Market Report September

The U.S. economy continued to climb its way out of the pandemic downturn. Promises for a rebound.

The U.S. economy continued to climb its way out of the pandemic downturn, as recent data showed promise for the rebound, particularly around the consumer. Economic readings released last week were consistent with improving consumer conditions, including: the latest NAHB home builders index rising for the fifth consecutive month to a fresh high; weekly continuing and initial jobless claims falling to the lowest level since mid-March; the University of Michigan Consumer Sentiment Index rising to a six-month high; and U.S. retail sales increasing for the fourth straight month. 

The Fed’s concluded on Wednesday its two-day meeting with no major changes to policy. The post-meeting statement and economic projections showed that policymakers expect official short-term rates to remain near 0% through 2023, while they soothed their expectations for the size of the economic contraction in 2020 from 6.5% to 3.7%. The Fed estimated year-end unemployment of 9.3% following the June meeting, but policymakers now project 7.6%; it currently stands at 8.4% as of the August payrolls report. On the inflation front, policymakers anticipate sub-2% for the next couple of years, rising steadily to 2% by 2023. Prolonged fears that the Fed’s excessive monetary accommodation had reached the limits of its influence appeared to weigh on the market. 

Europe seems to face a “very serious” situation as the number of new coronavirus cases registered weekly in Europe hit 300,000 for the first time. France reported the highest number of daily coronavirus cases since May. In the UK, the number of new infections almost doubled to 6,000 per day, urging top scientists to recommend the government to consider a two-week national lockdown at the end of October. On the economic front, Germany’s ZEW economic research institute’s gauge of investor sentiment rose to 77.4 from 71.5 in August. 

The Bank of England kept interest rates at 0.1% and made no changes in its asset purchase programme. With the effects of the furlough scheme fading, prospects of a no-trade-deal Brexit growing, and lack of testing leading to a resurgence of COVID-19 infection rates, the UK economy is likely to need more support in the months to come. Negative interest rates were not ruled out, however, there is a higher chance of further quantitative easing before the end of the year, with the potential for interest rates to be later cut to zero if it is required. 

In China, the latest macro data indicate the economic recovery remains on track. Industrial production expanded 5.6% y/y in August, up from 4.8% in July, and leading indicators are indicating further recovery in factory activity. Retail sales grew for the first time this year, up 0.5% y/y in August, supported by growth from consumer staples and some non-essential goods. Finally, fixed asset investment shrank at a slower pace of -0.3% y/y in August. As new COVID-19 cases in China continue to trend lower, along with more relaxed social distancing measures, it is highly likely the upward trend in consumption can be sustained. 

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