The hints of recovery continue

US Manufacturing PMIs accelerate

The gentle hints that the global recovery remains on track continued overnight. Italian, French, German and United Kingdom manufacturing PMI’s all climbed further into expansionary territory. But it was the US PMIs that draw a collective sigh of relief from financial markets. Both the Markit and ISM Manufacturing PMI’s for July outperforming at 50.9 and 54.2, respectively.

US Covid-19 new infections also gave some cause for tentative cheer, with cases across the southern and western hotspots coming in at less than 50,000 for the second day running. Hopes rose that the US might avoid a deeper recession which was all financial markets needed to send equity markets higher, and for the US dollar to continue recovering some of its recent losses.

That isn’t to say that the light at the end of the tunnel is not the train coming the other way, far from it. The follow-on pandemic relief package remains bogged down between Republicans and Democrats, with House Speaker Pelosi suggesting there will be no new deal before next week. Rather pleasingly for the common man on the street, House representatives have been told to stay at work until it is done, instead of going on recess for the rest of August as scheduled.

An exasperated President Trump has threatened unilateral executive action on a package if Congress can’t get its act together. It is unclear what that could be, but such details have never bothered the US president previously. My base case is that with US elections less than 100 days away, a deal will be done. They are politicians, after all.

The consequences, of course, will be with us for many years. The Financial Times is reporting that the US Treasury plans to borrow an additional $2.2 trillion this year to fund the pandemic relief. The US was already running trillion-dollar deficits before Covid-19, and trillion appears to be the new billion. To fund pandemic relief, interest rates will need to be lower for longer. That reinforces my belief that this week’s US dollar rally will be no more than a bullish correction in a longer-term bear market.

Another uber-dovish central bank today is expected to be the Reserve Bank of Australia. It will be relieved that Australian Retail Sales and Exports rose this morning, again hinting that a tepid economic recovery remains on track. However, with Victoria in Covid-19 isolation, with even more dramatic lockdowns in Melbourne, it will maintain its downbeat forecasts, adverse risks, and super-easy policy stance. Rates will remain unchanged at a record low of 0.25%.

What it won’t do is stoke more talk of negative rates, I believe. The jury is well and truly out on negative rates, with the policy more likely to do more harm than good in the longer run. Just look at Japan, Europe and Switzerland. Quantitative easing already grossly distorts the misallocation of capital and is highly addictive to financial markets. The RBA won’t want to throw more petrol on the barbie than absolutely necessary. It leaves a ghastly aftertaste in the prawns as well.

Today is relatively quiet in Europe from a data perspective, with markets’ attention concentrated on this evening’s US Factory Orders for June. A jump of 5.0% is forecast, but usefulness is diminished, with the data being well over a month old, and pre-US sunbelt pandemic wave. A more useful release will be the Johnson Redbook Index, with advanced sales for the first week of August expected to climb by 1.10%.

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