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Client Update - 23rd October 2020

As the UK’s COVID rate continues to climb, our economy is losing steam as rising restrictions undermine firms’ efforts to recover from the crisis, according to the purchasing managers’ index (PMI) data released today.


Both the dominant services sector, which makes up around four-fifths of the economy from cafes to banks, and manufacturing, saw growth slow this month. Business levels continued to edge higher in October, but at a slower pace than in September and at the weakest rate in four months. This is a severe challenge to the much hoped for “V” shaped recovery.


The PMI survey is a closely watched sign of the health of Britain’s economy, and the latest figures underline the impact of rising infection rates and government curbs on businesses nationwide. Services firms said local lockdowns and hospitality restrictions had dampened general consumer spending. Respondents said levels of new business had declined for the first time since June, and October’s figures were worse than expected by analysts. Companies said shrinking demand from customers was forcing them to make redundancies. “October data indicated a steep fall in employment numbers, with another month of deep job cuts signalled in both the manufacturing and service sectors,” said the latest PMI report, published by IHS Markit and the Chartered Institute of Procurement & Supply (CIPS).


The headline reading on the PMI for services came in at 52.3 in October, down from 56.1 in September. The figures are measured on a scale from 0 to 100, with readings above 50 marking growth and below 50 showing decline. Manufacturing came in at 53.3, down from 54.1 last month.


Chris Williamson, chief business economist at IHS Markit, said: “The pace of UK economic growth slowed in October to the weakest since the recovery from the national COVID-19 lockdown began. Not surprisingly the weakening is most pronounced in the hospitality and transport sectors, as firms reported falling demand due to renewed lockdown measures and customers being deterred by worries over rising case numbers.”


It was not all bad news however, as retail data released separately painted a more promising picture for September at least. Retail sales continued to rebound in Britain last month, beating forecasts for growth, according to the official figures. The Office for National Statistics said on Friday that retail sales grew by 4.7% in September. Month-to-month sales grew by 1.5%. Economists had expected annual sales growth of 3.7%, or 0.4% on a monthly basis. Sales were driven by DIY and garden items, as well as a revival in supermarket food sales as the Eat Out to Help Out scheme came to an end.


Across the pond, so to speak, White House officials and Democratic leaders are continuing negotiations over a nearly $2 trillion coronavirus-relief package, which many investors view as crucial to maintaining the economic recovery. Reported coronavirus cases in the U.S. have risen to their highest level since July.


Investors are increasingly optimistic that a second dose of stimulus will be delivered, even if many think the odds of a deal before the election are slim. Shares in sectors that are sensitive to the outlook for the economy, including energy and banks, have outperformed this week. Information-technology stocks have faltered. With earnings season in full swing, the technology companies that have powered the stock market higher are due to report next week. It will be very interesting to see how the market reacts after some profit taking this week.

Investors looked past the final presidential debate, in which President Trump and Democrat candidate Joe Biden offered differing views of the administration’s handling of coronavirus. Thursday night’s meeting was less combative than the pair’s first, three weeks earlier. It also has a reduced impact as more than 47 million Americans—more than a third of the total 2016 vote—have already cast ballots.


In Europe, the economic outlook is gloomier amid a large second wave of coronavirus infections that has prompted governments to restrict travel and leisure. A composite purchasing managers index for the eurozone fell to 49.4 in October, indicating a decline in manufacturing and services activity. We have already reduced European equity exposure in our model portfolio strategies ahead of this data.


As Brexit discussions resume and we move ever closer to the US Presidential elections, once more we look for more stimulus from central banks and a positive earnings season in the US to drive markets higher. In the meantime, we are conscious that this is not a time to take additional risks in the portfolios, and we are very comfortable with our current positioning.

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