Q1 GDP unlikely to provide a surprise

This week had been slated as the week when we were due to find out just how serious the recession is going to be in the UK. Given the data we have seen over the past weeks, the cat is well and truly out of the bag.

The data for Q1 GDP is due for release on Wednesday, but the contraction is unlikely to ruffle any feathers for two reasons. First, there is unlikely to be any surprise in a month on month fall of 7% and second, it is well documented that it is only to be this quarter where the real fall will be seen.

Prime Minister Boris Johnson in his address to the nation last evening was wary of creating fresh expectation in the population and set out another set of steps and gauges of how the lifting of restrictions will be done

One of the major takeaways from his address is that the hospitality industry will remain in lockdown until July and only be able to open then if social distancing can be guaranteed. It was a sobering speech which will have brought to the forefront of people’s minds just how much longer there will be restrictions in place.

With the change from stay at home to go to work if it’s safe to do so, there will be a balancing act to be performed for those told they can return to work between their physical health and their financial health.

The economic effect of the new measures is unlikely to be favourable to individuals or businesses in general. Public transport will remain almost impossible to use while the Prime Ministers suggestion to use cars (or bicycles) seems almost flippant.

Last week Sterling was hemmed into a tight range, between sellers at 1.2520 and reaction to risk appetite which added support around.1.2280.

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No quick fix

President Trump was fairly dismissive of the abysmal NFP headline data which was released on Friday. He adopted an attitude of move along, nothing to see here, as 20.7 million jobs were lost in April.

Wholly expected was Trump’s answer when questioned about the state of the economy.

There are varying replies when questions are asked about the speed of any recovery.

The Labor Secretary, Eugene Scala was optimistic that some of the jobs lost in April may have already been recovered. We will only know if that is true on June 5th, when the May report is released. Scala is clearly a glass half full kinda guy, as anyone who can find any positivity in the current situation must be.

Neel Kashkari, the President of the Minneapolis Federal Reserve is more glass half empty.

He commented before the data was released that he believes that the comeback from lockdown will be slower than most analysts believe. He believes that the manufacture of a vaccination is crucial, while politically, it will be hoped that it is created in the U.S. It is hard to imagine the current acrimony between Washington and Beijing if it comes from China. The conspiracy theory mill will go into overdrive!

He went on to say that an anticipated snapback from the lockdown is wildly optimistic.

Three White House Officials were in front of the cameras on Sunday morning and they were also optimistic, expecting a strong H2 and a roaring 2021.

When asked if he felt the same, Kashkari replied, I wish

The spread of the virus is far from under control, the lockdown will last longer than originally anticipated. The optimism engendered by the Administration is not shared by every member and this will have a lot to do with the political landscape.

With Global growth data now having been released by the major economies, attention will now switch to the future as most nations come through the peak of infections.

The dollar continues to be driven by global activity and risk appetite.

Last week the dollar index traded between 100.40 and 99.24. It ended 50 pips higher on the week at 99.74.

When does the long road back begin?

There is a second pandemic sweeping across the European Union at the moment, colloquially called every man for himself.

While the spread of Covid-19 has been nothing short of stunning, the unwillingness of nations to pull together and support other members has been almost on a par. It perfectly illustrates that when there is a possible financial contagion as in 2008/9, the Union if fairly united in fighting it although obviously some were made to suffer more than others.

The Eurozone is now at a critical stage with the disruption of 2009 paling by comparison to today’s potential debacle. While of the larger economies, France and Italy were thought to be too big to fail, today, they may turn out to be too big to support especially if that support cannot come from a united effort with each nation taking a fair share of the burden.

This week there will be data released for industrial production that will highlight the slowdown in the economies of the Eurozone. Having seen growth and employment data collapse, it is almost certain that production will follow.

Year on year industrial production is likely to fall from -1.9 last year to -12 in April.

As I have said before, the absolute number is fairly irrelevant since there is little difference between -12 and -14 or -10,

The entire financial and economic population will be searching for one imponderable answer; how long will recovery take.

For example, if the U.S. does indeed see a V-shaped recovery, (unlikely but possible) and the Eurozone struggles to even escape the clutches of Covid-19, the single currency could easily fall to well below parity to the dollar. Of course, this will eventually allow the Eurozone to become competitive in global export markets but by then it may not be able to produce the required goods.