Economic Highlights

The Bank of England’s Monetary Policy Committee held policy unchanged, but set a cat amongst the pigeons by confirming that the implications of a negative base rate are being considered. So negative rates are not off the agenda. Indeed the market is now pricing in the possibility by Q1 2021. Retail Sales continued to recover well in August, +4.3% y/y ex-fuel. The government’s “eat out to help out” scheme was a positive driver, and it also contributed to lower inflation last month.

The Fed confirmed its new approach to inflation and employment at its latest meeting, but markets were disappointed by a lack of any new measures to boost the economy immediately. Even so, neither does the market expect US interest rates to rise again for at least five years. In terms of current data, there was a disappointing Retail Sales number for August, with sales rising 0.6% m/m vs an expected 1% (with a downward revision to July’s figure). Nothing alarming, possibly exacerbated by a muted “back-to-school” season, with college students, notably, not returning to campuses in the usual numbers.

The ZEW survey of investors’ expectations for economic growth continued to rally, hitting 73.9, a level not seen since 2013. This tallies with the rapid recovery we have seen across the board since the trough of activity in April, but does not capture the absolute level of activity, which remains well below the peak. That fact is reflected in very subdued core inflation, which came in at 0.4% y/y in August.

The latest data cemented the view that China’s economy continues to recover. Retail Sales, which have lagged the industria economy so far, finally turned positive on a year-on-year basis, even if only to the tune of 0.5%. Industrial Production continues to lead the recovery, rising 5.6% y/y.