US figures influence markets

US retail figures for April and how the Federal Reserve can buy bonds have made the news this week, with a range of other topics covered in the latest podcast from one of our partners at Architas. Enjoy…

In brief

* US retail sales figures for May were significantly higher than for April, with a jump of 17.7%. The consumer in the US is getting back to what they do best and that is spending.

* Last week the US Federal Reserve (Fed) announced a change in eligibility criteria, which means that they can now directly purchase corporate and high yield bonds. As a result, high yield bonds performed very well. There has been a lot of talk about the second wave of Covid-19 cases around the globe.

* The market, to this point, hasn’t paid much attention because there has been only a localised pickup in cases. If it spreads into something more meaningful then it could really impact the market.

Our view

Mixed signals from US data?

Retail sales figures for May were significantly higher than for April, with a jump of 17.7%. Auto sales rose 44%. And if you think about how people buy autos in the US, they generally do it through financing. When the Fed cut interest rates, it reduced the payments on these financing deals, which was a real driver of auto sales. The US also saw clothing and accessories up quite aggressively, with an improvement of 188% on the previous month. As you can see, the consumer in the US is getting back to what they do best and that is spending!

How have US jobless figures been doing?

This is something that the market is going to focus on as a clear sign of the recovery, because when the unemployment rate comes down it should translate into growth in the economy. If we look at the initial jobless claims, it’s showing that 1.5 million people filed last week and the market was hoping that it would be 1.3 million. A little bit worse than expected, but what people are focused on is the how many people are continuing to claim unemployment benefits. And that number came in at 20.5 million. The market was hoping that number would come down to about 19.8 million.


Was there any news on China’s recovery?

What we see in China is an improvement in the demand side of the economy, particularly with consumer spending, which has been slower to recover compared to production. It seems that consumers have gradually resumed spending. Restaurants, which had underperformed significantly due to Covid-19 concerns, are improving moderately. Also, production levels have broadly returned to normal levels. Industrial production showed a solid recovery, rising 4.4% year on year, slightly below market expectations. The modest undershoot was most likely driven by weak global demand and export growth. These manufacturing figures show the recovery or normalisation process.

And how has China’s central bank responded?

One thing that has changed recently is the mixed signals from policymakers in China. Their change in rhetoric is because activity has picked up and we’re seeing the virus dying out in China, notwithstanding the slight uptick in Beijing last week. They believe the recovery is becoming embedded.

On the other hand, the Fed is extending its bond-buying programme. Yes, last week the Fed announced a change in eligibility criteria, which means that they can directly purchase corporate and high yield bonds. As a result, high yield bonds performed very well. And investors renewed their interest in this asset class with strong flows into those areas.

What is happing this week?

On Tuesday, we’ve got a raft of PMI (Purchasing Managers’ Index) data being released. A closely-watched gauge on how services and manufacturing activity is doing. We expect it to improve because we’re coming off a low base. We also have US personal spending figures being released. With easing lockdown measures, we expect to see people go out and spend. But the real focus is going to be Covid-19 cases. There has been a lot of talk about the second wave of cases around the globe. The market, to this point, hasn’t paid much attention because there has been a very localised pickup in cases, but if this spreads into something more meaningful, then it’s going to really impact the market.

What next for investors?

* Signs that the consumer has decided to start spending, as lockdown measures ease, should boost market sentiment.

* Elsewhere, stock markets have started to focus on issues outside of the global pandemic, with Brexit back on the agenda.

* In the meantime, patience and a long term view might be needed while waiting for a revival of economic activity and asset prices.

Listen to the latest podcast HERE

* Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire and the surrounding area, but not limited to the region.