Economic Outlook – 28 June 2020


  • As lockdown restrictions associated with the coronavirus pandemic eased last month, Americans opened their wallets wider than ever before as their spending rose a record 8.2%. Personal income fell 4.2% on the month as massive government relief measures began to wane.
  • The personal savings rate remains extremely elevated at 23.0% after reaching 32.0% in April. However, fears surfaced last week that an increase in COVID-19 infections and hospitalisations could slow the economy’s recovery.
  • Last Friday, Texas, the nation’s second-most populous state, rolled back its reopening and a number of states slowed their efforts to restart their economies. Consumer activity appears to have waned slightly as case totals have increased, according to nearreal time mobility indices and ride sharing and online restaurant reservation data.
  • After conducting its annual stress test on the banking system, the US Federal Reserve capped bank dividend payments for Q3 at Q2 levels and banned share buybacks by lenders next quarter. Banks voluntarily suspended buybacks earlier this year to conserve capital in the face of a deep recession. The Fed found that while the country’s biggest banks are healthy, a prolonged downturn could see their capital buffers eroded.
  • The Federal Deposit Insurance Corporation relaxed the Volcker Rule imposed after the global financial crisis to limit banks’ proprietary investments. That move should free up capital for the nation’s largest banks.
  • Just over four months remain before Americans go to the polls on 3 November 2020. While the COVID-19 pandemic and civil unrest have dominated the headlines of late, the presidential campaign is coming into sharper focus. Former Vice President Joe Biden currently enjoys a wide lead in opinion polling, prompting investors to examine the ramifications of a Biden victory. Some of the week’s market volatility has been attributed to this increased scrutiny, as investors anticipate higher taxes and increased regulation if Biden wins the White House. A poll of investors conducted by RBC Capital Markets showed that 60.0% believe that such an outcome would be bearish or very bearish for stocks.
  • On the housing front, sales data released showed signs of improvement. New homes sales soared by 16.6% month-on-month in May as buyers rushed back into the market, looking to take advantage of low mortgage rates. Sales of existing homes fell by 9.7%, reflecting the drop in contract signings in the previous two months when transac­tions were hampered by state mandated lockdowns. How­ever, a pick-up in mortgage applications suggests existing home sales should rebound in the months ahead.
  • Flash purchasing managers’ indices showed that the rate of output contraction slowed globally as economies began to reopen. The US composite index increased to 46.8 from 37.0 in May, the highest in four months. The US manufacturing PMI rose to 49.6 from 39.8 while the services index grew to 46.7 from 37.5
  • US Q1 gross domestic product was left unrevised at -5.0% . A very deep contraction is expected in Q2. Durable goods orders rose 15.8 in May after dropping 18.1% in April.
  • Coronavirus fears appeared to push the yield on the benchmark 10-year Treasury note down to around 0.64%, its lowest level since mid-May.
  • So that more US workers might be hired, President Trump signed an executive order halting until the end of the year the issuance of a number of employment-based visa types, including those for highly skilled workers.
  • Stocks gave back the previous week’s gains, as worries over a resurgence in the coronavirus offset enthusiasm over some positive economic data. Growth stocks handily outperformed value shares, and the technology-heavy Nasdaq Composite Index fared best relative to other benchmarks. The declines pushed the S&P 500 Index back into correction territory (down more than 10.0% from its February peak), according to a broadly used definition.
  • In terms of data release, the minutes from the Fed meeting in June are due on Wednesday and, in particular, it will be interesting to read about the discussions on yield curve control.
  • On Friday the US jobs report for June is due and despite continued claims being elevated in June,  employment rate is expected to have risen significantly, as the economy has continued to improve gradually based on higher-frequency data.


  • Last week the flash composite Purchasing Managers Indices came in above consensus at 47.6 (expectations were 40), while manufacturing came in at 50.1, indicating an expansion. These figures will be very welcome indeed as they show the economy is recovering more rapidly than many had feared would be the case.
  • With the lockdown restrictions due to be relaxed further over the next few days, there is hope that a busy summer may yet save many businesses. Key to any recovery will be the employment market, as steady employment will trigger larger-scale consumer purchases that will play an important role in a broader sustainable recovery.
  • The Employment PMI did bounce back in the latest figures as staff are coming back from furlough, although, overall, the employment index remains well below 50, and as such is a concern. The PMI survey asks purchasing managers to rate how they see orders against activities in the previous month, not against the average or long-term expectation.
  • Bank of England Governor Bailey said that the BoE should begin cutting back its bond-buying programme before raising interest rates on a sustained basis, a major shift in its asset purchase policy. He said now was not the time for such action but that the high level of asset purchases “shouldn’t always be taken for granted.”
  • The BoE previously said that it would reduce its balance sheet once the bank rate hits 1.5%. The change in policy means that rates could stay at 0.1% for two to three years, if not longer, as the balance sheet becomes the main monetary policy tool.
  • The UK Treasury is considering a temporary cut in the value added tax (VAT) and specific reductions for some sectors, such as tourism, following pressure from industry and Tory MPs. Chancellor Sunak is also contemplating deferred tax rises and lower public spending as part of the UK budget in the fall. Germany and Austria have already announced hefty VAT cuts, while Italy is thinking about reducing it by 10% for its most affected industries.
  • British car production plummeted by an annual 95.0% in May with just 5314 vehicles built as the coronavirus outbreak kept some factories shut and others operating at reduced levels, an industry body said on Friday. Output slightly recovered from just 197 cars made in April, the lowest level for any month since February 1946, according to data from the Society of Motor Manufacturers and Traders (SMMT). Volumes in the first five months of the year are more than 40.0% down at 324763 cars, with the sector expected to slump to its worst full-year performance in decades.
  • This week the trade negotiations between the EU and the UK restart. Despite the EU and the UK’s new ambition to reach an agreement in August, no major breakthrough is expected until the autumn when the parties will get closer to the ‘hard’ deadline on 31 December 2020 now that the UK has rejected to extend the transition period


  • Tensions between the US and Europe intensified as the European Union chastised the US for threatening to slap additional tariffs of USD 3.1 billion on EU and UK products. The EU said widening the range of tariffs would inflict unnecessary economic damage on both sides of the Atlantic. In 2019, the World Trade Organization allowed the US to impose levies of as much as 100% on USD 7.5 billion of European goods for illegally supporting Airbus.
  • Upbeat economic data provided signs that the coronavirus-induced slump in the eurozone may be bottoming out, reviving hopes of a V-shaped recovery. The flash IHS Markit Eurozone Composite Purchasing Managers’ Index (PMI) surged to 47.5 in June from 31.9 in May, the second-biggest jump in the survey’s history. Although the PMI reached its highest level since February, the data still point to a drop in business output. German and French business confidence recovered at record rates in June and more than expected by most economists, although they were still well below pre-pandemic levels, two national surveys showed.
  • The Macron-Merkel meeting in Meseberg is taking place on Monday ahead of the 17-18 July summit. The two leaders will discuss what strategy to employ to get the ‘frugals’ on board with the recovery fund.
  • In terms of data release, the EU Commission sentiment indicator for June is out on Monday and flash HICP inflation for June is due out on Tuesday. The labour market report for June in Germany (Wednesday) and for May in the euro area (Thursday) will also be interesting in terms of whether job losses remain contained


  • The People’s Bank of China (PBoC) left its loan prime rate (LPR), which serves as a reference rate for new local currency bank loans in the country, on hold for the second month at its latest policy meeting. Investors awaited signs of other easing measures, including a possible reduction in the reserve requirement ratio (RRR). However, China has resorted to other means of freeing capital besides cutting interest rates. Beijing has reportedly urged commercial banks to help smaller businesses and mortgage holders weather the coronavirus downturn by sacrificing RMB 1.5 trillion, or roughly USD 212 billion, of profits this year. Banks have also been asked to offer lower lending rates, defer loan repayments, and cut fees, according to reports. Analysts regard these easing measures as roughly equivalent to a 40-basis point cut in LPR. 
  • China’s property sector, which has proven to be surprisingly resilient amid the coronavirus pandemic, continued to show signs of strength. Residential investment and land sales have rebounded in the last few months as housing sales have increased despite rising unemployment. In May, home sales in Tier 2 cities rose 10.0% year on year even as sales in Tier 1 cities (the country’s wealthiest coastal cities) fell 17.0%. Housing is one of the few consumer-driven sectors in China to see a V-shaped recovery and has almost returned to pre-crisis growth levels.
  • On Thursday, the US Senate passed a bipartisan bill sanctioning Chinese officials responsible for a planned national security law that would allow the Chinese government to override Hong Kong’s independent legal system and erode its autonomy. The measure now heads to the House of Representatives.

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