PM relaxes lockdown
24th June: Highlights
- Sterling rallies versus weaker dollar, struggles versus euro
- Positive economic view obscured by Covid concerns
- Activity falling but no longer collapsing
U-Shaped recovery becoming more likely
Boris Johnson the UK Prime Minister outlined plans for a further easing of lockdown restrictions, From July 4th, the safe distance for people to stay apart has been reduced from two metres to at least one.
The hospitality sector of the economy is going to be allowed to reopen but this will be subject to strict social distancing restrictions. The two most significant requirements for the reopening of pubs and bars is that customers must provide their identity to enable contract tracing and they must only be served at their tables. This will ensure that the new one metre social distancing requirement can be maintained.
Activity in the manufacturing sector has expanded in June according to the latest Purchasing Managers Index. It showed a level of 50.1 which is an improvement of last month’s 40.5 and analysts’ expectations of a continuing contraction. Data for the services sector showed an improvement over May but it remains in contraction.
Within the services sector, one spinoff is likely to be the realization of the effectiveness of having staff working from home. Measures of productivity have shown a significant increase with employees’ work/life balance being considerably improved. This is something that could see a major increase post lockdown. With rents in the city centres continuing to rise and transport expenditure being a large part of employee’s monthly outgoings both issues could be solved by a degree of lateral thinking.
The pound rallied back above the 1.25 level versus the dollar yesterday although this was in part due weakness in the greenback. It reached a high of 1.2532, closing at 1.2519.
Housing data encourages positive outlook
Two more contradictory domestic measures are the improvements in output and activity which are offset by the almost reckless disregard for pandemic restrictions in several states. While New York State once the global epicentre of the pandemic appears to be recovering and being able to lift several restrictions, Florida and South Carolina saw record levels of infections and fatalities recently.
With the economic recovery being seen as a cornerstone of the President’s re-election strategy, it seems that measures to keep people safe across the country will be handled in a haphazard way.
Yesterday’s data for economic output saw both manufacturing and services activity recover to almost the 50 level while the composite figure was at 46.8 This is a considerable improvement over May’s 37 but still showing room for significant improvement.
Employment continues to be the area of the economy which the man in the street is most able to follow and remains most analyst’s bellwether for the state of the economy.
Data for weekly jobless claims has settled at around the 1.5 million mark and the next major milestone will be when the number of new claims falls below the one million mark, although tomorrow’s release is expected to be around the 1.3 million mark.
With the Federal assistance funds likely to be scaled back when the Bill that was introduced at the start of the pandemic expires at the end of next month it will be a true litmus test for how easily small and medium sized businesses are able to stand on their own feet.
Yesterday, the dollar index fell back to a low of 96.38 but recovered to close at 96.68.
Data for durable goods orders will be released tomorrow., This will give an indication of the longer-term prospects for the economy as it will show the willingness of larger companies to place orders for big-ticket items.
Flash data shows continuing contraction
It had been hoped that given the easing of restrictions and the opening of borders between member states that an expansion, however meagre, would be seen. While official data for retail sales since the lifting of restrictions is not yet available, footfall in shops as judged by the naked eye, is failing to live up to expectations.
This has led to the unexpected step of Spain allowing tourists from the UK to visit without restriction or quarantine. It is obvious from that move that Spain cannot allow itself to restrict the arrival of the more than fifteen million tourists who arrive from the UK each year.
However, with two-week quarantine measures being enforced in the UK on visitors and residents, it remains to be seen how many will take up Spain’s offer.
With the UK’s position on Brexit crystal clear it beholds Brussels with its new, more enlightened view of the effect of the UK leaving the EU to come up with a workable plan for trade and the other areas of the future relationship between the two.
Talks continue but with the time limit for an extension to be requested by the UK expiring next week, the entire four year process is looking more likely to end with a whimper than a bang, leaving the EU with a significant hole in its budget.
It remains to be seen if the UK will still pay the £37 billion divorce bill if no agreement is reached.
The sentiment surveys released yesterday most probably don’t include business’ disappointment across the entire region that no agreement has yet been reached over the Pandemic Recovery Package. With Brussels propensity to leak like a sieve, and no progress being reported, concerns remain that the entire issue will be around for some time to come.
The European holiday season is nearly upon us and it will be interesting how many visitors from northern Europe take the risk and travel to southern states, or whether this will be a good year to stay more local.
Yesterday, the euro rallied against a weaker dollar. It reached 1.1348 but fell back to close at 1.1308.
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.”