Weekly Reports

Weekly Market Commentary & Outlook.

The U.S. economy continued to climb its way out of the pandemic downturn. August nonfarm payrolls increased 1.371M, slightly missing estimates of 1.4M. The prior two months were revised down 39K. The unemployment rate fell to 8.4%, well below the 10.2% consensus, for the fourth-straight monthly decline. Labor market will continue to recover, but a return to unemployment near pre-pandemic levels will take an extended period of time. Average hourly earnings were up 0.4% m/m (+4.7% y/y), ahead of 0.0% (+4.5%) estimate. About 48% of the jobs lost during March and April have been recovered in the past four months. Initial unemployment claims fell from the prior week but, at a seasonally adjusted 881,000, remained elevated as many employers are still struggling to recover from the economic damage. 

In Eurozone, inflation turned negative for the first time since May 2016, raising chances that the ECB will have to inject yet more stimulus to generate price growth. Annual inflation fell to minus 0.2% in August from 0.4% in July, underperforming analysts’ expectations of 0.2%. One-off factors played a role, but declining services inflation confirms once more that this crisis is indeed deflationary. For the week ahead, no change is expected in the ECB meeting. However, President Lagarde is expected to hint at the possibility of more action in the future amid a faltering recovery and a stronger euro. The euro’s strength is worrying policymakers, who warned that further appreciation would weigh on exports, drag down prices, and hold back the economic recovery. ECB is also due to announce its projections which will help determine how much stimulus the economy needs. A Bloomberg survey of economists showed that the majority expect the ECB to increase its bond-buying program by December, with the median projection of €350B and an extension by six months to the end of 2021. 

The risk of a no-deal Brexit has increased after UK PM Johnson hardened his position on fisheries, demanding that British fisherman double the size of their catch from Britain’s coastal waters. Article cited EU negotiators, who said it would lead to a loss of one in three fishing boats in Europe and rejected the proposal. It highlighted that the impasse has led to growing pessimism ahead of a critical round of negotiations this week. Senior Downing Street figures now put the chances of a deal at 30-40%. 

The Bank of Canada will announce its latest policy decision on Wednesday and is widely anticipated to stand pat as Canada’s recovery gains traction. Both employment and consumption have picked up sharply and GDP growth accelerated to 6.5% m/m in June. 

In China, official and private PMI readings for August showed that China’s recovery continued, though at a slower pace. Both the official and Caixin/Markit surveys of manufacturing activity lingered firmly in expansionary activity, with the private Caixin/Markit manufacturing gauge marking the fastest expansion rate since January 2011. On the services side, the official services PMI reached 55.4 in August, underscoring stronger domestic demand for services. 

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