UK recession possible?
Morning mid-market rates – The majors
06th March: Highlights
- Standard rate cut or emergency cut. What’s the difference?
- Fed maybe not be one and done!
- Italy demands increase in deficit ceiling
MPC rate cut now 100% priced in
Incoming Bank of England Governor Andrew Bailey told a Parliamentary committee that he preferred to wait until the Bank had a clearer picture of the effect of Coronavirus going forward before a decision is made.
Concerns over negotiations about the future relationship between the UK and EU post-Brexit had also seen the pound weaken. While the original Brexit negotiations were characterized by the British Government’s continued internal difficulties both within the ruling Party and the wider Parliamentary wrangling, post the election that is one hurdle Boris Johnson won’t face.
The spread of Coronavirus has now reached stage two according to the Chief Medical Officer. This means that the focus will be on limiting the spread of the virus and will be the start of the more significant effect on the economy. It will entail closures of schools and Government buildings as the public sector initiates precautions. In the private sector manufacturing, construction and finance are likely to see considerable shutdowns simply due to lack of workers. Following a suspected outbreak at its main London office, HSBC has started sending research and analytical staff home but so far this has, apparently, had no effect on its front-line trading staff.
While numbers has become of secondary importance, this week’s data on services output was encouraging showing that the sector continues to expand despite the significant increase in competition. The UK has said that it expects a level playing field to be agreed between London and Brussels as a major plank of the current negotiations.
The pound bounced off its lows at 1.2861 and climbed to close at 1.2961. The 1.30 level remains a barrier but a close above that level today could be positive despite an approaching rate cut.
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100bp may be the target
The Central Bank announced yesterday that it remains vigilant over the effect on the global economy and won’t be bound by its own meeting schedules if it feels that action needs to be taken.
Yesterday’s data on factory orders was disappointing and may be the first sign of a coming slowdown. From a reasonably healthy increase of 1.9% in January. Orders fell by 0.5%. in February.
Of course, today being the first Friday of the month the employment report will be released later. It is certain that Jerome Powell and his colleagues at the Fed. have had an advance view of the report and, taken at face value, their actions over the Coronavirus effect may mean that they are concerned about a fall in the headline number.
Market expectations remain at around +175k new jobs created, a fall from last month’s +225k. However, a drop below +150k and a significant fall in average weekly hours will get the market back into rate hike territory. One other number from the employment report is growth in average hourly earnings. The recent rise in inflation will bring that to the fore
Yesterday, the dollar index fell to a low of 96.51, closing at 96.58. The break of support at 96.80 would be significant in a normal market but given the volatility currently being seen, technical analysis of the market is almost impossible.
Rome wants to be able to increase deficit by 0.35%
While this is a more than reasonable request, given the parlous state of the Italian economy and the additional burden of dealing with being the epicentre of Europe’s Coronavirus it is a more significant signpost to the EU’s lack of any central planning around such a situation.
There is no Federal relief available and the entire region remains in a fractured state in its ability to cope with such a potential disaster. While German and France want to see the spread restricted, each nation is making its own plans.
This week has seen activity data releases and they have not really shed any light on how the underlying economy is faring. If viewed apart from the Coronavirus concerns, the economy remains in the doldrums with the Central Bank now more concerned about it falling off a cliff than it is about stimulating output from the current level.
There is no doubt that there will be a significant gap between the U.S.’s ability to recover from the outbreak and that of the EU. The Eurozone is now almost certain to enter a recession that could easily last the rest of 2020, but its ability to put in place measures to encourage activity and consumption post any downturn could be the difference between survival and an economic abyss.
Yesterday, the euro rose to its highest level of 2020 versus the dollar. It reached a high of 1.1229, closing just one pip lower.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”