Economic Outlook – 9 August 2020


  • The manufacturing recovery picked up momentum during the month, with the ISM index rising to 54.2. Underlying details of the manufacturing report paint a brighter picture than previous months as well. The service sector was widely expected to weaken in July amid the flare-up of new cases, but the rebranded ISM Services (formerly called ISM Non-Manufacturing) rose to 58.1 in July.
  • In both reports, it is worth noting these ISM diffusion indexes can be prone to big swings at turning points in the cycle and are based on the share of firms reporting an increase in activity versus a decrease. It is therefore a measure of the breadth rather than the degree of change in activity within them.
  • Service sector business activity at a 16-year high in July is a great example of this. Obviously amid a pandemic, the service sector is not more active than it has been in 16 years, rather a broad group of businesses note improvement relative to the prior month. Still, the broad improvement in both manufacturing and services activity offer signs of resilience as the economy begins to dig out from the pandemic.
  • Construction outlays fell 0.7% during June, well below the consensus estimate of a 1.0% increase. Private and public construction spending both fell 0.7%. The continued decline in construction spending for single-family homes is probably the biggest surprise in the June report. Spending for single-family homes fell 3.6% in June.
  • Most of the recent data here have been positive with sales, buyer traffic, mortgage applications and pending sales collectively running at their strongest pace in years. The weakness is due in part to the fact that the bulk of construction outlays for new homes tend to occur 45 to 60 days after construction begins. The uptrend in housing starts figures suggests single-family home construction is likely headed higher.
  • Friday’s employment report showed that employers added 1.763 million people to their payrolls in July. Job growth in prior months saw slight upward revisions as well. The jobs number beat expectations, the upside strength was in the service sector, which added 1.423 million, though manufacturing jobs also rose slightly (+26K). The US economy lost 22 million jobs during the pandemic. In the past three months, roughly 9.3 million jobs have come back, more than 40.0% of the share that was lost.
  • US household debt declined USD$34 billion in Q2, the first decline since 2014. Credit card balances fell $76 billion, the largest drop on record. Separately, the Fed’s Senior Loan Officer Survey showed weaker loan demand amid tighter credit standards.
  • The White House and congressional Democrats remain far apart of the size and scope of a fifth coronavirus relief package. Democrats seek in excess of USD$3 trillion in additional spending, while the White House and Republican Senate leadership are looking for a package with a price tag closer to USD$1 trillion. Attempts to reach a narrower deal focusing on enhanced unemployment benefits and eviction restrictions were rejected by Democrats.
  • Among the sticking points, the Democratic leadership is seeking USD$1 trillion in funding for state and local governments, which the White House has rejected. In case of no deal, President Trump is considering taking executive action to redeploy unused funds from the CARES Act, to state governments to restore enhanced unemployment benefits, imposing a partial moratorium on evictions and suspending the payroll tax.
  • President Trump signed an executive order putting in place a US ban, beginning in 45 days, on Chinese-owned apps TikTok and WeChat over national security grounds. The order notes that the apps “automatically capture vast swaths of information from its users, including Internet and other network activity information, such as location data and browsing and search histories,” information the administration believes could be used by Chinese authorities. Chinese media has deemed the move as the beginning of a “digital cold war.” Officials from China and the US are set to meet in mid-August to assess the progress of the phase one trade deal.
  • Former Vice President Joe Biden said he would end tariffs on Chinese-made goods, instead focusing on Chinese intellectual property theft and persuading China to do away with joint venture requirements. The Democratic presidential candidate called for multilateral action against China’s trade abuses.
  • US stocks recorded solid gains for the week, pushing the technology-heavy Nasdaq Composite Index to new highs and lifting the S&P 500 to within roughly 1.2% of its February record peak. The small-cap Russell 2000 Index outperformed by a wide margin, helping it recover some of its lost ground for the year to date. Industrials shares benefited from hopes for new aid to airlines, while health care stocks lagged. It was the last major week of the earnings season, with 132 S&P 500 companies scheduled to report second-quarter results, according to Refinitiv.
  • The yield on the benchmark 10-year Treasury note touched a new five-month low on Thursday before increasing on Friday following the jobs report from the Labor Department, leaving it modestly higher for the week.
  • In terms of data release, this week on Friday brings the US retails sales and consumer confidence reading.


  • Eurozone business activity strengthened in July, signaling the fastest growth rate in two years, according to final data based on surveys. The composite index, which combines manufacturing and services output, rose six points to 54.9. However, firms operated with considerable spare capacity and continued to shrink their headcounts. German industrial production continued to recover in June, rising 8.9% on the month, compared with 7.4% in May. On a year-over-year basis, the country’s industrial output declined 11.5%.
  • The ECB is committed to providing the monetary stimulus needed to support the eurozone economy,” said ECB Chief Economist Phillip Lane in the first policy comment since ECB President Christine Lagarde’s 16 July  press conference. In the same blog post, Lane asserted that despite the bounce in economic activity “the level of economic slack remains extraordinarily high and the outlook highly uncertain.” His comments raise the possibility that the ECB could further expand its Pandemic Emergency Purchase Program in September, when the bank updates its economic forecasts.
  • European shares rose on signs that an economic recovery may be gaining traction and hopes for more US stimulus. However, escalating tensions between the US and China plus fears that Europe could suffer a resurgence of coronavirus cases curbed equity markets’ gains. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.03% higher, Germany’s Xetra DAX Index rose 2.94%, France’s CAC 40 gained 2.21%, and Italy’s FTSE MIB climbed 2.22%.
  • S&P upgraded the European Union’s ratings outlook to AA-positive from AA-stable after the EU agreed to establish a recovery fund to provide grants and loans to countries heavily impacted by the coronavirus, a move toward greater fiscal integration among member states.
  • In terms of data release, this week on Tuesday brings the German ZWE reading.


  • The Bank of England (BoE) forecast that the UK economy would contract 9.5% this year, less than the 14.0% projected in May. The BoE also predicted a slower recovery, with the economy clawing back its losses by the end, rather than by the middle, of 2021. The report was published alongside its latest policy decision, which, as expected, held interest rates at 0.1% and the bond-buying program at GBP£745 billion. BoE Governor Andrew Bailey reiterated that negative interest rates were part of the bank’s toolkit but there were no plans to use them.
  • British house prices saw a “mini-boom” as the market reopened following the coronavirus lockdown, according to mortgage lender Halifax. House prices rose 1.6% month-on-month, the biggest rise this year after being flat in June, Halifax said. Compared with a year ago, prices were 3.8% higher (the largest annual increase since January).
  • Extending Britain’s furlough scheme would leave some workers trapped in false hope that they could return to their jobs after the coronavirus pandemic according to British finance minister Rishi Sunak. With redundancies mounting, opposition politicians and think tanks have said Sunak should extend the Coronavirus Job Retention Scheme (due to expire at the end of October) until the economy is strong enough to support more at-risk workers. Sunak has said there is no question of a wholesale extension of the programme and he was backed up by BoE Governor Bailey on Thursday. “It’s wrong to keep people trapped in a situation and pretend that there is always a job that they can go back to,” Sunak told BBC Radio Scotland. He said the government had taken action to provide people with new opportunities, including apprenticeships and training during what “is unquestionably going to be a difficult time”.
  • More British shoppers returned to the high street in July, helped by the reopening of pubs and restaurants, but numbers were still much lower than normal for the time of year. The monthly report from the British Retail Consortium (BRC) trade body and market research firm ShopperTrak showed footfall was down 42% in annual terms in July, compared with a 63% decline in June. The reopening of pubs and restaurants in England on 4 July helped to spur only a small number of additional visits to the high street, the BRC said. The outlook for stores remains precarious and major retailers have announced a slew of job cuts since non-essential stores reopened to the public in England on 15 June.


  • In currency trading, the Chinese yuan gained 0.2% versus the US dollar to close at 6.96. In fixed income markets, the sovereign 10-year bond yield edged higher amid signs of a turnaround in the economy. China reported record inflows of USD$24 billion in July, roughly doubling June’s total, underscoring the attractiveness of its bond market to foreign investors.
  • Interbank rates in China have risen across all maturities since June, reflecting the People’s Bank of China’s relative restraint compared with other global central banks in adding liquidity to the financial system. After the release of the central bank’s second-quarter monetary policy report on 6 August, market participants believe that the People’s Bank of China is satisfied with the pace of recovery and will keep policy rates stable for the time being.
  • July’s Caixin/Markit manufacturing PMI climbed to nearly a decade-high reading of 52.8 from June’s 51.2. Exports rose by a better-than-expected 7.2% in July from a year earlier after a 0.5% gain in June, according to China’s General Administration of Customs, reflecting a surge in demand from countries that recently reopened their economies. Excluding medical equipment, China’s exports rose 4.7% last month. Taken together, the latest export data showed that China’s exports have already returned to pre-pandemic levels.
  • Mainland Chinese markets rallied after data lifted confidence in the economic recovery. The large-cap CSI 300 Index and benchmark Shanghai Composite Index each posted solid gains, even after declining on news that the Trump administration tightened restrictions on Chinese social media networks TikTok and WeChat in the US.
  • In another sign of the growing tech rift between the US and China, San Jose-based video conferencing company Zoom, which gained popularity during the pandemic, said that it would halt direct sales to China and only provide video conferencing services through third-party partners.

Sources: T. Rowe Price, Reuters, Wells Fargo, MFS Investment Management, M. Cassar Derjavets.