Last week was a mixed week across asset markets. For example, the UST 10-year yield reached a closing low of 0.508% on Tuesday but by Friday’s close it was trading at 0.57% having widened 4bps on the week. The S&P closed the week 2.45% higher, but global equity market markets lost momentum into Friday’s close and the Nasdaq and major Asian markets traded lower on the day.
Friday’s non-farm payroll data for July was one of the main focuses and the numbers surprised positively: in July the US added 1.76m jobs against expectations of 1.48m jobs added and the unemployment rate fell to 10.2% from 11.1% the prior month. This followed stronger than expected US manufacturing ISM and services ISM reports for July earlier in the week. However, while the economy continues to add jobs it still has 12.9m fewer jobs than before the coronavirus struck in February. Plus, as Friday progressed it was clear negotiations between the White House/Republicans and Democrats had reached a stalemate on another fiscal package and replacement for the unemployment payments that expired at the end of July. On Saturday, Trump signed executive orders for a payroll tax cut, unemployment benefits, eviction protection and student loan repayments.
On Friday markets were also left digesting a further step-up US-China trade tensions after President Trump signed two executive orders late on Thursday preventing US residents from transacting with WeChat and TikTok effective 45 days from the signing. He cited a national security risk with American citizens’ data being exposed. This follows Trump’s ultimatum to ByteDance Ltd, the Chinese owner of TikTok, to either close down its operations or sell them to a US company by September 15. On Friday, Trump also imposed sanctions on a number of senior HK and Chinese officials in response to recent imposition of a National Security Law in Hong Kong. Tensions have been building for over recent weeks and will only be added to by Alex Azar, the US Health and Human Services Secretary, visiting Taiwan this week, the highest-level visit by an American official since 1979.
Elsewhere, the Bank of England dominated central bank news making no changes to rates or its GBP745bn asset purchases target. Its updated forecasts showed a less negative outlook for the economy forecasting a contraction of 9.5% this year. Unemployment is expected to end the year at 7.5%. It forecasts a 9% recovery in 2021 but BOE notes there is considerable downside risk to the central forecast. BoE Governor Bailey said that negative rates remain an option, but the bank had no plans to use them at this stage. In Europe, there were a number of positive data releases: industrial production data for June beat expectations in Spain, France and Germany and the Eurozone PMI Composite data rose to 54.9. However, Covid-19 infections have been picking up and a number of restrictions have been re-imposed, triggering some concern whether a ‘second wave’ could hit hampering the economic recovery.
In the week ahead, US-China tensions and the expected trade deal review are likely to be a focus as is the continued spread of Covid-19 infections, particularly in Europe. Economic data wise, in the US, inflation data is due with the July PPI and CPI data due on Tuesday and Wednesday respectively. However, the July retail sales data and preliminary reading for August for the University of Michigan Consumer Sentiment are likely to be of more interest given the recent pick up in infections and some signs of slowdown in the high frequency data. Industrial production for July is also due. Developments on further US fiscal stimulus will also be closely monitored. Fed speakers over the week include Robert Kaplan, Eric Rosengren and Mary Daly and Joe Biden, the Democratic Presidential nominee, is expected to announce his running mate. Elsewhere, China's July inflation data is due Monday, July industrial production, retail sales data along with total social financing and Germany’s ZEW survey of expectations for August will be of interest later in the week. The Reserve Bank of New Zealand and Central Bank of Mexico are due to meet on Wednesday and Thursday respectively. RBNZ is not expected to make any change to interest rates but the market will be looking to see if it increases its QE programme. In Mexico the central bank looks to have scope to cut interest rates again.