Economic Outlook – 30 August 2020


  • The Federal Reserve has decided a chance of tack is necessary. Nothing too revolutionary of course, but a recognition that it should be more concerned with employment undershooting its goal than outperforming it. At the same time, having con­sistently over-predicted the future path of inflation over the past decade, it has come to the view that it should be less concerned about overshooting its 2.0% objective. So, rather than targeting a forecast of 2.0% inflation, it will target a rate that includes the recent past, an average inflation tar­get. In other words, if inflation has underperformed, due, for example, to a period of economic weakness, it will not immediately tighten policy even if inflation pushes higher than 2.0%.
  • Home prices in the US showed signs of recovery in June, rising 4.3%, according to the S&P CoreLogic Case-Shiller US National Home Price NSA Index. Phoenix, Seattle and Tampa continued to post the strongest annual gains among the 19 cities reporting. Sales of newly built homes soared 36.0% year-over-year in July and were up 14.0% from June as pent-up demand, urban flight and a new desire for more work-from-home space fueled the growth. Additionally, mortgage applications to purchase a home were 33.0% higher than a year ago, according to the Mortgage Bankers Association. Pending home sales were up 6.0% in July from June and advanced 16.0% year-over-year.
  • According to a majority of economists surveyed by the National Association for Business Economics, there is a 25.0% chance that the US economy will fall into a double-dip recession. Kansas City US Federal Reserve Bank President Esther George is concerned that there might be an intensification of the coronavirus pandemic and an economic pullback in the fall. However, she said that financial conditions are very accommodative and that the Fed is prepared to respond as needed.
  • Most US states have received approval to send workers an extra USD$ 300 a week in unemployment benefits from the federal government. Approved states are guaranteed three weeks of funding but may receive more depending on the number of applicants. 
  • After 92 years as the longest-serving component of the Dow Jones Industrial Average, Exxon Mobil (in its various forms) will be removed from the 30-stock index. In all, Salesforce, Amgen and Honeywell International will replace Exxon, Pfizer and Raytheon Technologies.
  • Stocks continued to grind higher on largely positive news flow about potential vaccines and treatments for COVID-19, generating solid returns for the week. Companies that would benefit most from a full reopening of the economy, such as airlines and aircraft part manufacturers, enjoyed strong support at times. However, higher-valuation growth stocks outperformed lower-priced value companies, extending the 2020 trend. Large-cap companies easily outpaced small-caps, as large information technology firms continued to drive the market’s upward momentum. 
  • US Treasury yields increased, with much of the move coming after Powell’s statements. The dovish speech boosted riskier assets at the expense of Treasuries, which investors widely view as a safe haven.


  • Germany’s ruling coalition extended a programme to help keep workers on companies’ books and increased its funding by EUR€ 10 billion. Additional measures would allow struggling companies to delay insolvency filings until year-end. The German economy contracted at a record rate in the second quarter, although the initial estimate of a quarterly decline of 10.1% in gross domestic product was revised up to a 9.7% contraction.
  • Castex said the planned EUR€ 100 billion recovery plan to be unveiled on 3 September would support small and medium-sized businesses and include cuts to commercial and industrial property taxes, local value-added taxes, and corporation taxes. Finance Minister Bruno Le Maire extended the emergency programme providing EUR€ 300 billion in state-guaranteed bank loans to businesses and added EUR€ 3 billion of guarantees for quasi-equity financing that will provide between EUR€ 10 billion and EUR€ 15 billion for small companies.
  • European shares rose on further economic stimulus in France and Germany, a recommitment by the US and China to their partial trade deal, and signs of progress in the development of treatments for COVID-19. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.02% higher, while Germany’s Xetra DAX Index climbed 2.10%, France’s CAC 40 added 2.18% and Italy’s FTSE MIB rose 0.74%.


  • British car production rose sharply in July but is still well below last year’s level after manufacturing almost completely stopped in April at the start of the coronavirus lockdown. A total of 85,696 cars were manufactured in Britain in July, 51.0% more than in June but 21.0% fewer than in July last year. “As key global markets continue to reopen and UK car plants gradually get back to business, these figures are a marked improvement on the previous three months, but the outlook remains deeply uncertain,” said SMMT (Society of Motor Manufacturers and Traders) chief executive Mike Hawes.
  • British business confidence has ticked up but remains far below usual levels as the economy struggles to cope with social distancing and employers are preparing to cut jobs, a survey showed on Friday.  Lloyds Bank’s business barometer rose eight points to -14, the biggest monthly increase in three years and optimism about the economy and trading prospects showed similar increases. Low levels of confidence, combined with the biggest contraction of the economy on record between April and June when it shrank by 20.0%, meant the shape of any recovered remains highly uncertain.
  • Britain’s services firms hemorrhaged jobs in the three months to August, a survey showed in the latest sign of mounting unemployment as the government’s coronavirus job protection scheme is wound down. Companies reliant on spending by consumers (many of which only reopened in recent weeks after the lockdown) cut jobs at the fastest pace on record, according to the Confederation of British Industry. Business and professional services firms reported the steepest declines since May 2009. Companies expected job losses to slow slightly in the next three months but the CBI said government action was urgently needed.


  • The yield on China’s sovereign 10-year bond increased for the week amid further evidence of the strengthening economy. Industrial profits in July surged 19.6% over a year earlier in their fastest year-over-year growth since June 2018. However, cumulative profits for the year to date remain in negative territory. Profits at state-owned enterprises significantly lagged those at private and foreign-owned companies.
  • In a sign of China’s growing focus on home-grown technology, Beijing reported that basic research and development (R&D) spending climbed 52.0% in 2019, more than triple the rate for the previous two years. Basic or “pure” research (which is viewed as essential for a country to successfully innovate and to develop more advanced technologies) represented more than 6.0% of total R&D, which accounted for a record 2.23% of China’s economy last year. In developed countries, basic or pure research averages 15.0%, suggesting that R&D investment has a long growth runway in China.
  • In the week starting Monday 31 August, investors will focus on evidence that China’s economy is picking up from the coronavirus-induced downturn. Purchasing managers’ indexes for August are expected to remain in expansionary territory as new export orders will likely temper the impact of devastating rain and floods across large parts of the country over the summer. Analysts expect that an improvement in corporate profits may bolster demand and help manufacturers replace depleted inventories and resume capital expenditure plans that were sidelined by the virus. Investors will also look for signs of a recovery in China’s services sector now that COVID-19 has largely been contained. 
  • Mainland Chinese stock markets rose for the week. The blue-chip CSI 300 Index gained 2.7% and the benchmark Shanghai Composite Index, which gives a significantly larger weighting to state-owned enterprises, added 0.7%. For the year to date, Chinese yuan-denominated A shares have gained about 10% compared with a roughly 8.5% gain for the S&P 500 Index, making them among the best performers in global stock markets. 

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