The weekend saw President Trump sign four executive orders to extend economic support – including $400 a week in extra unemployment benefits, a temporary payroll tax deferral for those earning up to $100k per year, eviction protection and extended zero per cent interest on federally financed student loans. Notwithstanding the unsurprisingly mixed political reception, financial markets look broadly satisfied, with US stock futures and European equities up and most of the Asian bourses that were open (Japan and Singapore were closed for holidays) firmer too. The gains in Chinese stocks (CSI300 up close to ½%) came as the latest national inflation data (see below) provided little in the way of major surprises.
In early London trading, USTs are slightly weaker at the long end of the curve (up just 1bp at the 10Y mark to just above 0.57%). And euro govvies (including BTPs) are a touch weaker too after Italy’s government followed Friday’s announcement of an extra €25bn of fiscal support by confirming on the weekend that it will borrow €28.5bn from the European Commission’s SURE programme to finance the extension of its temporary job layoff scheme for a further 18 weeks. A relatively downbeat assessment from the Bank of France – that the country’s economic recovery slowed notably last month after an initial rebound in May and June – should not have come as a surprise to any observer.
Looking ahead, after a relatively quiet start to the week, the economic newsflow will build as the week goes on. The data calendar includes the first estimate of UK Q2 GDP (Wednesday), which will be the worst of all major economies, as well as US and Chinese retail sales and IP (Friday). And on the geopolitical front, the end of the week will also bring discussions between senior US and Chinese trade officials as they conduct a six-month review of the first-phase trade deal, under which so far, inevitably, Chinese purchases of US goods have significantly undershot their targets.
Chinese inflation came in slightly ahead of expectations in July, with headline CPI rising for the second successive month to 2.7%Y/Y/Y. This principally reflected higher food price inflation, which accelerated 2.1ppts to 13.2%Y/Y, as severe flooding in key agricultural regions saw the annual increase in vegetable prices rise to 7.9%Y/Y, while pork prices remained exceptionally high (85.7%Y/Y). But underlying price pressures remained very subdued in July, with core inflation declining to 0.5%Y/Y, the weakest since March 2010.
While the annual decline in producer price inflation continued to moderate (up 0.6ppt to -2.4%Y/Y) it remained in negative territory for the twelfth month out of the past thirteen. But while headline inflation is likely to remain below target for the foreseeable future, Daiwa HK’s economist Kevin Lai expects the PBOC to maintain a prudent monetary policy stance, paying more attention to financial risks rather that short-term monetary stimulus.
Looking ahead, the end of the week will bring July readings for industrial production, retail sales and fixed investment. While manufacturing output is expected to have further increased to more than 5% above its level a year ago, the recovery in household spending looks to have continued to lag behind, with retail sales expected to be little changed on a year-on-year basis.
This morning saw the Bank of France publish its monthly economic update. After an initial surge in activity as the economy reopened in May and June following the lockdown restrictions in the spring, the Bank of France judges that the pace of recovery moderated in July. Having previously estimated that French GDP was in June down about 9% from the pre-crisis level (from 17% in May), the Bank estimates that the equivalent shortfall in GDP in July was around 7%. And informed by its latest business survey, it judges that activity broadly stabilised in August. Indeed, while the recovery in the construction and certain manufacturing subsectors – i.e. food and pharmaceuticals – continued to progress to leave output close to pre-crisis levels, other manufacturing industries – in particular autos – still saw a significant shortfall. And unsurprisingly, activity remained well below normal in the hospitality subsector during the summer vacation period.
Economic releases out of the euro area over coming days include the June industrial production report (Wednesday), as well as the second estimate of Q2 GDP and employment figures and June trade data (Friday). Despite the anticipated improvement in manufacturing output in June (likely up for the for the second successive month and by around 10%M/M following growth of almost 20%M/M the prior month), revised Q2 GDP figures are likely to confirm that the economy contracted at a record rate close to the initial estimate of 12.1%Q/Q, to leave output more than 15% below its pre-pandemic peak. Against this backdrop, despite various government job support schemes, employment is expected to have fallen significantly in Q2.
Tomorrow will bring the German ZEW confidence survey for August which is similarly expected to signal that firms are generally a little more optimistic about their current and near-term situations. Over the second half of the week, final CPI data for July will be published from the member states, starting with Italian numbers on Wednesday, German and Spanish following on Thursday and French figures on Friday.
It will be a busy week for UK economic releases, with the most noteworthy data coming on Wednesday with the first estimate of Q2 GDP, as well as monthly output and trade figures for June. With strict containment measures in place for much of the second quarter, the hit to economic activity will inevitably be hard. Broadly in line with the BoE’s latest projections and representing the worst performance of all of the major economies, we expect GDP to have contracted at a record rate, a little more than 20%Q/Q, to its lowest level since 2003. So, while the monthly figures for June are likely to reveal a second monthly pick-up in activity across the services, manufacturing and construction sectors alike as the country eased out of lockdown, output will have remained well below pre-pandemic levels that month.
Ahead of this, the latest UK labour market figures (due tomorrow) are likely to show an accelerated drop in the number of people in employment in the three months to June. But with almost 12 million workers registered with the government’s Job Retention Scheme and equivalent support programme for the self-employed at the end of that month, the unemployment rate is likely to remain relatively low, perhaps rising no higher than 4½%. And with the economy starting to reopen, the more timely Claimant Count measure (which also includes lower-paid workers) for July is likely to have eased back slightly from 7.3% the prior month, with the number of job vacancies in July expected to have stabilised too. Nevertheless, significant job cuts are now underway, with a CIPD survey today reporting that roughly one third of firms plan redundancies this quarter. Among other releases, tomorrow will also bring the BRC’s retail sales monitor for July.
After a quiet start to the week with Japanese markets closed today for the Mountain Day holiday, tomorrow’s economy watchers survey might well report a moderation in optimism about the economic outlook on the back of the recent resurgence in coronavirus cases. The latest bank lending figures, also due tomorrow, will also likely to show ongoing strong demand for loans in the face of the more challenging economic backdrop. This notwithstanding, ahead of the first estimate of Q2 GDP (due a week today), June tertiary activity figures (due Friday) are likely to report the first monthly increase since January. However, this will still leave output down considerably for the second quarter as a whole and still well below the pre-Covid level.
In the US, after a relatively quiet start to the week – with just JOLTs job openings data for June due today and the NFIB small businesses optimism survey and PPI data for July due tomorrow – Wednesday will bring the latest CPI figures. While prices are expected to have risen a further 0.3% on the month in July, this would see the annual inflation rate tick only slightly higher to 0.7%Y/Y. And underlying prices pressures appear to be moderating still, with core inflation forecast to have fallen from 1.2%Y/Y in June. It will be a busy end to the week for top-tier releases too, with retail sales and industrial production data for July and the University of Michigan consumer sentiment survey for August of particular note in light of the rise in Covid-19 cases of the past couple of months. Friday will also bring unit labour costs data for Q2 and June business inventories data.
The first half of the week will be dominated by Aussie sentiment surveys, with the NAB business confidence and Westpac consumer confidence indices due tomorrow and Wednesday respectively. Given the resurgence in coronavirus cases and the subsequent reinstating of lockdown measures in the State of Victoria, sentiment among firms and households alike seems bound to have deteriorated, albeit likely remaining above the lows seen earlier in the year. The latest labour market figures are also due, with the weekly payrolls and wages numbers for the week ending 25 July due tomorrow and the ABS’ monthly report for July due on Thursday. While employment is expected to have risen again last month, the unemployment rate is likely to have risen further to its highest since 1998 on the back of increased participation in the labour force.