Employment and GDP Data Point to Tough Times Ahead
US COVID AND UK JOBS CONCERNS
Risk sentiment was more mixed this week, mainly on concerns that continued rises in US Covid-19 cases will dampen the economic recovery. While US data releases have mostly surprised on the upside in recent weeks, some Federal Reserve policymakers have warned that activity may be “levelling off” and that more fiscal support may be necessary. Reports suggest the White House is aiming for an addition $1trn stimulus package to be passed by Congress before the summer recess. Meanwhile, President Trump is scheduled to hold an election rally in New Hampshire this weekend, with polls showing him trailing behind his Democratic challenger and former Vice President Joe Biden. In the UK, Chancellor of the Exchequer Rishi Sunak’s Summer Economic Update outlined the second phase of a three-step plan focusing on jobs, including a Job Retention Bonus to keep furloughed employees in work, a Kickstart Scheme for 16-24 year olds and targeted measures for hospitality and housing and to improve energy efficiency (more details from our summary here). The Office for Budget Responsibility (OBR) is scheduled to release a report next week (Tue) containing three economic scenarios for the UK economy, which are likely to form the basis for further fiscal responses in the Autumn Budget (the third phase).
UK GDP BOUNCE CONTRASTS WITH LABOUR MALAISE
As yet, official UK labour market data from the ONS have provide little indication of the coronavirus-related malaise that has been seen in other indicators of domestic economic activity. More timely evidence elsewhere, however, paint a more sombre picture, including data on the number of people claiming Universal Credit and/or having their wages paid for by the Coronavirus Job Retention Scheme (CJRS). We expect the true extent of the deterioration to become more evident in the coming months’ reports. For next week’s figures (Thu), we forecast the unemployment rate rising to 4.1% in the three months to May. Three-monthly employment growth is forecast to fall by 275k and headline average earnings growth is expected to turn negative at -0.7%, highlighting the hit to earnings from the CJRS. UK monthly GDP figures for May (Tue) are expected to show the economy on the road to recovery. After plunging 20.4% in April, we forecast an increase of 5%, reflecting the gradual reopening of the economy, as lockdown restrictions continued to be eased. The pickup in activity is likely to have continued into June, going some way to soften the overall extent of the decline in Q2 GDP (which is still likely to be a very bad quarter, but not as bad as the Bank of England or the OBR had feared). UK CPI inflation (Wed) is expected to stay well below the 2% target, with the outlook remaining subdued and likely to be further depressed by the temporary reduction in VAT on hospitality and tourism announced by the Chancellor. BoE speakers include Governor Andrew Bailey (Mon/Fri), Silvana Tenreyro (Wed) and Andy Haldane (Thu). Aside from economic data, informal UK-EU Brexit talks on the future relationship are scheduled to continue next week in Brussels, with the next formal round of negotiations resuming the week after (from 20 July). With the government insisting on no extension, the UK’s transition period with the EU will end on 31 December. Significant differences remain between both sides that still need to be overcome, while German Chancellor Angela Merkel has said the EU should be prepared for a no trade deal. Nevertheless, both sides are still talking with the aim to reach a deal.
STRONG US DATA TO CONTINUE FOR NOW Most of next week’s US releases are expected to be strong, although markets will watch for signs that the recovery momentum may be faltering. We expect June retail sales (Thu) to show a sharp increase (5.5%) in part due stronger car sales and a rise in gasoline prices. Industrial production (Wed) is also likely to post a decent gain in June (5.0%) led by manufacturing. Housing starts (Fri) should also see a big rise. Finally, headline CPI (Tue) is expected to show a sizeable bounce to 0.7% because of the oil price, although the Fed is unlikely to see that as a barrier to maintaining a growth supportive monetary policy stance. For early signs of slowdown, the University of Michigan consumer sentiment index (Fri) may provide a potential indication of rising Covid-related concerns (we forecast a fall to 75.0), while weekly jobless claims (Thu) will also be closely watched. Key survey releases for July include the NAHB housing market index (Thu) and the New York and Philly Fed manufacturing surveys (Wed/Thu).
ECB TO STAND PAT, EU LEADERS TRY TO COMPROMISE
In Europe, the ECB (Thu) is expected to keep policy settings on hold, having already increased the envelope of its Pandemic Emergency Purchase Programme (PEPP) by €600bn last month to a total size of €1,350bn. The ECB has so far bought less than €400bn of public and private sector bonds under PEPP. Policy rates are expected to be unchanged at -0.5% for the deposit rate and 0% for the main refinancing rate. Data wise, we should see a massive rebound in Eurozone industrial production (Tue) of around 15%. We also predict a second monthly improvement in the German ZEW current conditions index (Tue) to -65.0, although the expectations component may edge slightly lower to 60.0. There will be focus on a meeting of EU leaders from next Friday (17/18 July) with an agreement (which has to be unanimous) yet to be reached on the details of the €750bn recovery package. Elsewhere, Chinese Q2 GDP (Thu) will likely show a strong rebound. Finally, the Bank of Japan and Bank of Canada (both Wed) are expected to keep monetary policy on hold.
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