Economic Outlook – 22 November 2020


  • Retail sales improved by 0.3% in October, extending their winning streak to six months. The outturn, however, was below market expectations and a marked deceleration in the pace of gains from the 1.5% av­eraged in the three months prior. Within this slowing trend, there’s a noticeable shift toward online shopping. Sales at non-store retailers, a proxy for online sales, appear to be tak­ing the lead once again as in-store sales moderate.
  • Home sales, meanwhile, continued to be robust in October. Existing home sales defied market expectations, rising by 4.3%. The growth in resale activity over the past several months has been nothing short of remarkable. Sales are now up nearly 27.0% from year-ago and 19.0% from the pre-crisis peak. The number of homes for sale, on the other hand, is in short supply. At the current sales pace, there is just 2.5 months of supply on the market (a record low). With such little product for homebuyers to choose from, the median sales price accelerated further, to 15.5% year-on-year. The strong acceleration in home price growth has overwhelmed the positive impact of record-low mortgage rates on housing affordability. The combination of deteriorating affordability and low supply is likely to lead to a more moderate pace of sales growth going forward.
  • Signals from the labor market were not as upbeat. While continuing jobless claims trended lower at the beginning of the month, initial jobless claims recorded a mild increase to 742k last week from 711k the week earlier. The still-elevated level of initial claims, a proxy for layoffs, points to softer la­bor market momentum.
  • The US Department of the Treasury informed the US Federal Reserve Board that the department will not renew a number of programs put in place early in the coronavirus pandemic to backstop specific fixed income asset classes. While the programs have been little used, their existence has provided investors with a safety net, one that will expire at the end of 2020. Secretary of the Treasury Steven Mnuchin has asked the central bank to return $455 billion of unused funds and for Congress to reallocate those monies to fund additional Paycheck Protection Program loans. The Fed has asked Treasury to reconsider the decision. The incoming Biden administration could revive the backstop, but such an action would need congressional approval.
  • The major indexes ended mixed, as good news on the coronavirus vaccine front continued to be offset by worries about the worsening of the pandemic in most parts of the country. The Dow Jones Industrial Average, the S&P MidCap 400 Index, and the small-cap Russell 2000 Index all reached new intraday highs in the first part of the week before surrendering some of their gains. Energy shares outperformed as oil prices rose on hopes for an end to the pandemic in 2021, as well as signals that OPEC and other major oil exporters would delay a global production increase planned for January. Health care and utilities shares lagged.


  • UK retail sales increased by 1.2% month-on-month for October and 5.8% year-on-year, easily beating consensus expectations of 0% and 4.2% respectively. Retail sales, along with almost every other economic indicator, suffered a sharp downturn during the first lockdown, but had fully recovered by the summer, not just to levels seen before the pandemic, but to their long-run upwards trend. Retail sales excluding fuel were up 1.3% month-on-month and 7.8% year-on-year, again beating consensus expectations of 0.1% and 5.9% respectively. Overall, this is encouraging, as it demonstrates that, prior to the second lockdown, consumer spending had recovered, although it will likely slump again during the second lockdown
  • British finance minister Rishi Sunak will announce the heaviest public borrowing since World War Two when he spells out his spending plans next week after the biggest economic crash in over 300 years. With Britain in the midst of a second wave of COVID-19 cases and economic recovery on hold, Sunak has postponed longer-term plans for the public finances. Spending on the pandemic is on track to exceed £200 billion this year after the extension of job protection programmes, and other costs are likely to spill into the 2021/22 fiscal year. Only the armed forces will receive a multi-year increase in funding as Prime Minister Boris Johnson seeks to boost Britain’s profile outside the European Union. Sunak’s other spending announcements are likely to be dwarfed by the scale of new borrowing forecasts which will underscore the need for future tax rises.
  • British consumer morale sank to a six-month low in November as a second coronavirus lockdown prompted a surge in pessimism over households’ finances. The consumer confidence index from market research firm GfK fell to -33 from -31 in October. A Reuters poll of economists had pointed to a reading of -34. The survey’s gauge of personal finances over the last year slid to its lowest level since December 2013. “This will deal a blow to any future rebound because bullish consumer spending fuels the UK economy and low confidence is the enemy of recovery,” Joe Staton, client strategy director at GfK, said.
  • Time is running out for the United Kingdom and the EU to reach a trade and security agreement by the end of 2020. Complicating matters is the news that Michel Barnier, the EU’s chief negotiator, has been quarantined due to a COVID-19 exposure. While hopes are rising that a deal can still be struck, talks are now seen as potentially dragging on into December, leaving parliaments little time to ratify any agreement before the transition period ends on 31 December. As a result, European governments have begun preparations for a no-deal Brexit.


  • Hungary and Poland blocked the European Union’s planned €1.8 trillion fiscal package, which includes a large fund to help economies weather the damage caused by the coronavirus. They oppose a mechanism that would allow the EU to block disbursements to countries violating its rule of law principles. The Politico news website reported that EU leaders at their Thursday videoconference summit did not indicate how the standoff might be resolved. German Chancellor Angela Merkel said she would hold talks with the leaders of the two countries while defending the existing proposal.
  • Reports suggest that three main areas of contention (a level playing field for companies, fishing rights, and settling trade disputes) persist as the UK and EU negotiate a post-Brexit agreement on trade. Face-to-face talks have been suspended because a senior negotiator tested positive for COVID-19, although officials will keep working remotely, according to Reuters. France, the Netherlands, and Belgium urged the European Commission to start implementing contingency measures in case there is no deal before the Brexit transition ends on 31 December.
  • European Central Bank President Christine Lagarde told the European Parliament that the bank will forcefully act to help the economy. She told members that the Pandemic Emergency Purchase Program and targeted long-term repurchase agreements will likely remain the main tools in the central bank’s kit.
  • Shares in Europe rose for a third consecutive week amid optimism on potential coronavirus vaccines. However, concerns that soaring rates of infection might trigger harsher restrictions curbed gains. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.15% higher, while Germany’s DAX Index advanced 0.46%, France’s CAC 40 gained 2.15%, and Italy’s FTSE MIB climbed 3.84%.


  • Chinese data for industrial production and retail sales in October were strong, underlining the robust recovery. However, the growth momentum is expected to lose some pace soon, as the effect of the stimulus fades from Q1 and exports suffer from the downturn in US and Europe.
  • Yields on Chinese high yield bonds rose during the week after an unprecedented number of defaults among large state-owned enterprises (SOEs). After the coronavirus, some SOEs reportedly have struggled to make their bond payments, although most China investors appear to believe that Beijing would prevent the failure of a large SOE. The market tumult led to around 126 new issues being withdrawn as defaults by SOEs hit a record. Separately, a new directive banning domestic debt issuers from buying their own bonds at the time of issue weighed on sentiment. The order was issued by the National Association of Financial Market Institutional Investors, which falls under the PBOC and shares oversight of corporate bond issuance in China’s interbank market.
  • China and 14 other Asian countries signed the Regional Comprehensive Economic Partnership (RCEP), a trade deal that will eventually form a free trade area that includes over 30.0% of current global GDP and is expected to rise to about 50.0% of global GDP by 2030. The deal brings together China, Japan and South Korea (the region’s top-three economies) under a regional trade pact for the first time and includes 10 Southeast Asian countries, Australia, and New Zealand. The deal calls for tariffs and quotas to be eliminated for 65.0% of regional trade in goods and sets a target of 90.0% in 20 years, with possible expansion to include other services and countries.
  • Chinese stocks rose strongly after solid economic data lifted investors’ risk appetite. For the week, the large-cap CSI 300 Index gained 1.78% while the benchmark Shanghai Stock Exchange Composite Index added 2.04%, according to Reuters data. In fixed income markets, the yield on the sovereign 10-year bond increased six basis points to 3.34%. In currency trading, the renminbi strengthened by 0.6% against the US dollar to close at 6.570. The People’s Bank of China (PBOC) injected RMB 800 billion (about $121 billion) in medium-term loans into the banking system and left interest rates on hold for the seventh straight month. The central bank also kept its one-year medium-term lending facility rate to financial institutions unchanged at 2.95%.

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