Volatility Up, Sterling Down
RENEWED VIRUS CONCERNS Another volatile week ensued as investors weighed reports of rising Covid-19 cases in parts of the US against further signs of economic activity rebounding. Major equity markets were mostly lower (chart 1), while US 10-year Treasury yields fell below 0.7% and UK 10-year gilt yields reached a low of 0.14%. Brent crude oil was lower on the week but stayed mostly above $40pbl. The currency markets were mixed, but the pound has underperformed over a longer time horizon, for instance compared with a month ago. Texas, Florida and South Carolina have reported new cases rising by around 30% in the past seven days, while in Arizona the rate of increase is above 40% (chart 2). At the timing of writing, Texas and Florida have ordered bars to close. Also weighing on risk sentiment was mounting trade tensions, with the US considering imposing additional tariffs on imports from the EU and UK. The IMF, meanwhile, revised down its 2020 global growth forecast to -4.9% from -3.0% in April. It predicted a 5.4% rebound in 2021 but with the caveat that projections are subject to unusually high uncertainty. A number of key economic releases, however, surprised on the upside, suggesting that the near-term rebound could be stronger than previously anticipated. The purchasing managers’ index (PMI) surveys for June beat expectations in the UK and the Eurozone, continuing their advances since April lows, although most remained below the key 50 level separating expansion and contraction. The notable exceptions were UK and French manufacturing PMIs which increased to 50.1 and 52.1 respectively, while French services PMI also bounced back to 50.3.
UK services PMI improved for a second month to 47.0, pointing to a likely return to economic growth in Q3. In the US, personal spending bounced back in May by 8.2% after dropping 12.6% in the prior month. Weekly initial jobless claims, however, increased by another 1.48mn which was only slightly lower than 1.54mn in the week before, a possible indication that the pace of improvement in the labour market is slowing.
FURTHER RISE IN US PAYROLLS EXPECTED In terms of next week’s data, the main focus will be on the US June official labour market update (Thu). Last month recorded an unexpected, albeit partial, rebound of 2.5mln jobs after plunging by more than 20mln in April. For June, we have pencilled in another increase of 3mln in nonfarm payrolls and a further decline in the unemployment rate to 12.3% from 13.3%. Nevertheless, uncertainty in forecasts remains high. Also of particular interest will be the ISM manufacturing survey (Wed) which we think will rise back just above the key 50 level to 50.3 from 43.1 supported in particular by stronger output and orders. The minutes of the Federal Reserve’s June policy meeting will be closely analysed. The Fed left policy unchanged, including keeping interest rates at the zero lower bound and maintained asset purchases “at least at the current pace”. Markets may focus on discussions surrounding forward guidance (which was not changed despite prior speculation), yield curve control and negative interest rates. A number of Fed speakers have recently played down the likelihood of the latter two. Fed Chair Powell will also testify to Congress this week, alongside Treasury Secretary Mnuchin, regarding the response to the Covid-19 pandemic.
BOE SPEAKERS AND MORE UK SURVEYS
Next week’s UK releases include updates on consumer and business confidence from the GfK survey and our own Lloyds Business Barometer (both Tue). Consumer confidence had improved in the early June survey to -30 from -36 in May. Overall confidence in the Lloyds Business Barometer, however, fell to a new low of -33 in May. The Bank of England will also release May lending data, including consumer credit and mortgage approvals which had weakened significantly in April. A number of MPC members are speaking publicly in the coming week. They include Governor Bailey (Mon), Vlieghe (Mon), Cunliffe (Tue) and Haskel (Wed). But the pick of the week is likely to be Chief Economist Haldane (Tue). He of course dissented from last week’s decision for further asset purchases.
EUROZONE CPI TO AVOID NEGATIVE OUTTURN
In the Europe, the main focus will be on June CPI inflation, first from Germany and Spain (Mon) before the French and Eurozone flash releases (Tue). Eurozone headline CPI fell to just 0.1%y/y in May, but we expect it to avoid a descent into negative territory in June. While core CPI inflation may edge down to 0.8%, the turnaround in energy prices is forecast to lead to headline inflation rising to 0.3%. Nevertheless, that would clearly still be well below the ECB’s “below but close to 2%” goal as it ramped up its Pandemic Emergency Purchase Programme (PEPP) by €600bn earlier this month. The Eurozone economic sentiment survey (Mon) and German unemployment claims (Wed) are among other data releases. Sweden’s Riksbank (Wed) is expected to keep interest rates unchanged at 0%, but leave the door open for more asset purchases. In Asia, China’s official (Tue) and Caixin (Wed/Fri) PMIs for June will be watched for signs of further improvement, especially with the rest of world gradually moving out of lockdown (although cases are rising again in parts of the US). Japan will release its Q2 Tankan report (Wed) which is expected to show a deterioration in sentiment compared with Q1.
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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.