Jonathan Marriott, Chief Investment Officer
Last month, when the US non-farm payrolls showed better numbers, President Trump held an unscheduled press conference to herald the improving economy in the face of coronavirus. This week, however, we have seen the preliminary gross domestic product number that shows an annualised decline of 32.9%. The continuing jobless claims, published weekly, showed a rise for the first time since May. President Trump promptly tweeted that the presidential election in November would be fraudulent and the election should be delayed (read here for more on the US election).
Meanwhile, the US employment benefits, effected to counter the economic damage of the pandemic, will expire this weekend without a replacement agreed as yet. In an election year, it is not in the interests of the incumbent president to be in the middle of an economic crisis. Both the Republicans and the Democrats agree the need for a further fiscal package, but appear to be unable to agree the details. The US Federal Reserve (Fed) met this week announcing an extension of their emergency lending programmes to the end of the year. Whilst Fed Chairman, Jay Powell, indicated that they may need to do more, he called for fiscal action from the politicians. We may see more from the Fed at the September meeting, but all eyes will be on Capitol Hill this weekend hoping for progress on a new package on Monday.
In Europe, coronavirus is showing signs of a second wave and the UK imposed quarantine restrictions on people returning from Spain. With numbers rising again elsewhere in Europe, we expect to see further re-imposition of travel restrictions. In the North of England, some restrictions have been imposed again. This, combined with the US news, weighed on the equity markets on Thursday.
Thursday also saw results from some of the large tech companies in the US, including Amazon. The growth of online sales has been astonishing, with units shipped up 57% year on year. Even as restrictions lift, people appear reluctant to shop in person. Retail shops on the high street were already in decline and the pandemic has hastened their demise. The UK furlough scheme has prevented a steep rise in unemployment, but as this unwinds we will see more job losses, particularly in the high street. Although Chancellor Rishi Sunak has announced measures to ease the end of the furlough scheme, this may just be delaying the inevitable for jobs in the retail sector. Instead of talks of saving the high street, discussions should focus on alternative uses for the empty spaces and re-training for those in the sector. I fear the bustling high street full of shoppers has been consigned to history.
We would expect low interest rates and governments pumping money to boost inflation. However, rising unemployment is likely to counter this impact. If inflation remains low, interest rates will stay at historically low levels and rising unemployment is likely to be met with additional fiscal stimulus. This is positive for asset prices and equity markets in general. Nevertheless, the shifts in the way we shop and do business means that dispersion will remain high and a selective approach will remain appropriate.
As we move towards a fractious US election, reaching agreement on action may be difficult and President Trump will be ready to impugn anything that threatens his hold on power. This will add volatility to markets that are already sensitive to a resurgence in the pandemic. However, it is in no party's interest for the economy to slump and unemployment to rise. So we can expect fiscal and monetary stimulus to continue at least until a vaccine is widely available.
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