Risk sentiment flat as vaccine hopes downplayed but talk of phase 4 fiscal stimulus gathers pace
- USD: The broad based USD Index (DXY) is flat overnight as a STAT "expert report" downplays results of a US drug maker trial which had boosted risk sentiment Monday. The report concludes that "there's really no way to know how impressive - or not - the vaccine may be," with one doctor adding that "we don’t know if those antibodies are durable."
- USD: Talks of a compromise: Phase 4 stimulus - Fox News reports that Congressional Democrats/GOP agree on the need for another #pandemic stimulus aiming for mid-June; Democrats will likely accept scaled back aid to states/cities while the GOP might accept scaled back business liability protection, possible payroll tax cut. Talk is of a package totaling somewhere between USD500-700bn (considerably less than the original USD1trn) with President Trump seeking a 7.6 % payroll tax cut.
USD: The Congressional Budget Office releases new economic forecasts for the US - expects the economy to begin recovering H2 2020, with the labor market projected to materially improve post Q3. Estimates look for -3.0% drop in 2020 GDP and a 9.6% unemployment rate. This comes alongside forecasts for personal consumption expenditures to fall -3.8% and private investment down -12.1%. Rates are expected to remain low, with 10yr Treasuries yields at 1.1% and 3m Tbills at 0.7%. But a new study published by the San Francisco Fed sees returning to pre-outbreak unemployment levels by sometime in 2021 would require a significantly more rapid pace of hiring than during any past recovery. Even its most optimistic scenario would require around 9mn hires from unemployment per month during Q3’20, nearly 4 times faster than the most robust hiring rate during recovery from the Great Recession.
ZEW survey sees the euro zone economy in recovery mode
- EUR: ZEW survey sees euro zone economies in the recovery quadrant - headline ZEW investor expectations index for Germany jumps from -28.2 in April to 51.0 in May (consensus 30). The current assessment component, a proxy for the output gap though eases from -91.5 to -93.5 (consensus -87.6) but for the euro zone as a whole, shows all countries are in the recovery quadrant. On the expectations component, the range goes from 51 (Germany) to 32 (UK). Overall, ZEW investor survey suggests “optimism is growing with expectations that there will be an economic turnaround from summer onward,” according to ZEW President.
UK announces possible tariff regime post Brexit; UK jobs resilient in March but likely to deteriorate
- GBP: UK announces possible tariff regime post Brexit, saying, “this will replace the EU’s Common External Tariff on 1 January 2021 at the end of the Transition Period”. Some analysts take this to mean that the UK will not be extending the Transition Period and are preparing for a further breakdown in talks while others think this is the UK staking out its negotiating position to the EU ahead of talks on June 1 – 5. In any case, sterling does not move on the overnight headlines, as there is still time for the UK to ask for an extension to Article 50. Note the time line for Brexit talks – (1) June 01-05 - Final round of EU-UK negotiations; (2) June 17-18 - EU Summit; (3) June 30 - Deadline for extending the Transition Phase.
- GBP: UK labor force data is resilient in March, with employment growing by 210k on a three month average basis (consensus 30k) and the unemployment rate falls to 3.9% (consensus 4.3%). However, the data still relates to interviews conducted in the period prior to the implementation of Covid-19 social distancing measures, meaning these data continues to lag somewhat. More timelier data based on HMRC receipts corroborates a sharp reduction in returns in April, implying a 1.2% YY fall in paid employment and -0.9% YY fall in median pay. From here, Citi analysts expect UK unemployment to increase sharply in Q2.
Week Ahead: Week Ahead: FOMC & ECB Minutes and EZ PMIs the key data this week
- USD: FOMC Minutes Preview – Minutes from the April 29th FOMC meeting will be released tonight. Citi analysts expect some well-known Fed official themes – Fed plans to act proactively and aggressively to head off any emerging problems in the economy or financial markets. Still, there are a few areas we are watching - guidance on the pace of Treasury and MBS purchases, potential for enhanced forward guidance, and a restatement of the aversion to negative rates. Note that Chair Powell in his testimony overnight has already indicated that main-street lending, municipal lending, and other Fed programs would become operational by the end of May or very early June.
- EUR & GBP: UK CPI Inflation for April Citi: 0.8% YY from 1.5% YY; German Manufacturing PMI, May Flash Citi: 38.0 from 34.8; Services PMI Citi: 35.0 from 16.2 – PMIs seen rising as lockdown eases but still well in contractionary territory; Euro Area: Manufacturing PMIs May Flash Citi: 40.0 from 33.6; Services PMI Citi: 25.0 from 12.0; Composite PMI Citi: 24.0 from 13.6 – Modest gain for manufacturing PMI with bigger uptick for services PMI; UK Manufacturing PMI, May Flash Citi: 44.5 from 32.6; Services PMI Citi:41.1 from 13.4; Composite PMI Citi: 41.8 from 13.8; UK Retail Sales, April Citi: -12.1% MM, -18.4% YY from -5.1% MM, -5.8% YY. ECB will also publish minutes of the April meeting and BoE Governor Bailey will testify before UK Parliament.
- JPY: BoJ to hold unscheduled meeting Friday - meeting will likely discuss new measures to provide funds to banks and echo guidance around the last MPC. BoJ Governor Kuroda has reiterated his pledge earlier to do whatever the central bank can to support the economy and indicated he would introduce another new lending program for small companies and could unveil details via an emergency meeting before the next meeting on June 16.
This is is an extract from the Daily Currency Update, dated May 20, 2020. Please approach a Citigold Relationship Manager if you would like more information.