Economic Outlook - 8 November 2020

US

October NFP (nonfarm payrolls) showed another month of solid gains. The improvement in the unemployment rate was even more impressive, falling a full percentage point to 6.9% from 7.9%. Just as encouraging, the report showed a rebound in the labor force participation rate and decline in the permanent job losses. These have been rising in the past months, flashing warning signs of employment fragility.

The Fed maintained its monetary policy, with its statement virtually unchanged, hinting that there will be no further monetary loosening. This is despite the pressure to act soaring in the light of diminishing prospects for aggressive fiscal stimulus. The Fed commented that it will continue to purchase treasury securities and agency mortgage-backed securities as previously announced. This means approximately USD 120 billion per month. The Fed maintained its forward guidance, whereby the policy rate remains tied to the 2.0% average inflation target and did not change its forward guidance for asset purchases.

US stocks posted their largest weekly rally since April with investors anticipating a Goldilocks scenario of additional fiscal stimulus. The tech-heavy Nasdaq Composite Index and the small-cap Russell 2000 Index performed even better than the broad large-cap S&P 500 Index.

The Composite fell from 56.5 to 52.1. The Services PMI came in at 51.4, which still indicates economic growth, but represents a clear drop from the September high of 56.1. Even before the recently announced lockdown, the previously V-shaped recovery was showing signs of faltering and overall economic activity remained 10.0% short of the level at the start of this year.

New business across the private sector as a whole dipped for the first time in four months, with falling sales volumes at service providers offsetting a robust increase in orders received by manufacturing companies during October. The overall downturn in confidence masked divergent trends among manufacturing and service-sector companies. In the manufacturing sector, expectations strengthened to the highest level since January 2018, but service providers indicated the weakest optimism since May.

British house prices rose in October at the fastest annual rate since June 2016, although there were signs of fading momentum as the COVID-19 pandemic escalated, mortgage lender Halifax said. House prices rose 7.5% in October compared with a year earlier, compared with annual growth of 7.3% in September, Halifax said. But in October alone, house prices rose 0.3% (the weakest growth in four months).

British finance minister Rishi Sunak further ramped up his GBP 200 billion economic rescue programme as England went into a tough new coronavirus lockdown. Sunak extended the government’s costly coronavirus furlough scheme, which provides 80.0% of the pay of temporarily laid-off workers, until the end of March, and said he would provide billions of pounds of other jobs support. “It’s clear the economic effects are much longer lasting for businesses than the duration of any restrictions, which is why we have decided to go further with our support,” he told parliament. Earlier the Bank of England said it was increasing the size of its government bond purchases by a further GBP 150 billion (USD 196 billion), helping the government to fund the surge in public spending.

Two weeks of intensified negotiations between the UK and the European Union broke up with both sides saying they were still far apart on the core issues of state aid for companies, solving trade disputes, and fishing rights. Formal talks are expected to resume this coming week.

Data collected just before major European economies announced new public health restrictions showed that the region’s manufacturing sector was posting robust growth, with the eurozone purchasing managers’ index hitting a nearly 23-year high of 54.8 in October, up from September’s 53.7 reading.

Core eurozone bond yields bounced around but ended the week roughly level. The German 10-year bund yield, for example, plummeted after early US election results proved indecisive. This downward pressure eased as the odds of a Biden victory and a divided Congress appeared to increase. Yields on peripheral eurozone bonds fell overall. The growing likelihood of a Biden win drove demand for riskier assets, pushing the yield on Italy’s 10-year bonds to record lows last Friday.

Shares in Europe rallied in sympathy with US equities while also receiving a lift from the generally strong quarterly earnings reported by European corporations and the additional stimulus measures announced in the UK. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 7.02% higher, while Germany’s DAX Index rallied 7.99%, France’s CAC 40 gained 7.98%, and Italy’s FTSE MIB climbed 9.69%.

A batch of Purchasing Managers’ Index (PMI) surveys added to evidence of China’s rapid recovery from the coronavirus. The official PMI reports were both solid and suggested that Chinese business leaders had high confidence in Beijing’s management of the economy. Meanwhile, PMI reports from the private Caixin survey were also strong, with the manufacturing gauge recording its highest level since 2011. Taken together, the latest PMI readings showed that China’s strong economic momentum continued into the fourth quarter, though new export orders and lagging employment figures hinted at some weakness in the recovery.

In corporate news, the shock suspension of the widely anticipated USD 37 billion initial public offering of Chinese fintech company Ant Group rocked the investment world. The last-minute postponement of what was on track to be the world’s biggest-ever IPO, which the Shanghai Stock Exchange attributed to a changing regulatory environment, came after founder Jack Ma criticized China’s banks and financial regulators. Chinese regulators had been increasing their oversight of Ant Group well before Ma’s speech and last Monday issued draft rules calling for stricter regulations for online micro-lending companies. However, the timing of the suspension just two days before Ant Group’s public trading debut suggested that the authorities were uncomfortable with the fintech upstart’s threat to China’s politically connected financial institutions and its outspoken founder.

Chinese stocks advanced as the prospect of a Biden presidency raised the outlook for improved US-China relations. The benchmark Shanghai Composite Index ended up 2.2% and the large-cap CSI 300 Index rose 3.4%, according to Reuters data. The yield on China’s 10-year government bond increased to 3.22% as economic data showed the country’s recovery was on track. In currency trading, the renminbi rose 1.1% versus the dollar and closed at 6.621. Many policy analysts see scope for more cordial US-China relations in trade, cross-border investment and climate change. However, they caution that a major reengagement with China appears unlikely and that US policy toward China regarding intellectual property rights, technology transfer and national security may not change much under a Biden administration.

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