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Measuring the damage is an easier task than anticipating the duration

We’ve gone through a long period* of a large chunk of economic data being unanchored from normality and its use as a month-on-month measure of the health of the economy and of its resilience to further shocks being fairly limited. The jobs numbers released by the US Bureau of Labor Statistics on Friday indicated that total non-farm payroll employment rose by 2.5 million in May, which in and of itself is a fairly wild swing after dropping over 20 million jobs in April. But the caveats to the data bulletin explaining the circumstances of measuring this data ran to a side of A4. But now that the easing of lockdown measures is happening to various degrees across the world’s major economies, we are right at the beginning of being able to assess their ability to return to activity and what damage has been done to businesses and supply chains. (*I say a long period, but sub-zero oil prices were six weeks ago. It’s been 18 weeks since the first confirmed UK Covid-19 case. But I think that everybody’s sense of time has been unhinged by the lockdown measures.) FOR HOW LONG? So is the data coming through right now giving us an idea of how long a recovery will take? The gut reaction is that we are probably at the point where we have a pretty good idea about the depth of the damage that has been done, but that we don’t yet have a firm grasp of the rate of recovery, and with that we don’t know the duration of the downturn. And in the current climate, accepting that there are some or more “known unknowns” is a far more prudent approach to managing risk than to make predictions and attempt to extrapolate data to suit. Trade data released this morning from Germany this morning indicated the biggest declines since records began in 1990. Expectations had been for a pretty dismal drop of 15.6 percent and a EUR10bn surplus but the German Federal Statistics Agency indicated that seasonally adjusted exports declined by 24 percent while the trade surplus for Germany’s highly export-dependent economy fell to EUR3.2bn. Exports to France dropped by 48 percent, while exports to the United States declined by 35 percent. In addition to the trade numbers, surveys conducted by the Ifo economic institute reported that 24 percent of polled businesses required liquidity aid in May. As things stand, the German government expects the economy to shrink by 6.3 percent this year, citing “Collapsing global demand, interruption of supply chains, changes in consumer behaviour and uncertainty among investors.” As ever when it comes to measuring month-on-month activity rather than long-run trends it will remain crucial to pay attention to sampling periods when looking for direction of travel, but establishing whether this is the worst that things are going to get being the new good news is a theme that we are likely to see again and again in the coming weeks and months. This morning also saw the final reading of first quarter Eurozone data. There was a small upward revision to the initial reading to minus 3.6 percent, helped by an improved reading for France from minus 5.8 percent to minus 5.3 percent. Much like the initial reading, the numbers are bad, but they’re exactly what you would expect when you close down your entire economy, although the speed of the declines in household consumption at minus 4.7 percent was greater than may have been anticipated, while a 6.8 percent quarter-on-quarter decline in the services sector is pretty much what you’d expect when it includes accommodation and food services. To labour the point, we’re going to have to wait until the next GDP reading to see the damage wrought on supply chains and on businesses' abilities to return to activity.  That brief foray into fundamental economic data done and dusted, the biggest drivers this week are going to continue to be central bank activity. Tomorrow we have the eagerly anticipated pronouncement from the Federal Reserve, while the European Central Bank continues to battle deflation fears. When the Federal Reserve makes its policy announcement tomorrow, it will be under pressure to maintain or to add to its massive bond purchase programme. Despite Chairman Jerome Powell’s opposition to such a move, the US central bank is also under pressure to follow Japan and Europe and cut rates into negative territory. It is highly likely that the Fed will continue to resist these pressures, but that it will use its current zero rates alongside liquidity support to try and cushion a US economy still being hit hard by new Covid-19 cases. The aforementioned non-farm jobs numbers gave risk sentiment a short-term boost when they were released on Friday, but few see that rebound as the beginning of a rapid recovery and we see it as likely that the Fed will quickly address any exuberance over the labour market tomorrow. Along with the FOMC’s economic projections, tomorrow is going to be a bit of a wild ride in the FX markets. JOBS NUMBERS LIFT RISK APPETITE. FOR NOW. We’ve seen choppy trading through this week after a big boost to sentiment on Friday helped to lift risk appetite. At time of sending, EUR/USD continues to bounce around the 1.1280 mark despite the worrying data from Germany this morning, but with the Fed looming large we’re unlikely to see any major moves until tomorrow’s announcement. GBP WILL STRUGGLE TO MAKE MEANINGFUL GAINS ON BREXIT AND LOCKDOWN MISMATCH Sterling has had a worse time of it today, back below USD1.2700 after gaining ground on the reduced bid for dollar as a haven asset. Again, this is something that we have said plenty of times this year but sterling price action is far more sensitive to risk appetite than it might once have been thanks to continued uncertainty over Brexit negotiations. Before the global pandemic we had been consistently positive in our medium and long-term outlooks for sterling, but until there is some clarity over the United Kingdom’s future trading relationship with Europe, sterling will continue to be more risk-correlated versus euro and dollar pairs. In addition, with Britain still locked down as Europe slowly resumes activity, unfavourable comparisons will do damage to sterling as more and more data is released. To discuss any of the items we have covered in today's market update, contact us via or call us on (+44) 0203 3488 1169

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