The Week Ahead: Waiting for Congress

Summer markets are strange creatures at the best of times, as liquidity is often reduced and moves can leave traders scratching their heads in exasperation. Of course, this year market participants may just be working from home instead of entirely away from their desks leaving others to look after their positions. Of course, major data releases still carry equal significance and the US jobs report released Friday is always no exception and worth revisiting, due to the wider implications of other events going on Stateside in Washington. 

The headline non-farm payrolls rose 1.763mn in July, above the 1.5mn consensus, with unemployment falling to 10.2%. Wage growth came in at 4.8% but is a largely irrelevant number at the moment as it is caused by fewer people in low-income employment as they have been made redundant, so ‘average’ hourly earnings are skewed higher versus last year.Amongst all the impressive gains, we should remember that the number of people in work remains some 12.8mn lower than before the pandemic kicked off. 

The most relevant jobs number from the US as we have mentioned before is the more timely weekly jobless claims and this shows that roughly 31mn people are claiming benefits, which means they will also be subject to a drop in income of $600 due to the expiry of the unemployment benefit payment. 

Rounding this subject up, it seems the good jobs report last week supporting the narrative of recovery may well release the pressure on lawmakers in Washington to finalise speedy agreement on the new fiscal deal. This is the key driver for markets this week and any delay to a phase IV deal puts a dampener on risk sentiment. 

Closer to home, sterling traders woke up extra early last weekfor the ‘Super Thursday’ Bank of England meeting, and were met with a couple of surprises, though rates and QE were left unchanged as expected. Growth expectations were less pessimistic than they had been in May and inflation is seen to return to target in two years. This suggests the MPC doesn’tthink it will need to add any new stimulus at all – quite a positive spin on current events it must be said.

Negative rates were discussed, but only as part of the Bank’s toolbox and there were no hints or imminent plans to use them. The money markets have taken note and reigned in substantially the chances of a rate cut below zero and Sterling was the best performing major currency on the day. 

This week, June’s monthly GDP figure will take some of the headlines with analysts expecting a reading in the region of +8% as more of the economy opened up. But the bigger news will be the full quarterly number with expectations of a fall of more than 20%. This exceeds even Spain’s decline of 18.5%although we should see a material rebound in GDP with July’s data. Perhaps the real test will come in the Autumn when local lockdowns have an impact, there are no more ‘lockdown releases’ to boost the economy and the furlough scheme is wound down – over to you Chancellor Rishi. The latter data especially will be a focus this week though the latest jobs figures will not yet reflect the Bank of England’s expectations of a 7%+ unemployment rate.