New virus wave casting a shadow over US growth and Trump
In the United States, the number of COVID-19 cases increased in such states as Arizona, Texas, Florida and California. Los Angeles was among several California counties ordered to close bars, and in Kansas the governor declared that face masks will become mandatory in public places starting on July 3. The US economy has been reopening gradually, but this has gone hand in hand with faster spread of the virus, which may weaken the continued recovery. For President Donald Trump, these developments increase the need to prop up the economy with new stimulus programmes, especially since he is losing ground in public opinion surveys ahead of the November election. Treasury Secretary Steven Mnuchin said the Trump administration is weighing an additional relief package in July; we expect new fiscal stimulus measures totalling at least USD 1 trillion.
Risk of renewed US-European trade conflict
The US announced last week that it is considering new or higher tariffs totalling more than USD 3 billion on goods from France, Germany, Spain and the United Kingdom in such categories as alcoholic beverages, aircraft, trucks, cheese and yoghurt. The threat is presumably related to the multi-year conflict between Europe and the US regarding state subsidies to the aircraft industry. This coming month, the World Trade Organisation (WTO) is expected to rule that American authorities may have given illegal subsidies to Boeing. The US is therefore probably trying to increase pressure on Europe to reach a solution to the conflict.
Sharp improvement in PMIs, but risk of false optimism
European purchasing managers’ indices (PMIs) for June showed a strong recovery, while other economic indicators in various countries have rebounded, almost reaching pre-pandemic levels. Like the dramatic declines in March and April, this very positive trend in June is difficult to interpret. Just because the outlook has improved as many countries have eased their COVID-19 related restrictions, this does not necessarily mean that the situation is good – only that it is less bad – yet improved indicators are a hopeful sign.
Sweden’s Riksbank will follow the example of the ECB
Swedish economic data have largely surprised on the upside since the Riksbank’s latest policy meeting in April, except that inflation has been lower than the central bank had forecast. On July 1 (today), we expect the latest meeting to result in an announcement that the Riksbank will be following the example of the European Central Bank (ECB) in June by extending its own stimulative bond purchasing programme until mid-2021. The Riksbank is also expected to keep the door open to a key interest rate cut, although it does not regard such actions as effective right now. In April, the Riksbank chose to publish a key rate forecast for only the next 12 months − compared to the customary three years − due to great economic uncertainty. If the central bank extends its forecast period in today’s announcement, we believe this will signal an unchanged key rate until 2022.
Our market view
Uncertainty about the effects of new and continued coronavirus outbreaks is causing some stock market instability, as earlier signals of increasing economic activity appear to be facing headwinds. In recent weeks, share prices have remained essentially flat despite relatively wide fluctuations, which are nevertheless smaller than in the acute crisis phase this past spring.
The prospect of continued stimulus – such as central bank bond purchases and ongoing discussions in the US Congress and elsewhere on new fiscal packages – will help to sustain risk appetite. The weaker economies become, the higher the probability that central banks and governments will provide even more support, but if downturns are milder, corporate earnings will recover faster and share prices can then climb without such support. At this writing, the market seems worried that the trend will end up somewhere in the middle. The reopening of economies will generate some growth, so that new stimulus measures need not be launched, but new virus outbreaks will slow the pace of growth and curb risk appetite enough to prevent the reopenings from driving improvements in corporate earnings and share prices.
Looking ahead, we still expect continued low interest rates and bond yields − along with a slow return to more normal growth trends − to help sustain the stock market. We thus have a cautiously optimistic view of risk assets such as equities and high yield corporate bonds, and we are maintaining our hypothesis that stock market downturns can be regarded as buying opportunities.
The agenda ahead
- July 1 − United States: Federal Reserve policy announcement.
- July 1 – Sweden: Riksbank announcement: we expect an unchanged key interest rate but an extension of bond purchases.
- July 4 - United States: Labour market data. Since the July 4 national holiday is being observed on Friday, July 3, employment figures for June will be published on Thursday. We expect them to show 3 million new jobs and 12.5% unemployment.