Confidence growing that UK downturn can be contained

The UK is suddenly seen as a leader in the fight against a second wave of infections from Covid-19. If not a global leader, certainly a leader as far as Europe is concerned.

The fear is that there is going to be a second wave of infections across Europe that will decimate their ability to fight off its worst effects on their economy, while the UK considers its own plans but limits travel to and from the mainland.

This week, the country will announce the data for Q2 GDP. It is expected to show that the economy contracted by 21% in the period between April and June, and is now in recession.

But, in all honesty what does the contraction in Q2 actually signify?

It is common knowledge that the economy was in recession and that the Government was struggling to find a way of helping individuals who had lost their jobs or been furloughed and those businesses that were struggling to meet their commitments to survive.

However, the initial support provided by the Government headed off the worst of the downturn and the reopening of hospitality, despite what has happened since, allowed the economy to survive and gave the Prime Minister and Chancellor time to regroup.

It is impossible to say how the economy is going to fare going forward. According to the Governor of the Bank of England, the best that can be expected is that the economy will recover slowly and the degree of activity seen last December cannot be expected to be seen again until the end of next year at the earliest.

This week, apart from the GDP data, the UK will release data for employment that will provide a further indication of how far the Government measures have been successful.

The employment rate is expected to climb to around 7.5% while the total unemployed is expected to rise to 2.75 million by the end of the year.

Last week, the pound rose to a high of 1.3186, but drifted back to close at 1.3052 as the dollar found a floor.

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$44 billion could run out very quickly

President Trump has stepped in to break the deadlock over what the Administration is able to provide to support those who have lost their jobs due to the Coronavirus pandemic.

There has been a standoff between both houses of Congress since before the relief Bill that was passed in March to provide additional relief to those suffering the worst of the economic fallout expired almost two weeks ago.

The numbers being argued about had become astronomical. Democrats said they would come down by a trillion if Republicans went up by a trillion. As the U.S. passed the grim milestone of five million infections, the President signed Executive Orders that will provide an additional $400 per week to the unemployed.

The NFP data that was released on Friday showed that a little over 1.75 million jobs were created in July. This was a little better than predicted but well below June’s 4.8 million. With weekly jobless claims still rising, the President’s new order will be well received although some of the strings that are attached may still face a legal challenge.

Trump said the lower level of payments should act as an incentive for those unemployed to get back to work, as if in many cases they have a choice.

That sentiment runs contrary to the view of several economists including Federal Reserve Officials.

There could be a rift developing between the Treasury and Federal Reserve, since Treasury Secretary Steve Mnuchin rejected an offer made by House Democrats, clearly under the instruction of the President, while Several members of the FOMC supported the proposal.

Market participants see the dollars recent fall as a necessary evil, but are prepared to support it, should the opportunity arise.

Such an opportunity arose late last week, and the index recovered to reach a high of 94.00, closing at 93.32. It provided the first positive close in six weeks.

Confusion over common bonds remains

There remains a large degree of uncertainty over the common bond issuance program that was announced as part of the Pandemic Relief Fund. There is no mention yet of any allocation to individual States, who confirms that any issuance carries the common guarantee and what the legal status of any issue would be.

Every official has said they stand ready to support any issuance but look to each other to actually get their hands dirty. Given the pace at which the EU operates, it may take some time for funds to arrive where they are needed.

With apologies for sounding like a broken record this is another issue that illustrates the inefficiencies created by the lack of any fiscal plan or a central treasury that would be the natural arbiter of these decisions

Until the Eurozone gets around to creating a framework upon which it can hang the necessary legislation, it will exacerbate any potential crisis by always being late to the party.

Investor confidence data will be released this morning. Although it is expected to have improved, it will remain well into negative territory due in no small part to the lack of sound leadership being portrayed at the top of several EU institutions.

Last week, the single currency looked likely at one point to break the 1.20 barrier versus the dollar but in the end, it lacked sufficient impetus. It reached a high of 1.1916, but fell back to close at 1.1788.