The Daily Update - More Fiscal Support Required

US equity markets came under pressure overnight as investors focused on comments from Jerome Powell and some Fed speakers on the need for further stimulus amidst a backdrop of rising Covid-19 infections. Plus, the protracted failure of the Republicans and Democrats to reach an agreement another fiscal package has not helped investor sentiment. Chicago Fed President, Charles Evans, warned: “Every week and every month we go without renewing additional fiscal support…we risk a longer period of slower growth if not recessionary dynamics.”

On a positive note, yesterday’s IHS Markit flash purchasing managers’ indices for the US showed economic activity expanded in September with the composite index registering 54.4, down slightly from August (54.6). Encouragingly, both the manufacturing and services sectors expanded, and the manufacturing PMI reached a 20-month high at 53.5. Chris Williamson, Chief Business Economist at IHS Markit, commented: “The question now turns to whether the economy’s strong performance can be sustained into the fourth quarter. Covid-19 infection rates remain a major concern and social distancing measures continue to act as a dampener on the overall pace of expansion, notably in consumer-facing services.” And that “Risks therefore seem tilted to the downside for the coming months, as businesses await clarity with respect to both the path of the pandemic and the election.”

The news for the Eurozone was less encouraging with the flash PMI data for September indicating the economic recovery is losing momentum in the face of a rise in covid-19 infections and further restrictions.  The Eurozone Composite flash PMI index for September disappointed coming in at 50.1, down from 51.9 in August: a reading below 50 indicates contraction.  By sector, the picture was mixed: the September Eurozone services sector PMI moved into contractionary territory at 47.6 while the Eurozone September manufacturing sector PMI remained in expansionary territory at 53.7. Chris Williamson, Chief Business Economist at IHS Markit, commented: ”A two-speed economy is evident, with factories reporting that production growth was buoyed by rising demand, notably from export markets and the reopening of retail in many countries, but the larger service sector has sunk back into decline as face to-face consumer businesses in particular have been hit by intensifying virus concerns.”

The UK PMI data suggested the economic bounce post lockdown is fading. The September composite flash PMI fell back to 55.7, a 3-month low, and down from 59.1 in August, although the reading remained in expansionary territory.  The services and manufacturing PMI readings also eased back but also remained in expansionary territory. Within the services sector, restaurants in particular were impacted with the end of the Eat Out to Help Out scheme but growth in business services and financial services was able to offset some of this weakness. However, the announcement of further restrictions in the UK this week for as long as the next 6 months, has heightened concerns about the impact on the economy and calls for further fiscal support. Rishi Sunak, the UK Chancellor, is due to appear in parliament today to provide an update on the government’s plans to protect jobs and support businesses until a vaccine allows economic activity to normalise.