Economic Outlook – 23 August 2020

US

• Both housing starts and existing home sales trounced market forecasts in July, rising by 22.6% and 24.7% month-on-month, respectfully. Starts are now just 7.0% below their pre-pandemic peak (January), while exist­ing home sales are 8.0% above January levels. The housing market has been a bright spot for the US economy during this pandemic. Record-low mortgage rates have had a magnetic pull on prospective buyers, es­pecially millennials who have held-off purchasing a home due to affordability constraints. This has given homebuilders the confidence to resume construction at extraordinary speed. Looking ahead, the housing outlook depends on the labor market recovery. Prospective buyers will need the income to take the plunge into homeownership, but a wobbling labor market could delay their plans.

• The labor market recovery appears to be losing steam. Initial jobless claims data released for the week end­ing on 15 August rose to 1.1 million claims, flattening at a level almost one million higher than in pre-pandemic months. Likewise, overall continuing claims are also stabilizing around the 28 million mark. Taken togeth­er, these indicators suggest employment gains slowed in August compared to May, June or July.

• The US dollar index fell to its lowest level in more than two years on the ongoing effects of the Fed’s stimulus programmes. The dollar usually functions as a safe-haven investment in moments of crisis, but the central bank’s programmes helped propel risk assets to all-time highs while reducing demand for safe-haven assets. However, that changed after the Fed minutes shifted the focus to a more risk-off sentiment on Wednesday, strengthening the US dollar.

• In the Fed minutes of its July meeting: “Members agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term.” In terms of monetary policy, several FOMC participants agreed that without convincing fiscal support, more stim­ulus may be needed to promote the economic recovery. They debated the use of forward guidance and yield curve control, with the former getting more attention among members. Fed Chairman Jerome Powell will likely provide more insight into these issues as well the broader wrap up of the comprehensive monetary policy framework review at the Fed’s annual Jackson Hole Symposium.

• Discussion on another US fiscal support package stalled following disagreement between Donald Trump’s administration and the Democrats in Congress. There is speculation that a smaller package of ‘just’ $USD 500 billion will be approved now, leaving the more contentious issues until after the election.
• US Postmaster General Louis DeJoy said that he is suspending certain changes at the US Postal Service until after the 2020 election in order to “avoid even the appearance of any impact on election mail.” Recent changes including sweeping cost-cutting measures have raised alarms about widespread mail delays that could impact the November elections. DeJoy testified before the US Senate Homeland Security and Governmental Affairs Committee on Friday concerning the controversial moves. This week-end, the US House of Representatives is scheduled to vote on $USD 25 billion legislation to address funding shortfalls and block organisational changes at the Postal Service.

• The major indexes ended mixed in a week of generally light summer trading, at least in the context of the market’s recent volatility. Nevertheless, the week was notable for the S&P 500 Index hitting record intraday and closing highs on Tuesday. By common definitions, this marked the fastest recovery from a bear market in history, according to Barron’s and Dow Jones Market Data, the 126 trading days it took for the S&P 500 to reclaim its February peak was over 10 times as fast as the index’s average historical rebound (1,542 trading days).

• Treasury yields drifted modestly lower through most of the week as the disappointing jobless claims and manufacturing data appeared to add to concerns that the US economic recovery is slowing down.

• In terms of data, on Tuesday the US Consumer confidence print will be released, on Thursday the Jackson Hole conference will be held and on Friday the US PMI read will be made available.

UK

• Retail sales are up a strong 3.6% (above consensus forecast of 2.0%), as pent-up demand continues to be met post lockdown. Savings have been rising (and debt has been repaid) throughout Q2, and while the total accumulated savings will not be completely spent, clearly a portion will be, and there is almost certainly more to come, albeit at a slower and more sustainable pace. Notably, there was a strong return to High Street, as online clothing sales fell by 7.0%, while overall clothing expenditure increased. It is too early to determine the scale of the shift in consumers’ expenditure patterns, but the picture is not as simple as the shift to online.

• Some small lenders issuing loans on behalf of Britain’s Coronavirus Business Interruption Loan Scheme (CBILS) risk running out of taxpayer-backed cash to lend before an end of September deadline for applications. The British Business Bank (BBB), which oversees CBILS and provides accreditation to participating lenders, has declined to top up allocations to some small lenders as the scheme draws to an end, said the sources, who declined to be named because the matter was commercially sensitive.

• Britain’s economic recovery from the shock of the COVID-19 pandemic has gathered pace, data showed on Friday, but government borrowing rose past the £GBP 2 trillion mark and fears of future job losses are mounting. Retail sales rose above pre-pandemic levels in July, the first full month for many shops reopening after lockdown, and August’s Purchasing Managers’ Index (PMI) data showed the fastest growth in almost seven years. But Britain’s economy still faces a long recovery after shrinking by a record 20.0% in the second quarter, the largest decline of any big country.

• The latest round of talks between the UK and the European Union (EU) on the details of their post-Brexit relationship broke up without yielding any breakthroughs on the main sticking points of competition and fishing rights, according to anonymous EU officials cited by Reuters. The EU has said a deal must be struck in time for approval at a mid-October leaders’ summit to enable ratification before the UK’s 31 December exit from the bloc.

EU

• The eurozone Flash Composite PMI was 51.6 in August compared to 54.9 in the previous month. Meanwhile, the Manufacturing PMI was 51.7 compared to 51.8 the month before, and the Services PMI was 50.1 compared to 54.7. All indices were below expectations. August saw euro area business activity losing momentum, driven by the service sector, albeit all headline indices remained in expansion. There are concerns over rising cases of COVID-19, as renewed restrictions in some countries may have impacted the service sector, in particular. Consequently, expectations of future business activity in the service sector fell for the first time since March.

• The German Flash Composite PMI was 53.7 in August compared to 55.3 in July, the Manufacturing PMI was 53 compared to 51, and the Services PMI was 50.8 compared to 55.6; all indices except manufacturing were below expectations. Business activity lost some momentum in August as the service sector fell back, but remained in expansion territory, primarily driven by less new business from abroad. The manufacturing sector saw an uptick in both output and new orders, but failed to stem further job losses in the sector. Meanwhile, employment in services also fell back to neutral levels.

• The French Flash Composite PMI was 51.7 in August compared to 57.3 in July, the Manufacturing PMI was 49 compared to 52.4, and the Services PMI was 51.9 compared to 57.3 a month earlier. All indices were significantly below expectations. Business activity softened much more than expected in August, to a large extent driven by new orders in manufacturing. Meanwhile, measures of employment remain in contraction territory and fell significantly in the manufacturing sector. There is some concern over what IHS Markit referred to as a “reacceleration in the rate of job cutting after three months of successive easing”.

• European shares weakened on worsening US-China relations and growing concerns that a resurgence in coronavirus infections could derail an economic recovery. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.81% lower, while Germany’s Xetra DAX Index fell 1.06%, France’s CAC 40 slipped 1.34%, and Italy’s FTSE MIB declined 1.66%.

China

• The renminbi edged up 0.4% versus the US dollar to close the week at 6.922 per dollar. In credit markets, the yield on the sovereign 10-year bond increased 3 basis points (0.03%), aided by expectations of a quickening recovery amid signs that China has largely succeeded in containing the coronavirus. Monetary officials left the loan prime rate (LPR) unchanged for the fourth straight month, as expected. China’s top five banks announced a major change to how mortgage loans are priced, when mortgage interest rates will switch to floating rates linked to the LPR. The move was reportedly ordered by Beijing and was likely undertaken in order to cool a buoyant property market.

• Mainland Chinese stocks ended the week slightly higher as President Donald Trump’s postponement of a six-month trade review assuaged concerns about deteriorating US-China ties. Some observers believe that the White House is seeking more time to allow China to increase purchases of US farm and other exports in order to burnish the optics of the trade deal. However, tensions remained on low boil as the US announced more restrictions on Huawei Technologies, making it difficult for the Chinese telecoms giant to maintain production beyond September without a supply of advanced chips from the US or Taiwan. Longer term, the Trump administration’s actions to restrict the access of Chinese companies to US semiconductor technology will likely remain a source of tension with the US and spur Beijing to foster its domestic technology capabilities.

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