Overview
With new developments arising over the respective regions, here are our market highlights for last week.
China
Inflation higher than expected, but that may not be due to improving economic activities.
China’s consumer price index (CPI) and inflation figure for June increased by 2.5% and 0.1% respectively compared to May which is largely attributed to rising food prices. The CPI announced was in line with analyst consensus. Producer price index (PPI), which measures the cost of goods for manufacturing, fell 3% and was modestly lower than the estimated 3.2%.
While on paper, improving CPI from a depressed level indicates that China’s economy is improving faster than expected, this may not be the case. According to China’s National Bureau of Statistics (NBS), the rise in CPI is mainly due to rallies in food pricing, mainly led by pork prices and vegetable prices. On a monthly basis, pork prices climbed by 3.6%, reverted from a decline of 8.1% last month. At the same time, vegetable prices increased by 2.8%. When an economy improves, people will tend to consume more food, leading to higher demands in food.
However, the surge in prices was mostly due to a supply shock rather than demand. Recent floods and the shutting down of Beijing’s Xinfandi (Asia’s largest wholesale market) due to the emergence of a COVID-19 cluster has cut vegetable supply which drove prices up sharply. Meanwhile, pork supply has dropped due to a slower butchering rate, stricter hygiene requirements and slower imports. Thus, revealing that June’s CPI numbers does not accurately reflect the underlying economic situation.
Similarly, a rising PPI may indicate that rising cost of material stems from an increased demand. Yet, upon closer inspection, the rise was actually led by surges in petroleum-related raw materials stemming from an increase in the price of international crude oil.
Overall, it is insufficient to simply conclude that China is recovering faster than expected based on CPI and PPI alone. Incorporating a range of indicators and context is vital in painting a clearer picture of current conditions
EU
Mixed economic sentiments in Eurozone
From Christine Lagard’s interview with Financial Times, it was concluded that new stimulus measures are unlikely to be announced in the upcoming monetary policy meeting given the sheer number that has already been meted out. Additionally, the European Commission has cut the EU’s growth forecast citing a longer than anticipated lockdown in many parts of the region which delayed the recovery process. Moreover, the COVID situation in the US dimmed the prospect of a swift economic recovery. As a result, global market sentiments took a toll and European stock market took a plunge.
On Friday, positive economic data ended the market’s 3 day losing run. Italian industrial production jumped to 42.1% in May, outgrowing the median forecast of 22.8%; French industry output was at 19.6% higher than the forecasted 15.1%.
Overall, European stocks have slumped throughout the week but managed to close on a positive note as production output values surpassed expectations. Moving forward, we expect further volatility in the European market as we await further developments on the recovery fund.
UK
Review of Bank of England’s latest stimulus
On Wednesday, Chancellor Rishi Sunak announced a £30 billion stimulus plan following an interest rate cut to 0.25% in a bid to lower unemployment and to further kickstart the economy.
The Kick Start scheme is targeted at the younger demographic by providing grants and wage coverage for companies to encourage them to provide more work opportunities and apprenticeships.
Despite the incentive bonus of £1000 to encourage business owners to bring staff back from furlough, the amount seems to be somewhat lacking. For businesses whose operations have been impaired significantly by the pandemic, it might be more cost-effective to just lay off their staff since revenue earned might not be enough to cover operating costs even with the incentive.
Stamp duty threshold increased to £500,000 which translates to roughly 90% of domestic households not needing to pay tax. Eat Out to Help Out scheme where diners can receive 50% off their meals in conjunction with the slashing of VAT to 5% is welcomed as a move to spur some much needed demand for businesses in the hospitality sector.
Overall, it is a good comprehensive package of measures although it is worth noting that net public debt (£360 billion) has now exceeded total annual output. This is bound to have future economic implications but for now, recovery is key.
United States
Why did the United States mortgage rates tank?
The United States mortgage rate has reached its lowest point since 1971. The 30-year fixed-rate average fell to a historic low of 2.97% on Thursday (9th July 2020) compared to 4.98% since November 2018. The change has surprised some as rates were seemingly on the rise after staying at near all-time lows. Rates were breaking into the 4% territory again after being boosted by the favourable non-farm payrolls report but with the reversal of economic reopening this, it has slumped yet again to record lows. This drastic fall depicts the United States profound concern of the novel coronavirus and they hope that by cutting down the interest rates, it will stimulate the whole economy as a whole.
The low rates have fuelled some recovery in the housing market as purchase applications rose 13% annually. However, from the sale side, there is reluctance due to the economic uncertainty and depletion of savings making some homeowners hold on. A W pattern for key housing indicators such as home sales, price growth and housing starts is likely. With pent up demand from home buyers but little supply on the market from reluctant sellers, housing prices may go up. Home sales will go up as well due to the fact that demand will drive prices up and buyers may be more willing to capitalise on these low rates. However, the W pattern is due to the fact that this won’t be for a sustained period and with delayed and frozen economic reopening, mortgage payment freezing being cut off as well as unemployment insurance this will result in a decline in all these indicators before a rise yet again when the economy eventually reopens.
The novel coronavirus has reached its peak of cases/day in the United States with 68,000 cases on Friday. This implies that the United States is currently facing some obstacles in controlling the spread of coronavirus which also signals the investors on the upcoming second wave of the virus. With Fed Chair Jerome Powell announcing that the economic recovery may be slower than expected and only expect interest rates to leave near 0 levels in 2022 and a huge market sell-off in the S&P and Dow Jones as well as the November elections coming up, it will be interesting how the US economy will navigate this pandemic and the economic uncertainty this year.
The M Word 