Economic Outlook – 21 June 2020


  • Last week’s economic data offered mixed signals as to whether the economy will be able to manage a V shaped recovery. The Commerce Department reported a 17.7% surge in retail sales in May, better than double consensus expectations and the biggest gain in history, albeit one measured against the 23.3% cumulative decline over the previous three months.
  • Last week’s labor market data disappointed. Weekly jobless claims fell less than expected, and continuing claims remained elevated, at over 20.5 million. A gauge of current manufacturing activity in the mid-Atlantic region surprised dramatically on the upside, indicating considerable expansion instead of continued contraction, but overall industrial production in May rose less than expected. US state and local governments have laid off more than 1.5 million workers due to a plunge in revenues resulting from stay-at-home orders.
  • The US Federal Reserve announced that it will begin buying individual corporate bonds in the secondary market. Chair Powell testified to Congress that over time the Fed will shift from buying ETFs to purchasing bonds, saying, “It’s a better tool for supporting liquidity and market functioning.” Regarding the central bank’s toolkit, Powell pledged flexibility and a willingness to revise the terms of its various programs, as needed. Powell urged lawmakers to increase fiscal assistance, saying direct support can make a critical difference in limiting long-term economic damage.
  • There were also signs of a rebound in manufacturing senti­ment. Both the Empire State and Philly Fed manufactur­ing indices recovered strongly in June, with current condi­tions at the 50-mark in the case of the former and above (53.3) in the latter. Both were quite close to their pre-pan­demic levels. Expectations for six months from now were even more optimistic.
  • Reflecting the conflicting signals, longer-term Treasury bond yields ended the week roughly unchanged. The broad municipal debt market marginally outperformed Treasuries through most of the week.
  • US Secretary of the Treasury Mnuchin warned four European governments that talks on digital-services taxes have reached an impasse and threatened to retaliate if foreign countries implement their own taxes. France and the United Kingdom indicated that they plan to press ahead with the taxes that would primarily target US-based technology giants. 
  • US stocks recorded gains and erased part of the previous week’s steep declines. The technology-heavy Nasdaq Composite Index fared best and briefly moved close to the all-time intraday high it established on 10 June. Energy stocks led the rebound, helped by signs that major oil-exporting nations were adhering to previously agreed production cuts as well as optimism for increased global demand. Health care and materials stocks also outperformed, while airline stocks were especially strong early in the week, boosted by reports of a resurgence in air travel. The small real estate and utilities sectors lagged.
  • In terms of data release, Thursday will bring the reading on US personal consumption, durable goods, and jobless claims.


  • The Bank of England enlarged its bond-buying program by GBP 100 billion and left its key interest rate at a record low of 0.1%. The BoE would slow the rate of purchases and expected to meet the new target of GBP 745 billion by end of this year. The BoE cited signs of a recovery in its minutes of the Monetary Policy Committee.
  • The partial lifting of the lockdown in May resulted in retail sales volumes partly rebounding in May 2020, with an increase of 12.0% month-on-month, although sales were still down by 13.1% in February before the impact of COVID-19. Non-food stores provided the largest positive contribution to monthly growth in May 2020, aided by a strong increase of 42.0% in household goods stores. The opening of hardware, paints and glass stores was encouraging, as their sales almost fully recovered with the ending of the lockdown. The proportion spent online soared to the highest on record in May 2020, at 33.4%, which compares with 30.8% reported for April 2020. It will be interesting to see how much of the transition to online remains permanent; clothing, for instance, was already strong in terms of online sales, but there has been a further surge under the lockdown. While there was a strong increase in the volume of fuel sales in May 2020, levels still remain 42.5% lower than in February 2020, before government travel restrictions were in place. Anecdotal evidence provided by Apple shows that UK commuting levels remain well below normal and are lagging most comparative EU countries.
  • Inflation as measured by the CPI (Consumer Prices Index) slowed once again as the lockdown prevented widespread consumer spending. Even in areas where spending was present, such as food and drink, rises were subdued. The CPI including owner occupiers’ housing costs 12-month inflation rate was 0.7% in May 2020, down from 0.9% in April 2020.The largest contribution to the CPIH 12-month inflation rate in May 2020 came from recreation and culture (0.23%). The lockdown has meant that 14.2% of the items in the basket of goods used to calculate inflation are not readily available, although the number of such items affected is declining. These numbers are a demonstration of the subdued state of consumer confidence across the economy.
  • British shoppers bought much more than expected in May as the country gradually relaxed its coronavirus lockdown and online retailers boomed, adding to signs that the economy is moving away from its historic crash in March and April. But official data also showed public borrowing hit a record high as the government opened the spending taps and public debt passed 100.0% of economic output. Sales volumes in May jumped by a record 12.0% after an unprecedented 18.0% slump in April. The rise was at the top end of economists’ forecasts in a Reuters poll but still left sales 13.1% down on a year ago. Most shops in England remained closed until mid-June, suggesting a further increase is likely this month.
  • As regards Brexit, UK has now formally ruled out extending the transition period running until 31 December 2020, as expected. The UK and the EU have agreed to hold more negotiation rounds in July and August. The ambition is now to reach an agreement in August ahead of the EU summit in October. There are signs that both sides may be willing to soften their positions during these negotiations, but comments after the meeting suggest the individual negotiating positions are unchanged.


  • European Union leaders met to hash out the details of a recovery fund at a video summit amid low expectations for an imminent decision. German Chancellor Merkel reiterated that she expects a deal by July. Geopolitical challenges have added urgency to the talks, according to diplomats quoted in news services. Germany’s coalition cabinet signed off on an additional EUR 62.5 billion in debt to finance the country’s stimulus program, pushing net borrowing up to EUR 218 billion this year. Parliament will need to approve the spending increase.
  • The European Central Bank conducted a targeted long-term repurchase operation in which EUR 1.3 trillion was taken up by banks at interest rates as low as -1.0%. This resulted in an additional EUR 550 billion being put into the system, a move that is seen as supportive for the corporate sector.
  • Equities in Europe ended the week higher, supported by stimulus efforts and the reopening of key economies. However, a resurgence of COVID-19 cases in the US and China cast doubt on a quick recovery and hindered the advance. The pan-European STOXX Europe 600 Index ended the week 3.31% higher, while Germany’s Xetra DAX Index climbed 3.51%, France’s CAC 40 Index added 3.23%, and Italy’s FTSE MIB Index advanced 3.99%.
  • In terms of data release, the ECB minutes will be released on Thursday.


  • US Secretary of State Pompeo and Chinese envoy Yang Jiechi met in Honolulu last week to ease strains in the US-China relationship. The meeting was apparently at least partially successful as China reportedly plans to accelerate purchases of US farm products to comply with the phase one trade deal. Purchases had fallen behind due to the coronavirus pandemic.
  • People’s Bank of China Governor Yi Gang announced a new bank lending target of RMB 20 trillion for 2020 and a total social financing target of RMB 30 trillion. The targets imply much slower credit growth in the second half of 2020, indicating that the PBoC remains cautious about fully opening the credit taps. Yi was speaking at a gathering of senior government officials in Pudong. With regard to the PBoC’s financial support during the coronavirus outbreak, Yi said it had been phased, with a need to “pay attention to the hangover of the policy.” 
  • In China’s bond market, yields on government bonds continued to rise. The yield on the 10-year bond increased from 2.78% to 2.90%. Yields rose as the scale of new debt issuance required to fund stimulus plans to counter the coronavirus came into focus. At the country’s recent State Council meeting, Premier Li Keqiang said that China’s central bank would reduce its reserve requirement ratio and re-lending to keep “liquidity reasonably sufficient.” While news of central government special purpose bond auctions saw rates sell off, supply pressures may ease following the issuance of RMB 1.3 trillion of local government bonds in May.
  • China’s domestic large-cap index, the CSI 300 Index, gained 2.4% for the week, outpacing the 1.6% advance in the country’s benchmark Shanghai Composite Index. The gains in Chinese stocks came despite a reported surge in new COVID-19 cases in Beijing, highlighting the risk of a second wave of infections. In response, Beijing returned to tight movement restrictions, though not a complete lockdown, after the new cases were traced to a wholesale food market. Despite fears of another wave, public health experts believe that China will be able to better manage a resurgence in infections given the country’s extensive experience in battling the coronavirus.  

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