A test of policy

Last Monday, the market showed initial signs that asset prices had bottomed and indeed throughout the week we saw consistent, incremental improvement, due to fiscal policy intervention announcements and signs that the virus has potentially peaked in some geographies.  Not surprisingly the economic ticker tape is almost agonising to watch – on Friday, the US Unemployment rate jumped nearly a full percentage point to a two-and-half year high – but the market has seemingly taken a stoic view of the blow-by-blow and is watching the for the light at the end of the tunnel. I suppose one needs to be thankful that a collective rationalism has prevailed, even if it does stem from a tolerance to terrifying headlines. 

Much like preceding crises, dramatic government intervention will change the political landscape in the succeeding recovery period.  In the Global Financial Crisis, one of the key lessons learned was the benefit of decisive and timely government action.  The byproduct was that central bankers have been the global economy’s life raft for nearly a decade, and we haven’t yet managed to deflate it. The test in the coronavirus saga is certainly going to be different than 2008, in the same way that each financial crisis has a characteristic catalyst.   Since it follows that the central banks are largely out of ammunition at this stage and are relegated to a supporting role, focus is likely to veer back to government stewardship, a role they have successfully dodged since the global financial crisis.

One of the positive notes from last week was the uptick in Chinese data, which demonstrated the material, positive impact that coordinated government efforts – once the problem is acknowledged, that is – can produce.  In the west, governments are scurrying to mimic the top-down Chinese effort. This has led to dramatic changes in government models in a very short space of time.  Where once the Free Market was the government watchword, governments are dictating terms to business, an unthinkable prospect several weeks ago.  The implications of these changes are profound; we will soon learn that governments cannot simply revert to previous form once the danger has passed.  It’s a new test for governments globally and for some it's going to get very ugly indeed.

Bottom Line:  The test of government policy is back in the spotlight and one place that is starting to show cracks is the EU.  The tensions arising from too-little financial integration, that were revealed post-financial crisis, are becoming deadly.  “As Italy faces its most severe crisis since the second world war, with more than 15,000 deaths from coronavirus and its economy on course to suffer the deepest recession in its modern history, there is a rising feeling among even its pro-European elite that the country is being abandoned by its neighbours.” (Financial Times)


The week ahead

GBP

Last week, Sterling traded flatter than its G10 counterparts and held itself against a strengthening US Dollar before giving way on Friday. For most of the week, the Pound bounced between the 1.23 to 1.25 region before Friday’s slump to the low 1.22’s. London trading opens with poor, yet unsurprising overnight UK GfK Consumer Confidence data which came in at -34, wildly missing expectations of a -9 print. Although this week’s UK economic calendar is light and short due to the Easter bank holiday, data releases are likely to follow the poor readings we’ve seen from China and mainland Europe recently.

  • UK Construction PMI for March came in at 39.3 this morning, missing expectations of a 44 reading.

  • On Thursday, February’s monthly Industrial and Manufacturing Production is forecast a modest 0.1% growth for both readings. This data point doesn’t include the UK lockdown which came into effect in March, so is unlikely to rattle markets.

  • Also, on Thursday is month on month GDP for February. This reading won’t include the UK’s lockdown that occurred in March, so may be largely looked over by markets awaiting more leading indicators. The forecast is 0.1% during Feb.

USD

Last week, the US Dollar climbed against most major currencies after finding support at 100 and 200 daily moving averages on its trade-weighted index. The Greenback remains in the driving seat for most currency pairs as it wildly swings along with other asset classes. Central bank policy to supply Dollars has somewhat reduced the volatility markets experienced a few weeks ago, but short-term shifts in appetite for risk assets may extend US Dollar volatility into the new quarter.

  • On Wednesday, the Fed’s Meeting Minutes will provide a detailed record of the Fed’s monetary policy action in March. This will include a decision to slash rates to near zero.

  • Unemployment claims out on Thursday is expected to show another 5 million people claiming unemployment over the past week in the US. This would be an improvement from last week’s 6.65 million, but still quite a shocking figure.

  • Thursday will also hold monthly inflation data in the form of PPI. The forecast is a deflationary -0.3%, with the core reading expected to show stagnant price growth at 0%.

  • Preliminary Michigan Consumer Sentiment is expected to read 80, down from 89.1 previously.

  • Friday’s monthly CPI data for March is expected to read -0.3%, with the Core reading expected to show 0.1% price growth. Oil and energy prices, which collapsed in recent weeks, isn’t included in the Core reading, hence the expected difference between the two measures.

EUR

The Euro fell victim to the US Dollar last week, falling over 3% against the Greenback and dipping below the 1.08 figure. Despite a lack of key economic data this week, a deterioration is expected in the few releases on the calendar. The ECB’s Monetary Policy Meeting Accounts are due for release on Thursday morning and will provide further detail into last month’s decision to keep interest rates on hold and boost asset purchases. Eurogroup meetings will be held via video conference on Tuesday and are expected to further develop a coordinated policy response among Euro member states to the economic slowdown.

  • German factory order for February came in at -1.4%, beating the expected -2.7% reading but significantly down from January’s 4.8%.

  • On Tuesday, German Industrial Production for February is forecast to show -0.9% growth, down from 3% in Jan while year on year is expected to be down 3%.

  • On Friday morning, French monthly Industrial Production for February is forecast to read 0% growth, down from 1.2% growth from Jan.