In a week which saw the UK government put the brakes on UK tourists by adding new countries to the quarantine list, there was no holding back US growth stocks which continued to motor on, powered in part by Tesla, which reached $2000 per share this week. This milestone was overshadowed by Apple which, after rising close to 60% in 2020, now has a market capitalisation of $2 trillion dollars, close to the entire market capitalisation of the FTSE 100. The move in Apple helped contribute to the S&P 500 closing at an all-time high during the week, an incredible statistic given the extraordinary events of 2020 thus far.
It was not just the US breaking records this week as the UK also marked a landmark moment with government debt reaching the £2 trillion level for the first time. This level of debt represents just over 100% of GDP and it is the first time since 1960-1961 to reach this level. The sharp acceleration in government debt has been driven by a combination of additional borrowing to help offset the impacts of COVID-19, and a fall in income tax. The phenomenon of increasing public sector debt is something we are witnessing across most of the developed world, not a UK specific incident. With current ultra-low interest rates and borrowing costs, the cost of financing such debt is manageable and one of the reasons why certain economists expect interest rates to be kept lower for longer.
On the economic data-front we saw higher than expected inflation, with UK core CPI coming in at 1.8% versus expectations of 1.2%. Core CPI strips out energy and food prices from inflation as these can be very volatile, as such it is often the preferred measure used by economists. A similar pickup in inflation was also recorded in Europe.
Across the pond, the US initial jobless claims once again rose back over one million, in a sign that the recovery in the jobs market is slowing. There are still currently around 28 million Americans claiming benefits which highlights the challenge the US economy will have in attempting to get the nation back to work.
Next week is the last full week of August. This would normally be a week for final summer holidays, a rush to buy new school shoes and generally wrap up the summer period ahead of a return to work and school. However, such are the times we find ourselves in today that this may not be the case, with work from home, staycations and staggered schooling all looking like being the new normal for a little while longer at least.
The key data at the beginning of the week is focused around the US housing market, which has been very robust of late. With the lowest mortgage rates on record, a shift from renting in expensive cities to purchasing in more rural areas and increased spending on home renovations the US housing market is in somewhat of a sweet spot. This is likely to be reflected on strong new home sales data and increasing house prices.
Continuing in the US, there are durable goods orders on Wednesday. Durable goods are classed as typically expensive goods that last three years or longer, and as such are infrequent purchases and not insignificant; markets will be hoping that the recent recovery in durable goods orders continues. Next week’s initial jobless claims data is published on Thursday, and after disappointing this week they will take on added importance, with investors and economists looking for signals on the speed of recovery in the jobs market.
Perhaps the biggest focus of the week will be on Thursday and Friday at the Jackson Hole symposium, which will be a virtual event for the first time. US Fed Chairman Jay Powell will be headlining the conference and is expected to provide an update on inflation targeting as well as the very latest thinking from the US Fed, carrying significant weight with the market as always.
On the other side of the pond the UK and Italy will be carrying out 10-year bond auctions. Despite their historically low yields there is likely to be significant demand for both countries debt.
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 August 2020.