Markets Weekly

13 March 2020

4 minute read

Week ahead

The two-horse race to be the Democrat party candidate in the 2020 US elections reaches a pivotal stage on Tuesday, with 577 delegates up for grabs and key primaries in Arizona, Florida, Illinois and Ohio.

On the data front, next week starts with both China and the US publishing February retail sales and industrial output figures on Monday and Tuesday respectively. In China, both retail sales and industrial output data were positive in December, with retail sales stable at 8% year on year (y/y) and industrial output rebounding from previous weakness to 6.9% y/y growth. However, due to Covid-19, the next set of figures is expected to be mixed as the economic impact of the epidemic starts to spill-over to some of the macro data.

In the US, January data for both retail sales and industrial production remained on the soft side, with 0.3% and -0.3% y/y growth respectively — raising concerns about the economy’s ability to continue expanding at a moderate pace. UK employment data ended the final quarter of last year strongly after third-quarter (Q3) jitters. Signs of a post-election bounce may be seen in the January data out on Tuesday.

After cutting rates in between meetings by half a percentage point for the first time since 2008, the US Federal Reserve’s meeting on Wednesday will be top of investors’ minds. The market is pricing in another percentage point (at the time of writing) cut at the meeting. The central bank tends to lead interest rate policy globally. Therefore, the Bank of Japan meeting the day after will also be watched closely given the fact the country is likely to enter a technical recession (two successive quarter of contraction) in Q1 and saw output shrink in 2019.

In the eurozone, the February final inflation data on Wednesday is likely to confirm subdued inflation as disruption to output on the supply side, from the coronavirus, grows and any inflationary pressures are offset by weak demand.

Chart of the week

Chancellor Sunak has his cake and eats it… for now

The budget on 11 March not only ended 10 years of austerity, that has weighed on the UK economy, but saw the largest sustained fiscal boost in nearly thirty years. In doing so, Chancellor Rishi Sunak took full advantage of the “not usual Covid-19 impacted circumstances” rhetoric and the Bank of England (BOE) cutting interest rates by half a percentage point on the same day.

A significant £12bn was devoted to combatting issues linked to Covid-19, ranging from providing the national health service (NHS) with whatever funding it requires, a £5bn NHS emergency response fund and statutory sick pay for those advised to self-isolate (expected to cost the government £2bn).

The current budget being in balance gave the chancellor the room to increase spending without violating the fiscal rules in the Conservative party manifesto, as we mentioned in March’s Market Perspectives, with Covid-19 being the catalyst.

Chart of the week

However, it is worth noting that the Office for Budget Responsibility (OBR) growth forecasts do not incorporate the hit to economic activity from Covid-19 in 2020/2021. The fiscal stimulus would mean the deficit rising from 2.4% of gross domestic product (GDP) to 2.9% of GDP. Should growth turn out to be one percentage point weaker than the OBR’s forecast (0.7%), the deficit would widen by 0.5% of output and violate the 3% fiscal rule.

It is no surprise that the fiscal rules are under review, with the chancellor reporting back in Autumn if they are amended.


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