Market news 12 October 2020

Chinese data still robust; UK GDP disappoints in August

• China’s private sector Caixin services PMI rose to 54.8 in September (August: 54.0, consensus: 54.3). Among the sub-components, the new business index rose from 52.9 to 53.6, new exports moderated to 48.4 and the employment index indicated further expected improvement (50.8). The output prices sub index suggested that inflationary pressured eased – declining from 52.4 to 50.3 in September.

• UK GDP surprised to the downside in August, rising just +2.1% over the month against expectations of a +4.6% increase. Much of the forecast growth was expected to come from Sunak’s ‘eat out to help out’ scheme, which resulted in a 71% spike in accommodation and food services sales. However, overall the services sector rose just 2.4% over the month, leaving the sector -9.6% below its pre-COVID level. In other sectors of the economy, manufacturing sales increased +0.7% over the month (-8.5% since February), construction +3% (-10.8% since February) and agriculture down -0.4% (-4.3% since February). 

FOMC and ECB meeting minutes underscore commitment to accommodative stance

• Minutes from the 15-16 September FOMC meeting show that the Fed remain committed to an accommodative policy stance until the economy is “clearly out of the woods”. Whilst it was noted that the recovery so far has been stronger than the committee had expected, but cautioned that there could be a “transition to a longer than expected slog back to full recovery as some segments struggle with the pandemic’s continued fallout”.

• The ECB minutes indicated concern that earlier forecasts had been too optimistic on inflation, which slipped to -0.3% at an annualised rate in September. Among factors causing concern, there was a lot of focus on the recent appreciation of the euro which is causing some volatility in the inflation numbers. Lagarde commented that the ECB does not target the exchange rate, but will have to “monitor carefully such matter”. In comments reported in the media, Lagarde also indicated a readiness to expand the bond-buying programme further should the recovery falter.

“Risk-on” mentality returns to markets

• Global equities bounced, led by the US, as expectations rose for a Democrat clean sweep. The market has become more sanguine regarding this possibility, regarding a reversal of the 2017 corporate tax cuts as unlikely given the economic backdrop and further fiscal stimulus as a distinct possibility. Value maintained its outperformance versus Growth and the US dollar experienced further weakness.