4 August 2020: Demand sees factory output grow

Demand sees factory output grow

4th August: Highlights

  • Happiness is V-shaped
  • U.S. becoming more and more driven by Big Four
  • Manufacturing returns to growth but worries remain.

Fastest rise in three years as lockdown lifted.

The Bank of England’s Chief Economist Andy Haldane is paid to see into the future and predict just how the economy is going to perform. It would appear that he has earned every penny of his salary over the past month as he predicted a significant rise in manufacturing output and that is what the economy delivered.

Factory output grew to 53.3 in July, in line with the flash estimate, confirmed Haldane’s view that the economy is going to experience a V-shaped recovery. Of course, his prediction was made prior to the current fears over a second wave of Covid-19.

That could curtail what has been a run of improving data despite headwinds over China and Brexit threatening to push the recovery off course.

The rise in output was the strongest since November 2017, when negotiations over Brexit were still in their infancy. Despite the strength of the data, it will be some time even at these levels of output before the economy recoups all that was lost during the lockdown. It remains to be seen just how much of the contraction from the first two quarters can be made up in this and the next quarter.

In what is the possible first amendment to the Government’s scheme to support furloughed workers, Chancellor Rishi Sunak has tightened the rules about who can receive the £1,000 bonus for retaining employees beyond January of next year. The bonus will still be paid for anyone earning more than £520 per month but not if the worker has already been given notice of possible redundancy no matter how far in the future.

As part of the effort to improve infrastructure development, it is expected that the UK’s planning laws, some of the most stringent in the world, could possibly be loosened slightly. That could lead to development of new homes starting sooner than expected. An announcement is expected in the next few days.

The pound is struggling to hang on to its recent gains and threatened the psychologically important 1.3000 yesterday. It made a low of 1.3004 and closed at 1.3068.The market appears in a state of flux as it awaits several pieces of information from the U.S., not least of all the July employment report and detail from Congress over the new Coronavirus Support Bill.

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Job losses and support are still major factors

The effect of the big four tech giants was underlined yesterday as the market capital of Google, Amazon, Apple, and Facebook reached almost a quarter of the market’s overall value.

While the U.S. has exported a significant amount of its manufacturing overseas to countries with a lower cost base, it retains pre-eminence in the development of on-line and web-based services.

It seems that the entire sector is only limited by the minds of a few entrepreneurs. Pichai, Bezos, Cook and Zuckerberg were called in front of Congress this week to explain anti-competitive practices, but it seems Congress is powerless since such power is held in such a limited number of companies and individuals.

U.S. factory output improved in July. This is not such a surprise given the return from lockdown of several industries but around 72% of businesses reported growth and that is significantly better than was first expected.

The issue the market has with the U.S. is the contrary information it is expected to make decisions based upon.

Several investors have attempted to distil all the data into bite sized chunks based primarily upon employment which is seen as key prior to the U.S. developing (or buying) a vaccine.

That will make this week’s July NFP data particularly closely watched but prior to that, Thursday’s weekly jobless claims, both new and existing will also be keenly anticipated.

Since it is impossible to correlate every part of the U.S. economy right now, using employment as the most encompassing driver makes sense.

The dollar index appears to have made a low following the past few weeks’ downturn.

Yesterday, it reached a high of 93.99, closing at 93.59 as traders remain sceptical about the shape of the recovery but are prepared to believe that the U.S. is not headed towards depression.

Factories produce more but concerns remain

The financial markets often take some time to be convinced over something that to the untrained eye seems fairly obvious.

The untrained eye would have seen the progress made by the EU Heads of State at their recent meeting and be satisfied that relief funding, in various forms, will soon reach where it is needed most.

The untrained eye needs more training.

Experienced investors have been watching the shenanigans of the EU for more than twenty years, even before the common currency was born.

What they have developed is a singular lack of confidence and a keen eye for expediency.

Several countries, even Italy among them, were not truly qualified to join the single currency when it was first introduced, but how could they be left out? Several smaller nations like Cyprus were allowed in, the brief being what harm could they do? Ask their citizens who lost large chunks of their savings at the whim of Mrs Merkel.

Coming right up to date, traders felt almost honour bound to buy back their short positions in the single currency, telling themselves that the dollar’s demise was imminent and now that the EU Heads of State had agreed to fund those hit worst by the pandemic that the economy could begin to grow.

Funding the struggling nations with their own money is a brilliant ploy but when the supplementary budget is needed the pot(s) may be empty.

Now, a second spike is imminent and with all that has gone before, the old lack of confidence returns, and the euro begins to show signs of fatigue.

Yesterday, it fell to a low of 1.1695, closing at 1.1759. This may be a temporary blip, a lot depends on U.S. employment data, but confidence that it can rally further is slowly fading.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”