Markets Worry About Further Lockdowns
NEW RESTRICTIONS AND POLICY MOVES IN THE UK
It has been an eventful week, particularly in the UK, with some significant policy moves in reaction to growing concerns about a new pickup in Covid-19 cases. PM Johnson announced a tightening of restrictions in England, while other parts of the UK also made some changes. Those moves were subsequently followed by a new economic support package from Chancellor Sunak. That included a new jobs support scheme to replace the CJRS (furlough scheme) from November. There was also an extension of the VAT cut for the hospitality sector until March, and some changes to the lending schemes for businesses. Risk-off sentiment has predominated in markets this week as they fret that a rising trend in Covid-19 cases in the UK and on the Continent may herald a sharp slowdown in economic growth in Q4 and beyond. As a result, equities are down on the week in most places. Some government bond markets, for example in the US, have seen a fall in yields as investors search for safe havens. However, in the UK, yields have risen modestly possibly reflecting concerns about rising government debt. Meanwhile, the US dollar has seen its biggest weekly rise against both the euro and sterling since April.
ECONOMIC NEWS GENERALLY POSITIVE NEAR TERM
Against this background, it seems likely that there will be an acute focus on the Covid-19 statistics in the week ahead. The concern for many is that restrictions not only in the UK but elsewhere will need to be tightened further in the coming weeks unless new cases stops accelerating. Consequently, that data may receive more attention than the coming week’s economic data calendar, particularly as the releases will be for the period prior to the recent rise in coronavirus cases. Economic data over the past few months have generally pointed to a stronger-thanexpected initial rebound in economic activity in the UK, US and the Eurozone. However, output across most sectors is still well below pre-pandemic levels and the recovery has been uneven not least because spending by consumers has picked up more quickly than that of businesses. Moreover, there are some signs now that activity is turning down. Most notable is the Eurozone services PMI, which has decelerated sharply over the past two months, although more positively the manufacturing readings, where social distancing is less of a constraint, are firmer. In the UK, the September PMIs also slipped but from high levels in August and so still seems consistent with growth continuing for now at a decent pace. A key issue, however, is will that remain the case.
UK ECONOMIC DATA CONTINUES TO IMPROVE
Next week’s UK data slate is expected to show economic activity continuing to rise through late summer. August bank lending and mortgage approval (Tue) figures are forecast to record a further acceleration in housing market activity helped by the temporary cut in stamp duty. Meanwhile, the September Lloyds Business Barometer (Wed) will be watched for signs of whether business confidence continues to rise. However, the data is for the period before the recent increase in restrictions. Thursday’s GDP update is a final reading for Q2 and so will be seen as ‘old news’ although it will provide further detail on the downturn. The September manufacturing PMI (Thu) is also a final reading that is not expected to move significantly from this week’s first estimate. The coming week is scheduled to see another set of ‘formal’ negotiations between the UK and the EU on the long-run relationship. Some reports this week have pointed to breakthroughs on some key sticking points. However, the situation remains uncertain and the late December deadline for the end of the transition phase is fast approaching. There will probably be another vote in the House of Commons next week on the Government’s Internal Market Bill. The PM’s reported deal with Tory MPs that are unsure about some of the content should mean that it should pass by a comfortable majority. After which, it will go to the House of Lords.
A BUSY WEEK FOR US ECONOMIC DATA
Outside of the UK, there is a busy data calendar in the US but a slimmer one elsewhere. Of most interest in the US will be the timely data for September. Despite concerns over the summer months that a rise in Covid-19 cases might lead to a sharp slowdown in the economy, so far activity appears to be holding up relatively well. However, weekly unemployment claims data do suggest that the rebound in the jobs market is slowing. Consequently we expect a smaller rise in nonfarm employment in September (920k from 1371k in August) and only a modest further fall in the unemployment rate to 8.2% (from 8.4%). That still leaves the unemployment rate elevated compared to the spring. The ISM manufacturing survey for September is expected to be down from August but still be at a relatively high level, consistent with further rise in factory output. August updates for construction, consumer spending and trade are a little less timely but still interesting and are forecast to show activity rising across most sectors but at variable rates. In the Eurozone, September inflation is predicted to be -0.2%y/y unchanged from August, remaining well below the ECB’s target. The August unemployment rate may have nudged up to 8.1% from 7.9% in July, while the September Economic Sentiment index may rise to a six-month high. The latter looks somewhat inconsistent with the more downbeat picture painted by the PMIs. Finally for China, which was the first country both into and out of lockdown, September PMI data is expected to show the economy’s rebound remains intact as the government announced a further easing of restrictions in parts of the service sector.
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