Job shedding continues despite better PMIs

Initial jobless claims in the US rose slightly to 1.42mn in the week of 18 July, raising concerns about the slowing rate of recovery there and increasing pressure on congress and the White House to agree on a new stimulus package, especially with the USD 600/week federal boost to unemployment insurance expiring this week.  While the initial jobless claims point to continuing job losses, continuing claims declined to 16.2mn in the week of 11 July from 17.3mn previously.  Economic data on Friday was mixed, with new home sales rising by more than expected  in June but the Flash PMIs for both manufacturing and services coming in below forecasts, as new restrictions to contain the spread of coronavirus in some states weighed on services sectors in particular

In the Eurozone and UK, preliminary PMI data for July were better than expected for both services and manufacturing.  In the UK the composite PMI rose sharply to 57.1 in July from 47.7 in June as more businesses reopened. While activity continued to rebound in July, jobs continued to be lost with the employment component of the PMIs remaining well below the neutral 50-level in both the Eurozone and the UK.   UK retail spending rose by a larger than expected 13.9% m/m in June and is largely back to pre-pandemic levels. However, some of this reflects the shift away from non-retail spending (eg restaurants to supermarkets) as well as growth in online spending. 

The Turkish central bank held its benchmark one-week repo rate steady at 8.25% on Thursday, as widely expected. High inflation has pushed real interest rates into negative territory at -4.4%, and it looks increasingly likely that the easing cycle which began last July has reached its conclusion.

The focus this week will be on the expected US stimulus package, with legislation expected to be introduced early this week. The White House has reportedly dropped its insistence on a payroll tax cut as part of the package, which is now likely to include USD 1200 cheques for those earning up to USD 75k pa and some extension of federal unemployment insurance. Q2 GDP data in the US is due Thursday and is expected to show the economy contracted -35% q/q annualised (Bloomberg consensus).  We don’t expect any significant changes to monetary policy at this week’s FOMC meeting.  

Composite PMIs show a return to growth in July

Source: Bloomberg, Emirates NBD Research

Fixed Income

Yields on US treasuries continued to test lower last week as market anxiety over a spreading resurgence of coronavirus cases weighs on the outlook for the global economy. Yields on 2yr UST were roughly flat over the week, closing at 0.147% while the 10yr slipped by almost 4bps to 0.59%. The curve bear flattened over the week with the 2s10s spread closed down by 4bps. Markets will be watching the US Federal Reserve decision this week for commentary on how long rates will stay as low as they are.

Emerging market bonds stretched their gains further with the Bloomberg Barclays USD EM index adding 1% last week. Spreads over US treasuries managed to push below 390bps and settled at the end of the week at around 380bps.

Corporate results are setting the tone for regional markets at the moment with no primary issuance forthcoming.

FX

The dollar continued to weaken last week and has shown no signs of easing its decline. The DXY index fell by over -1.65% to 94.346, a new low for the year and its lowest point since 2018. The prospect of further losses remains intact for the foreseeable future. USDJPY declined by over -0.8% to trade at 106.14, its lowest level since March. Continued risk-aversion is providing a boost to the JPY, with the next key indicator being the 38.2% one-year Fibonacci retracement of 105.41.

Meanwhile the euro has climbed to its highest point since 2018 at 1.1656, marking an increase of over 2% for the week. The latest PMI data out of the Eurozone has been positive, showing a steady return to growth. Similarly sterling advanced to reach 1.2794 after UK composite PMI data beat expectations considerably. The currency remains well above the 200-day moving average of 1.2702. The AUD continues to operate above the 0.70 handle at 0.7105 whilst the NZD rallied by over 1.25% for the week to settle at 0.6641.. 

Equities

While some major global indices (the S&P 500 and the DAX) briefly enjoyed their first ytd gains in months over the course of last week, a loss of momentum over Thursday-Friday saw both slip back down to lower than they started the year once again. In the end, the S&P 500 closed down -0.3% on the week (down -0.5% ytd) while the DAX lost -0.6% w/w (down 3.1% ytd). Strong PMI numbers in Europe on Friday were seemingly insufficient to counter negative sentiment generated by the ongoing rise in coronavirus cases in the US, Spain and elsewhere, and by rising tensions between the US and China once again. The w/w losses were replicated in Asia, where the Shanghai Composite lost -0.5% over the period, and the Hang Seng -1.5%.

Commodities

Oil market volatility continues to wane with prices recording their third consecutive week of minimal change. Brent futures gained all of 20 US cents last week to close at USD 43.34/b while WTI saw a ‘richer’ gain of USD 0.75/b, three measly US quarters, to settle at USD 41.34/b. The lack of movement is attributable to markets having to assess whether demand will succumb to second waves of coronavirus across many countries while the supply side adjustment from OPEC+ and others is already priced into the market. Forces of nature beyond viruses are also contributing to the sense of quietude in oil markets: Hurricane Hanna will pass to the south of most oil and gas platforms in the Gulf of Mexico.

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