Markets Weekly

04 September 2020

4 minute read

Week ahead

Next week’s main focus will undoubtedly be the European Central Bank (ECB) monetary policy meeting on 10 September. The deposit rate is unlikely to be reduced further into negative territory. That said, ECB President Christine Lagarde will probably reiterate the need to provide continued support through asset purchases. She may also hint at further fiscal cooperation across the bloc – especially as the number of COVID-19 cases continues to rise across the euro area.

In the backdrop of continued suppressed economic activity, the US May year-on-year (y/y) core consumer price index (CPI) on Friday will likely remain at 1.6%. Meanwhile, the Chinese August y/y consumer price index looks set to remain at 2.7% – indicating subdued inflation in the region.

US initial jobless numbers are likely to be a focal point in determining the health of the American economy. Prior weeks have seen falls in the number of unemployment claims from March’s record high, though they remain extremely elevated.

As financial markets look for continuing signs of economic recovery, revised second-quarter gross domestic product data from both the eurozone and the UK will further hint at the state of the recovery. This is especially so in the latter, with some containment measures being lifted in early July. The country’s July m/m manufacturing output data is also out.

Chart of the week

Advance data pointing to tepid recovery… for now

As investors grapple with the shape of economic recovery from the pandemic, a key indicator is the leading purchasing managers’ index (PMIs) of business activity.

The survey readings, as expected, fell to unprecedented lows around the world when economies locked down at the peak of the crisis, with many sectors halting production.

Since easing containment measures and restarting production, contrary to popular belief at the time, the indices have suggested that activity did not pick up where it left off before the crisis. Instead, output seems to have gradually increased towards, and above, the 50 change/no-change mark from pre-crisis levels.

Activity in the eurozone only started expanding in July and August. A similar story can be found in the US, though the country experienced a less dramatic fall than the bloc, which had a longer lockdown period. Surveys such as the Richmond Federal Reserve Bank’s manufacturing index point to a eurozone-like story of modest improvement into expansion (see chart).

While there are tepid signs of recovery being seen, risks do persist. Production remains vulnerable to a damaging second wave of COVID-19 infections and geopolitical tensions, in the form of Brexit negotiations and the US presidential election, could dramatically alter the rules of the game. Furthermore, a hit to demand as fiscal support measures run dry cannot be ignored.

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