Markets Weekly

24 July 2020

4 minute read

Week ahead

Undoubtedly the focus of the week will be on the Federal Reserve (Fed) meeting on 29 July. The US Fed has cut rates in two interims meetings first beginning of March by 50bp to 1.25% followed by another 100bp cut mid-March bringing down the target range to 0.00-0.25%. The meeting is likely to preserve the status quo of providing unprecedented liquidity to markets, but no new measures.

While financial markets look for continuing signs of economic recovery, advance second-quarter gross domestic product (GDP) data from US and the eurozone will likely show the true impact of lockdown measures on output.

Chancellor Rishi Sunak’s summer statement included a temporary increase in the stamp duty tax threshold for property purchases. Given house price growth in the UK has struggled leading up to this announcement, July Nationwide house price data should help gauge the initial impact the policy response is having.

In the eurozone, the July flash year on year (y/y) harmonised index of consumer prices is also due out on Friday. The euro area inflation rate was 0.3% in June, up from 0.1% in May – indicating as expected subdued inflation.

US jobless claims data have continued to moderate from their record highs, they still remain elevated and we are a long way from recovering the 20m jobs lost in April. With COVID-19 cases surging in the US and states such as California reversing their reopening, Thursday’s US initial jobless numbers will continue to matter in determining the health of the economy.

Chart of the week

Fiscal taps spring to life

Fiscal profiles are set to worsen, in the wake of COVID-19, across the developed world. The deterioration is likely to be uneven across economies and will probably be dependent on the size of stimulus packages, underlying fiscal dynamics and growth trajectories.

With most countries expected to extend their fiscal stimulus to help the recovery, the exact fiscal deficit for 2020 looks on the way to being historically large. Globally, fiscal support is estimated to be about $11 trillion so far, half in direct fiscal measures and the remainder in liquidity support.

The debt-to-gross domestic product ratio for advanced, G20, countries is set to rise beyond world war two levels in the coming year. Indeed, there is a risk this might deteriorate if additional fiscal stimulus occurs. Policymakers will not be able to ignore worsening public budget profiles for long.

Rising debt loads can potentially become a drag on growth by crowding out private investments in normal times or by reducing policy flexibility in future downturns. With central banks already at the lower bound of interest rates and with their balance sheets at record levels, the need for governments to control debt levels to address more downturns could become a priority.

Chart of the week

Lower budget deficit, stronger economic growth, higher inflation or additional financial repression – measures which lead private money to finance government debt at artificially low rates – are all options to reduce the debt burden. It is likely that a combination of those factors, with different countries privileging one option over the others, will be needed.


The great inflation debate

While inflation risks may at least two years’ away, the market seems be underpricing the risk. There may be value in hedging inflation risks with real assets exposure.

Previous editions of Markets Weekly

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