Data update to test pound

Today the new rules over quarantine for travellers arriving in the UK come into force. The protests from the travel industry and airlines highlight the Government’s dilemma over the pandemic and the economy.

Across the UK, there is a clear divide between public concerns about how safe it is, or can be, to lift the lockdown, even using baby steps and the long-term effect of the job losses that are bound to occur as the recession begins to bite.

The newspapers continue to talk about how bad the recession is going to be, but the truth is that no one really knows what the landscape will look like in a year or even six months.

The UK has the additional issue of Brexit to contend with and with time rapidly running out for the Prime Minister to request an extension (the deadline expires on 30th June) the stresses being faced by businesses that are already requiring extraordinary support just to survive Covid-19 are becoming palpable as both sides admit to very little progress being made.

As the Government continues to support the whole of society whether corporate or individual, analysts and commentators are starting to look at fundamental changes in the way the Government acts and reacts to stresses in the economy.

There are signs of a fundamental shift towards a greater degree of public debt under Conservative rule that will increase the tax burden on the country as a whole.

This week, the update on Q1 GDP will be released, together with April’s data on industrial production. Both these reports will make for unpleasant reading with GDP to continue to predict a massive fall in Q2 and industrial production set to show a 15% decline month on month.

There is an unreal feel to the pound’s continuing rally. It seems to be built on sand but continues to gather momentum. Last week the pound made a high of 1.2731 versus the dollar, closing at 1.2669. It also recovered versus the euro trading between 1.1085 and 1.1278, closing at 1.1220.

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Last week’s jobs data takes pressure off Powell

The market seems to have been stunned into inaction by its massive miscalculation of the employment report for May. Despite the weekly jobless claim’s numbers receding, it was wholly unexpected that the headline NFP data could even move into single figures of millions of job losses, let alone turn positive.

This is the most incredible turnaround in economic data for more than twenty-five years, yet the market took it almost completely in its stride.

More than 2.5 million new jobs were created in May compared to a market expectation of 10 million further jobs being lost. Analysts were lost for superlatives to describe the turnaround and there was also some scepticism about just what the adjustment will be when the June report is released.

Rather incredibly, President Trump used the spectacular jobs report to try to quell growing racial tension to say that George Floyd (the victim of police brutality in Minneapolis) would have been pleased by the data.

This week, the main event is the FOMC meeting that will take place tomorrow and Wednesday with Chairman Jerome Powell attending a press conference on Wednesday evening (UK time). One regional confidence report (Michigan) will be released and this is likely to improve from 72.5 to 75, while weekly jobless claims are expected to fall to 1.5 million, still terrible, but moving in the right direction.

The jobs data has drawn praise for the Fed (and the Treasury) for its rapid response to the economic implications of the pandemic although there is still a great deal of work to do as the recession begins in earnest with the end of several support packages at the end of next month.

Market expectation is for no change in interest rates and Chairman Powell is likely to be watchful in his press briefing and continue to confirm that the Fed is ready to act should the situation deteriorate.

Last week the dollar index continued to correct (the fall has not yet become a trend) reaching a low of 96.44 and closing at 96.93.

Data to underline stimulus need

In a similar manner to the rise in the value of the pound, the euro’s rise is equally inexplicable, possibly even more so.

The Eurozone has similar pressures to the UK with Brexit also weighing heavily despite various comments that the UK will suffer more from a no deal departure.

Last week the main subject for discussion and speculation continued to be the recovery package that has been being discussed for some time.

German Chancellor Angela Merkel announced that Germany was going to introduce a series of longer term measures designed to both replace the short term emergency support that it has put in place and designed to support business in the medium to long-term as the recession starts and efforts to combat its worst effects kick in.

While this is being touted as a blueprint for the entire region, not all members of the Union have the resources that Germany has and the entire conversation thus switches back to the source of support that the entire region is beginning to demand.

Last week, the single currency rallied versus the dollar reaching a high of 1.1383, closing at 1.1291. This rally seems even less sustainable than that of the pound, but a period of calm is now most likely to occur once the Central Banks have had their monthly meetings.

Last week’s ECB meeting agreed to add a further Eur 600 million to the bond purchase package but until real funding is made available to consumers, kickstarting the economy is going to be difficult if not impossible.

This week, the pan-Eurozone GDP data for Q1 will be updated, although this is not expected to have changed materially from the previous estimate of a QoQ fall of 3.8% and a YoY fall of 3.2%