Economic Outlook – 6 September 2020

US

• As largely expected, the American economy continued to churn out jobs last month, albeit at a slower rate than in June and July. In­deed, August saw a total of 1.4 million net new jobs added, down from 1.7 million in July. Overall, nonfarm employ­ment is about 7.6% below where it was in February. The un­employment rate also continued to trend lower, falling to 8.4% in August. While it has come down significantly since the apex of the crisis, it remains high by historical standards.

• Purchases of new vehicles jumped up 3.9% month-on-month in August (from 12.4% in July), to 15.2 million units. Meanwhile, the recovery in international trade progressed further in July, as exports rose by 8.1% (from 9.6% in June), and imports grew by 10.9% (from 4.6% in June).

• The number of people receiving unemployment benefits has ticked up to 29.2 mil­lion in all programmes in the week ended 15 August. Unlike initial claims, continuing claims have yet to show any mean­ingful and sustained improvement. Similarly, the latest Fed Beige Book (covering the period up to 24 August) noted that hiring volatility is becoming a recurring issue, particu­larly in services industries. The report highlighted that as demand remains subdued, temporary furloughs are increas­ingly being turned into permanent layoffs. That was born out in the August jobs data, where despite a drop in overall unemployment, the number of people “permanently” unem­ployed (i.e. out of work, but not on a temporary layoff) rose to 7.4 million, outnumbering the temporarily unemployed (6.2 million) for the first time in months.

• The ISM Services Index declined by 1.2 points to 56.9, signal­ing that the pace at which the services sector is expanding is slowing. By contrast, the ISM Manufacturing Index recorded a surprise 1.8-point gain to 56.0. Despite the top-line increase, the details reveal an uneven recovery thus far, with many businesses still holding back on invest­ment and hiring due to elevated uncertainty.

• Now that the party conventions are in the rearview mirror and Labor Day approaches, the focus on the US presidential election has intensified. National polls have tightened slightly, while those in the “battleground” states have narrowed more significantly. As of 4 September, former Vice President Joe Biden leads President Donald Trump by 7.2% nationally, according to the Real Clear Politics average, down from 9.3% in late July, and by 3.3% in the swing states, down from July’s 6.3%. The betting odds, however, show the candidates tied. Remarkably, Biden’s standing versus Trump in early September polls is almost identical to that of former Secretary of State Hillary Clinton’s at this point in 2016, when she headed the Democratic ticket.

• Although the S&P 500 finished Monday with modest losses, the benchmark still returned more than 7.0% in August, its best month since April. The market climbed on Tuesday and Wednesday, driven by some of the tech names that have propelled the recovery from the late-March lows. Apple continued to attract investor demand after a four-for-one stock split, and shares of video-conferencing company Zoom Video Communications surged after a strong earnings report.

• Stocks finished the week lower, as investors took profits after an August rally that left the major benchmarks at or near all-time highs. The technology-heavy Nasdaq Composite Index suffered the largest losses, declining more than 3.0%, but has still produced significant gains on a year-to-date basis. The S&P 500 Index also remained positive for the year, but the more narrowly focused Dow Jones Industrial Average slipped back into negative territory for 2020. Value stocks lost ground but held up better than their growth counterparts.

• The sell-off in equities, month-end portfolio rebalancing, and Federal Reserve debt purchases drove the yield of the benchmark 10-year US Treasury note lower early in the week. However, demand for Treasuries waned after the release of Friday’s employment report, and the 10-year yield finished little changed for the week.

EU

• The August flash annual consumer price index was -0.2 % year-on-year, and below expectations, compared to 0.4 % in the previous month. This was the first time headline inflation fell below zero since 2016. Core inflation was 0.4 % compared to 1.2 % the previous month, and also below expectations. This month’s low reading was to a large extent driven by core inflation, and the unusual level of economic activity amidst a pandemic during Europe’s main summer month. Meanwhile, unemployment eased somewhat to 7.9 % in July, compared to a revised 7.7 % the month earlier.

• Headline inflation continued to fall significantly in all core eurozone countries: France, Germany, Italy, and Spain saw headline (harmonised) inflation rates of 0.2 %, -0.1 %, -0.5 %, and -0.6 % year-on-year respectively in May. The largest one-month year-on-year falls in May were observed in Italy (-1.3 %) and France (-0.6 %). In all of those countries, headline inflation remains at or below the 10th percentile of the post-2010 distribution. Throughout the eurozone, a combination of VAT cut in Germany, delayed seasonal summer sales in France and Italy, as well as a disappointing tourist season in Spain contributed to the lower readings this month.

• An early estimate of eurozone consumer prices showed inflation of -0.2% in August (the first decline since May 2016) heaping more pressure on the European Central Bank (ECB) to increase stimulus. Speculation that the ECB would have to act soon to counter a stronger euro had mounted before the release of the latest data on consumer prices. The euro’s strength is worrying policymakers, who warned that further appreciation would weigh on exports, drag down prices, and hold back the economic recovery, according to the Financial Times newspaper. Evidence of this unease emerged earlier when the euro briefly rallied to more than USD 1.20 for the first time since 2018, prompting ECB Chief Economist Philip Lane to say the euro-dollar rate “does matter” for monetary policy. The consensus calls for the ECB to keep its policy settings unchanged at its meeting this week.

• Finance Minister Bruno Le Maire said France could extend its emergency furlough scheme beyond 2020 if the economic crisis worsens. His comments suggested France was ready to expand its EUR 100 billion stimulus plan unveiled earlier in the week. Funds will be devoted to enhancing competitiveness, fostering climate-friendly energy sources, and supporting jobs.

• European shares pulled back in sympathy with the technology-led decline in US equities. However, news of merger talks between Spanish lenders Bankia and CaixaBank helped to curb losses. In local-currency terms, the pan-European STOXX Europe 600 Index ended the week 1.76% lower. Germany’s Xetra DAX Index fell 1.46%, France’s CAC 40 slid 0.76%, Italy’s FTSE MIB declined 2.27%.

UK

• The UK services PMI came in at 58.8 (below consensus of 60.1), while the composite came in at 59.1 (consensus forecast at 60.3). The services PMI will have been boosted by the easing of the lockdown and the fact that a considerable degree of spending has been contained within the UK. The Chancellor’s Eat Out to Help Out (EOHO) campaign will also have added to August’s numbers; indeed, it is notable that the EOHO programme has proved so popular that many restaurants are looking to continue it, despite the government subsidy coming to an end on 31 August. There has been some discussion as to how accurate PMI figures have been over the course of the COVID-19 pandemic. While some arguments seem to have some validity, the truth is that no data set is perfect in such unprecedented situations and the PMIs continue to at least provide some guidance as to what is happening.

• There is growing pessimism that the UK and EU trade talks next week will break the impasse between the two sides, after Prime Minister Boris Johnson said the UK would look to double its fishing quota. EU officials said the demand would lead to a loss of one in three EU fishing boats. The Times newspaper said senior government officials put the chances of a deal at 30.0% to 40.0% and that a breakthrough on the key issues of fisheries and state aid remains elusive.

• There is growing pessimism that the UK and EU trade talks this week will break the impasse between the two sides, after Prime Minister Boris Johnson said the UK would look to double its fishing quota. EU officials said the demand would lead to a loss of one in three EU fishing boats. The Times newspaper said senior government officials put the chances of a deal at 30% to 40% and that a breakthrough on the key issues of fisheries and state aid remains elusive.

China

• Official and private purchasing managers’ index (PMI) readings for August showed that China’s recovery continued, albeit at a slower pace. Both the official and Caixin/Markit surveys of manufacturing activity remained firmly in expansionary activity, with the private Caixin/Markit manufacturing gauge signaling the fastest expansion rate since January 2011. The readings suggested that the production side of China’s economy remained in solid shape, despite the impact of devastating rains that flooded large parts of the country over the summer. On the services side, the official services PMI reached 55.4 in August, underscoring stronger domestic demand for services, while the Caixin/Markit reading of services activity was broadly flat. However, services companies increased their hiring for the first time since January, suggesting a recovery in the labor market, according to China’s statistics office.

• The People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) announced simpler rules to facilitate trading of domestic bonds by overseas investors. Under the new measures, foreign investors can access onshore foreign exchange and rate-hedging tools and invest in exchange-traded bond products. Separately, the PBOC said on August 31 that the depositary institutions repo rate (DR) would now be the key short-term reference rate. Following the move, DR rates will become the pricing basis for most money and liquidity products. Along with the medium-term lending facility rate, the new key rate will form the backbone of China’s policy rate system and brings the country a step closer to the rate-setting systems of other major central banks.

• Mainland Chinese stock markets fell, with both the large-cap CSI 300 and benchmark Shanghai Composite Index shedding 1.5% following the overnight sell-off on Wall Street. The yield on China’s 10-year bond increased and ended the week at 3.14%.

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