Euro area heads of government meeting yielded an impressive raft of joint fiscal measures
- The Four “Pillars” of the agreed funding total €1.29 trillion. This comprises enhancement of the European Stability Mechanism (ESM) which lends to euro area sovereigns in distress – funds made available with relatively light conditionality attached, with capacity up to 2% of member states’ GDP, totalling €240bn. There is also the creation of “Support to mitigate Unemployment Risks in an Emergency (SURE)”, a re-insurance system worth €100bn. The European Investment Bank (EIB) will help banks lend up to €200bn. Finally, the most significant pillar is the European Recovery Fund (ERF) itself, worth €750bn, comprising €390bn in grants and €360bn in loans.
Robust trend in UK data continues
- The July UK services and manufacturing PMIs jumped to 56.6 and 53.6 respectively (consensus: 51.5 and 52.0), marking a 5-year high in services and an 18-month high in manufacturing, with the output and new orders sub-indices driving the gains, whilst the employment sub-index remained relatively muted.
- Retail sales rose 13.9% mom in June (consensus: 8.0%), consolidating upon May’s +12.3% gain. The 13.5% mom gain in the ex-fuel measure actually left it 1.7% higher than the June 2019 reading. Unsurprisingly there has been a large shift in the composition of sales, with supermarket and online sales leaping whilst “going out” sales (restaurants, bars, events, etc.) remain extremely depressed.
And PMIs elsewhere also rose, notably in the euro area
- The euro area composite output PMI rose 6.3pts to 54.8 in July, the third consecutive increase from the trough of 13.6 in April, taking it well above pre-Covid levels (average in January-February was 51.4). The US flash PMI also rose but is notably shy of European gauges (US composite stands at 50.0).
Dollar weakness was the standout feature of the week; equities were somewhat softer
- The dollar fell across the board, notably against EUR which surged to a 20-month high, buoyed by the ERF announcement, and gold, which is in the process of surpassing the previous all-time high of ~$1,920/troy oz. The Chinese renminbi broke through 7.00 vs USD although it later retraced on renewed geopolitical tensions with the US ordering the closure of the Chinese consulate in Houston, TX, and China reciprocating by closing the US consulate in Chengdu.
- Equities fell modestly in response to this sabre-rattling and core government bond yields continued to grind down towards the March lows.