Weekly Market Commentary & Important Highlights.
The recovery lost the momentum in July, as coronavirus cases rose in different parts of the U.S. and reopening measures are rolled back. The biggest headline was the initial estimate of Q2 GDP, which revealed a contraction at an annualized rate of 32.9%, slightly less than consensus forecasts but by far the largest decline in modern history. This plunge, combined with the five percent retrenchment in Q1 of this year, wiped out three years of economic growth. The size of the economy is back to what it was in Q2 2017. Initial jobless claims rose for the second straight week to 1.43 million. The housing market was a bright spot, with pending home sales rising in June. The manufacturing sector also seemed to remain on the road to recovery, with durable goods orders expanding by 7.3% in the month.
FOMC, as widely expected, held interest rates steady at the target range of 0.00% to 0.25% and extended its emergency lending facilities through the end of the year. Monetary policy will likely remain a key pillar of support for markets. Chairman Powell suggested that rates and credit costs will stay low for longer, reducing some of the market downside risk. For the week ahead, we have the release of the ISM manufacturing index, which is expected to move in expansionary territory, the non-manufacturing index, and the ADP employment report. The main release will be the nonfarm payrolls, which are forecast to have risen by another 2.3 million in July, pushing the unemployment rate down to 10.3%, from 11.1% previously.
In Europe, the German and French economies slumped in Q2 as household spending, business investment, and exports collapsed during the coronavirus pandemic, according to preliminary data. Germany’s GDP shrank by a record 10.1% q/q, and in France, the economy contracted 13.8%. However, the latest euro area PMI survey data beat consensus expectations for the third consecutive month. In UK, composite PMI soared to 57.1 in July and retail sales continued to climb in June, though the labor market remained weak. For the week ahead, market participants will be closely watching BoE’s upcoming policy meeting on Thursday. The BoE is expected to maintain an unchanged policy stance after only just extending their QE programme by GBP100 billion at their last meeting in June.
The Japanese Cabinet Office lowered its GDP growth forecast for fiscal 2020, to a 4.5% contraction due to the impact of the global pandemic. Rating agency Fitch revised its outlook on Japan’s long term foreign currency debt rating to negative from stable while reaffirming its A rating. Fitch expects Japan’s GDP to contract 5% y/y in 2020 followed by a 3.2% rebound in 2021.
In China, activity in both the services and manufacturing sector in July expanded for the fifth month in a row hinting consumer confidence is recovering. The official non-manufacturing PMI expanded at a slower pace, as it fell to 54.2 from 54.4 in June. PMI manufacturing unexpectedly rose to 51.1 in July from June’s 50.9, as improving prospects for electrical and pharmaceutical goods helped sustain a broader recovery from earlier coronavirus shutdowns.
Read the entire market report prepared weekly by Blackmount advisors.