The Full Covid-19 Story Is Yet To Unfold
POSITIVE DATA OFFSET COVID-19 CONCERNS
Most equity markets seem set to end the week up despite a sell-off on Friday. Concerns about a gradual resurgence in Covid-19 cases around the world and US politicians’ failure to reach agreement on further fiscal stimulus have not as yet been enough to derail the bull market. Government bond yields have edged up over the week, led by US Treasuries, on the back of higher-than-expected July US CPI inflation. In currency markets, the US dollar continued to trade close to the bottom end of its recent range against both the euro and the pound. Markets have been helped in riding out the negative news on coronavirus cases by some positive economic data surprises. In the US, in particular, a majority of recent releases have surprised on the upside despite ongoing concerns that the rebound may be faltering. Similarly the bulk of the data in the UK and the Eurozone have suggested that the upturns have initially proved to be stronger than expected. Nevertheless, the more widespread rise in Covid-19 cases reported this week, including in some countries where infections were previously believed to be falling may add to concerns that the pickup in activity will falter in the coming months. That will mean that further evidence on infections rates in both the US and the Eurozone will be watched very closely in the coming week. Meanwhile, the timeliest economic data will be scrutinised for indications that the recovery continues to gather pace. That suggests next Friday’s August PMIs in the Eurozone, UK and US, may be of particular significance for markets. Also of interest will be this weekend’s talks between US and Chinese officials to review the initial impact of last year’s trade deal and the latest round of UK-EU negotiations, which are due to start on Monday.
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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