Markets Weekly

05 June 2020

4 minute read

Week ahead

The US Federal Reserve’s (Fed) meeting on 9-10 June, and what it may mean for policy, will catch investors’ attention. The central bank has taken dramatic measures in the past few months to do whatever it can to support the US economy. The measures include voting unanimously to cut interest rates by 150 basis points in two moves in March.

The US May year-on-year core consumer price index on Wednesday will likely fall from 1.4%, with consensus at 1.3%, and hint at the effect of the pandemic-induced suppression in activity. We expect price rises to slow in the short to medium term. That said, global monetary policy and fiscal stimulus has been substantial and will likely amount to inflationary pressures as we emerge out of the pandemic.

From the other side of the Pacific, the Chinese May year-on-year consumer price index is also expected to rise from 3.3%, with consensus at 3.7%, indicating relatively subdued inflation in the country.

American initial jobless claims have started to fall from their unprecedented record highs and as the country moves out of quarantining, it is likely this will continue to trend downwards. However, we doubt that all jobs lost since March will be recovered and that the speed at which companies rehire workers is likely to be slow. 

UK April gross domestic product (GDP) data will likely show a truer picture than those seen in March of the effect of strict containment measures on the economy. The nation was under the measures for the whole month, unlike in March. Eurozone GDP for the first three months of the year is also out next week.

Chart of the week

Surge in consumer savings points to a shallow recovery

Financial markets, especially equities, seem to be assuming a quick, V-shaped, global recovery from the COVID-19 pandemic.

The initial record plunge in economic activity in March stemmed from strict containment measures that effectively halted the demand-side of the economy.

As economies re-open, supported by sizeable global monetary and fiscal stimulus measures, and worker rehiring, a sharp recovery could occur as consumption recuperates, generating “demand-pull” inflation.

While government and central bank stimuli have mitigated the fall in real disposable incomes, consumers may not be quick to spend again. As such, a more dragged out, U-shaped, recovery seems to be increasingly likely.

Consumers have been shaken by the impact of the outbreak contributing to a markedly higher savings rate. For instance, data from March shows that Italy and Spain put aside €16.8bn and €10.1bn respectively, compared to a monthly average that has typically hovered between €2bn and €3bn. In the UK, March household deposits jumped by a record £13.1bn. Meanwhile, in the US the savings ratio has climbed and could well hit a record high in the second quarter of the year.

Chart of the week

Admittedly, some household savings reflects the closure of certain sectors, such as travel and hospitality, where consumers would have normally spent money. Pandemic-inspired employment support schemes won’t be around forever, so it is likely that some of the additional savings are precautionary. This could exacerbate the problem further as consumers defer spending. In such a backdrop, it is hard to envision a V-shaped recovery emerging. A U-shaped one looks more plausible.

From an inflation perspective, the above strengthens our views that price rises are likely to be muted in the short term, before potentially rising in a few years. With the savings rate set to hit record levels soon, the velocity of money should remain low. Risks of deflation, in the short term, can’t be excluded.


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