Markets Weekly

18 September 2020

4 minute read

Week ahead

Investors are likely to focus on the latest advance survey data to understand the impact on companies’ supply chains of reintroduced containment measures as COVID-19 cases rise globally.

September flash manufacturing and services purchasing managers’ indexes in the eurozone, UK and US will help to gauge the effect of the pandemic on economic activity. As the manufacturing sector requires less physical interaction with its end product and many factories have implemented social distancing measures, the sector has recovered more quickly than services. Output in all three areas is expanding.

The services sector, however, struggled initially and activity in the three areas only started to grow in July. In the case of the eurozone, the sector expanded by 0.5 percentage points in August. While September is likely to remain in positive territory, with economies largely open for business, surprises in the coming months remain to the downside.

July house price data in the US will be a key reading for determining the underlying momentum of the economy after the index grew by 5.7% on a year-on-year basis in June. That said, there is little doubt that the housing market was aided by accommodative monetary policy, the Coronavirus Aid, Relief, and Economic Security Act and employment showing signs of recovery.

Thursday’s initial jobless claims will also be an important data point. While the number has remained elevated, claims for the week ending 5 September were unchanged from the week before, at 884,000. This is the first time since March that US claims were below the 1m mark for two consecutive weeks.

Chart of the week

Policy measures provide 2020 housing market relief from COVID-19

At the beginning of the year the UK housing market appeared to have all the right ingredients for a strong 2020. The Conservative party’s majority in the 2019 election breaking Brexit deadlock, a relaxing of austerity measures and low interest rates provided somewhat of a favourable backdrop.

Strength in survey and official data early in 2020 suggested some potential for a post-election bounce in demand and a sustained pick-up in activity. However, the coronavirus pandemic hit sentiment and social distancing initiatives limited the practicality of housing transactions. Consequently, in May, the Nationwide house price index fell to its lowest month-on-month growth in 11 years.

How things change. The lifting of containment measures, allowing postponed house purchases to proceed, with a temporary increase in the stamp duty tax threshold to £500,000 until March 2021, seems to have driven a bounce in growth.

According to Nationwide data, house prices in August grew by 2.0%, the highest monthly rise since February 2004. Further positives for UK housing are a weaker sterling, ostensibly stable, lower interest rates and long-term supply and demand imbalance.

On the other hand, growth beyond 2020 could be impeded by tighter lending standards, a second wave of COVID-19 infections increasing restrictions and the impact on employment, and sentiment, once the furlough scheme ends in October.

Political uncertainty over Brexit is ever-present and a ‘no deal’ at the end of the transition period would likely impede house price growth. Even if this is avoided, it remains to be seen what effect the outlook for the economy has on prices that are likely to vary by region and value quantum.


Chart of the week

Rates may rise but unlikely at the short end

While expectations of higher rates grow, short-end rates seem likely to remain low for some time.

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