30 April 2020: UK in Danger of falling behind

UK in Danger of falling behind

30th April: Highlights

  • No sign of lockdown relief leaves Sterling mixed
  • U.S. economy slams the brakes on
  • Easing of lockdown means little as employment expectations fall

Economy versus society?

The cautious attitude of the UK Government over lifting any lockdown restrictions creates two questions; first, is it really a simple choice between protecting the population versus protecting the economy and second, when does the effect on large corporates (BA, John Lewis) make it a risk worth taking?

Dominic Raab, again deputising for the Prime Minister who was absent attending the birth of his child, confirmed that the current restrictions would be reviewed by May 7th, when the second three-week period of the lockdown ends.

It is hard to get to the bottom of just how restless people and small businesses are becoming since the media are prone to making a story where no real story exists. While it is hard to get to the facts, it is perhaps an assumption that human nature dictates that seeing other countries starting to lift restrictions leads to the question; if they can, why can’t we?

The release of Q1 GDP data for the UK is not until May12th, so speculation about how much the economy slowed during the January – March period will continue until then. This has been a particularly slow week for data releases in the UK but next week sees activity numbers for services and construction released. They are likely to be significantly lower but as has been seen in other nations that will simply confirm what the market already knows; that there is a long steep road to recovery which is yet to begin.

The pound, for now remains driven by the gyrations of other major currencies. Yesterday, it rose versus the dollar and fell versus the single currency. Against the dollar, it reached a high of 1.2485, closing at 1.2468, while it fell to a low of 1.1421 but rallied to close at 1.1468 versus the euro.

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….wait for Q2

The Q1 data for growth in the U.S. was as bad as the market had expected and then some! GDP contracted by 4.8% in the January to March period. Given market expectations of 4%, which in reality were little more than a shot in the dark, illustrates just how bad it can be when an economy slams on the brakes.

Most analysts believe that this data which includes only a two week period out of twelve when the country was on lockdown is merely a taster for the carnage that will be seen in Q2 when the lockdown was in place for at least eight of the twelve weeks.

President Trump trying to find a degree of positivity was forced to push his date for the recovery to be in full swing back again, commenting that it will be Q4 before the recovery was well under way. That is significant since it means that when the U.S. goes to the polls, it may not be during as rosy a picture as Trump had previously predicted.

As he made these comments the President was also reeling from a fall in his poll ratings. He was told by his team that had the election taken place in the past few weeks he would have lost to Democrat candidate Joe Biden. The reason for the fall in his popularity has been the freewheeling nature of his press briefings and his open hostility toward anyone who questions his actions.

Following yesterday’s data, the FOMC which was already well into its meeting when it was released. announced no change in official interest rates. Jerome Powell used his press conference to acknowledge that no matter the stimulus pumped into the economy the loss of jobs due to the Covid-19 pandemic will likely create a depression that rivals if not surpasses the Great Depression of the 1930’s.

He went on to say that the economy could remain in recession for a year or so unless a vaccine is produced before that. His concerns over a prolonged lockdown is that more smaller businesses would go to the wall leading to continued mass unemployment and an erosion of the skills of those who remain unemployed.

The dollar reacted with ambivalence to the GDP data since it was well known that it would be poor. The index ended lower on the day. Having reached a high of 99.87, it fell back to close at 99.51.

Declining employment bodes badly for any rise in sentiment

It is hard to discern the difference between sentiment and reality when studying the effect of Covid-19 on the Eurozone. While make or break time is fast approaching for the EU, today will see one of the most important ECB meetings ever, certainly since the 2008/9 crisis.

It is a relatively simple job to put plans in place to help an economy to recover as was seen in 2009 despite those plans not being to everyone’s taste. However, when lives are at risk, the minds of the Governing Council will be sharpened by the fact that this time around, lives are at stake. As a Greek delegate was heard to say yesterday, we have been poor before and will be poor again, but we will only be dead once.

The release of today’s GDP data will be awaited with a massive degree of concern. It is likely to be abysmal but even that will be tempered by the fact that no matter what the number is, the reality of the situation is that Q2 will be worse.

Analysts expect the economy of the entire region to have contracted by 3.1% with pockets where it has been even worse. The Spanish economy may have contracted by close to 5% with Italy not far behind. The economic effect of the lockdown has also meant that Italy has found it impossible to gather activity and sentiment data, so its figures contain several estimates.

Sentiment indices are showing that hiring expectations are plummeting as fears remain that it may be years until the economy even regains the level of activity that was seen in the final quarter of last year. The recovery will be slow with tax receipts falling and remaining low while claims for unemployment support continue to rise.

The outcome of today’s ECB meeting is impossible to predict, but unless Christine Lagarde has a magic wand, it is likely to disappoint the markets.

Yesterday the euro traded in a surprisingly upbeat manner versus the dollar, it traded up to a high of 1.0885, closing at 1.0872.

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.”