The US economic surprises continued coming yesterday (Tuesday 18 August 2020) with readings for both housing starts and building permits coming in significantly higher than economist expectations.
Housing starts jumped 22.6% to nearly 1.5m on an annualised basis from 1.2m last month, while permits to build a new house increased 18.8% to nearly 1.5m from 1.26m last month.
While some market commentators will brush these readings aside due to the supportive demand backdrop of low interest rates, we believe they are fundamentally more important.
It suggests to us that Americans are confident: confident about the security of their jobs (suggesting that the worst of the US coronavirus layoffs is probably now behind us); and confident enough to spend rather than save.
The US is a consumer-driven economy (with the consumer accounting for two-thirds of the US economy) and so consumer spending will obviously help the economy to quickly and strongly bounce back – especially as building and moving house sets consumer spending in motion, which will last for several months as people spend on new decorations and furnishings.
Adding to our recovery optimism was Home Depot’s results statement. Home Depot is the US equivalent of the UK’s B&Q – and they yesterday said that comparable store sales jumped 23.4%.
Interestingly, the UK’s biggest house builder, Persimmon, also said yesterday that house reservations had jumped 49% since the start of July compared with the same period last year and as a result, the company had returned to its pre-coronavirus building pace. As with the US, the UK housing market is very important as it has a profound effect on the wider economy as so much of our personal wealth is invested in our homes. As a consequence, a strong housing market can improve our confidence and encourage consumer spending – which contributes to economic output and creates jobs, etc.
However, it wasn’t all sunshine and rainbows, as Marks & Spencer announced plans to cut 7,000 jobs, which equates to around 10% of their total workforce.
As we have previously warned in our commentaries, while the UK government’s job retention (furlough) scheme has been very successful in helping to support the UK economy, it has effectively kept the unemployment numbers artificially down – and given just over 9.5m workers, or nearly a third of the UK workforce, have been furloughed, as the scheme starts to wind down (and ends completely on 31 October 2020), unfortunately there will be many more announcements similar to that of M&S’s.
Consequently, we will only start to see the full extent of the damage caused by coronavirus to the UK employment market in the coming months – unless of course Rishi Sunak, the Chancellor of the Exchequer, reverses course and extends the furlough scheme, as Germany is widely expected to do.
This morning in the UK, we have had CPI inflation data. While both the headline and core readings rose strongly (the headline rate climbed to 1% from 0.6%, while the core rate, which excludes volatile items such as food and energy, rose to 1.8% from 1.4%), we don’t believe this is the start of an inflationary upswing as coronavirus lockdowns have distorted prices. For example, clothing and footwear prices are 6.7% higher than they were a year ago – but this reading is being distorted by the delaying of the usual summer sales promotions. Instead, as we have previously highlighted, we expect UK inflation will slow (and could be negative – i.e. deflation – next month) due to the recent VAT cut for the hospitality sector from 20% to 5%, coupled with the ‘eat-out to help-out’ promotion which has obviously reduced the cost of eating out.
Later today (7pm UK), we will get to see the minutes of the Fed’s last monetary policy meeting (held on 28-29 July 2020). Although policymakers left US interest rates unchanged at 0.25%, they did state they would use all its available tools to support the US recovery, while Jay Powell, the Fed Chair has since said the economic downturn is the most severe “in our lifetime”. Consequently, we will be looking at the minutes for clues on what support the central bank is considering and for hints to see if policymakers will adjust their current goal and allow US inflation to run above their current 2% target.
Investment Management Team