Sentiment From BOE & US Fed: Down
FED & BOE DOWNBEAT ABOUT THE ECONOMY Both the Fed and the BoE actually noted that the economic rebound had so far been stronger than forecast, led by a faster than expected rebound in consumer spending. However, both also confirmed their ongoing elevated concerns that the upturn could peter out. In particular, the BoE noted a rise in UK Covid-19 cases and ongoing certainty about the UK’s future relationship with the EU. In addition the Fed confirmed that its new more pragmatic approach to inflation targeting means that US interest rates were likely to be no higher than the current near-zero levels until at least the end of 2023.
LAST SET OF PMIS SENT MIXED MESSAGES This coming Wednesday’s September PMIs follow some big surprises last month. August saw much weaker than expected outturns, particularly for services, in the Eurozone, alongside upside surprises in the UK. That may have reflected a pickup in Eurozone Covid-19 cases providing a dampener on activity, while UK output was boosted by government initiatives including ‘eat out to help out’. Nevertheless the gaps between the Eurozone and UK data look suspiciously wide and we expect them to have narrowed this month. We forecast modest upward moves in both the Eurozone manufacturing (to 51.9 from 51.7 in August) and to services (to 51.2 from 50.5). In the UK, we expect falls in manufacturing (53 from 55.2) and services (55 from 58.8). Those levels that are still consistent with strong GDP growth. In the US, we expect mixed outturns with the manufacturing measure rising to 53.5 from 53.1 but services slipping to 54.5 from 55.0. The data calendar is otherwise light. In the UK, August public finances (Tue) will be expected to provide further indications that the pandemic has led to a sharp rise in the government’s budget deficit. Also on Tuesday the CBI’s September industrial survey will provide another update on the factory sector. It was less optimistic than the PMI manufacturing last month, so will it have turned up this month? Finally, the CBI retail survey for September will provide one of the first indications on whether the consumer rebound continued this month. In the Eurozone, the German IFO will provide further timely information on the strength of the economy in September. It was more upbeat than the PMI surveys last month, showing a rise in both current conditions and expectations. A strongerthan-expected September ZEW survey, particularly the expectations reading, points to a further rise in the IFO measure this month. The EU’s consumer confidence measure for September (Tue) is another timely update. US existing and new home sales may have slowed or even slipped in August following rapid rebounds in the previous two months. Meanwhile, durable orders continue to be depressed by issues in the aerospace sector but are showing improvements in other areas.
MORE DETAIL WANTED FROM CENTRAL BANKS
This week’s central bank policy updates raised a number of questions for which markets will be looking for answers in upcoming speeches. In the UK, markets reacted to a further mention of the possibility of negative interest rates by increasing the probability they give to a move below zero in 2021. Consequently there will be particular interest in whether BoE Governor Bailey will have any more to say on that topic in his two speeches next week (Tue & Thu). In the US, the Fed’s amendments to its policy guidance talked about allowing inflation to move “moderately” above target for “sometime” before it will raise interest rates. That was probably intended to reinforce the message that rates will stay very low. However, markets will be looking for more detail from a raft of Fed speakers on what exactly they meant. Fed Chair Powell, alongside Treasury Secretary Mnuchin, will also brief a Congressional Committee on the effectiveness of the policies enacted to combat the economic effects of Covid-19. Markets may look for hints as to whether further fiscal stimulus measures are likely in the near term and how the Fed will react if these are not forthcoming. Informal talks between the UK and the EU’s negotiators will continue in the coming week ahead of a formal round of talks in the following week. Meanwhile, the UK government’s Internal Market Bill will remain in the detailed committee early next week, with another vote in the House of Commons ahead. However, media reports suggest that the PM has done a deal with his rebel MPs to ensure passage.
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