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UK GDP roars in Q2 2021
An outstanding showing from the services sector and lifting of COVID-19 restrictions have helped fuel a surge in the UK’s gross domestic product last quarter.
A productive quarter for the UK economy
Data from the Office of National Statistics (ONS) reveals the UK economy grew 4.8% in Q2 2021.
That falls a shade below the Bank of England’s 5% prediction. The ONS, however, was quick to point out the UK’s growth rate was faster than those recorded in the US, France, and Germany. In fact, this was the fastest level of growth seen in all G7 nations.
For context, the UK economy showed a -1.6% contraction.
The economy is now 4.4% below pre-pandemic levels.
GBP/USD stayed relatively flat on the news, trading around the $1.380 level.
Services turbo-charge the British economy
Between April and May, pandemic restrictions were gradually lifted, helping stimulate a services sector boom.
Accommodation and food services recorded exceptional acceleration to the tune of 87.8%, as customers flocked to bars, clubs, and restaurants. The Home Nation’s respective runs in the Euro 2020 tournament, including England making it to the final, was a big catalyst as revellers took the opportunity to watch their teams in pubs or on big screens in communal spaces.
Travellers were also able to stay overnight outside their own homes for extended periods too. This helped increase revenues in the hotel and accommodation sector. Overseas travel rules are still not particularly clear, so we may see more home nation holidays as the summer progresses.
Food and beverage services grew 10% in the last quarter too.
Services represents 80% of the UK economy, so it’s encouraging to see the sector get a big boost in Q2. In total, the services industry grew 1.5% in June.
Where next for the UK economy?
The growth in services is extensive and a real motor of economic expansion, but the pandemic and its effects are still being keenly felt.
Supply chain issues, partly from Brexit and partly from the pandemic, will play a role in slowing growth going forward.
Take construction as an example. While building activity picked up in the second quarter, builders have noted they may face shortages of key materials like timber, steel, and masonry as the year progresses.
This is also true of UK manufacturing. We’ve seen in recent PMI readings that British factories’ output growth has slowed. High commodities prices and supply chain issues are weighing on the manufacturing sector.
A shortage of workers, exacerbated by the “pingdemic” of new COVID cases impacting on new hires and workers attending work, also played a role in creating future uncertainty.
However, 75% of all UK adults have now had two vaccine jabs. Cases are also falling. That’s good news all round.
Inflation is still the ever-expanding elephant in the room. Firms may transfer their higher input costs onto consumers, which may result in less spending if prices continue to rise. A general shift towards experiences, rather than consumer shopping, could also happen, which is something we’ve seen in the US recently.
Third quarter predictions are mixed. At the top end, The Bank of England is forecasting 3% growth. Other analysts, such as those at ING, are predicting 1.5% GDP growth in the third quarter.
Deloitte, on the other hand, has a much rosier outlook. It believes the British economy can reach its pre-pandemic levels by the end of the year.
“The pace of repair in the UK economy has been extraordinarily fast. It took five years for the economy to recover output lost in the financial crisis. The damage caused by the pandemic has been far worse and the recovery far quicker”, Deloitte Chief Economist Ian Stewart
“Massive government support has helped preserve capacity and speed up the rebound. This experience will strengthen the hands of those who believe that government – and public spending – should take a far more active role in countering conventional recessions.”
Week ahead: OPEC+ meets as Delta variant puts pressure on oil markets
OPEC-JMMC August meetings, pushed back after July’s tough negotiations, take place this week. Traders will look to the cartel for a response to potential dents to demand recovery caused by rising Delta variant numbers worldwide.
Elsewhere, UK Q2 GDP figures are released on hopes of strong growth while US CPI inflation is in focus too with July’s stats coming this week.
It’s fair to say July was a bit of a tense month for OPEC and its allies. It will be hoping to avoid further conflicts when it meets on Thursday this week.
The Cartel has been doing its best to not go overboard with production tapering. Given the relative strength of prices, despite last week’s wobble, its efforts to curb output to protect prices have been broadly successful.
Come July’s meeting, fractures began to appear in the OPEC façade. It’s always a balancing act when its members and allies get together in order to weigh each individual member state’s interests. Oil production is an integral part of all their economies after all. In this case, the UAE was pushing hard to lighten restrictions and redress base levels – something which Saudi Arabia was resisting.
That’s all spilt milk under the bridge now. A deal was reached, after delayed and reorganise meetings and hectic negotiations on both sides. The stoppers have been loosened. New baselines were awarded to members, including chief agitator the UAE, at the eventual outcome.
An extra 400,000 bpd will be added to OPEC+ production monthly volumes from August onwards. That should bring production up to about 2m bpd by the end of 2022. OPEC also confirmed it had extended its production cut deal until April 2022.
This month’s meeting, however, takes on a different hue as rising Delta variant COVID cases continue to mount worldwide. That could majorly impact demand recovery, and thus instigate some kind of retooling to OPEC+’s plans going forward.
A slowdown in Chinese manufacturing could also affect OPEC’s thinking. China is the world’s largest crude importer, so if less oil is needed to fuel its factories then prices could drop as markets recalibrate to lowered Chinese crude imports.
Whatever happens, OPEC will no doubt be extremely keen to avoid any fortnight-long negotiations as happened in July. Either way, Thursday’s meetings will be an interesting watch.
This week also sees the publishing of the UK’s preliminary Q2 growth figures.
Strong vaccine rollout coupled with dropping COVID cases are expected to have supported growth in Q2, following the UK’s1.6% contraction in Q1. Higher consumer spending is likely to be the main growth engine, however, accounting for roughly 70% of gross domestic product between May-July.
So, what are the forecasts? The British Chamber of Commerce (BCC) believes Q2 growth will clock in at 4.1% in 2021’s second quarter.
“The UK economy is in a temporary sweet spot with the boost from the release of pent-up demand, if restrictions ease as planned, and ongoing government support expected to drive a substantial summer revival in economic activity, underpinned by the rapid vaccine rollout,” the BCC said in a statement.
Looking long term, overall GDP growth predictions float between the 7-8% mark. The Confederation of British Industry’s forecasts sit at the optimistic end of the scale at 8.1% for the year.
As it stands, however, the UK’s domestic output is still some 8.8% lower than before the pandemic. Long term growth will likely cool with the effects of inflation and lower government support as we move into 2022.
Speaking of inflation, the week’s other key data release is the US consumer price index figures for July.
If the pace of inflation continues, then it will really test the Fed’s resolve. Chairman Powell has committed to the historically low cash rate, and seems content to let the economy run hot, but is this really sustainable?
June’s CPI inflation already caused alarm for some economists. By rising 5.4% year-on-year, the index had risen at its fastest pace since August 2008.
So far, the Fed has characterised inflation as “transitionary” and is still sticking to its dovish outlook. Its data modelling calls for 3% headline inflation by the end of 2021, before falling back to 2.1% in 2022.
Given consumer spending is the US economy’s major growth engine, accounting for roughly 68% of GDP, it’s little wonder why some observers are feeling tetchy and calling for more action. Gross domestic product missed growth expectations in Q1, for instance, as high prices limited consumer spending.
July’s CPI reading may thus be doubly important for the Fed.
It’s a subdued week for earnings on Wall Street, but we still have some large caps reporting. Headliners this week include Walt Disney, Palantir, and Airbnb who all report in on Thursday.
Make sure you check out our US earnings season calendar to see which large caps are still due to share quarterly earnings this week and beyond.
Major economic data
|Tue 10-Aug||10.00am||EUR||ZEW Economic Sentiment|
|10.00am||EUR||German ZEW Economic Sentiment|
|Wed 11-Aug||1.30am||AUD||Westpac Consumer Sentiment|
|1.30pm||USD||Core CPI m/m|
|3.30pm||OIL||US Crude Oil Inventories|
|Thu 12-Aug||ALL DAY||OIL||OPEC-JMMC Meetings|
|7.00am||GBP||Prelim UK GDP|
|1.30pm||USD||Core PPI m/m|
Key earnings data
|Mon 9 Aug||Tue 10 Aug||Thu 12 Aug|
|The Trade Desk (TTD) PMO||Coinbase Global (COIN) AMC||Palantir Technologies (PLTR) PMO|
|Viatris (VTRS) PMO||Airbnb (ABNB) AMC|
|Walt Disney (DIS) AMC|
UK growth cools and is there still more downside to this market pullback?
Reopening can’t come soon enough: UK GDP expanded by a meagre 0.8% in May, led by indoor hospitality, but held back by a global chip shortage hitting car production. The monthly growth rate was below the 1.5% forecast and leaves the economy 3.1% below its February 2020 pre-pandemic size.
Stocks sold off on Thursday. The kind of worries that have seen narrowing breadth and overbought conditions for the major indices broke over the broader market. Concern about China regulatory pressure on big tech, and concerns about antitrust stuff in the US have gnawed away at the margins. Worries about the rise of the Delta variant globally are also a factor – Tokyo’s decision to ban spectators was taken as a warning that Covid the pandemic is far from over. The biggest worry it seems it this sense that we have hit peak growth – and hit peak expectations a couple months back as evidenced by the top in the commodity market. The last one-two months has seen mega cap growth do all the lifting as the reflation trade unwinds but even with lower rates we saw the market come off yesterday, so there is just this broad sense of being overblown after a 5% rally for the S&P 500 in the last fortnight, while the Treasury market is not making much sense at all and the recent plunge in yields is apparently without any justification and being explained away as a technical thing. This is true but it is not entirely the whole story, and we now face the risk of the 10yr being at 1% at year end and not 2%. Or at least that is what the market seems to be saying – in fact I’d expect once this flushing out of the market (painfully), normal service will resume with the Fed beginning to signal the taper in Aug/Sep.
The US 10yr note yield rallied off a low at 1.25% to reach 1.33% this morning. US equity indices finished Thursday down but well off the lows. The S&P 500 fell 0.86% to 4,320 after hitting a session low of 4,289. The Dow Jones declined 260pts but was about that much off the low of the day by the close. The S&P 500 could still drop another 100 pts to the 4215 area to perform the tap on the 50-day SMA that has been a feature of recent pullbacks. After running up 5% in just two weeks it was ripe for a pause, if not a deeper pullback – the 50day line looks appealing. Current trailing PE of 30 for the S&P 500 suggests it’s heavily overbought – earnings season kicks off next week and with high expectations and the broad market +15% YTD it could be a sell the news affair.
Still a bull market: corrections like these are seen as ‘healthy’, rotation is about positioning for growth not running for cover. Bank of America’s closely followed Flow Show notes that ‘poor level of yields and Wall St dependent Fed remain key reasons why stocks and credit investors still believe in TINA’. Futures this morning indicate a higher open on Wall Street.
The Dow transports index slipped 3% with Biden taking aim at rail and sea shipping with an executive order addressing competition in the US economy. Pain for meme stocks continued with AMC, GME falling sharply in early trade before ending the day higher in an impressive turnaround. Meanwhile, the US is to place more Chinese companies on its blacklist. San Francisco Fed president Mary Daly warned on prematurely declaring victory over the pandemic.
Signs of inflation cooling? China’s factory gate price growth cooled in June, as the rollover in the commodity market following the May peak eased cost pressures. China’s producer price index still rose 8.8% in June, but this was down from the 9% growth in May.
The FTSE 100 is higher in early trade Friday to recover some of the ground lost on Thursday when it declined 1.7%. Continues to tread a 3-month range as the 78.6% Fib level at 7.155 continues to prove a tough nut to crack.
S&P 500: Looking for the 50-day tap on the S&P 500 before the weakest hands are flushed out?
EURUSD: looking for a breakout of the trendline, potential bullish crossover on the daily MACD coming?
UK preliminary GDP q/q preview (Wed, 07:00 BST)
The Bank of England anticipates UK economic output contracted by 1.5% in the first quarter of the year, which should be pretty much our reference point for the print on Wednesday, with the consensus at –1.6%. The –2.2% in January was stronger than expected and was followed by a 0.4% expansion in February. Whilst March data does not capture the reopening of non-essential shops, there is evidence that spending and activity were already picking up before the Apr 12th easing of lockdown restrictions. Moreover, the UK economy has proved to be a lot more resilient to lockdown 3 than lockdown 1. Put that down to the adjustment of people and business to the displacement; for instance the embrace of remote working, as well the lockdown rules themselves being less restrictive to economic activity than the first lockdown a year before. Better and more comprehensive testing has also played an important part in keeping in most economic activity going.
The March IHS Markit / CIPS services PMI showed a strong rebound in March, with the index rising to 56.3 from 49.5 in Feb. The robust PMI coupled with other evidence of increased card spending and mobility suggest a solid bounce back in the final month of the quarter, with a month-on-month expansion of around 1.3% expected. Whilst not a direct read on the Q1 numbers, Barclays today says that April card spending has exceeded pre-pandemic levels.
But this all remains rear-view fare: the market is more interested in the +7% growth expected in 2021 which is going to imply some pretty impressive expansion in the third and fourth quarters in particular. Strongest expansion since WW2 is more eye-catching than a mild contraction in Q1 that has been well and truly priced. Going forward, we are not really going to know what the true size of the economy really is for some time because there has been a huge displacement in economic activity as well as the velocity of people. Adjusting to this new normal will take time and measures of output will always lag what is really happening. Moreover, as Friday’s nonfarm payrolls report in the US evinces, hard data is liable to being way off forecasts because it’s so hard to get a handle on what we are comparing it with; furlough and other emergency schemes masked the true depth of the economic contraction. Just as the pandemic led to an unprecedented contraction, there is not really a playbook for this recovery, so we should be careful not to over-read individual prints.
By way of context, the NIESR this morning estimates that the UK economy will recover 2019 levels by the end of 2022. The recovery is strong but it’s coming from a low base. To add further context, as of Feb the British economy remains 7.8% smaller than it was a year before. Moreover, it is still 3.1% below where it was at the peak of the post-lockdown recovery in October 2020 – evidence that this long third lockdown over the first quarter has set things back some way. NIESR also estimates that UK unemployment will peak at 6.5% rather than 7.5%, reflecting the extent to which government support schemes have masked what is really going on.
Week Ahead: UK Q1 GDP + US retail sales & CPI releases
The UK’s Q1 GDP figures are released today, setting the tone for the year to come. Will economists’ optimistic outlines ring true? In the US, retail sales and CPI data reports are due, possibly highlighting potential inflation as the economy surges onwards. Elsewhere, Wall Street braces for another earnings blitz.
UK GDP Q1 to match optimistic outlook?
First quarter GDP figures are expected to show a milder contraction than first feared as the country entered a period of lockdown. Last week saw the Bank of England said it expects the economy to have contracted by 1.5% in the first quarter. Nevertheless, the quarterly Monetary Policy Report saw the MPC raise its full-year growth outlook for the UK economy to a full 7.25% increase in GDP.
This view has been mirrored by economists. Instead of a gloomy portrait, estimates instead paint a sunnier view for UK’s economy. Maybe not golden sunlight uplands just yet, but promising numbers.
Consensus estimates forecast the drop in GDP to be anywhere between 1 and 2.5%. Barclays, Oxford Economics and ING are cleaving closer to the top end, predicting a 2-2.5% decline. Deloitte, on the other hand, puts the figure at -1.7%.
We keep banging the vaccine drum, but the impact of the speedy rollout and implementation of a robust nationwide vaccination regime cannot be underestimated. More and more people are heading back to work; lockdown restrictions are lifting; pubs and restaurants will soon be fully open; construction is preparing for double digit growth.
Indeed, looking to longer predictions, we could be looking at some of the fastest UK GDP growth for 30 years.
EY ITEM Club’s spring forecast suggests 6.8% annualised growth for the whole of 2021, with the economy returning to pre-pandemic levels by Q2 2022. Goldman is even more optimistic, according to analyst Sven Jari Stehn, with 7.8% forecast.
Once lockdown lifts fully, and the economy gets back to normal, we’re probably going to see some of the biggest economic expansion figures for decades. It all depends on how successfully the country navigates out of lockdown.
All eyes on US CPI as inflation stirs
Inflation could be about to start nibbling at the US economy. March’s CPI data showed a month-on-month jump, so this week’s release charting price rises in April takes on renewed importance.
Looking at March’s data consumer prices rose 0.6% against February, while they were 2.6% higher than in March 2020. A 9.1% rise in gasoline fuelled the rise in CPI, which was higher than Dow Jones estimated 0.5% monthly and 2.5% annual growth.
Inflationary pressure on the economy is going to be one to watch going forward. Higher consumer prices could prove a catalyst towards raising the base rate, something which Fed Chair Jerome Powell has so far steadfastly refused to do. At present, the Fed’s strategy is to let the economy “run hot”.
But still, markets have been pricing in higher growth an inflation across the year so far. Government bond yields have caused a fair few rumbles this year too, with yields reaching some of their highest levels since before the pandemic. Overall, the opening up of the economy, plus major government stimulus, is contributing to an inflationary environment, so the Fed should be watching this month’s CPI data with a keen eye.
Can April match March’s smash hit US retail sales?
We’ve seen the US economy step on the gas in 2021, surging 6.4% in Q1. Across the board, the outlook is brighter, if clouded slightly by the shadow of inflation. April’s retail stats will be reported this week, following a blowout in March, but a change in where US consumers spend their cash could be on the way.
Total US retail sales grew a huge 9.8% month-on-month in March. A combination of warmer weather, lighter lockdowns, and stimulus spending pushed sales higher. Year-on-year growth was colossal, coming in at 30.4%.
The highest growth areas were sporting goods (23.5%), clothing (18.3%), and motor vehicles (15.1%).
However, with the economy opening up again, US spenders may turn their attention to other areas. “Experiences” and trips could see large gains this month, as travel restrictions are loosened, while spenders may also start pumping money into hospitality. This could take further cash out of the retail sector, so growth in April may not be as high as March’s terrific performance.
Earnings season continues on Wall Street
Wall Street readies itself for a fresh week of large caps sharing quarterly earnings.
Some titans are reporting in the next earnings season phase. Disney will be one to watch. Parks have reopened, but that will be too late to make any real impact on Q1 earnings. Instead, the focus will be on its Disney+ streaming service, which hoovered up subscribers across the last year.
Chinese e-commerce behemoth Alibaba’s Q1 earnings will be in focus too. The giant beat estimates by an average of 19.29% across the previous two quarters and could be on track to do so again. Zack forecasts are in the positive, which is normally a good sign for an upcoming earnings beat.
See below for a round up of large caps reporting this week.
Major economic data
|Mon 10-May||02.30am||AUD||Retail sales m/m|
|Tue 11-May||10.30am||AUD||Annual budget release|
|Wed 12-May||07.00am||GBP||Prelim GDP q/q|
|1.30pm||USD||Core CPI m/m|
|3.30pm||USD||US Crude Oil Inventories|
|Thu 13-May||1.30pm||USD||Unemployment Claims|
|3.30pm||USD||US Natural Gas Inventories|
|Fri 14-May||1.30pm||USD||Retail Sales m/m|
|1.30pm||USD||Core Retail Sales m/m|
|2.15pm||USD||Industrial Production m/m|
|3.30pm||USD||Prelim UoM Consumer Sentiment|
Key earnings data
|Mon 10-May||Duke Energy||Q1 2021 Earnings|
|Air||Q1 2021 Earnings|
|Mariott Inc.||Q1 2021 Earnings|
|Tyson Foods||Q4 2021 Earnings|
|Panasonic Corp.||Q4 2021 Earnings|
|Tue 11-May||Palantir Technologies||Q1 2021 Earnings|
|Electronic Arts||Q4 2021 Earnings|
|E.ON||Q1 2021 Earnings|
|Alstrom||Q4 2021 Earnings|
|Nissan||Q4 2020 Earnings|
|NAMCO BANDAI||Q4 2021 Earnings|
|Wed 12-May||Toyota||Q4 2021 Earnings|
|Allianz||Q1 2021 Earnings|
|Deutsche Telekom||Q1 2021 Earnings|
|Merck||Q1 2021 Earnings|
|Bayer||Q1 2021 Earnings|
|Hapag-Lloyd||Q1 2021 Earnings|
|Fujifilm||Q4 2021 Earnings|
|Polyus Gold||Q1 2021 Earnings|
|Thu 13-May||Alibaba||Q4 2021 Earnings|
|Walt Disney||Q2 2021 Earnings|
|Airbnb||Q1 2021 Earnings|
|Coinbase||Q1 2021 Earnings|
|Petrobras||Q1 2021 Earnings|
|Telefonica||Q1 2021 Earnings|
|BT Group||Q4 2021 Earnings|
|Mitsubishi||Q4 2021 Earnings|
|Suzuki||Q4 2020 Earnings|
|Rakuten||Q1 2021 Earnings|
|Burberry||Q4 2021 Earnings|
|Fri 14-May||Rosneft||Q1 2021 Earnings|
|Honda||Q4 2021 Earnings|
|UNICHARM||Q1 2021 Earnings|
|Knorr-Bremse||Q1 2021 Earnings|
|Toshiba||Q4 2020 Earnings|
Week Ahead: The economic outlook for the EU, US CPI release & UK GDP unveiled
In the week ahead, the EU reveals what could be a less-than-optimistic economic forecast. The UK is also releasing GDP figures – is a double dip recession on its way? Over in the US, CPI data is released which could point towards inflation, and earnings season continues on Wall Street with Disney and other large caps reporting in.
US CPI – is inflation going to ramp up?
Are the dogs of inflation starting to bark? We’ll find out in the US this week as CPI data for January is reported.
The Labor Department reported the CPI rose 0.4% in December, following a 0.2% rise in November. Consumer prices may have risen, but the key driver here was gasoline. Gas prices jumped 8.4% in the last CPI review period, account for 60% of the index’s overall growth. Food, on the other hand, rose 0.4%.
Excluding volatile food and energy prices, CPI growth in December was at 0.1%, kept in check by a decrease in the price of used vehicles, as well as drops in airfares, health care costs, and recreation activities.
Last month’s CPI readings were in line with economists’ expectations. Overall, the CPI rose 1.4% in 2020, which is the smallest yearly gain since 2015, representing a drop from 2.3% in 2019.
There are mixed outlooks going forward. On one hand, over $has been pumped into the economy via stimulus packages so far, and President Biden has plans to add an extra $1.9 trillion. Whether that full figure makes it through Congress, we don’t know yet, but either way more stimulus is probably on its way, which could cause inflation to breach targets.
On the other, price pressures may stay more benign. Some 19 million Americans are on unemployment benefits. Stress in the labour market could also curbing wage growth and increasing rental vacancy rates are could restrain rental inflation too.
A not so bright EU economic forecast
Europe could be about to head into a double dip recession. That’s the stark headline as the EU shares its economic forecast in the week ahead.
The last quarter of 2020 pulled back any gains made that year, with the EU’s overall economy retracting 0.5% in 2020’s last 3 months. It’s the same story we’ve seen across the year: lockdown loosens, GDP goes up, but virus cases surge; lockdown tightens, GDP shrinks, virus cases still increase.
The EU is facing particular difficulty in its vaccine programme, although coordinating efforts across the bloc’s many constituent members requires almost Olympian effort. So far, it doesn’t look like it is paying off. Difficulty in sourcing vaccine supplies is one aspect of the EU’s vaccination woes, in particular the recent EU/UK spat over exports of Oxford’s AstraZeneca vaccine.
The euro has fallen against both the dollar and pound too, with a euro now worth about 88p at the time of writing, and roughly $1.20 – nine-month lows for the currency, and not a great indicator of a healthy economy.
Will Europe double dip? It’s possible. Basically, the bloc needs to pick up the pace when it comes to vaccination and get people out and about again. Stimulus will play a key role here too, as the first cash from its €750bn package should start reaching the EU’s economy in 2021’s first half. A reason for hope? Maybe, but for now the forecast isn’t particularly bright.
UK GDP – will the UK be double dipping?
The UK releases its latest quarterly GDP data this week. Q3 2020 showed rapid 16% growth, according to headline figures published by the House of Commons Library, but that was still down 8.6% compared with the previous year. Will we see a contract or continued growth in the upcoming quarter’s figures?
The Bank of England’s report from 4th February is actually better than previously feared. UK GDP is expected to have risen a little in the last quarter, to a level roughly 8% lower than Q4 2019.
This is a little surprising. Most of the UK returned to tough lockdown restrictions during November, with non-essential shops opening. While some were let open again in the run up to Christmas, and businesses of all sorts adapting to changing conditions, it may still not be enough to avoid recession. That said, it was spending season as Christmas and Black Friday fall in the last quarter. Perhaps they‘ve played a role in keeping the UK economy afloat.
Recession will be still be on everyone’s lips watching Q4’s official GDP figures, as they’ll be a barometer for what’s going to happen in Q1 2021. Lockdown measures are tight across the UK, and non-essential businesses remain shuttered for the foreseeable. Goldman Sachs has reconfigured its UK Q1 2021 outlook for 1.5% growth.
A mixed outlook then, but there is a small sliver of sunlight through the cloud. The UK’s vaccine rollout has been one of the most successful in the world, with evidence suggesting the spread of the virus is slowing with vaccine uptake. But will businesses remain closed, GDP growth seems out of reach for the UK economy going forward. We’ll know more when official GDP figures are released.
Earnings season rolls on
Plenty of large caps are yet to report their latest earnings as earnings season rolls on Wall Street.
Disney looks one of the most interesting companies to watch this quarter. The House of Mouse has its fingers in multiple deep pies, but with key revenue streams falling off, like its theme parks and resorts, and of course cinema, it will have to prop those up through gains in other business areas.
It looks like its working already. Disney+, its own in-house streaming service, has already obliterated subscription forecasts. In April 2020, Disney was targeting 60-90m subscribers by 2024. As of February 2021, subscription numbers had already hit 87m. Now commentators put future subscriber levels in the 250m range.
As well as its own properties established and developed over decades, Disney’s acquisitions of Marvel and Star Wars basically put two of the most popular franchises in the hands of a company already used to owning, marketing, and creating obscenely popular entertainment properties. Basically, limiting access to both show’s films and TV series together on a single platform is exceptionally shrewd.
So, while earning may have slumped in physical media, digital output could help propel Walt Disney to a strong quarter.
Disney is now fourth on Fortune’s list of the World’s Most Admired Companies and first overall for entertainment. Its brand recognition is already immense, but, according to Fortune, its business operations are a textbook case of identifying how and where to succeed.
A look at some of the key large caps reporting this week can be found below.
Key economic data
|Wed 10 Feb||1.30pm||USD||CPI m/m|
|1.30pm||USD||Core CPI m/m|
|3.30pm||USD||US Crude Oil Inventories|
|Thu 11 Feb||10.00am||EUR||EU Economic Forecasts|
|1.30pm||USD||US Unemployment Claims|
|3.30pm||USD||US Natural Gas Inventories|
|Fri 12 Feb||7.00am||USD||Prelim GDP q/q|
|Mon 8 Feb||Softbank||Q3 2020 Earnings|
|Take Two||Q3 2021 Earnings|
|Loews||Q4 2020 Earnings|
|Hasbro||Q4 2020 Earnings|
|Namco Bandai||Q3 2021 Earnings|
|Tue 9 Feb||Cisco||Q2 2021 Earnings|
|Total||Q4 2020 Earnings|
|S&P Global||Q4 2020 Earnings|
|Daikin||Q3 2020 Earnings|
|DuPont||Q4 2020 Earnings|
|Honda||Q3 2020 Earnings|
|Q4 2020 Earnings|
|Ocado||Q4 2020 Earnings|
|Fujifilm||Q3 2021 Earnings|
|Nissan||Q4 2020 Earnings|
|Wed 10 Feb||Coca-Cola||Q4 2020 Earnings|
|Toyota||Q3 2021 Earnings|
|Commonwealth Bank Australia||Q2 2021 Earnings|
|General Motors||Q4 2020 Earnings|
|Heineken||Q4 2020 Earnings|
|Vestas||Q4 2020 Earnings|
|A.P Moeller-Maersk||Q4 2020 Earnings|
|IQVIA||Q4 2020 Earnings|
|Sun Life||Q4 2020 Earnings|
|Uber||Q4 2020 Earnings|
|Thu 11 Feb||L’Oreal||Q4 2020 Earnings|
|AstraZeneca||Q4 2020 Earnings|
|Schneider Electric||Q4 2020 Earnings|
|Duke Energy||Q4 2020 Earnings|
|Kraft Heinz||Q4 2020 Earnings|
|Credit Agricole||Q4 2020 Earnings|
|Tyson Foods||Q1 2021 Earnings|
|ArcelorMittal||Q4 2020 Earnings|
|UniCredit||Q4 2020 Earnings|
|Kellogg||Q4 2020 Earnings|
|Expedia||Q4 2020 Earnings|
|HubSpot||Q4 2020 Earnings|
|Fri 12 Feb||ING||Q4 2020 Earnings|
Thursday running order: Ocado Q4, UK GDP, ECB and US CPI
US stock markets hit fresh record highs in the early part of the session before paring gains and turning a little softer. European markets remain broadly higher, albeit more modestly than they were in the morning session. It’s a big day tomorrow with UK growth figures, the ECB meeting and some bumper US data all on the slate. In addition, we have earnings from DS Smith and Ocado to look forward to.
Traders are likely to be greeted with some more Brexit headlines – so far no is prepared to take a decisive position and cable continues to chop around the 1.33-34 area. This only shows that traders think both outcomes – deal or no-deal – are still very much in the running. We await signals from the dinner between Boris Johnson and Ursula von der Leyen this evening.
Thursday’s running order:
UK GDP: The UK economy grew 15.5% in the third quarter as since stalled reopening of the economy saw spending and activity bounce back between July and September. Nevertheless, the economy remains 9.7% smaller than it was before the pandemic and the November lockdown will smash the Q4 recovery. October’s data due tomorrow at 7am will likely show a modest 0.4% month-on-month gain.
ECB: The European Central Bank is likely to announce fresh stimulus by way of expanding its Pandemic Emergency Purchase Programme (PEPP) by an additional €500bn and extend it beyond the current Jun 2021 cut-off to the end of next year. This is not likely to produce much volatility in EUR crosses as there was a strong pre-commitment at the October meeting to taking additional easing measures in December. As we said at the time, it’s all but a down deal now that France and Germany have locked down and the economy is heading for another recession. Last time Christine Lagarde said staff were working on recalibrating all instruments, which means even interest rates could be cut further in addition to expanding QE envelopes, however any tweak to rates looks unlikely at this stage.
Recent survey data has been soft and hard data for November when it comes is not going to be pretty. Q4 is shaping up badly, though Lagarde and co may now be willing to jump the shark on vaccines and prep for a rosier 2021 – which would suggest no dovish surprise from the ECB. Inflation remains very weak and has been stable at –0.3% since September.
The stronger euro exchange is another headache for the ECB – traders will be closely watching for any jawboning by Lagarde around the recent euro strength. We should also look for extension of TLTROs and upping the tiering facility to help banks. Lagarde will look to show that the ECB will stay super-loose for as long as necessary but will lean hard on the fiscal side too and not want to do too much. Moreover, the advent of vaccines will keep the ECB from over-doing it now. As ever, the announcement is at 12:45 GMT and presser follows at 13:30.
US CPI and weekly unemployment claims: After a tame reading for October, core and headline CPI are seen ticking up marginally to 0.1% over last month and +1.1% year-on-year for the headline number and +1.8% for the core reading. US inflation expectations have hit 18-month highs, but it’s not thought that we will see a material imprint on last month’s figures – expectations seem to be more about the coming Great Monetary Inflation caused by central bank printing and pro-cyclical fiscal stimulus in 2021 as vaccines allow the economy to bounce back. Nevertheless, the latest PMI surveys for November showed the quickest rise in selling prices yet recorded, with the rate of inflation hitting a record high in the service sector and a 25-month high in manufacturing. Inflation may be coming, but probably not until the pandemic is over. Data on tap at 13:30 GMT with unemployment weekly claims numbers (seen at +723k vs 712k last week) coming at the same time.
Ocado Q4 trading statement: Ocado has been a big winner from the pandemic and shares are +75% YTD, putting in the top three FTSE 100 performers this year (after Scottish Mortgage and Fresnillo). Two key questions are on the lips of investors: how has the M&S tie-up fared and has Ocado been able to ride the November boom in grocery spending? It’s been operating at full capacity every day – any progress on increasing capacity will be another q for investors.
The Marks and Spencer partnership has now had a full quarter to deliver some initial indications of consumer demand. I’d expect the progress to be strong given both the rising demand for online and the increased consumer spend on groceries due to lockdowns.
Last time (Nov 2nd) Ocado raised its full-year EBITDA guidance to £60m from £40m. Given the massive surge in grocery sales in November reported by Kantar, which said sales rose 13.9% year-on-year in the four weeks to Nov 29th. A total of 6m households shopped online in November, with digital platforms accounting for 13.7% of all sales – both are records and may call for another, albeit modest, upgrade to the FY earnings. Kantar notes: Ocado demonstrated the trend, growing by 38.3% in the latest 12 weeks. This period also fully covers the time since Ocado started selling M&S products, during which its share of the chilled ready meals market has tripled to just over 3%. Shares were up over 2% today to 2,319p ahead of the announcement. Look for a push to 2,400p to recapture the Nov highs around 2,580p.
Week Ahead: UK GDP in focus, will labour data help ease recovery doubts?
There’s plenty of growth and labour market data in the docket this week to further improve the picture of the global economy, while sentiment data could provide some clarity on the outlook. The RBNZ will announce its latest policy decisions, and oil markets could see heightened volatility on reports from the International Energy Agency and OPEC.
UK Q2 GDP, smaller decline but longer recovery?
The first estimate of the UK’s Q2 GDP is due on Wednesday. Analysts have forecast a -20.4% drop on the quarter. Last week the Bank of England stated that it believes the Q2 drop will be “less severe” than initially predicted, although the timeframe for the recovery has been extended.
A second reading of Eurozone GDP is also due this week – the economy fell by a record -12.1% between April and June according to preliminary estimates and no changes are expected this time around.
Labour market data key as questions over recovery pace grow
Jobs data remains one of the key metrics used to measure the economic recovery from Covid-19 and the figures are coming under threat from fresh lockdowns in major cities and regions in the world’s largest economies.
The UK’s unemployment rate currently stands at 3.9% but some analysts are expecting the data for June to reveal a jump to 6%. The Bank of England’s latest forecasts predict the jobless rate will hit 7.5% by the end of the year. We’ll get figures for unemployment benefit claims for July as well.
Australia also releases monthly employment change and unemployment rate figures, while the weekly US jobless claims data remains a key focus.
Have fresh lockdowns hit consumer, business sentiment?
Consumer and business sentiment data this week includes Australia’s NAB Business Confidence and Westpac Consumer Confidence, the ZEW Economic Sentiment indexes for the Eurozone and Germany, and the latest US University of Michigan Consumer Sentiment index. Sentiment may have taken a knock from the new restrictions put in place to help control the spread of the virus.
Also of note this week are Chinese and US inflation rates and retail sales.
RBNZ interest rate decision
Recent economic data suggests the Reserve Bank of New Zealand may not need to make any further policy adjustments at this moment, although a rise in hedge funds betting against the Kiwi indicates the smart money is expecting more stimulus in the near future.
Q2 employment data showed a much smaller-than-expected drop in employment and, thanks to an upwards revision to the Q1 data, the jobless rate unexpectedly held steady at 4%.
Business inflation expectations have also risen from 1.2% to 1.4%, meaning the outlook for both areas the RBNZ is mandated to consider has improved.
IEA & OPEC oil market reports
As well as the weekly US EIA crude oil inventories data, commodity traders will also want to watch for the latest oil market reports from the International Energy Agency and OPEC.
Recent oil inventories data from the US has been bullish, showing a huge draw over the past two weeks. Traders will want to see that the IEA and OPEC expect a continued recovery in demand.
Highlights on XRay this Week
Read the full schedule of financial market analysis and training.
|07.15 UTC||Daily||European Morning Call|
|17.00 UTC||10-Aug||Blonde Markets|
|From 15.30 UTC||11-Aug||Weekly Gold, Silver, and Oil Forecasts|
|17.00 UTC||13-Aug||Election2020 Weekly|
|12.00 UTC||14-Aug||Marketsx Platform Walkthrough|
Key Events this Week
Watch out for the biggest events on the economic calendar this week:
|01.30 GMT||10-Aug||China Inflation Rate|
|01.30 GMT||11-Aug||Australia NAB Business Confidence|
|06.00 GMT||11-Aug||UK Claimant / Employment Change & Unemployment Rate|
|09.00 GMT||11-Aug||Eurozone / Germany ZEW Economic Sentiment|
|02.00 GMT||12-Aug||RBNZ Interest Rate Decision|
|06.00 GMT||12-Aug||UK Preliminary Q2 GDP|
|09.00 GMT||12-Aug||Eurozone Industrial Production|
|Pre-Market||12-Aug||Tencent Holdings – Q2 2020|
|12.30 GMT||12-Aug||US Inflation Rate|
|14.30 GMT||12-Aug||US EIA Crude Oil Inventories|
|12-Aug||OPEC Monthly Oil Market Report|
|After-Market||12-Aug||Cisco Inc – Q4 2020|
|01.30 GMT||13-Aug||Australia Employment Change / Unemployment Rate|
|06.00 GMT||13-Aug||Germany Finalised Inflation|
|08.00 GMT||13-Aug||International Energy Agency Oil Market Report|
|12.30 GMT||13-Aug||Initial Jobless Claims|
|14.30 GMT||13-Aug||US EIA Natural Gas Storage|
|02.00 GMT||14-Aug||China Industrial Production and Retail Sales|
|09.00 GMT||14-Aug||Eurozone Q2 GDP 2nd Estimate|
|12.30 GMT||14-Aug||US Retail Sales|
|14.00 GMT||14-Aug||University of Michigan Sentiment Index|
Stocks pull back as California shuts up shop again, pound retreats
A rolling back of the reopening process in California and rising US-China tensions left Wall St and Asian markets weaker, with stocks in Europe following their lead as surprisingly good Chinese trade data was not enough to calm markets.
European equity indices fell back in early trade on Tuesday after stocks on Wall Street suffered a stunning reversal late in yesterday’s session. At one point the S&P 500 touched its highest since level since the end of February at 3,235 before sellers sold hard into that level and we saw a very sharp pullback to 3,155 at stumps.
After threatening to break free from the Jun-Jul trading range, the fact the S&P was unable to make good on its promise could signal fresh concerns about the pandemic but also investor caution as we head into earnings season – the fact is the market should not be up for the year. Although it’s hard to get a real feel for valuations because so many companies scrapped earnings guidance, the S&P 500 is trading on a forward PE multiple that is way too optimistic, you would feel. Earnings season gets underway properly today with JPMorgan and Wells Fargo.
The Nasdaq also slipped 2% as tech stocks rolled over, with profit-taking a possible explanation after a) a very strong run for the market has left prices very high and, b) signs of a pullback for the broader market indicated now might be a good time to take stock. Tesla rode a $200 range in a wild day of trading that saw the stock open at $1,659, rally to $1,795 and close down 3% at $1,497.
Stocks retreat as California rolls back reopening, US-China tensions rise
California’s economy is larger than that of the UK or France, so when Governor Gavin Newsom rolled back the reopening of the state on Monday, investors took notice. The closure of bars, barbers and cinemas among other business venues followed moves in economically important states like Texas, Florida and elsewhere, indicating the rate of change in the recovery is not going to improve.
Whilst the market had developed a degree of immunity to case numbers rising, it is susceptible to signs that the economic recovery will be a lot slower than the rally for stocks in the last three months suggests.
Overnight Chinese trade data surprised to the upside with exports up 0.5% in June and imports rising 2.7%, beating expectations for a decline and signalling that domestic demand is holding up well. Singapore’s economy plunged into a recession with a 41.2% drop in GDP, while Japan’s industrial production figures were revised lower.
Tensions between the US and China took another sour turn as the White House rejected China’s claims to islands in the South China Sea, which aligns the US with a UN ruling in 2016. It had previously declined to take sides – the move indicates Washington’s displeasure and willingness to go up against China on multiple fronts now.
UK economy undershoots forecasts with tepid recovery
The UK is already seeing what a non-V recovery looks like. GDP growth rebounded 1.8% in May, which was well short of the 5.5% expected. In the three months to May, the economy contracted by 19.1%. Some of the numbers are truly horrendous and it’s hard to see how the economy can deliver the +20% rebound required to get back to 2019 with confidence sapped like it is and unemployment set to rise sharply.
UK retail sales rose 10.9% in June on a like for like basis excluding temporarily closed stores, whilst overall sales rose a more modest 3.4% and non-food sales in stores were down a whopping 46.8% for the quarter. Suffice to say that headlines of rebounds mask many ills.
Sterling extended a selloff after the GDP numbers disappointed. The reversal in risk appetite late yesterday saw GBPUSD break down through the channel support and this move has continued to build momentum overnight and into the European morning session. The rejection of the 1.2667 region seems to have made the near-term top for the rally. The 38.2% retrace line at 1.250 may offer support before the old 50% retracement level at 1.2464.
WTI (Aug) was a little softer under $40 as market participants eye the OPEC+ JMMC meeting on Wednesday. This will decide whether to roll back some of the 9.6m barrels or so in production cuts by the cartel and allies. The risk is that if OPEC acts too earnestly to raise production again the market could swiftly tip back into oversupply should the economic recovery globally fail to build the momentum required.
Another factor to consider is whether giving the green light to up production is taken by some members as an excuse to open the taps again and result in more production than agreed – compliance remains the ever-present risk for any OPEC deal.
Stocks head for best quarter in years, Powell testimony weighs on yields
The UK’s economy shrank a little more than expected in the first quarter – the 2.2% plunge was the joint worst since 1979. Of course, it will be dwarfed by the Q2 drop, with April already printing 20% lower. Meanwhile China’s PMI data showed a slight improvement and Japan’s industrial production plunged over 8%.
Does any of this tell us much as investors and traders? In normal times, yes of course, as it might make a difference of a few points on the margins, but in the time of coronavirus there is an awful lot of noise around the data which makes it a lot more challenging, as well as of course all the stimulus, which muffles the notes that the data is trying to sound. Boris Johnson will launch an FDR-like New Deal infrastructure package today to distract us from the harsh reality of rising unemployment and ongoing restrictions on our liberties.
Powell’s economic outlook weighs on US yields
US Treasury yields declined as Federal Reserve chair Jay Powell said the outlook for the economy is ‘extraordinarily uncertain’. In prepared remarks for today’s Congressional hearing alongside Treasury Secretary Steve Mnuchin, Mr Powell said output and employment remain ‘far below their pre-pandemic levels’, adding: ‘The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus.’
He also noted that ‘a full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities’. San Francisco Federal Reserve President Mary Daly said it’s too early to tell and is just ‘watching the data’. Aren’t we all.
A strong quarter for stocks, but risks of a sharp pullback abound
Stocks rallied on Monday despite a wobbly start, as US pending home sales jumped the most on record in May, whilst Boeing surged 14%, heaping dozens of points on the Dow as it restarted test flights on the 737 MAX aircraft yesterday.
But as I keep stressing, this is a very rangebound market. The S&P 500 rose 1.5% but is caught between the 38.2% and 50% retracement of the pullback in the second week of June. The Dow added more than 2% but couldn’t even achieve the 38.2% line. Whilst indices are still trading this range, there is a downside bias evident lately and emerging down trend channels as we’ve made a couple of lower highs and lower lows. If this trend strengthens it could gain enough momentum to retest of the June lows.
Indeed, during cash equity trading hours the last 5 sessions has produced a lower low and lower high on the S&P 500. Valuations still look too high and based on a far-too-optimistic view of an earnings rebound in 2021 and does not account for permanent productivity and demand destruction. Of course stimulus is making a big difference here, but risk assets are exposed if we see the pandemic get worse from here. World Health Organisation boss Tedros said the worst is yet to come. Cases across states like Arizona, Texas and Florida continue to surge and look to be completely out of control. A short, sharp pullback is a very real possibility.
Nevertheless, it’s been a solid month and an exceptionally strong quarter. US equities have enjoyed their best quarter in 20 years, whilst stocks in Europe have fared pretty well too as investors participated in the rebound off the March lows. It’s mirrored elsewhere in risk assets – copper is up a fifth, but is slightly weaker for the year. For instance, the S&P 500 is up 18% QTD, but down 5% YTD. The FTSE 100 is up almost 10% QTD, but down over 17% YTD.
On the open on Tuesday, European stocks were mixed and lacking direction as they traded either side of the flatline. The FTSE 100 was trading around the 50% retracement of the June pullback and took a little hit as Shell downgraded its oil outlook and warned it will need to take up to write down the value of its assets by as much as $22bn. This follows a similar move by BP, which moved lower apparently on the Shell read-across.
Chart: Dow tests 50-day SMA support, downtrend starts to gain momentum.
Elsewhere, gold was supported around $1770 but slightly below the recent 8-year high as the flag pattern starts to near completion following the leg up on Friday. Needless to say, we can look to US real rates and 10yr Treasury Inflation Protected Securities (TIPS) dipping to –0.7%, a new seven-year low. Across the curve real rates are more negative than they have been a decent while.
Crude oil recovered the $39 handle but has failed to ascend all the way to $40 and has peeled back this morning. The near-term rising trend is offering support but the double top still exerts its influence and may well result in a further pullback to $35.
In FX, the dollar continues to find bid and the dollar index is making a nice little move off its lows still in a strong uptrend channel but is just running into horizontal resistance around the 97.65 area – breakout could see 98 handle again in short order. The downtrend dominates for cable as the pair continued south down the channel to test 1.2250. Whilst this held, the failure to recover 1.23150 on the swing higher may call for a further decline to the 1.22 round number support, and thence our old friend 1.2160 may come into play.
Chart: Downward trend dominates for cable