Weekly Focus – Reopening Lifts Spirits, US-China Tensions Increase

Fundamental analysis of Forex market

This week we got some encouraging data releases . In Germany, the May labour market report showed a further increase in the unemployment rate to 6.3% from 5.8% in April. Still, the employment losses remain relatively contained, as Kurzarbeit is cushioning the labour market crisis. PMI and IFO point to improving employment expectations in May, not least among service providers. The e uro area unemployment rate also increased significantly less than expected in April from 7.1% to 7.3%. The rate might be artificially low though, as many are not actively looking for jobs at the moment. Euro area composite PMI rebounded but remained at just 31.9 in May. In China, the Caixin service PMI rebounded to the highest level since October 2010 at 55.0. We still see a fair chance that most advanced economies will see a similar rebound in a couple of months’ time.

This is also what we express in our new global macro update,  The Big Picture – Reopening, recovery and risks , 2 June . While the world economy is in the deepest economic recession since the Great Depression, we continue to think it will be relatively short-lived. High-frequency data support the view that the advanced economies are recovering, as the virus comes under control and economies start to reopen.

Europe is set to get a significant push along the way with the approval of another recovery stimulus package of EUR130bn (3.8% of GDP) for 2020 and 2021 by the German government. The package is a combination of support for struggling municipalities, car sales incentives, a VAT reduction until the end of 2020 as well as direct payments to families with children. The fiscal boost comes on top of the EUR750bn coronavirus emergency package already deployed in March.

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President Trump was busy over the weekend. First he terminated the US relationship with WHO after criticising the organisation for being controlled by the Chinese. The US is the largest financial contributor, paying more than 15% of the budget. Then he said he would begin to remove policy agreements with Hong Kong, including an extradition treaty, commercial relations and export controls. A Chinese foreign ministry spokesman said that harm to the interests of  China  will be resolutely counterattacked by the Chinese side. The spat is becoming a threat to the US-China trade deal. Meanwhile protests against police violence continued to rage across the US and a number of cities have imposed curfews as a consequence. Some protests turned violent but violence subsided after the president threatened to deploy the military. So far, none of the above have knocked Wall Street off course, with stock markets closing in on all-time highs from mid-February. The lifting of lockdowns and government and central bank stimulus still seem to dominate.

Next week, much focus will be on the virus development now that Southern Europe is also opening larger parts of the service sector. We will keep an eye on the Brexit process as the 1 July deadline for a potential extension of the transition period is drawing nearer. At the Fed meeting, we expect the Fed to keep the policy rate unchanged at 0.00-0.25%, as the appetite for going negative is very limited. We also expect the Fed to keep the QE programme unchanged (i.e. unlimited and flexible), although we cannot rule out it will start saying how much it will buy each month. We could also see a strengthening of the forward guidance, i.e. be more precise about what the conditions are for the Fed to start consider hiking (assuming a recovery).

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