Will US jobs growth continue to weaken?

Investors will be watching America’s unemployment numbers on Friday to gauge the strength of the recovery in the world’s biggest economy. 

US employers added 1.4m jobs last month, according to data from the Bureau of Labor Statistics, falling short of the 1.8m that were added in July. Growth has been slowing over the summer: July saw 3m fewer jobs added than in June.

Despite the rebound from the coronavirus pandemic, only half of the jobs lost since the outbreak began have since been regained. The unemployment rate stood at 8.4 per cent in August. It is expected to have fallen further to 8.2 per cent this month, with US employers adding 865,000 jobs, according to a survey of economists by Bloomberg. 

Equity investors have been rattled this month by worries over the fragility of the economic recovery, fed in part by cautious statements made by central bank officials. Meanwhile, the risks of a second wave of coronavirus cases and a possible disputed presidential election appear to be growing. 

“There is no doubt that the economy is healing, but there are also building signs that the underlying damage done by the pandemic will keep us in a low growth, low inflation, weak recovery regime for years to come,” said Jonathan Hill, an interest rate strategist at BMO Capital Markets. Joe Rennison

What can the ECB do to stimulate inflation?

European Central Bank policymakers are facing yet more pressure to support the economy, as inflation drifts further from its target of just below 2 per cent.

Friday’s inflation reading for September will provide the bank and investors with a better idea of how the coronavirus pandemic is weighing on the prices of consumer goods after a poor reading for August. The eurozone slid into deflation for the first time in four years last month with a lower than expected headline reading of minus 0.2 per cent.

Finnish bank Nordea said it expects to see deflation deepen. “This is bad news for an already struggling ECB,” it said. “It is possible to manage a truckload of debt but not in an outright deflationary environment.”

In June, the ECB expanded its emergency bond-buying programme to €1.35tn from €750bn and extended it into 2021, but it surprised analysts this month by raising its inflation forecast for next year. Many economists expect the bank to extend its asset purchases further in December if inflation remains weak, while further cuts in interest rates remain an option.

Katharine Neiss, chief European economist at PGIM Fixed Income, pointed to a picture of “weak underlying inflation”, which she said continued a worrying trend that predated the pandemic, with the ECB seemingly unable to achieve its own target of annual inflation.

As well as the pandemic and the bloc’s long-running sluggish growth, pressure has come from the euro’s strong rise this year, which lowers the cost of imported goods. However, some of that pressure has been reduced this month after the single currency fell from $1.19 to $1.16 as the dollar strengthened — reflecting growing nervousness among investors over the global economic recovery. Laurence Fletcher

Will domestic demand continue to drive China’s economy?

China’s official purchasing managers’ index for the manufacturing sector has been closely watched over recent months as the country’s economic recovery gathers pace at a time when other countries continue to struggle.

The world’s second-largest economy returned to growth in the second quarter as industrial production increased. It has been bolstered since by rising retail spending, which had lagged behind the wider recovery.

On Wednesday, investors expect the PMI manufacturing survey to reach 51.5 for September — its highest reading since March. A reading above 50 marks expansion compared with the previous month. It was 51 in August.

As well as reflecting the pace of the recovery, the data will offer an insight into the level of export orders at factories.

Non-manufacturing PMI data, also out on Wednesday, is expected to come in at 54.9, narrowly below its level of 55.2 in August. It will shed further light on the role of the consumer in what has been a domestically driven recovery.

The August rise came after China’s Ministry of Culture and Tourism allowed travel companies to offer trips across provincial borders. It also signalled a wider increase in spending on services by locals as the country began to emerge from the coronavirus crisis.

Although retail spending rose 0.5 per cent year-on-year in August, households in China have continued to exercise caution given uncertainty over the crisis and its longer-term impact on jobs. Thomas Hale

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