Markets Weekly

02 October 2020

4 minute read

Week ahead

The pandemic’s economic impact will remain the focus of investors’ attention with a second wave of COVID-19 infections seemingly underway.

The US and eurozone final manufacturing and services purchasing managers’ indexes (PMI) for September, and services final PMI in the UK, will likely confirm the slowing in recovery indicated by the flash readings. Unlike most crises, COVID-19 has placed far greater strain on services, than manufacturing, with flash services data showing falls in the UK, US and eurozone. Meanwhile, manufacturing continues to grow.

August retail sales data will likely flag a stalling eurozone recovery. Sales rebounded in June to pre-pandemic levels, but July significantly underperformed with a 1.3% fall compared to expected growth of 1.5%. The latest data should show whether this was an anomaly or the start of a trend.

Thursday’s US initial jobless claims will be a focus for financial markets heading into November’s presidential election. These remain elevated from their pre-COVID levels and exclude people on the Pandemic Unemployment Assistance programme. Continued elevated initial claims suggest a stuttering labour market rehabilitation.

Friday’s UK August gross domestic product (GDP) estimate should hint at the pace of recovery. Monthly GDP grew by 6.6% in July, but has contracted by 11.7% year on year. While steady progress has been made, the economy still has a long way to go to recoup the losses of the pandemic.

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.

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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