It was difficult not to get too negative during the past week; rising COVID-19 rates, the introduction of local lockdowns in the north east and unemployment starting to creep back up, all made for sobering news, so much so even the Bank of England (BoE) were thinking more negatively.
During a press conference on Thursday, the central bank admitted that it was looking more closely at how it might cut interest rates below zero even though they voted unanimously to keep their main stimulus programmes on hold for now. However, the BoE said its Monetary Policy Committee had been briefed on how a negative rate “could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low rates”.
The bank’s Governor, Andrew Bailey, and some of his colleagues have previously said that they were looking at the pros and cons of following the lead of other central banks, including those in the eurozone and Japan, in introducing negative rates. Although sterling initially reacted to the announcement with a sharp fall of 0.6%, it slowly clawed its way back up throughout the rest of the day to finish around the $1.295 mark, a level it seems to have settled at as Brexit negotiations start to hot up.
Data released earlier in the week showed that unemployment had increased to 4.1% in the three months to July from the 3.9% level it had clung to since early 2020, in line with economists’ predictions.
Although the picture may be mixed on domestic shores, investors cheered improving data in China, an economy considered very much to be emerging from the worst of the economic effects of COVID-19. On Tuesday, data showed Chinese industrial output accelerated the most in eight months during August, up 5.6%, to spark a jump in the yuan to a 16-month high. Retail sales in China also grew for the first time this year, beating forecasts comfortably. The news spurred global markets higher as haven assets such as gold and government bonds, retreated from previous records.
With talks of a second lock down being introduced in the UK as the rate of COVID-19 infections continues to rise, all eyes will be on the coming week’s UK economic data releases to gauge just how resilient the economy is looking.
Fortunately, we should only have to wait until Tuesday as the Bank of England’s Governor, Andrew Bailey, is set to give his views on the domestic economy when he addresses the British Chamber of Commerce on a live webinar. As head of the central bank, which controls interest rates, the governor has more influence over the value of sterling than most others, meaning that his words are scrutinised by investors in order to pick up on any hints as to future monetary policy. With rates of COVID-19 infections starting to creep back up, it will give his views an added impetus, especially to those whose livelihoods may be under threat once more.
The tone of the coming week could well be set by central bank addresses as Andrew Bailey’s opposite number in the US Federal Reserve, Jay Powell, will also testify about his nation’s economic outlook, again facing the same issues over a resurgence of COVID-19 infections. With the US presidential elections just over a month away, it will be interesting to see if Mr Powell strays into the political realm. Although the bank is meant to remain neutral, Donald Trump has remarked again and again that he wants to bring the Fed under White House control.
The week will be rounded off with a slew of European PMI data. Showing us just how much those on the continent have been making over the past month, manufacturing PMI data is released for the majority of Europe’s major economies, including Germany and France. The release should give us a more comprehensive view of just how well the continent is bouncing back from the COVID induced slump of March and April.
The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in September 2020.