Renewed restrictions cause reset of expectations for economic activity in Q4
- US flash PMIs suggest improvement in both manufacturing and services in November, despite renewed concerns about the spread of the virus. The manufacturing composite improved from 53.4 in October to 56.7 in the November estimates, as the output reading jumped and new export orders moved into expansion territory. The services composite estimate was also higher at 57.7 (October: 56.9) as incoming new business increased and the business expectations reading reached 77.7.
- Conversely, the Eurozone flash PMI estimates reflected a drop back into contractionary territory in November, as was largely expected given ongoing lockdown restrictions. The composite reading fell from 50.0 in October to 45.1 in the flash estimates (consensus: 45.8), driven by the fall in services from 46.9 to 41.3. The manufacturing flash estimate dropped to 53.6 (October: 54.8).
- The UK flash composite PMI also fell back into contraction territory, from 51.4 to 45.8 over the month (consensus: 43.0). The detail of the reading was very different to the first months of lockdown earlier this year – manufacturing improved over the month (53.7 to 55.2), helped by overseas export demand and potential stockpiling ahead of Brexit. Services fell on the news of a second lockdown in England and continued tiered restriction systems across the devolved nations, although the decline was a fraction of what was observed earlier in the year.
Hard data remains resilient but sentiment surveys indicate waning confidence in the US and Germany
- Consumer confidence dropped by more than was expected in the US in November, with the Conference Board Index down -5.3pts to 96.1 (consensus: 98.0). The present economic conditions index fell -0.3pts to 105.9 and the household expectations index -8.7pts to 89.5. The Richmond Fed Manufacturing index fell by 14pts to 15 in November, the lowest reading in 4 months. US durable goods orders were stronger than expected in October, +1.3% over the month (consensus: +0.8%).
- German GDP was revised higher in Q3 to +8.5% (8.2% reported earlier), the largest quarterly expansion on record following Q2’s unprecedented contraction. In the more recent Ifo business climate survey, the index declined 1.8pts to 90.7 in November (consensus: 90.2pts). Respondents reported similar current conditions (-0.4pts to 90.0pts) but future expectations declined on further COVID restriction-related uncertainties -3.2pts to 91.5.
Markets continue to look through short-term slowdown in anticipation of vaccine roll-out in Spring 2021
- Equities continue to rally impressively, with MSCI ACWI pressing to fresh all-time highs led by ongoing outperformance of Value (European bank stocks and US small caps both up ca 20% in the past month) vs Growth (Nasdaq up “only” 12% over same period, propelled by a very gradual rise in US 10-year yields (currently 0.85% vs recent low of 0.50% in early August).
- FX markets have witnessed analogous price action to equities, with high beta currencies (BRL, ZAR, MXN, TRY in Emerging Markets, Scandis and Antipodeans in the G10) outperforming and havens (USD, JPY, CHF, gold) lagging.