15 September  2020: Q3 may not see massive recovery

Q3 may not see massive recovery

15th September : Highlights

  • Johnson wins first round of Parliamentary votes over Internal Market Bill
  • Pandemic slump to last well past election
  • Industrial production grows MoM but still well below last year’s level

Beginning of second wave slowing growth

When the data for the contraction of the economy in Q2 was released, it was greeted with a fairly sanguine response from analysts who believed that the collapse in growth would be more than made up for by a major recovery in Q3. With just a few weeks of Q3 left, the outlook is, perhaps, not as rosy as had been expected.

The Government’s eat out to help out scheme, while very successful in its own right looks more like a gimmick as high street activity has fallen considerably since the scheme ended at the end of last month.

Government help for companies whose staff have been furloughed has been scaled back from 80% of wages to 70% and the cap has been reduced from £2.5K to a little over 2.1K. While we await unemployment data for August, there is little doubt that as Government support is withdrawn, the rate of those losing their jobs will increase.

The Government’s Internal Market Bill received its first vote in Parliament last evening and while it was passed, the five remaining living Prime Ministers bedsides Boris Johnson each voiced their concerns.

David Cameron who set the entire Brexit debacle in motion commented that breaking international law should be the absolute last resort for any Government and not be used as a bargaining tactic to get what you want.

The time for negotiation over the border between Ireland and Northern Ireland has long since passed and although the UK can boast that it has already agreed trade deals with Japan and several smaller nations, deals with both the EU and also the U.S. are in the balance.

Yesterday, the pound gained a little ground following its rout last week. It reached a high of 1.2919 and closed at 1.2847.

With inflation to fall to very close to a deflationary level, the Bank of England, which meets on Thursday will still have wiggle room if it wants to provide more support to the economy.

However, with the position clouded by the Government’s seeming intransigence over Brexit Andrew Bailey and his colleagues may prefer to hold off for now.

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Fed decision to have political overtones

Stephen Mnuchin the Secretary of the Treasury has said that an agreement over support for small business and those whose jobs have been lost due to Covid-19 can be reached but he placed the ball very much in House Speaker Nancy Pelosi’s court.

The wrangling over the scheme to help those suffering more from unemployment than would normally be the case, has dealt a severe blow to the pace and rate of the recovery since Q2’s 32.9% contraction.

While there is no doubt that the economy is improving, as has been said before, the rate of that recovery depends on who you ask.

President Trump and his Administration believe that the recovery has been historic, while both his opponent in the November election and some prominent banks and investment firms beg to differ.

Sitting astride this and with their own view is the Federal Reserve.

At their regular monthly meeting which starts later today, the FOMC will sift through the latest information provided by forward looking leading indicators and conclude that while more can be done with monetary policy, it is fiscal support that needs to lead the way.

Jerome Powell is likely to repeat his recent determination to provide every support possible but take no immediate action. Having said that, of course the Fed Chair can be unpredictable.

Retail sales data for August will be released before the end of the meeting although it is certain that the FOMC will have had an advance read of the data available to them. Market volatility may grow during the afternoon should the data be out of line.

Market expectations are fairly neutral, perhaps leaning towards a marginally weaker number but probably insufficient to prompt action.

Following its recent rally, the dollar has entered a period of consolidation. Yesterday, it reached a low of 92.07 but rallied to close above the 93 level at 93.06.

Covid effect to be around for some time

The data for industrial production, released yesterday, showed that the improvement that began in June continued, but the pace of the recovery slowed down.

Having grown by 9.5% in June, industrial production grew by 4.1% in July as pent up demand that started during lockdown was satisfied.

However, year on year production contracted by 7.7% in July down from a 12% fall in June.

While this shows that the Eurozone economy is emerging from the effect of the Pandemic, that recovery is slower than had been forecast by both the ECB and EU Commission.

While warning of complacency particularly when faced with a second spike that is seeing Covid-19 cases increase at an alarming rate, the ECB will wait and see before committing to an increase in the PEPP.

Despite the parlous state of the banking sector, there have been calls from ECB Council members for instalment holidays and rate reductions to be provided to borrowers across the entire region but with particular focus on those nations that have been hit hardest by the pandemic.

It is unclear just how the liquidity created by the PEPP will be used but bailing out banks probably wasn’t near the top of the agenda and is contrary to the comments made recently by former ECB President Mario Draghi.

It is becoming more difficult to plot a path for the single currency independently since its prime drivers barely differ from the entire G7.

However, the banking crisis that was starting before Covid-19 hit is likely to play a major part in the pace of the recovery. The rules that have been put in place concerning bonuses and dividends will depress share prices and limit new lending.

The euro continues in a reactive mood but there is virtually no interest to see a further test of the 1.20 level in the medium term, possibly until after the election, unless a major event hits the dollar.

Yesterday, the euro traded in a 1.1888/1.1832 range, closing at 1.1867.

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.”