Last week the US Dollar continued to soften as economic data and politics failed to provide a boost. In terms of economic data, US initial jobless claims increased for a second consecutive week possibly a sign that economic growth may be cooling or faltering. Meanwhile, US second-quarter GDP contracted at an annualised rate of 32.9% after a 5.0% decline for the first quarter. This was the sharpest quarterly contraction on record by a substantial margin albeit expected given the crisis. With a unanimous vote, the Fed maintained the Fed Funds rate, in the 0.00-0.25% range, in line with consensus forecasts. Chair Powell stated that the evidence suggests that the pace of economic recovery had slowed since June and the pandemic is a disinflationary shock. He added that there is clearly a risk of a slowdown in the rate of growth and the labour market has a long way to go to recover. US politicians continue to debate whether to approve a fourth fiscal stimulus package as urged by Fed Chair Powell last week. The problem is that Congress is supposed to go into recess on Friday and some of the existing measures have expired.
Sterling is on the front foot as data and comments boost the economy. UK mortgage approvals increased sharply to 40,000 for June from 9,300 the previous month. Further evidence from the Nationwide house price index show prices increased by 1.7% following the stamp duty tax cut. Also, the CBI retail sales report surged in July to its highest level in over a year as more of the economy reopened following the coronavirus lockdown. This is all positive for the economy so far.
In the meantime, the Euro has also continued its push against the US Dollar since the agreement of the EU recovery fund. Last week, economic data was not as positive as it could be, however, the combined weakness of the US Dollar and sentiment surrounding Europe pushed the currency pair higher. The first reading of Q2 GDP showed a decline of 12.1%, a touch higher than expected but not a surprise considering the COVID-19 impact. However, on the positive, inflation showed signs of recovery as core inflation (excluding food and energy prices) pushed over 1% higher.
The week ahead is largely going to be dominated by developments in the UK and US. The Bank of England’s (BoE) meeting will take place on Thursday, whilst no change is expected the tone will be closely monitored. The BoE’s Chief Economist Andy Haldane described the situation as “so far, so V”. However, there is uncertainty beyond the “V”, with one risk being that it morphs into a “W” based not only on how the pandemic situation evolves but also on how much permanent scarring there may be in the economy because of the previously enforced lockdowns. So far, economic data and sentiment remain mixed so the overall tone for the central bank will be closely watched.
Across the pond in the US, the focus will remain on political figures and whether they can agree on a fourth fiscal stimulus package. The clock is ticking on this as recess is supposed to start on Friday. The outcomes could be that recess is pushed back, a partial deal agreed, or nothing is done until September (this is the most negative outcome). There are several key economic data readings, but the focus will be on the US jobs numbers set for release on Friday. With the data softening of late, the market will be keen to see what the overall labour picture is looking like.
- US ISM Manufacturing PMI
Released on Monday was the ISM Manufacturing PMI which posted a better than expected reading with new orders and production growing; however, the employment element of the survey showed contraction which may not be a great sign for the labour numbers at the end of the week.
- Spanish Unemployment
- Eurozone PPI
Spain’s unemployment data will be watched following caution from both the UK and Germany re-grading travel in recent weeks. However, this is unlikely to affect these figures so it will be interesting to see what change looks like following the reopening of their tourism industry.
- US ADP Employment
- US ISM Non-Manufacturing
The ADP employment data may provide the market with a signpost of how the all-important government labour data is expected on Friday. The headline figure is expected to 1.2m jobs, however, this will be down from the 2.6m+ last month. The US ISM Non-Manufacturing will provide the market with a timelier indication of economic activity. It is expected to show that the sector continues to expand, albeit at a slightly slower pace than last month.
- BoE meeting
- US weekly jobless claims
The BoE meeting will be the key event for the UK this week, one which could still present a wildcard. Whilst no change is expected the tone will be closely monitored. So far, economic data and sentiment remain mixed so the overall tone for the central bank will be closely watched. The wildcard event element could be if we see negative comments from the BoE surrounding projected growth concerns and/or if negative interest rates are discussed as a policy option.
- US Non-Payrolls
As always, the market will focus on the US non-farm payrolls and the accompanying data that supports it. With evidence that the economic activity may be slowing and initial jobless claims rising over the past couple of weeks the market will decipher the data for a wider view on how the economy is performing.
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