It’s been two weeks since my last update, and it’s not been a great two weeks for the markets. The virus is fighting back and although economic data remains strong, especially for goods, the re-imposition of lockdowns across Europe have taken their toll on the service sector.
The flash PMI number for services in the eurozone has fallen to 47.6, anything below 50 signals contraction, and way below the 54.7 number recorded in July when lockdowns had been eased and people were enjoying the wonderful weather. There’s a lot of bad news around at present, especially for the UK, but there are reasons to be optimistic.
A big week for US data releases
It’s all eyes on the US this week. On Friday, we get the employment report, the consensus expectation is for a big rise in employment – getting on for a million extra jobs in the month, with a further small decline in unemployment. These numbers are always important but they are the last ones before the elections in November and President would be delighted if they came in line with consensus. Unemployment at a little over 8% would still be more than double the pre-Covid level but it has fallen every month since the peak of almost 15% in April.
And there are other important data releases too. We get figures for August consumer spending, the first month since the very generous $600-a-week Federal unemployment payment expired. The consensus is that spending will show a healthy rise despite a big fall in income. US consumers saved a huge chunk of the generous fiscal support they received so they should be able to keep shopping. Indeed, expectations for US growth this quarter have improved dramatically since the dark days of March. The consensus is now for a growth of 25% in Q3. That’s a massive improvement from the near zero number expected a few months ago – remember that this is annualised, which is the way the US present their data, but it’s still a big increase of 6% quarter-on-quarter. However, were consumer spending to fall short of expectations this week, expect forecasters to revise their growth forecasts down heavily.
US political temperature gauge set to rise
The political temperature will rise this week with the first debate between Biden and Trump. Trump’s supporters will be watching carefully for any signs that Biden isn’t totally alert. We have already heard from respected analysts that Biden has been diagnosed with dementia. It turns out that that diagnosis came from a nurse who watched him on television. But fake news can be very effective…remember the suggestion that Barrack Obama’s middle name was Hussein and that he was born overseas (and therefore ineligible to be US president) – this forced him to publish his birth certificate.
The other news on Trump is the revelation that the New York Times has obtained his tax records, which show that he paid only $750 in Federal incomes taxes in 2016 and nothing at all in the previous 15 years. Also, if the Republicans succeed in nominating Amy Coney Barrett to the supreme court and Trump contests the election results – as he surely will if he loses – she could possibly end up ruling on the outcome. Lots of political excitement to come.
Back to the economy and markets
The world economy has been showing a v-shaped recovery from the terrible recession induced by lockdowns. China has almost recovered all the way back to pre-Covid levels. Data throughout the world has been coming in strong and stronger than expected. But the surge in virus cases in much of Europe and the continued high infection rates in the US and much of the rest of the world mean that this recovery could prove short lived. And where goes the economy, so goes corporate profits, as well as the stock market.
Could the vaccine save Christmas?
We should get the efficacy signal on the Oxford, Pfizer and Moderna vaccines very soon, probably next month. Pfizer look set to be first, but the Oxford vaccine would be the fastest to the market. They’ve been mass producing since April and the UK should have 30 million doses in the next few days and 100 million by year-end. The government hope that they can roll out a mass vaccination programme by Christmas for key workers, the elderly and of course students. It may take longer and further trials where volunteers are vaccinated and then exposed to the vaccine are planned for the new year.
But if any of the seven vaccines currently in Phase Three trials are shown to work, I would expect a significant rally in markets. Of course, trails are exactly that and we’ll have to wait and see. As Britain shivers under new stricter lockdown measures, there is good reason to be optimistic.