Weekly Market Outlook

This week will bring out some important economic figures and developments on the monetary front. On Monday, market participants will witness a whole set of global services PMIs for the month of September. The Reserve Bank of Australia is holding its regular interest rate meeting on the next day. Minutes of the last Fed meeting are due Wednesday, so investors are going to be on a careful watch for some fresh developments in the central bank’s monetary policy. We will close the week on Friday with the UK releasing some key numbers for its economy, including GDP, industrial and manufacturing PMIs for August.

Global Services September PMIs (Monday)

The manufacturing sector has been doing reasonably well lately, following a difficult second quarter. Rather different has been the story in the services sector, with most recent flash PMIs in Germany and France slipping back into contraction territory. This gives a serious reason for concern, especially in weaker countries like Italy and Spain, whose economies are heavily reliant on foreign tourists. With drastically increasing infection rates and imminent lockdowns, both countries are just starting to feel the burn. In August, Italy and Spain both recorded contractions in their services sector, with PMI numbers coming out at 47.1 and 47.7, respectively. Chances are growing high that the figures will slip deeper into contraction territory for September. The situation in France is similar, whose services PMI is expected to be confirmed at 47.5.

News has not been as bad everywhere though, as we have seen services numbers to improve in the US and in the UK. Chinese services activity has also been doing pretty well. With quarantines being imposed on travelers around Europe, the major fear now is that the recovery in the Old Continent is set to grind to a halt. And this promises to have negative repercussions in many other economies around the world.

Reserve Bank of Australia Interest Rate Decision (Tuesday)

The current weakness seen in the Australian economy gives grounds to believe that we might see the Reserve Bank of Australia cut rates from their current record low of 0.25% to 0.1% this Tuesday. In case we do not see a decrease in the main interest rate, the central bank is likely to resort to further QE. Quantitative easing would be more effective than a nominal rate cut, provided that unemployment is at its highest level since 1999, at 7.5%, and is anticipated to jump further up to 9.25% by year end.

US Federal Reserve FOMC Minutes (Wednesday)

The most recent Fed meeting did not tell us much more than some additional details on the new policy of average inflation targeting. The central bank pledged to keep rates at their present levels until 2023, or at least until inflation has been higher than 2% for a lengthy enough period of time. This policy goal is rather ambitious given the fact that the core PCE has been above 2% just twice in the last decade. The discussions between the various Monetary Policy Committee members will be instructive in providing some more clarity on how the Federal Reserve would achieve a goal, which they have been struggling to meet in the past 20 years.

UK August GDP (Friday)

The UK economy has been going through a gradual recovery following the record -20.4% meltdown in April. May witnessed a moderate 1.8% growth, followed by solid 8.7% in June, while the following month the country’s GDP added another 6.6%. We are likely to see another positive reading for August as a result of the gradual reopening of businesses. Worries, however, remain for the developments in Q4 in the face of tighter restrictions and the prospect of a no deal Brexit.

UK August Manufacturing/Industrial Production (Friday)

The solid rebound in manufacturing and industrial activity looks set to continue for now. Recent PMIs have been really strong, and August’s figures are expected to confirm this trajectory. Even with all business re-openings since July, however, it will be increasingly difficult to compensate for the lost output in the longer term. The growing number of infected people in the UK would result in the imposition of new restrictions, which would seriously limit the potential of further improvements.