Key events in developed markets next week

The breakdown in talks on another broad fiscal package may result in a more wary set of comments from Federal Reserve officials this week. The potential of $250 billion or so of targeted aid is obviously a positive, but it falls well short of the $1.6-2.4 trillion stimulus that markets had been hoping for and the Federal Reserve had been pencilling into its thinking based on the minutes of the September FOMC meeting. FOMC members will reiterate the point that interest rates are not going to be moved up anytime soon and they could potentially do more quantitative easing. After all, there is a long way to go in the recovery and it is important to remember they cannot generate demand, they can only help to ensure the smooth functioning of markets and the flow of credit.

The data flow includes inflation numbers, which have surprised on the upside recently, but given the flatlining energy components, we look for fairly benign 0.2% month-on-month increases in both headline and core inflation. Friday then sees the release of retail sales, industrial production and consumer confidence. All three should post decent increases given manufacturing business survey numbers, car sales, credit and debit card transaction numbers, rising equity markets and the strengthening housing market. However, the labour market improvements are stalling and income support from government benefits are waning, suggesting that the numbers may soften more as we head towards year-end.

The UK unemployment rate has stayed pretty stable over recent months, but that looks set to change. We expect another slow uptick for the three months to August, as the forthcoming end to the furlough scheme continues to add pressure. While we don't have great visibility on how many workers are still benefitting from the Job Retention Scheme, the latest ONS business survey suggests around 9% of employees are still fully or partially furloughed. A proportion of those are still likely to return to work over the coming weeks but it is also unfortunately likely that the unemployment rate could rise to 9 or 10% by the end of this year or early next, as a chunk of previously-furloughed workers are made redundant.

This, combined with the recent closure of hospitality in Scotland (with areas in England reportedly set to follow), will put further pressure on the Bank of England to add stimulus in November. We expect another expansion in the Bank's asset purchase target.

The pace of the recovery continues to be watched very closely as parts of Europe start to introduce new restrictive measures to fight the new surge in Covid-19 cases. Industrial production for August will show whether the industrial recovery has maintained its pace or whether it has slowed down. As reopening effects are fading and German data already showed stagnation, we're not getting our hopes up for a strong August reading.