Second spike a genuine possibility

As has been seen in other economies as lockdown restrictions have been eased, the excitement in England of reopening of the hospitality sector has been replaced by a sense of foreboding over the ability of pubs and restaurants to effectively socially distance their customers and the viability of their businesses.

If the economy is to recover in the manner that has been projected, this sector must succeed in overcoming the pitfalls of reopening. It is one of the major employers, provides significant tax revenue to the nation’s coffers and allows other knock-on areas of the economy to perform.

With the Government’s furlough having just a month to run in its current form, the more employees that are returning to full-time work the better. This will protect their jobs as their employers will have positive cash flow to allow them to keep some workers furloughed, since they will not be able to operate at full capacity while restrictions, albeit reduced, remain in place.

Fears remain that for every month of lockdown the economy will be in, or close to recession for a year.

While it seems extreme to consider that if the lockdown remains for two more months, (children are expected to return to school full time in September) that five months of lockdown will lead to five years of recession. However, there is little doubt that the economy will be dealing with the fallout, in some way or another, for the entire length of this Parliament.

It is doubtful that it has escaped the notice of Boris Johnson and his advisors that even having had an election a little over six months ago, Covid-19 has already replaced Brexit as the single most important issue for this Government to deal with.

Yesterday, the pound lacked any direction with neither new economic data or significant comment to provide influence either positive or negative. It traded between 1.2543 and 1.2414 versus the dollar, closing at 1.2418.

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Latest report shows depression-like symptoms

There is no solid historical evidence to support any claim about how the U.S. economy will recover from the Covid-19 pandemic. The Great Depression was 90 years ago, and the world was an entirely different place then. Therefore, every theory about V-shaped or U-shaped recoveries on the one hand or years of high unemployment and low growth on the other is valid.

While the markets perform their usual trick of applying long-term theories to short term trading decisions the dollar will continue to gyrate, driven by the almost daily reversal of opinion created by economic data.

A few months ago, trade was making a comeback as the most significant piece of data released on a monthly basis. The U.S / Chinese relationship was based around agreement over their relative imports and exports and the world was coming to terms with their symbiosis.

Employment data, whether weekly jobless claims or the monthly NFP report, was relatively stable and the theory that a 5% unemployment rate meant that the country was theoretically in full employment had fallen by the wayside as the rate fell to around 3-3.5%

Now, as the fallout from Covid-19 has centred around employment and the jobless rate has surged to well in excess of 10%, it will remain the employment data that is the basis of many theories around the pace of recovery.

It is becoming apparent that President Trump’s views of recovery differ from the norm and don’t necessarily gel with those of his supporters. While he attracts a significant number of highly paid executives and investors, his groundswell of support is blue collar. They do not avidly follow the gyrations of the Dow, Nasdaq, or S&P 500. All they care about is remaining in work in order to satisfy their less-lofty goal of putting food on the table for their families.

Therefore, the President’s assertions that the return of the stock markets to pre-Covid levels represents a recovery and not a reaction to the amount of cash that has been injected into the market may come back to bite him.

The dollar index is also caught in a vortex of conflicting opinions and this has led to significant volumes of two-way traffic but no discernible trend for now. Yesterday, it traded between 97.23 and 96.55, closing at 97.22.

German data shows significant improvement in confidence

It is well known that the Eurozone economy was in trouble long before Covid-19 hit and it was becoming increasingly difficult to understand how the growing gulf between the goals of the Union were ever going to gel with the demands of individual states and their reasons for remaining within the confines of a trading bloc that had ambitions to become a global superpower.

One of the main reasons for that confusion was the lack of cohesion around policies designed to make use of a huge captive market with the potential to be far more significant than that of the U.S.

Exports to countries outside the region outstripped those to fellow members of the Union while imports came from China and other Asian nations as the growing theory of exporting manufacturing capability to countries with a lower cost base took hold.

This theory has afflicted the U.S. but it is a far more established economy, operating to a large extent, as a single entity driven by a single fiscal policy.

Now, as Covid-19 decimates several economies that now appear less related than ever and even a unified financial response seems impossible to find, the what I have I hold mentality that pervaded the early days of the pandemic is returning.

Yesterday, data for the current business climate and future expectations for the German economy were released by the influential Munich based IFO Institute.

It showed a significant improvement over recent readings. While the reason for that is evident, the German economy has shown a resilience, not always illustrated by bald data releases that other EU members have not. Even a significant recent spike in infections that sent the R number into a major reverse failed to shake the country’s resolve that its treatment of the virus has been the right one.

Emmanuel Macron and Angela Merkel announced that they will meet again early next week to discuss the Pandemic Relief Fund. While their determination is admirable they are doomed to failure in their quest to unify the response for several reasons; first, they are too late, second Germany still faces Constitutional issues around its guarantee of another nation’s debts and finally the frugal four are more unable than unwilling to change their position.

Yesterday, the single currency. Was affected by the price action of the dollar index. It fell to a low of 1.1248, closing at 1.1250.