Markets Weekly

11 September 2020

4 minute read

Week ahead

The US Federal Reserve (Fed) meeting on Wednesday and the Bank of England monetary policy committee meeting on Thursday are likely to grab investors’ attention.

The Jackson Hole symposium confirmed the Fed is now pursuing an average inflation targeting and stable employment policy. While this could mean further accommodative policy, we do not see a change at the September meeting.

Governor Andrew Bailey continues to reiterate the size of the bank’s policy toolkit to respond to any economic difficulties, including lower and even negative interest rates. While a rate cut or further quantitative easing in September seems unlikely, further support measures in the future also cannot be ruled out.

August retail sales data for China, the US and UK will signal the health of the consumer. In the UK, August’s restaurant subsidy scheme may have boosted consumption. With non-farm payrolls data improving for a fourth consecutive month in August, US retail sales could build on July’s positive reading. In China, however, sales growth has contracted despite monetary and fiscal support measures.

The UK unemployment rate has remained low while furloughed workers are classified as employed. However, the second-quarter decrease in employed workers was the largest since May to July 2009. July’s figures are unlikely to improve much, with the worst probably yet to come when the furlough scheme ends.

August flash inflation data from the euro area showed inflation fall into deflationary territory. The final reading is likely to confirm this. Meanwhile, UK inflation numbers due next week might be pushed down by the leisure sector, due to the government’s “eat-out-to-help-out” subsidy scheme.

Chart of the week

Unemployment to weigh on recovery

The latest US employment figures, released on 4 September, highlight the challenges the economy will face to recover fully from the impact of the COVID-19 crisis.

Leading indicators and housing data have bounced strongly and in some cases are above where they were in February prior to the slowdown. However, the jobs market paints a less rosy picture for the medium-term outlook.

While private sector employment increased by 1m in June, this was below expectations of 1.3m. Between February and April, the US lost 22m jobs, of which only 10.6m have been recovered. The struggle to capture more jobs stems mainly from the way this crisis has hit the economy.

In a traditional recession, manufacturing typically suffers more than services. But with restaurants, hotels and leisure in general suffering disproportionately, it is employment-heavy services sectors which seem to be under most pressure.

Even the better than expected unemployment rate should be taken with caution. The 8.4% unemployment rate is much better than what most predictions anticipated for the end of August at the height of the crisis. But, adjusted for people leaving the labour market and some misclassifications in the same period, the rate is probably north of 10%.

Another negative signal is the increasing number of permanent job losses in the survey. More than 2m people have permanently lost their job since February.

The unemployment rate is generally a good barometer for consumer sentiment. It is therefore not surprising to see the University of Michigan consumer sentiment survey, a gauge that determines changes in consumers’ willingness to buy and forecasts discretionary expenditures, hovering close to its recent bottom while other economic indicators recover strongly.

Without a sustainable rise in consumption, and with measures to support the unemployed having expired at the end of August, the US economy could struggle to recover further.

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