Surprises From Across The Pond
US DATA SURPRISE ON THE UPSIDE
A bit more optimism for risk assets returned in the past week, despite US-Sino tensions relating to escalating security concerns with Chinese technology firms. Also at the time of writing, US politicians seemed to have reached an impasse in negotiations for further fiscal stimulus backed by Federal Reserve policymakers, although a last-minute agreement remains possible. What seems to have buoyed risk sentiment is a broader sense that the global recovery may be proceeding more quickly than perhaps previously anticipated. Concerns that the US recovery may be running out of steam abated after the July ISM services survey increased unexpectedly to 58.1, well above the 50 level signalling expansion, while weekly initial jobless – which had risen in the prior two weeks, raising fears that the labour market may be stalling – dropped to the lowest level since the start of the pandemic. Non-farm payrolls gains did slow, but less than forecast, with the economy adding a further 1.76m jobs in July.
BOE: BETTER STARTING POINT BUT SLOWER RECOVERY
The Bank of England left policy unchanged on Thursday, as widely expected, including interest rates at 0.1% and the total stock of asset purchases at £745bn – our Rapid Response is here. The Bank’s messaging about future prospects for the economy and therefore policy was nuanced. First, the starting point for the economy is not as weak as previously feared, thanks to the earlier easing of lockdown measures and greater-than-expected online spending. Secondly, however, the recovery remains uneven and is now forecast to be more protracted,
A BUSY WEEK FOR UK ECONOMIC DATA The UK government has reacted to the acceleration in Covid-19 cases on the Continent by adding France, Malta and the Netherlands to its list of quarantine countries. Whether or not others will soon follow may be an area of focus this week. More positively for the economy a further easing of lockdown measures in areas such as bowling alleys, casinos and live indoor performances was also announced. The coming week is a very busy one for UK economic data releases. As noted earlier, the manufacturing and services PMIs (Fri) will be amongst the first updates for August. The services PMI should provide some indications of the initial impact on activity of the government’s temporary VAT reduction and also the effects from a further easing in lockdown restrictions. Consequently, we look for a further rise in the services PMI to 58.0 (a five-year high) from 56.5 in July. Manufacturing is also expected to notch a fourth consecutive rise to 54.5 from 53.3. The preliminary GfK consumer confidence reading (also Fri) will provide a further timely update. We expect another modest rise to -25 (from -27), which points to an ongoing gradual rise in confidence but still leaves it well below pre-pandemic levels. Friday’s retail sales update for July will also be watched closely. Uncertainty persists as to what extent sales have slowed after what appeared to be an initial post-lockdown surge due to pent-up demand. Anecdotal reports appeared to point that way but ‘unofficial’ gauges of sales from the CBI and the BRC have surprised on the upside. After very strong rises in the official measure of retail sales in both May and June, which left it only slight below its level of a year ago, it would be no surprise if it has fallen in July. Consequently we look for a 0.5% monthly decline. However, that will still leave the underlying trend very hard to gauge. Next week’s other UK updates may command less attention. Tuesday’s July inflation release is forecast to show a modest rise in annual CPI inflation to 0.7%, from 0.6% in June. That will still leave it well below the 2.0% target and so will have no new implications for monetary policy. Particularly as inflation seems likely to fall below 0% in August when the temporary VAT reduction and ‘eat out’ policy will impact on the numbers. Meanwhile, Friday’s update for the public finances will point to a very large ongoing impact from the economic effects of the pandemic.
EUROZONE AND US PMIS ALSO IN FOCUS
Assessments of Friday’s Eurozone PMIs for August will inevitably be effected to some extent by the recent rise in Covid-19 cases in some countries in the region. It is almost certainly too soon for these to have had a significant impact on the data. However, the additional uncertainty means that markets may be wary of the potential for negative surprises ahead. We look for a rise in the manufacturing PMI to 52.5 from 51.8 but a modest fall in the services measure to 54.0 following last month’s surge, which took it to a two-year high of 54.7. In the US, August PMI data will also be seen as timely updates on the pace of the recovery. We expect manufacturing to rise to 51.5 (from 50.9 in July) and services to 50.5 (from 50.0). Both outturns would be consistent with the rebound in the economy continuing for now despite ongoing concerns about Covid-19. Moreover, it should be noted that the PMIs seem to so far be underestimating the pace of activity when compared to other indicators, such as the slightly less timely but more closely watched ISM surveys. The New York and Philadelphia Fed surveys will provide other indications for August. Finally, the US central bank will release the minutes of its last policy meeting on Wednesday. Of most interest may be the discussion on ‘forward guidance’ as many analysts expect the Federal Reserve to change this in the near future to be more explicit on the criteria for policy changes.
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