobs as furloughed as of 31 July, down from a peak of 8.9 million in early May. The government said final data could show an upward revision of around 10%, making it likely that 5.3 million jobs were still furloughed at the end of July. Since July employers have been able to bring furloughed staff back part-time, but still claim furlough payments for the hours when staff are not working. The 4.8 million jobs registered as furloughed included 950,000 where staff are now back working part-time but less than their usual hours.
  • Economists from Goldman Sachs are warning that not reaching a trade deal with the European Union could be more costly to the UK economy than the coronavirus. The investment bank said the fallout of a no-deal outcome was likely to be “two to three times larger” than that of “the worst pandemic witnessed in post-war history.” However, many analysts suggest that any no-deal costs would blend in with the global pandemic losses, making it difficult to determine the real source of economic pain.
  • British shoppers spent more last month, taking sales further above pre-COVID levels, as strong online demand helped much of the sector rebound faster than the rest of the economy. Retail sales volumes rose by 0.8% in August, slightly above the average 0.7% forecast in a Reuters poll. Compared with a year earlier, they were up 2.8%, just below forecasts of 3.0% annual growth. Sales had already overtaken pre-COVID levels in July and now stand 4.0% higher than before the crisis, although economists are cautious about what will happen later this year if unemployment rises sharply as forecast. Spending may yet stutter as the furlough scheme is wound down and unemployment rises, weighing on household incomes and job security. And other parts of the economy, such as investment, are taking much longer to recover.


  • The ZEW economic research institute’s gauge of investor sentiment rose to 77.4 from 71.5 in August. ZEW President Achim Wambach said the improvement signaled that investors expect the economic recovery to continue, despite stalled Brexit talks and rising coronavirus infections.
  • European Commission President Ursula von der Leyen said in her annual State of the Union address that the European Union should aim to cut greenhouse gas emissions by 55.0% from 1990 levels during this decade (more than the current target of a 40.0% reduction). She said 30.0% of the EUR€ 750 billion recovery package should be raised through green bonds, and 37.0% should be devoted to helping industries decarbonize.
  • The pan-European STOXX Europe 600 Index overcame concerns about a resurgence in the number of coronavirus cases to eke out a 0.22% gain. However, the major European indexes lost ground: Germany’s Xetra DAX Index slipped 0.66%, Italy’s FTSE MIB tumbled 1.49%, France’s CAC 40 pulled back 1.11%.


  • A trio of economic readings offered more evidence of a strong recovery unfolding in China, the first country to successfully control the coronavirus. Retail sales rose 0.5% in August from a year ago, the first year-over-year growth since the pandemic began. Industrial production, seen as the best proxy for gross domestic product, rose a better-than-expected 5.6% in August from a year earlier. Fixed-asset investment in the first eight months of 2020 declined slightly from a year ago, narrowing the 1.6% decline from January to July and in line with forecasts.
  • Taken together, the data underscored how China’s economy is recovering faster than expected by many economists. On Wednesday, the Organization for Economic Cooperation and Development (OECD) raised its 2020 growth outlook for China to 1.8% from a 3.7% contraction it projected in June, crediting the country’s rapid control of the coronavirus. China is the only country expected to see positive economic growth this year, while all G-20 countries will have suffered recession.
  • China’s weekly stock market gains occurred before the US announced restrictions on the Chinese-owned WeChat and TikTok apps. However, trade tensions with the US are expected to weigh on investor sentiment toward China in the coming months. Two-way capital flows between the US and China sank to a nine-year low in the first half of 2020 as bilateral relations worsened and the coronavirus curbed investment in both countries, according to a research report by the Rhodium Group. The Trump administration’s move to ban TikTok from US app stores could mark the start of a trend of forced divestitures by governments in both countries. Numerous other companies, both Chinese firms operating in the US and US firms with a presence in China, could face pressure to divest. 
  • Chinese stocks rallied as a batch of indicators highlighted the country’s economic momentum, and investors hoped for more fiscal stimulus to boost the coronavirus-hit economy. The benchmark Shanghai Composite Index and blue chip CSI 300 Index each rose 2.4% for the week after two straight weeks of losses. In fixed income markets, the yield on China’s sovereign 10-year bond was broadly flat as of Friday morning despite signs of the improving economy.

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