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Weekly Focus – US Situation Keeps Getting Worse

The number of new global COVID-19 cases continues to move higher and is now at 170,000, an increase of around 25% compared to two weeks ago. Given the lag between infections and deaths, we will probably see a rising number of new deaths over the coming weeks. The outbreak in the US continues to worsen with new highs this week in the three biggest states Texas, California and Florida. Many other smaller states saw a similar development. The positive rate in tests continues to move higher, underlining that it is not just about more tests. Hospitalisation rates keep rising as well and could reach maximum capacity in some states within the next 2-3 weeks if the trend in infections does not turn around. The development in the US is quite worrisome, as recent research suggests that health concerns are a more important driver of private spending than the lockdown itself. Fear of catching COVID-19 in the US remains elevated, which probably means that the consumption rebound is going to be more gradual than in Northern Europe.

This week we got preliminary PMIs for June for Japan, Europe and the US. Nearly all PMIs remain below 50 (contractionary territory) suggesting economic activity in June was lower than in May, which was also lower than in April. This ‘story’ is not supported by other high-frequency indicators and we think overall poor sentiment is weighing on the PMIs. PMIs are survey-based and sometimes people are not reliable data sources.

Next week, there are several important things on the agenda. In the US, the minutes from the Fed meeting in June are due on Wednesday. We will in particular read about the discussions on yield curve control, which we know the policymakers were briefed about. We discussed yield curve control in more detail in Fed Monitor: A primer on the Fed’s discussions on changing its forward guidance, 17 June. On Friday the US jobs report for June is due and despite continued claims being elevated in June, we expect that employment rose significantly, as the economy has continued to improve gradually based on higher-frequency data.

In the euro area, the Macron-Merkel meeting in Meseberg is taking place on Monday ahead of the 17-18 July summit. The two leaders will discuss what strategy to employ to get the ‘frugals’ on board with the recovery fund. Data-wise, the EU Commission sentiment indicator for June is out on Monday and flash HICP inflation for June is due out on Tuesday. The labour market report for June in Germany (Wednesday) and for May in the euro area (Thursday) will also be interesting in terms of whether job losses remain contained.

In Japan, May retail sales are set to be very weak due to lockdown effects. The Q2 business Tankan survey, a key indicator watched closely by the Bank of Japan, will likely plunge to 2009 levels Until now, the labour market has been the bright spot as high job security has kept unemployment low. We get May figures next week here as well.

Next week, the trade negotiations between the EU and the UK restart. Despite the EU and the UK’s new ambition to reach an agreement in August, we do not expect a major breakthrough until the autumn when we get closer to the ‘hard’ deadline on 31 December 2020 now that the UK has rejected to extend the transition period. See Brexit Monitor: New ‘soft’ deadline in August but the ‘hard’ deadline is still 31 December 2020, 17 June.

Note that the Weekly Focus will take a break until 7 August.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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