Markets Weekly

17 July 2020

4 minute read

Week ahead

July’s IHS Markit flash purchasing managers’ indices (PMI) for the US, eurozone and UK are published next week. The latest US composite figure showed signs of improvement, the figure increasing by 10.9 to 47.9, where a figure below 50 suggests economic contraction. However, both the services and manufacturing sectors are still shrinking.

With quarantine measures being lifted gradually, the eurozone PMI composite figure also improved. The figure increased by 16.6 to 48.5. Similar to the US, both services and manufacturing sectors recovered noticeably, but are still in contractionary territory.

In the UK, a similar pattern could be observed, with the latest PMI composite figure increasing by 18.7 to 47.6. The latest readings for services and manufacturing show signs of recovery, by 19.3 to 47.1 in the former and by 9.5 to 50.1 in the latter.

US jobless claims data are moderating from this year’s record high. That said, they remain elevated and 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 easing their containment measures, jobless data will become ever more important.

With July seeing more reopening of restaurants, pubs, hairdressers and other hospitality and leisure services, month-on-month UK retail sales growth is likely to continue its momentum after 12% growth in May. Although, it is worth noting that on a year-on-year basis, growth remains firmly in the red.

Chart of the week

The potential impact of surging US unemployment

At a first glance, recent economic data arguably points to a “V-shaped” recovery in the US as it reopened its economy. Initial jobless claims continue to fall gradually from the unprecedented peak, May and June nonfarm payrolls showed 7.3m jobs created. Turning to retail sales, growth was positive in May compared with that in April.

However, April saw 20m jobs lost and so the economy is still a long way from the pre-Covid environment. Moreover, as mentioned in a chart of the week on retail sales data in June, month-on-month growth may be positive but, given the collapse in consumption under quarantining, the bar for positive growth was very low. On a year-on-year basis, growth remains deeply in the red.

While jobless claims are falling, a sharper fall is likely. Furthermore, the noticeably high first-time claims seen in recent months are a cause for concern.

The chart shows that, including the number of claimants receiving benefits under the Pandemic Unemployment Assistance, US jobless claims hit a high in the 20 June reporting week on a non-seasonally adjusted basis.

As policymakers debate the need for further stimulus, the jobless claims data highlights the potential impact of a sudden withdrawal of the current fiscal support. As it stands, in two weeks’ time, tens of millions of US households would lose unemployment benefits totalling $600 per week. In some cases, the benefit payments were higher than what households were earning before COVID-19. The overnight withdrawal of unemployment support would likely hit the US economy.


Chart of the week

Hopes of a V-shaped recovery appear misplaced, with claims data showing its reliance on support programmes and surging COVID-19 cases forcing some states to re-impose some containment restrictions. The potential drop in unemployment support in the US also underlines the challenge governments face in adjusting their policies to transition from initial emergency support to gradual recovery.


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