Sterling saw a souring of sentiment last week as concerns over economic data and Brexit trade talks grew. Taking a look at the economic data, whilst weak readings were expected, reality actually saw figures fall below even that expectation, with PMI data from the UK posting record lows as lockdown consequences took effect on the nation’s economic activity. We saw the flash services PMI’s fall to record lows of 12.3 last week and UK retail sales fell sharply by 5.1%m/m in March despite strong grocery sales; all of which pointing towards an extremely tough few months for the UK economy.
On the Brexit front, EU Chief Negotiator Barnier criticised the UK for not engaging seriously on some topics, insisting that there will be no partnership trade deal with the UK unless an agreement had been reached on the level playing field and fisheries areas. Barnier, however, stepped back from directly calling for a transition extension at this stage. Currently, lockdown restriction will be reviewed on 7 May, as the government balances demands to reopen the economy, with risks of a second wave of infections.
In Europe, there were mixed signs as the German ZEW and IFO surveys returned contrasting results. The primary focus was on the expectations reading (6-month outlook), the ZEW improved significantly whilst the IFO declined slightly. EU leaders agreed that a longer-term recovery fund is “needed and urgent” but failed to agree on its details including how it would be funded. Over the weekend we saw some signposting of lockdown restrictions being lifted from Italy and Spain. Italian PM Conte said that the country would begin easing lockdown measures from 4 May, while Spain is expected to follow suit and announce some relaxation from 2 May.
US economic data continues to remain under scrutiny ahead of next week’s all-important labour numbers. The weekly unemployment claims once again took centre stage. US initial jobless claims increased by another 4.43mn. Claims have totalled over 26.0mn in the past few weeks, maintaining expectations of a jump in unemployment and slump in payrolls in next week’s jobs report. In the meantime, New York Governor Cuomo announced a phased plan to reopen the state – possibly as early as 15 May.
Looking to the week ahead, PM Johnson has returned with speculation mounting that that we may have an announcement this week on lockdown restriction. Several countries report first estimates of Q1 GDP, although attention has already turned to the scale of the downturn in Q2 with full lockdowns in place. This will provide markets with a taster of growth in Q2.
- US consumer confidence
With the US messaging surrounding COVID-19 continuing to be somewhat confused and with the unemployment rate continuing to rise, the market is expecting a large drop in consumer confidence.
- US GDP
- FOMC Meeting
With lockdown restrictions coming into to play in the latter half of the quarter the market is already starting to focus on Q2 output or lack thereof. However, the Q1 reading will give an early indication of the potential implication of the lockdown restrictions. A contraction of circa 4% is expected on a quarterly basis by the market. The FOMC is due to host a virtual meeting, it is rumoured that the Fed may discuss two policy options. One is an amendment to their recent announcement of purchasing municipal bonds. The other is substantive change would be a move to yield rate targeting, although that seems unlikely right now.
- China PMI data
- Eurozone GDP
- ECB Meeting
- US Jobless claims
The market will once again focus on the PMI data from China in the early hours of the morning with investors focusing post lockdown figures. As China came out of lockdown earlier, its economic indicators may serve as a possible template for financial modellers across the world.
The figures are expected to back expansion in these sectors. Similarly, in the US, the market is more interested in Q2 GDP numbers. ECB President Lagarde reportedly mentioned a potential contraction of 15% for the Eurozone in 2020. The Q1 GDP figures are expected to decline by 3.0% q/q, with France, Italy and Spain also releasing their individual country estimates.
The ECB has already committed to buying €1.1 trillion of bonds this year, including €750bn in the Pandemic Emergency Purchase Programme (PEPP). There is some speculation that we could see further extension to these programmes as the ECB meet virtually.
As we have seen in the previous few weeks, there has been a big focus on the US weekly initial jobless claims. The past five weeks has already seen initial claims rise by more than 26 million.
- US ISM Manufacturing
Friday provides a slightly calmer day to start of May, with only the US ISM manufacturing set for release. With many analysts starting to focus on the GDP numbers for Q2, the market will focus on how quickly the manufacturing sector is contracting.
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