Markets continue to lack a clear direction, with equities remaining range-bound below recent highs. This ‘holding pattern’ is justified. The shape of the economic recovery remains unclear and most (not all) of the monetary and fiscal stimulus measures around the world have been announced already. The market is likely now waiting for more information on the severity of the COVID-19 pandemic and shape of the macro-economic recovery. The virus remains an enigma, with no consensus on the likely trajectory of its spread or timing on effective vaccines and treatments. On that front, investors will just have to wait and see. With respect to the shape of the economic recovery, we have much more useful data that can guide our thinking.
In the US, the latest economic data releases paint a mixed picture. New orders of durable goods rose by 0.4%, month-on-month (MoM) in August – well below the previous month’s increase of 11.7%, and below the expectations for a 1.5% rise. Meanwhile, orders of non-defence capital goods excluding aircraft (a proxy for business spending) rose 1.8%, below July’s 2.5% but above expectations for 0.5%. Sales of new single-family homes were a positive surprise, jumping 4.8% MoM in August to more-than 1 million houses. This was a significant beat against expectations for less-than 900,000, and the highest reading since September 2006. These latest data indicate the US economy is recovering, but the pace of recovery is slowing.
In Europe, the recovery continues, but at a slow pace. The Flash Eurozone PMI stood at 50.1 in September – marginally above the crucial 50-level that indicates expansion. It also looks as though Germany’s business morale has stalled: the IFO Business Climate Indicator for Germany rose by 0.9 points to 93.4 in September – the highest it’s been since February, but below expectations for 93.8. Christine Lagarde (Head of ECB) told an audience on the 28th of September that Eurozone consumer spending had increased significantly, although uncertainty about continued employment and income continues to hold it back. The case is similar for business investment, which has improved, but remains constrained by weaker demand and elevated uncertainty. Europe is recovering, but it’s slow going.
In China the story is more positive, with multiple signs showing that the recovery is picking up pace. Industrial profits grew 19.1%, year-on-year (YoY) in August – similar to July’s figure and the fourth straight month of growth. The country’s official manufacturing PMI for September came in at 51.5 (up from 51 in August), while the Caixin Manufacturing PMI increased to 53. The Caixin Services PMI also rose to 55.9 in September from 55.2 in August. This combination of continued positive profit growth and strong lead indicators leaves little doubt that the Chinese recovery is accelerating. China’s recovery, much like after the 2008-2009 financial crisis, is leading the world.
Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.
