New School Year, New Virus Concerns
COVID-19 TRENDS WATCHED AS ENGLISH SCHOOLS OPEN
Markets will probably remain on Covid-19 alert in the week ahead reflecting ongoing concerns about signs of an acceleration in European coronavirus cases. However, more positively, the number of new cases in the US has been reported as down for a fifth successive week. Switzerland and a number of others were added to the list of countries from which travellers need to quarantine when entering the UK. There have also been some indications of an increase in the number of UK cases. With the move back to school set to get underway in England and Wales in the coming week, markets will be watching for any sign of further rises. Meanwhile, media reports suggest that the government will more strongly encourage a move back to work during the autumn reflecting rising concerns about negative impacts of working from home on the economy.
FEDERAL RESERVE HELPS SUPPORT MARKETS
Equity markets seem set to end the week higher despite ongoing concerns about Covid-19 and further signs of a deterioration in relations between the US and China. The positive mood was helped by a speech by Federal Reserve Chair Powell. He said the US central bank will in future take a more pragmatic approach to inflation targeting allowing for overshoots in order to balance out previous undershoots in inflation. The speech was seen as implying that US interest rates are likely to stay lower for longer. In response the US dollar slipped, while in the US Treasury market the yield curve steepened as shorter-term interest rates dipped but longer rates rose in anticipation of future higher inflation.
US EMPLOYMENT AND ISM SURVEYS IN FOCUS
The coming week is holiday-shortened in the UK. Nevertheless there is a lot of international data to focus on, particularly in the US. The most recent deceleration in new US Covid-19 cases may help to reduce concerns about a stalling of economic activity. However, recent economic data have still been mixed. The key indicators next week will be the August labour market report (Fri) and the ISM surveys (Tue & Thu). We expect employment growth to have slowed to 1,425k (from 1,763k in July) but the unemployment rate to fall to 9.8% (from 10.2%). Both the manufacturing and services ISM indexes are forecast to hold well above 50 but services may fall back from its very high July level. Overall the data are likely to be consistent with a slowing, but not a stalling, in activity. A number of Fed policymakers are scheduled to speak next week. They will be expected to follow up on the Fed Chair’s remarks and possibly provide more colour on how much difference in practice the change will make to the monetary policy outlook. Their comments will also be watched for any signals on the Fed’s ‘forward guidance’, something that Powell did not mention this week. It is widely expected that the Fed will tweak its guidance in the autumn to provide more indication of the timing of future policy changes. So markets will be looking for hints whether this will happen at the next policy meeting in September. UK CONSTRUCTION PMI MAY SHOW A FURTHER RISE The coming’s weeks UK data calendar is very sparse. Tuesday’s Bank of England money supply and lending data will watched for signs of acceleration in consumer spending and in housing activity. Pickups are expected to have occurred in both consumer credit and mortgage approvals in July. However, next month’s updates for August, which will show the impact of the Chancellor’s schemes to support growth including the temporary cut to stamp duty, may show bigger rises. Construction PMI data for August (Fri) is likely to match the initial readings for manufacturing and services (final estimates due Tue and Thu), and show a further rise in activity. Anecdotal reports point to an ongoing strong bounce in construction, which may have been further boosted by the move on stamp duty. Less positively, the employment subcomponent may provide the same warning of potential future declines seen in manufacturing and services reports.
RECENT EUROZONE DATA HAS BEEN MIXED
In the Eurozone, final readings for August PMIs (Tue & Thu) will be watched for any improvement from the much lower-than-expected initial readings. This week’s stronger-than-forecast August outturns for the German IFO survey and the European Commission’s measure of economic sentiment suggest that the PMIs may have exaggerated the extent of any slowdown. Nevertheless it will be surprising if the initial estimates were revised significantly. One area of concern in the Eurozone, as in the UK, is employment as businesses may be forced to lay off staff. So far, European unemployment rate measures have remained very low. The July update for the region as a whole may show a small rise to 8.0% (from 7.8% in July) but the German August reading for jobless claims is expected to hold at 6.4%. In China, PMIs for August will provide further information on the strength of the rebound in the first country into and out of lockdown. The consensus expectation is for the levels of both the official and Caixin surveys to be little changed from July. That would mean that they are all holding some way above 50 consistent with ongoing growth in the economy, albeit that activity is still well down on its prepandemic level. Finally the Australian central bank’s latest update (Tue) is not expected to signal a policy change. The RBA is expected to say that monetary policy will remain growth supportive amid ongoing concerns about the impact of the latest rise in Covid-19 cases. However, the RBA seems very reluctant to promise any further easing.
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