UK GDP posts biggest Q2 drop in entire G7; superficial U-rate stability masks significant labour market weakness
- UK GDP declined -20.4% in Q2, despite an increase of 8.7% in June (consensus: -20.7%, Q1: -2.2%), taking the economy into its deepest recession on record. Household spending drove the majority of the decline, -14.3% in Q2, but government spending and business investment were also down -2.6% and -3.1% respectively. Manufacturing output declined -20.2% in Q2 and services declined -19.9%. This was the worst quarterly decline among European peers, resulting in a GDP decline of -22.1% for the first half of the year (Spain: -22.7%, France: -18.9%, Italy: -17.1%, Germany: -11.9%). Chancellor Rishi Sunak responded saying “today’s figures confirm that hard times are here” but promised to leave nobody “without hope or opportunity”. The Bank of England is expecting a sharp recovery in the second half of the year, forecasting a GDP decline of -5% for FY20 in their August Monetary Policy Report.
- Headline UK unemployment was better than expected at 3.9% in June (consensus: 4.2%), although. underlying indicators provided early warning signs of worsening conditions. ONS data reported employment fell 220,000 in Q2, entirely due to part-time employment (-365,000 jobs). However, PAYE data suggests that the situation is worse than that, with 114,000 fewer payrolls in July than June and 730,000 fewer since March. Further redundancies are expected as the government tapers the Coronavirus Job Retention Scheme, making it more expensive for companies to furlough employees from 1 July. At the peak of the crisis, 9.5m people were registered for the government furlough scheme, which will end on 31 October. The BoE recently revised their forecast upwards to 7.5% unemployment by the end of the year. Total pay declined -1.2% 3m/yr in June, driven by a sharp decline in bonus payments.
US incoming data remains among the strongest in developed markets
- Initial jobless claims fell more than expected to 963k for the week ended 8 August (prior week: 1,191k) in the US. Continuing claims fell to 15,208k (-624k) on a non-seasonally-adjusted basis and initial Pandemic Unemployment Assistance (PAU) claims declined -167k to 489k. Although initial claims have continued to decline since the peak of 6.9m weekly claims in March, there is increasing pressure for Washington to provide further stimulus measures as unemployment remains high at over 10% and hiring slowed last month.
- Retail sales showed impressive strength in July with the control reading (which excludes autos, gasoline and building materials) rising 1.4% mom (vs consensus 0.8%) and the June figure revised up to 6.0% mom (from 5.6%). However, the retail sales number does not include a wide range of services (including travel & tourism) which are still running well below pre-Covid levels, moreover the pace of combined unemployment insurance benefits has fallen from around USD25bn per week in mid-May through late July to USD15bn at the start of August and a renewed increase in benefits may be required to sustain consumer spending going forward.
China continues on uneven economic recovery
- In China, retail sales declined for the seventh consecutive month -1.1% in July compared to the same month a year ago (consensus: +0.1%, June: -1.8%). Many countries are looking to China as an indication of economic recovery, given their more advanced stage in dealing with COVID-19, but consumption has remained low despite gradual easing of restrictions and lower new infection numbers. Fixed asset investment declined -1.6% in the first seven months of the year, in line with consensus (June: -3.1%). Within fixed asset investment, however, property investment continued to gain momentum, +3.4% yoy to the end of July. Industrial production increased +4.8% in July vs the same month last year (consensus: +5.1%, June: +4.8%), supported by government-backing and demonstrating that the recovery will be uneven. This follows reported GDP growth of 3.2% year on year in Q2, recovering from the -6.8% decline in Q1.
Equities grind higher, USD remains under pressure, bond yields continue to gently rise
- Equities continue their low-vol rally, and the MSCI ACWI global benchmark now stands within 2% of the all-time high attained on 12th February of this year. More interesting were the shifts beneath the surface, as the roughly 15bp rise in 10-year Treasury yields and attendant steepening of the yield curve (as front-end yields remain anchored by Fed policy close to the zero bound) gave further impetus to the equity factor rotation away from Growth and Price Momentum (principally Tech and Consumer Discretionary) towards Value (Oil, Banks, Small Caps).
- A notable casualty of the rise in yields was the precious metal complex, with gold staging its largest 1-day decline in seven years on 11th August (-5.7%), although it has subsequently recovered modestly and is still sitting within 10% of the all-time high it had achieved at the end of the previous week ($2,075/oz).
- USD was again one of the weakest currencies in the G10 over the week, principally vs European currencies (NOK, SEK, EUR, CHF) as FX investors buy into the same pro-cyclical “value trade” evident in equity markets in recent weeks.