This Week's Data Releases: Mindblowing
REASSESSING DOWNSIDE RISKS
Market participants appear to be getting more nervous about the global economic outlook. Latest Q2 GDP figures from the US show a mindblowing 32.9% contraction. Coupled with that are concerns about political risks if the result of the US election result, in key states, is less than decisive in less than 100 days' time.
BOE POLICY AFTER THE “V-SHAPED” RECOVERY
Next week Thursday, the Bank of England will announce its latest monetary policy decision amid the extremely uncertain economic outlook beyond the current short-term economic rebound which Chief Economist Andy Haldane described as “so far, so V”. That uncertainty beyond the “V” – with one risk being that it morphs into a “W” – relates not only to how the pandemic situation evolves and the reaction of households and businesses, but also to how much permanent scarring there may be in the economy as a consequence of previously enforced lockdowns and ongoing restrictions such as social distancing. For instance, how much of furloughed staff will be brought back to employment once the scheme ends after October? For now, with evidence that the economy is recovering from the low point in April, the Monetary Policy Committee is likely to keep policy unchanged, including maintaining Bank Rate at 0.1%. Only last month, the MPC decided to extend the QE programme by a further £100bn (albeit with Andy Haldane as the sole dissenter), while at the same time expressing a desire to slow the pace of asset purchases. More important will be signals for policy going forward, based on the balance of risks for the economic outlook. For the MPC, risks remain skewed to the downside, so the key message that the Bank is likely to repeat is that it will do everything it can to support the recovery. That likely means more monetary policy easing further down the line, if it is needed, including more QE and even the possibility of a shift to negative interest rates which has so far not been ruled out.
US RECOVERY CRACKS APPEARING
There are two big stories for the US next week. The first, as mentioned above, is what happens with the latest fiscal stimulus package. The problem is that Congress is supposed to go into recess after next Friday and some of the existing measures expire at the end of the month, so the risk is that any agreement may only happen at the eleventh hour. Otherwise, there seems to be three possibilities: (a) probably the most likely is they do a partial deal for now, extending the extra unemployment benefits and wait to negotiate on the rest in September; (b) the recess is delayed; (c) nothing is done until September which would be the most negative for the economy and market risk sentiment. The other story will be concerns that the US economy is slowing. This week’s initial jobless claims, for example, increased for a second week. Next week’s big economic numbers, apart from weekly claims (Thu) again, are the ISM surveys (Mon/Wed) and the labour market report including nonfarm payrolls (Fri), both for July. We forecast falls in both the manufacturing and non-manufacturing ISMs, but they are expected to remain above 50. For payrolls, we look for a smaller rise of 1.5m after last month’s 4.8m gain. These numbers should be consistent with a deceleration in, not stalling of, economic activity, but that may be of little consolation to markets if further fiscal stimulus is not agreed.
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