Markets Weekly

25 September 2020

4 minute read

Week ahead

With the threat of a second wave of COVID-19 infections growing worldwide and more restrictive containment measures seemingly inevitable, unemployment figures will remain a focal point in determining economic health during the crisis.

With US unemployment having been elevated since April, Thursday’s initial jobless claims and Friday’s non-farm payroll data should indicate the strength of the recovery in the labour market. August was the fourth consecutive month of job gains with the unemployment rate much reduced from the record high seen in the second quarter. Tuesday’s consumer confidence data for America also serves as another recovery indicator with confidence a key aspect in driving consumer spending and so the economy.

With the pandemic wreaking havoc on the UK economy, Wednesday’s second-quarter gross domestic product data will likely confirm the deeply negative growth that has been seen since February. August saw the greatest monthly rise in UK house prices since February 2004. Wednesday’s September Nationwide data will help determine whether the positive momentum is likely to continue through the year.

Unemployment in the euro area has not risen hugely since the onset of the pandemic, despite the devastating impact on the eurozone’s economy. Thursday’s unemployment data for the bloc will give further insight into the strength of the economic recovery.

With inflation falling into deflationary territory in August, September flash inflation data for the eurozone should help uncover whether last month’s fall was merely technical or a result of more fundamental reasons.

Chart of the week

The struggling services sector

The latest leading eurozone indicators, published 23 September, highlight the challenge the northern hemisphere’s economies are likely to face in coming months in case of a sustained second COVID-19 wave.

The flash purchasing managers’ index (PMI), which surveys senior executives at private sector companies, shows that the manufacturing recovery is gaining more steam while services is back in contraction territory (see chart, a reading below/above 50 indicates a contraction/expansion in activity compared to last month).

Unlike most previous crises, the COVID-19 pandemic has hit services more than manufacturing. In a typical recession, manufacturing grinds to a halt while services sector is less impacted.

But the need for social distancing and reduced human interactions is harming the services sector much more than manufacturing, demand for goods having been less affected. This can be seen by April’s record fall in the eurozone services PMI. 

The original bounce in services’ activity is now hitting a wall as the number of COVID-19 cases is steadily rising in Europe. This has resulted in renewed constraining measures to try and slow the spread of the virus. But that comes at an economic cost, as the services sector is labour-heavy.

Chart of the week

In Europe, furlough schemes have so far mitigated the impact of the pandemic on the employment market. However, a prolonged period of restrictive measures could ultimately lead to higher unemployment and/or a worsening fiscal position for governments. And the latest setback in the flash services PMI does not yet reflect the additional containment measures introduced by some countries in recent days to reduce the spread of the virus. The management of this second wave of COVID-19 cases is likely to create uncertainty for financial markets.

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