Traders are waiting for the release of important economic data this week, especially on Friday when the latest US job market statistics, expected to be the worst reading in history, will be announced. At the same time, the market will wait for developments regarding the spread of the coronavirus, as it is the speed of the spread of the virus that is causing the destruction in the global economy, and news of its decrease or acceleration affects markets.
This week when America’s nonfarm payroll data reveals how much destruction the pandemic has left in its wake, the calmness that has encompassed global markets lately will be tested. With the current dovish tone from central banks around the world, both The Bank of England (BoE) and the Reserve Bank of Australia (RBA) are likely to maintain the tone and not deliver anything new at their meetings.
Worst non-farm payrolls ever?
April’s US non-farm payroll data due on Friday will be a wake-up call for investors. The US economy is forecast to have lost 20 million jobs, which could push the unemployment rate up to 14%, far above the 10% peak of the previous recession. Average hourly earnings are expected to have lost steam too, but admittedly, the focus will be on job losses, not wage growth.
These negative numbers are horrifying, but what’s truly concerning is that this job survey was conducted in the second week of April. This means that the real unemployment rate today is much higher, as the number of people applying for unemployment benefits has remained alarmingly high in the last two weeks.
On Tuesday, ahead of Friday’s jobs data, we’ll receive the crucial ISM non-manufacturing survey for April which could impact market sentiment and the dollar. Then on Wednesday, the ADP employment report will give us a taste of what to expect from the official jobs data before Thursday’s weekly jobless claims.
How realistic is the V-shaped recovery that stocks are baking
The end of April left financial markets in a cheerful mood as the recent stimulus and liquidity plans helped stabilise markets. US stocks are headed for their best month in decades, beaten-down commodity currencies are on the mend, and the dollar strength is losing some of its recent gains. It seems that the huge QE measures by governments and central banks, alongside re-opening announcements by many economies and positive signals regarding the progress of medical treatment, have all done their part to calm investors.
However, other elements paint a very different picture, specifically commodity markets, which central banks have little influence over. Oil prices are dropping as the world is running out of capacity to store the black metal, while gold holds strong near $1700 per ounce. Both are completely disconnected from what the stock market is saying. One can argue that commodities are the last stronghold where demand and supply fundamentals still truly matter for prices, as they aren’t subject to heavy interference by central banks and may therefore reveal the true status of the depressed global economy.
For now, the equity market implies a quick, V-shaped rebound for the world economy. Regrettably, that assumption is probably overly optimistic. Firstly, many small enterprises will shut down permanently due to the lockdowns. Secondly, the soaring unemployment impact on consumption is being hugely underestimated. In only three months, the US lost all the jobs it created in the last decade. How long will it take to recover them and what does this imply for consumption? Thirdly, there are those who might be much more defensive with their spending even after things open up, as we’ve seen in China. The behavioural shock from some consumers is to be expected.
As for the dollar, it’s still difficult to imagine any sustained weakness in the reserve currency. The Fed has already done almost everything in its power to weaken it, yet the greenback remains stubbornly strong, as there are few viable alternatives. The euro, for example, looks quite undesirable as the Eurozone’s recession might be deeper and its recovery longer than America’s. This given the fact that Europe’s stimulus response is insufficient and does not share the burdens of ravaged economies like Italy and Spain.
Additionally, since the dollar has been acting as a safe haven in this crisis, the euro/dollar tends to move in the same direction as stocks nowadays. Hence, if risk aversion indeed returns and stocks turn lower again, the euro/dollar could be dragged down as well.
Outlook for British currency seems challenging as BoE might hold for now
The Bank of England (BoE) is unlikely to do any more for now after having already slashed rates to almost zero and restarted QE. Yet it will still have a tough job on its hands as new economic forecasts try to estimate the depth and length of this unique recession.
The pound’s reaction will depend mainly on the comments of the bank’s new governor, who probably has more incentive to maintain a dovish tone and has hinted that his central bank is prepared to do much more if need be.
Overall, the cable could be challenging. In the near term, the UK is one of the few major economies that hasn’t announced an opening-up plan so far, and the longer things stay shut, the bleaker the outlook for the economy. However, Boris Johnson announced on Thursday that the country is finally past the peak of the coronavirus which, in theory, means it can start preparing for lockdown measures to be lifted. This won’t be done quickly or without certain conditions being met - the five tests laid out by the PM. But it does provide hope that some businesses will reopen their doors and people return to work.
Longer term, Brexit worries could come back to haunt the currency, as PM Johnson insists that he won’t request an extension to the December deadline for the transition period, setting the stage for more eleventh-hour negotiations, brinkmanship, and drama ahead.
The Reserve Bank is unlikely to act on Tuesday either
In Australia, the RBA could follow the same path as the BoE, but that doesn’t mean the meeting will be boring. Lately, the Australian dollar has rallied quite sharply, partly as market participants rewarded the government’s impressive response to the pandemic and partly because the RBA itself has been slightly less aggressive than other central banks, for instance by ruling out negative rates.
Nonetheless, a strong Aussie is probably the last thing the RBA wants, as that could reduce exports even more. That implies policymakers may try to do much more, like buying corporate bonds.
Overall though, the outlook for the Australian dollar is somewhat favourable. Conversely, the overall global situation is clearly negative for an export-powerhouse like Australia. The fact that its domestic economy will be among the first to re-open, the huge fiscal stimulus, and the re-opening of its biggest trading partner – China – all paint a relatively bright outlook.
Australia’s retail sales for March are also due on Wednesday. Across the Tasman sea, New Zealand’s jobs data for Q1 will also see the light on Wednesday.