Market news 20 November 2020

US production and sales continue on the long path to recovery

• US retail sales growth moderated in October to +0.3% m/m after several months of strong catchup growth (September: +1.6%, consensus: +0.5%). Although the majority of categories remained above February levels, sales declined over the month in furniture stores, food and beverages and clothing. Non-store retail sales provided a glimmer of hope, reaching a record $88.2bn sales (+$2.7bn m/m), and forecast to remain strong in the lead up to the holiday season.
• Industrial production increased +1.1% m/m in October, taking current production levels to 5.6% below pre-pandemic levels after the sharp -12.7% decline seen in April. Analysts noted the potential tailwind for increased demand as the inventory-sales ratio remains at an all time low of ~1.2x (previously 1.4x – 1.7x). Manufacturing production (75% of total IP) increased by 1.0% and services IP was supported by a 3.9% m/m increase in utilities production.

UK data mixed before further lockdowns announced in November

• UK retail sales beat expectations of a decline in October, rising 1.2% m/m (September: consensus: -0.3%). Areas of strength were household goods (+3.2% m/m) and non-store retail (+6.4% m/m), whilst food store sales detracted (-0.2% m/m). Online retail sales have increased 45% since February and are expected to now represent c.28% of total retail spending. Expectations for Q4 remain mixed as the second lockdown in England will inevitably disturb consumer spending patterns over the Christmas period.
• UK inflation accelerated to 0.7% y/y in October (September: 0.5%, consensus: 0.5%), the highest reading in 3 months. Transport prices picked up over the month (+1.2%) and food prices increased 0.6%, whilst housing and utility prices fell -1.3%. With little expectation of a sustainable pickup in inflation to the Bank of England’s 2% target in the near term, this adds pressure on the BoE to provide further easing.
• UK public sector net debt was £22.3bn in October, lower than was expected (consensus: £30bn), but around £10bn higher than the same time last year. Cumulatively, borrowing reached £214.9bn for the fiscal year to the end of October, and net debt is currently 100.8% of GDP. More detail on plans for public borrowing are expected to be announced by Chancellor Rishi Sunak on the one-year spending review on 25 November.

New global trade agreement

• The Regional Comprehensive Economic Partnership (RCEP) was signed by 15 countries including China, Japan, South Korea, Australia and New Zealand on 15 November. RCEP is expected to eliminate a range of tariffs on imports within 20 years, and includes harmonized “rules of origin” policies which sets out how much regional content a product must have to enjoy lower tariffs. The partnership is intended to build on the current Free Trade Agreements currently in place between member states, and will sit alongside the CPTPP Agreement (2018). The CPTPP links 7 of the 15 countries on the new RCEP with Chile, Peru, Canada and Mexico. Representing the world’s largest regional trade deal, RCEP covers 29% of global GDP – bigger than the European Union or US-Mexico-Canada Agreement.