News & analysis

As time elapses, hard data releases from major economies are likely to become increasingly relevant for markets. The hard data will add to participants’ information sets and allow for a more accurate measurement of the true economic contraction caused by COVID-19.

Previous market pricing has been based on preliminary estimates of the hit to domestic and global growth conditions, which are subject to a high degree of error due to the lack of data.

While soft data points, such as PMIs and jobless claims, have helped inform the projections in the short-run, these data points aren’t the best leading indicators due to quirks in their methodology and scope.

The hard data, which tends to lag by a month, or longer in the case of GDP data, will highlight the economic toll with a greater degree of precision. Given this, the incoming data points for March and April will likely see markets reprice assets based on the true economic damage caused by COVID-19 and their assessment of the effectiveness of current stimulus packages in play both domestically and globally. How effective the efforts made by monetary and fiscal authorities to return their respective economies to pre-virus levels, has been a disputed topic thus far. The discussion of a potential V-shaped recovery has been rife with speculation and will only continue as containment policies extend and the hard data begins to filter into the market.

Will stable financial conditions and USD liquidity offer markets a pause from the “risk-on, risk off” dichotomy of the past few weeks?

Broad risk-on/risk-off moves have dictated FX price action for the past few weeks, with the US dollar strengthening with deteriorations in risk appetite, and weakening with improvements. Last week began with a burst of dollar strength that was mostly sustained throughout the week, coinciding with fresh lows in crude oil prices. The moves in G10 FX followed a pattern broadly consistent with a deterioration in risk appetite: AUD and NZD underperformed, although not as badly as oil currencies. However, the price action was not accompanied by a wider deterioration in financial conditions, and dollar funding conditions remained unchanged. This suggests that the Fed’s liquidity measures have been successful in calming markets and that perhaps idiosyncratic factors such as data releases, will once again be able to influence price action for individual currencies. This week’s data calendar will give market participants another look at the severity of the virus shock to several key economies, potentially breaking the risk-off/risk-on dichotomy that has driven FX for the past couple weeks.

Dollar strength has been a common feature of previous global growth slowdowns, as local financial systems scrambled to cover dollar liquidity requirements and investors sought the safety of the world’s reserve currency.

This certainly seemed to be the case in mid-March this year, when the dollar saw rapid, sustained appreciation against all currencies. Aggressive liquidity measures from the Fed have ended stress on dollar funding since then, easing pressure on the greenback.  LIBOR-OIS spreads remained in check last week, as did other measures of US financial conditions. Most relevantly, high-yield debt indices did not see the rapid deterioration as seen in March, despite the fact that in the US oil producers represent a meaningful portion of high yield debt. Dollar strength faded towards the end of last week, consistent with a rally in equities and the overall “risk on, risk off” dynamic of the last few weeks.

This week sees some important data releases, which should help guide market pricing…

The PBOC are set to kick start the week with a monetary policy announcement, after Friday’s release of Q1 data showed the economy contracted for the first time in decades. The UK labour market report follows on Tuesday with a dramatic jump in the claimant count expected for March, while the ILO measure is discounted due to its measurement period being the three-months ended February. UK inflation data and retail sales are also released throughout the week along with preliminary April PMIs from the US and the Eurozone. Initial jobless claims data is also released as usual in the US this Thursday.

PBoC set to cut new lending measure after Q1 contraction

20th April, 02:30 BST: After the Chinese central bank dramatically cut the one-year medium-term lending facility (MLF) by 20bps to a record low of 2.95% and reduced the amount banks must hold as reserves by around $28bn, further monetary easing measures are set to be announced this week.

The 20bp cut in the MLF arguably paves the way for a similar reduction in the one-year loan prime rate (LPR), the benchmark reference rate for banks to price loans to their most creditworthy customers, as LPR quotations are now linked to the MLF rate.

Economists also expect the 5-year LPR to be cut, albeit by a lesser amount. The 7-day reverse repo rate is also expected to be cut by 20bps, underlining a strong intent to lower funding costs, which is understandable seeing as last week the Q1 data confirmed the economy contracted the most in decades.


Graph: PBOC set to cut rates further as economy contracts in Q1

First batch of hard data from the UK expected to show big hit to the economy

21st April, 07:00 BST: The UK labour market report is released and is expected to highlight the depth of the economic contraction caused by lockdown measures. While the ILO measure of unemployment, which is regarded as the more accurate measure of the true level of unemployment, can be discounted due to its reporting window centering on February, claimant count data is expected to show a sharp rise in the number of unemployment benefit filings. Similar to that in the US, this data is subject to some sizeable quirks not least of which include a shortfall in processing capabilities. A backlog in claims means that the data point is likely to underreport the true number of unemployment filings for March, but will nonetheless give UK investors their first glimpse of the impact COVID-19 has had on the labour market. Preliminary estimates suggest that the claimant count rise will be substantial, with nearly a million applications made for universal credit alone in the second half of March. Seeing as most applying for UC are also eligible for job seekers’ allowance, we expect the claims change data to be deep into the millions.

22nd April, 07:00 BST: CPI data for March is unlikely to show the impacts of social distancing measures, as data was almost certainly collected on March 17th, six days before the lockdown began. Regardless, CPI data is unlikely to have much of a market impact in the coming months, as the Bank of England has already emptied its toolbox to patch up the UK economy.

23rd April, 07:00/ 09:30 BST: Retail sales data for March and flash PMIs for April are released. The PMIs are likely to fall even further into contractionary territory, considering the strong weighting business sentiment plays in the overall figure, while the March data was predominantly collected prior to the peak of coronavirus effects, as the final data cutoff was March 26th. Meanwhile, Pantheon Economics estimates that retail sales for March, which actually measures the period March 1st– April 4th, will contract by around 15%. This would measure the sharpest decline since a near 10% drop in July 1979, as non-essential shops were closed to the public at the back-end of the survey period.

A continued rise in jobless claims data in the US is expected, and April PMIs are set to slump further

23rd April, 13:30BST: Claims data has been elevated in the US since containment measures have been implemented. Last week, the 5.245m rise in claims saw the total rise in unemployment (proxied by imperfect unemployment claims data), erase the job gains made since the global financial crisis in 2008. Due to processing reasons and the rolling out of the CARES act, we expect this week’s claims data to remain in the 5m region as key states expand processing capabilities and extend call centre hours.


Graph: Over 22m new jobless claims in the last 4-weeks erases 21.5m jobs added during 2008 recovery


23rd April, 14:45BST: Purchasing managers’ indices in the US are also poised to sour further, as the covered period corresponds to the enforcement of stringent lockdown measures. March figures showed the tip of the iceberg in terms of the potential size of the economic collapse from coronavirus, but timelier jobless claims data over the last weeks has hinted that the fallout will be extremely severe. The hit is expected to be larger for the manufacturing sector, which will fall from a higher previous figure of 48.5, near the 50 neutral-growth line. Industrial production already plunged to a post-war low of 6.3% in March, when the manufacturing PMI indicator had only slid by 2.2 basis points. In the services sector, the indicator is expected to fall to a low of 32.5, although the decline in services has been spread out across a longer time. The current composite indicator still sits over 10 points above the lows seen during the 2008-2009 recession, which indicates significant room to the downside. March PMI is roughly consistent with a Q1 annualised contraction of around 4%, which means that the US will likely face a double-digit contraction fallout by Q2.


Graph: US PMIs point to a nasty contraction in Q2 GDP


The range of estimates of the depth of the recession will remain wide as hard data to inform analysis slowly becomes available. Moreover, the uncertainty in the timing of a full resumption of economic activity itself casts tremendous doubts on the potential path of recovery. However, predictions by major financial institutions at least give some idea what the shape of sequential growth may look like in the quarters ahead. From initial estimates of a sudden rebound in Q2, the overall range of forecasts now suggests that economic activity will plunge substantially further in the second quarter of the year, while pushing hopes of a recovery back to Q3 and beyond.


US GDP QoQ forecasts from main financial institutions



Eurozone leading indicators could paint a worsening picture

23rd April, 08:15 – 09:00 BST: A series of purchasing managers’ indices from France, Germany and the Eurozone features in this week’s calendar. The data covers the April preliminary reading, which means that these are the first measures of economic activity for the month. Readings from March already confirmed substantial economic damage, with a sharp drop in services sectors across several eurozone countries, while manufacturing enjoyed another lift from a tighter supply side due to the inverse effect of the supply delivery times. March data from Germany printed slightly better than in France, but for both countries, even worse readings are expected for this week, considering the longer time in lockdown during the data period relative to March. The median forecasts submitted to Bloomberg for manufacturing and services PMI for Germany are 39.0 and 30.0 respectively, both record lows.

24th April, 09:00 BST: The PMIs for this week are accompanied by the IFO ZEW Survey from Germany, where the median Bloomberg forecast for the current situation is currently -65 compared to a prior reading of -43.1. Meanwhile the consensus for the 6-month future is projected to be -51.5, signalling that the majority of analysts are more bearish than the previous reading.


Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst



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