12 August 2020: Employment data confirms issues

Employment data confirms issues

12th August: Highlights

  • Johnson warns of a long journey ahead
  • Trump’s actions too little too late
  • Fears recession will be worse than anticipated

94k new claims in July

One million jobs have been affected since the beginning of lockdown.

Yesterday’s release of employment data for July confirmed that the biggest issue facing the economy is the double edged sword rising employment benefit payments, coupled with lower tax receipts.

Almost 95k jobs were lost in July as businesses battle with falling activity and rising fixed costs.

This morning’s release of GDP data shows that the economy is back in recession breaking a run of forty quarters of growth stretching back over the entire period since the Conservative Party came to power.

While the data comes as no shock to analysts, it confirms what will be, in Boris Johnson’s words, a long long road to recovery.

Many UK businesses are planning redundancy measures with around 140k new job losses announced in the past few weeks. Household names like BA and Debenhams have both announced cuts to the workforce.

This highlights two of the more damaged sectors under the pandemic. It could be four years until air travel regains the levels of activity seen at the end of 2019 while retail has been hit by lack of footfall due to social distancing, rising high street rents and the continued growth of online shopping.

Research has shown that more than 50% of under 30’s prefer to shop online, irrespective of the current pandemic, as this fits in with their lifestyle.

While it is too soon to sound the death knell for the high street, there is little chance of the situation improving.

The effect of the employment data on the pound was negligible since although it highlighted the parlous state of the economy, it was hardly unexpected.

Sterling is currently reacting to the fate of the dollar. Traders feel that as long as it remains above 1.30 versus the greenback they are comfortable. It fell to a low of 1.3042 yesterday, closing at 1.3048.

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AirBNB IPO provides confidence in economy

The strength of the U.S. economy is still a matter of who you ask, but that remains almost a byword for many issues being faced by the Trump administration:

Covid-19, the scientists say the situation is grave while Trump claims the rise to 5 million cases is due to increased testing. The Treasury and Trump’s Chief Economic Advisor believe the economy is in a V-shaped recovery while the Fed stands ready to do whatever it can to help as the economy falters. Now, that same Chief Economic Advisor says that the negotiations between the U.S. and China are fine, a sentiment unlikely to be shared by Beijing.

Relations since the Pandemic began have become frosty as the President began by insisting on calling Covid-19 Chinese Flu, and have barely improved since, with little or no contact between the leaders for several weeks.

Continuing the who you ask theme, but moving on to stock markets and economic data, the S&P closed yesterday within a whisker of its all time high.

Equity markets were further buoyed with the announcement that an Initial Public Offering from short term rentals business AirBnB is about to be announced. The offering that would value the business at around $35 billion denotes another departure from brick and mortar businesses to companies that are solely online.

While such a move alienates a reasonably significant area of the economy, it is shrinking and for a forward-looking business it has to be the right move.

Economic data still shows that the economy is struggling to gain a foothold and yesterday’s announcement that Russia is about to release a mass immunisation drug fo Covid-19 will push drug firms to use all possible means to create a vaccine. Until that happens, the economy will remain in a struggle to grow and continue to need Federal aid.

Yesterday, the dollar index moved a little higher but remains in a narrow range. It closed at 93.74, closing at 93.66.

Future prospects better than current outlook

Investor confidence in Germany continues to improve, but with one caveat, future expectations far outstrip the current outlook. While this is hardly surprising, and is almost certainly true of every area of business across a large swathe of the Eurozone, it shows that there is still a belief that things will get better.

The French Prime Minister spoke yesterday of his concerns over a second spike of Coronavirus, commenting that over the past two weeks, France had gone backwards.

Concerns over a second wave are still the most significant worry but in Germany, there is a growing belief that it can be controlled. Just how much support Germany will then be willing or able to provide to the rest of the region remains an open question.

With the EU commission adopting a hope for the best without necessarily preparing for the worst policy, there remains a real concern about the rest of the region as it is almost seeing Germany as a separate case while the rest of the Eurozone/EU requires significant support.

There is still a degree of angst among the Frugal Five over the agreement that was reached at the most recent EU Leaders Summit as they struggle to rein in the enthusiasm of the banking sector in a few already heavily indebted nations.

It was mentioned yesterday that bank lending in Italy had skyrocketed, the same is likely true of Spain and Greece too. It has been likened to a shopaholic who suddenly receives a new credit card and cannot wait to use it.

The euro is also a victim of something of a summer lull and is closely tracking the dollar index. Yesterday, it closed virtually unchanged at 1.1740, having climbed earlier in the day to 1.1808.

Have a great day!
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.”