Despite a number of localised city/state covid-19 lockdowns around the world risk assets have retained a broadly positive tone. Credit and equity markets also closed out the second quarter having registered an impressive rally. Hopes for a vaccine from Pfizer/BioNTech and some positive data releases helped the S&P ended the holiday shortened week +4%. In what was a data heavy week, the US Conference Board Consumer Confidence Indicator for June came in ahead of expectations, the US June manufacturing ISM came in at 52.6 exceeded expectations of 49.8. Later in the week, the non-farm payroll data also exceeded expectations showing a 4.8m gain in jobs and the unemployment rate fell from 13.3% last month to 11.1%.
However, Jerome Powell struck a cautious note in his prepared remarks for the joint testimony with Treasury Secretary Steven Mnuchin in front of the House Financial Services Committee. He stated: “While this bounceback in economic activity is welcome” that “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus.” Mid-week, the FOMC minutes were released for the June meeting: the main takeaway was that the FOMC participants had discussed yield curve control but “they had many questions regarding the costs and benefits of such an approach”. Longer dated Treasuries closed the week on a softer note: the yield on the UST 10-year backed up 3bps to 0.67% and the UST 30-year yield backed up 6bps to 1.43%.
Elsewhere, in Europe data releases continued to point to a recovery from the April lows: both the final manufacturing and services PMIs for the Eurozone in June exceeded expectations. In China the manufacturing PMI rose to 50.9 in June, from 50.6 in May, and the PBOC moved to cut the rediscount and relending rates for agriculture and SMEs by 25bps to support the recovery. However, China-US tensions continued as President Xi signed an order mid-week bringing the HK Security Law into force. In response to this, the U.S. House of Representatives passed legislation that will penalise banks looking to do business with Chinese officials who have helped implement the new national security law in Hong Kong. The legislation, which was passed unanimously, reflects US concern that China has violated its promise to honour the autonomy of the former British colony. Nancy Pelosi, the House Speaker said the new law ‘signals the death of the one country, two systems’ system China followed with respect to Hong Kong. The Senate also passed the legislation sending it to Donald Trump to sign into law.
In Monday morning trading, European equity markets have followed a positive lead from Asian markets: Shanghai has led the way closing +5.8%, extending Friday’s gains. In the week ahead, investors will be watching for any resurgence of the virus, particularly in the US, to see if this has any implications for the strength and speed of the global economic recovery. So far markets have taken an optimistic view of the recovery. In terms of data releases, this morning German industrial orders for May registered +10.4% mom which was below expectations of +15.4% putting German and French industrial production data for May later this week in focus. Other key economic data releases include the US services PMI for June which is again expected to show improvement on the prior month. The market will be looking to see if it can exceed expectations and move into expansionary territory (i.e. above 50). Later in the week we have US jobless claims and US PPI data although inflationary pressures are not concerning the market at this stage. In the UK, Rishi Sunak’s midweek economic update will be a focus as investors look for any new policy initiatives and his plans for the economy. Elsewhere, China’s CPI and PPI data for June is due out later in the week while the RBA is also due to meet on Tuesday of this week with no major policy changes expected.