Awaiting News On Second Spike
MARKETS WEIGH UP NEWS ON SECOND SPIKE & THE ECONOMY
The past week has been a volatile one in markets. Equities in particular continue to be buffeted between signs of improving economic conditions as lockdown restrictions ease against concerns that covid-19 cases are rising again in some countries. Following last week’s sharp sell-off in equities, many markets started this week down amid reports of new coronavirus cases in Beijing and an acceleration of cases in a number of US states. However, confirmation from the Fed of its intention to buy corporate bonds and reports that the US government is considering a $1trn infrastructure spending boost helped push US equities up earlier in the week. Despite some further wobbles later in the week, most equity markets seem set to end the week higher. Government bond markets have also seen fluctuations. The US 10-year Treasury yield is modestly above its level of a week ago. Other markets have seen more sizeable rises. UK 10-year gilt yields have risen above 0.25% from 0.19% despite the Bank of England’s announcement of a further £100bn of asset purchases. The market may have been disappointed that the QE increase was not even larger and the BoE’s intention to taper the pace of its purchases from here. No mention in the Bank’s communications of the possibility of a move to negative interest rates may also have contributed to the sell-off, although BoE Governor Bailey subsequently reiterated that he wasn’t ruling out any policy options. Sterling has slipped this week despite a rise in UK market interest rate expectations. It has fallen below 1.24 against the dollar (it’s lowest since the end of May) and below 1.11 against the euro (to its lowest since March). Some reports suggest that growing concerns about the lack of progress in UK-EU talks around the future relationship may be helping to drive down the pound. UK PM Johnson after talking to the EU Commission President this week said that he saw no reason why a deal couldn’t be done by the end of July. Nevertheless, concerns about the situation seem to be rising in markets as we head into the second half of the year.
PMIS WATCHED FOR SIGNAL ON JUNE ACTIVITY
More timely economic data continue to point to economic conditions improving as lockdown restrictions are eased. Most notably, in the past week were much larger than expected rises in May retail sales in both the UK (up 12%) and the US (up 17.7%). The US also saw pickups in both industrial production and housing starts in May. With restrictions continuing to be eased, June data will be watched for further signs of improvement. The coming week sees a number of June updates including ‘flash’ PMIs for the Eurozone, UK and the US. The May releases saw sizeable pickups in headline indices for both manufacturing and services, from their April lows, across all three. Crucially, however, all the data remained below the key 50 level that is supposed to signal an expansion in activity. June is forecast to see a further rise in PMIs in all three, although the headline numbers in the Eurozone and the UK are forecast to remain below 50. In theory that suggests their economies continued to contract in June but it seems more likely that these measures are underestimating activity.
US CONSUMER SPENDING LIKELY ROSE IN MAY
There are a number of other interesting releases due in the coming week. In the UK, Monday’s June CBI industrial survey will provide further evidence on whether the factory sector has improved this month. Close attention will be paid to orders data for an indication of the sustainability of any upturn. Meanwhile, Thursday’s CBI retail survey will provide the latest gauge of post-lockdown sales. Anecdotal reports suggest that retailers have initially seen strong sales as they open up again. In the Eurozone, the June consumer confidence reading (Mon) is expected to show a rise to -15 (from -18.8 in May) signalling some improvement in sentiment as restrictions ease across the region. Germany’s IFO survey for June is also likely to signal some improvement in both current conditions and future expectations, although both measures are expected to still be well below pre-pandemic levels. In the US, the big bounce in May retail sales is predicted to translate into a sharp rise in overall consumer expenditure. Other areas of spending are likely to have been much weaker. In particular, many consumer service providers, which account for a large part of overall spending, continue to be locked down. Nevertheless, we still look for a strong monthly rise of 9.0%. The advanced international trade report and durable goods (both Thu) will provide further information on May trends. Both are expected to show improvement from very weak April out-turns.
MARKETS WAIT FOR FURTHER FISCAL MEASURES
The week ahead is scheduled to be a relatively light one for central bank activity. The Reserve Bank of New Zealand will give a policy update. It is forecast to leave monetary policy unchanged, including keeping interest rates at 0.25%, but may say more about its intentions with regard to QE following an announcement this week that it will further taper purchases. The RBNZ Governor will probably also confirm that a cut in interest rates below zero is unlikely. Fiscal developments will also be closely watched by markets. Today’s EU summit was described as having made little progress in agreeing on the EU’s €750bn recovery fund. Beforehand German Chancellor Merkel and ECB President Lagarde warned about dire consequences if a deal is not agreed on. Leaders are scheduled to meet again in July but in the meantime, the uncertainty may have a negative impact on confidence in European markets.
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None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.
