A Pause In The Euro's Relentless March

EUROZONE DATA DISAPPOINTS In contrast to the UK, Eurozone August PMI data surprised significantly on the downside boosting concerns that the rebound in activity is faltering. This seems too early to be a response to the rise in Covid-19 cases in recent weeks. Instead it may just be a sign that the initial post-lockdown surge in activity has begun to run its course amidst a number of underlying impediments to growth. Tuesday’s German IFO survey will be another timely update for August. We forecast a further rise in both current conditions and expectations. Today’s PMIs point to downside risks to that forecast, but the two series do not always move in tandem. US DOLLAR RALLIES INTO THE WEEKEND A volatile week in markets seems to be ending on a mixed note. On the one hand, news from Pfizer that its Covid-19 vaccine was on course for regulatory review in October has lent support to some equity markets. However, on the other, a further pick up in coronavirus cases in a number of European countries, notably France and Germany, and disappointing August Eurozone PMI data provided timely updates of the impact of the pandemic. In response, equity markets have been relatively range bound with few major movers on the week. Government bond yields, after rising last week, have edged lower. However, they are generally still above their levels of two weeks ago as markets assess countervailing pressures. In currency markets, the US dollar initially stayed under pressure but seems to be finishing the week on a stronger note. The euro, having touched above 1.19 against the US dollar, has subsequently depreciated. Sterling at one point hit a new high for the year, above 1.3250, before easing back despite some positive economic data surprises in the UK. US JULY CONSUMER SPENDING EXPECTED TO BE UP The coming week’s sparse economic data calendar has a distinct late August feel. There are a number of releases in the US that may interest markets but elsewhere it seems set to be very quiet. That suggests the focus will remain on coronavirus news and particularly the latest evidence on European trends. Also likely to command attention is the Kansas City Fed’s annual economics symposium, which will include talks from US Fed Chair Powell and Bank of England Governor Bailey. The second reading of Q2 US GDP will probably not receive much market attention even if it shows some modest revisions. It is already well known that output fell sharply in Q2 during the lockdown, so of more interest are indications on the pace of the rebound. This week’s US updates for August, with the exception of some strong PMI data, generally surprised on the downside fuelling concerns that growth is slowing again. Next week we have a number of July releases including new home sales, durable goods orders, and international trade in goods. Already released retail sales for July point to another solid gain in overall consumer spending (Fri). The other data may be more of a mixed bag but overall should be consistent with growth continuing at a decent pace through July. Weekly jobless claims (Thu) are likely to again attract attention after this week’s higher-than-expected outturn suggested that the pace at which people are returning to work is slowing. JACKSON HOLE SYMPOSIUM GOES VIRTUAL The Kansas City Fed symposium, often called ‘Jackson Hole’ after its usual location, will this year be online. It is an opportunity for economists and central bankers to swap economic policy ideas. In the past, it has featured speeches, particularly from Fed Chairs, that have had market impacts. So the sessions involving Powell and Bailey will be watched closely. The title of this year’s symposium is “Navigating the Decade Ahead” but it will be no big surprise if much of the focus is on the near-term outlook. Powell is set to talk about the Fed’s review of its policy framework. A number of analysts have speculated that this may include a recommendation for a more flexible approach to inflation targeting, in order to allow overshoots to balance out previous undershoots. Powell may say something about this and about what policy options are still open to the Fed, including forward guidance. Possibly of most interest to markets is that he may reiterate that the Fed remains unenthusiastic about the merits of a move to negative interest rates.

UK ECONOMIC DATA POST POSITIVE SURPRISES This week’s UK data releases mostly surprised on the upside. Most notably, July retail sales recorded a much stronger-than-expected rise. That was slower than the very big gains in May and June but hardly consistent with reports that sales have disappointed after an initial post-lockdown surge. Both the manufacturing and services August PMIs were also much stronger than expected pointing to a ‘so far so V’ view of the initial post-lockdown upturn. However, some of the detail, in particular the signals of weak employment trends, have raised questions about its sustainability. Next Friday’s August update for the Lloyds Business Barometer will provide more evidence on these trends. Last month’s report showed business confidence rising for the second consecutive month but firms remained generally cautious about the outlook. Moreover, while the employment measure edged up slightly it remained very low. The UK data calendar is otherwise very sparse but the August CBI retail survey is due on Wednesday. After the positive surprise in the July official data, it will be interesting to see what the CBI says about how retailers are faring in August, particularly as consumer’s will have had a greater number of alternatives of where to spend their money as more consumer services venues emerge from lockdown.

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