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Global policy stance unlikely to be tightened in the foreseeable future as recovery still too fragile to be self-sustaining
- The July FOMC meeting minutes, released his week, underscored the growing uncertainty over the path of the US economic recovery as new outbreaks continue to cause disruptions and fiscal support fades. There was no change to guidance on the pace of asset purchases, but it was suggested that these should be labelled as recovery funds rather than “aimed at promoting market functioning” (i.e. the use of extraordinary monetary policy not just to restore order to markets but also to stimulate growth in the medium-term). Yield curve control, although it was discussed in detail in June, seems unlikely in the near-term.
- Japan Q2 GDP posted a record decline, although this was largely in line with consensus, -7.8% q/q (consensus: -7.6%, Q1: -0.6%). Whilst this is a multiple of the contraction that Japan saw in 08/09, this was less severe that the contractions seen in Q2 in the US (-9.5%) and Europe (-12.1%). Consumer spending and net exports were the main drivers of the decline in Japan, -16.0% and -10.8% respectively over the quarter, as a result of service sector shutdowns. Business investment was relatively resilient, contributing only -0.2% to the GDP decline over the month, as companies continued to spend on technology in particular. The Japanese government have so far offered $1trn in cheap loans to support the economy, and have recently avoided announcing another state of emergency despite the new case count remaining high.
- UK inflation jumped unexpectedly in July, with the core rate increasing from 1.4% to 1.8% yoy and headline up from 0.6% to 1.0% yoy. Whilst pent-up demand is expected to provide some support to inflation, discounting and various schemes including hospitality VAT reductions and “Eat Out to Help Out” are likely to cause further volatility in price levels. Despite this increase in inflation, the Bank of England are under increasing pressure to provide further stimulus measures after the record economic contraction in Q2 and with unemployment set to rise significantly in the coming months.
Markets in quiet summer mode; USD arrests run of nine consecutive weekly declines
- US equities were slightly up whilst the rest of the world was for the most part slightly down. Growth (principally Tech) outperformed Value (Financials, Small Caps).
- US rates rallied steadily all week and the US dollar finally eked out (modest) weekly gains versus other major currencies. Precious metals rallied in the early part of the week before ceding their gains in the face of the US dollar rally. Brent crude fell ~50c/bbl.
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