This is not over
Welcome to a new blog update of the Weekly Overview Series.
In this week…
- The UK becomes the second most affected country by the Covid-19 pandemic with 30,689 deaths. Trump says the U.S must safely re-open even if more Americans get sick. While many states are partially reopening already, all of them except from Montana and Florida, fall short of meeting the White House criteria. Meanwhile in Spain and Italy, lockdown de-escalation plans have started this week and daily deaths and cases rates are continuing their decreasing trend.
- Non-farm Payrolls will be released today at 1.30pm BST. Expectations are for a record 22 million jobs lost in April, the biggest drop in payrolls since the Great Depression. Unemployment rate is expected to jump to an all-time high of 16%.
- Chinese exports unexpectedly rose 3.5% in dollar terms in April from a year earlier as imports fell due to lower oil prices. This rise is seen as temporary due to reduced global demand. “April exports may have been boosted by exporters making up for shortfalls in the first quarter due to supply constraints then” according to Louis Kujis, head of Asia at Oxford Economics. Export orders in the PMIs (a forward-looking indicator) showed how this initial rebound was losing momentum in the near term as trading partners fall into depression.
- Crude oil inventories in the U.S. rose by 4.59 million barrels last week compared with market forecasts of a 7.759 million advance, according to the EIA Petroleum Report. Following from evidence of increasing demand from China and the OPEC+ supply cuts effective since the beginning of the month, WTI oil price was on track of a 30% increase this week, peaking at $27 and then dropping to $24.
- Uber reports first-ever decline in rides due to the effects of the pandemic. However, Uber is getting closer to its goal of generating an adjusted profit. The first quarter loss amounted to $612 million, a 30% decline from a year ago. The CEO said that Uber believes the U.S is off the bottom, as sales increased in the last three weeks and are on track to do so again this week. During the past week, Uber started to reduce costs by ending their food delivery operations in more than six countries; transferring its scooter business to Lime; cutting 14% of staff… Uber shares jumped 11% on Thursday and 8% in pre-market today
ECB vs Germany: The Monetary War.
On Wednesday, for the first time, a national court overruled the European Court of Justice in Luxembourg. The German Supreme Court gave the ECB three months to prove that its bond purchases under the Public Sector Purchase Program (PSPP) were proportionate as stated in the European treaties. Otherwise the Bundesbank, the German Central Bank and the ECB’s largest shareholder, would no longer participate in this quantitative easing program.
The issue here is if the ECB is exceeding its remit, limited to monetary policy, and covertly deciding on economic and fiscal policy through its national debt purchases.
There are two lines of reasoning in their ruling. The first, just mentioned, proportionality in the ECB QE programmes. The second, that through this unlimited QE programmes, the Bundesbank keeps accumulating risky assets in its balance sheet that if were to lose value, they would require money from the German national budget. The ECB, an unelected institution would oblige the parliament, that was never part of the decision, to approve that budget.
The EUR/USD dropped from 1.09 to 1.07 as a result. The weak economy of the last 10 years has been sustained by Quantitative Easing programmes and low interest rate that have led in highly indebted nations and companies. A reduction in any of the ECB bond purchases could rocket higher the risk of default of some countries of the Eurozone.
Bank of England releases its Monetary Policy Report
The Bank of England released on Thursday its Monetary Policy report where it published their economic estimates for the UK in the near future.
The Bank of England Monetary Policy Committee kept the bank rate at 0.1%. It has been decided to continue with the £200bn programme of UK government bond and sterling non-financial investment-grade corporate bond purchases, taking the total amount of the quantitative easing programme to £645bn. The current inflation rate is 1.5%.
Bank of England foresees a Nike-shaped recovery in the UK GDP, picking up sharply in the second half of 2020 and growing at the previous rate in mid-2021. Given the unpredictable behaviour of the virus spread, if there was a second wave of contagion, the scenario would change dramatically, and this prediction would be useless.
The expected unemployment peak is higher than in the financial crisis, at 10% but will rapidly recover next year, contrary to the plateau at 8% that the UK had for almost 6 years until the unemployment rate started to drop in 2014.
From an inflation perspective, BoE predicts there will be a big drop following the demand shock, bottoming out at around 0%. The Committee expects inflation to reach 2% target in late 2022.
As usual, I leave here the S&P500 heat map. As the FT has replaced the static chart for an interactive one, I leave just the link to it.
Link to the FT coronavirus tracker interactive chart: https://ig.ft.com/coronavirus-chart/?cumulative=0&logScale=1&perMillion=0&values=deaths
Have a good weekend!