News & Analysis

In what is set to be a relatively quiet data week, we take this opportunity to break down some of the main themes seen in markets over the last few weeks.

Notably, the confusing subtleties of data releases during lockdown and the shift to alternative data, the Fed’s reluctance to begin yield curve controls, Canada’s upcoming fiscal deficit projections and labour market release, and finally inflation data in the EM space.


Investors, spectators and economists have become fixated on trying to alphabetise the shape of the economic recovery, both nationally and globally. By doing so, they have arguably created the perfect conditions for market functionality as data is read through whatever shade of glass that confirms ones prior beliefs. Last week’s US labour market data was one such event that perfectly highlighted this phenomena; the report had something for both sides. The payroll number outstripped expectations by a staggering 1.767m to read 4800K while the unemployment rate dipped 2.2% to 11.1%, both of which encouraged a general bull run in the afternoon of the European session in equity and FX markets. However, dig a bit deeper into the release and you find support for the “dead cat bounce” argument outlined by Nobel laureate Paul Krugman. The data was compiled up until the 12th June, prior to the re-imposition of lockdown measures in many states including New York, while continuing claims and initial claims data remained elevated for the last week of the month. On top of that, part-time workers being permanently laid off rose from 2.2m to 2.8m, while the measurement error of the unemployment rate was 1%.

The arguments for both a V-shaped recovery and those for a prolonged “swoosh” or W-shaped recovery are compelling, and the economic data to date is doing little to disprove either just yet.

The theme of mixed data releases isn’t just isolated to US labour market data, or labour market data as a whole under job retention programmes, but is visible in global PMIs and even new case counts. For example, the latest South African manufacturing PMI data for June saw the highest reading in nearly 7-years at 53.9. Again, digging a little deeper the headline data appears to paint a falsely overoptimistic picture of the economic rebound. In fact, the surveying authority Absa stated in the report “while the headline PMI rose to a multi-year high, this does not mean that the level of actual manufacturing production rose to a multi-year high”. Sub-components of the report, much like the US labour market report, painted a substantially less optimistic picture, however. Employment intentions and purchasing commitments are both yet to rebound above 50, showing that while demand conditions recover in business activity and new sales orders data, the more structural aspects linked to businesses balance sheets are yet to recover. Additionally, headline new case data is also being misinterpreted by markets, and skewed by authorities’ efforts to increase the number of tests carried out. For example, on Thursday the new case count in Florida showed a record 10,109 cases, prompting a broad USD retreat after it sold off following the labour market report. Markets became increasingly risk averse in the afternoon of that session as the growth path of the outbreak seemed to be steepening, supporting the narrative of a more prolonged lockdown regime and therefore a more protracted US economic recovery. However, with testing being ramped up to 68.8k compared with less than 46k over the last three months, the rise in cases is likely to have been attributed to increasing testing. This has led many to shift focus towards hospital occupancy rates instead of the headline figure in an attempt to second guess state level policy measures. Down from last week’s 9, only 3 states now reach the four Federal guidelines to continue re-opening; Vermont, New Hampshire and New Jersey (3% of the population).


Multi-year rise in manufacturing PMI overstates the true rebound as employment and purchasing commitments sub-components remain suppressed

In such an environment, signals provided by regular economic data is weakening and are being quickly drowned out by Covid case counts as well as being greatly complicated by the subtleties of each release. This has led economists craving timelier, and arguably more accurate, measures for economic variables. This has led the flight to alternative data. These range from simple Google trends data to map the number of US citizens googling how to apply for unemployment insurance benefits to proxy for incoming claimant data, to demand data on housing website zoopla to assess the damage the virus has done to the housing market, and in turn the consumers main stock of wealth. Tracking data from Apple has become fashionable to map the activity of users and in effect proxy the return to work and economic activity, along with public transport usage data. Even as recently as Thursday prior to the US labour market release, many chief economists from major banks were discussing the data found on homebase – a website that tracks daily labour market data such as local business open, hours worked by employees, etc in different states to gauge the extent of the labour market scarring.


Public transport usage data by Movit is such an example of alternative data that is gaining increasing attention by economists


Homebase data has gained increasing popularity too as many try to access the most timely labour market data in the US amidst shifting lockdown measures

There are thousands of alternative data series out there, with many arguably providing as much noise relative to signal when compared with the more traditional economic data that markets are accustomed to. With this in mind, FX volatility is likely to remain elevated as investors try to find an edge to cut through the economic fog, while daily case count data continues to shift the parameters in which the data is examined and expectations of the economic recovery are formed. This will only become increasingly apparent as traders await a more stable trend to appear in the traditional economic data, which is unlikely to appear in Q3 and is only delayed further the more the spikes in case count lead to localised lockdown.


G10 and EM vol rises as the economic data confuses and fresh lockdown measures are announced



The dollar saw another indecisive past week, but our conviction is building that the combination of a severe coronavirus situation, activist Fed, and relatively bad scarring to the labour market will weigh on the dollar to year-end.

This week’s FOMC minutes and Thursday’s non-farm payrolls report add several interesting angles to the wider dollar outlook:

  • As expected, forward guidance and yield curve control were the key themes of Wednesday’s FOMC minutes.  Outcome based forward guidance now seems all but a done deal as the next marginal easing measure: Fed staff presented modelling exercises suggesting the measure would help both the labour market and inflation converge towards the FOMC’s objectives. In response, FOMC members “generally indicated support” for outcome based guidance. Members discussed Inflation and labour market conditions as potential outcomes for guidance to be tied to, as well as calendar-based guidance. In our view, the ECB’s standard of inflation converging sustainably to target may be a useful benchmark.
  • Members were far less receptive to the idea of yield curve control of the sort implemented in Japan, however. “Nearly all” participants had “many questions” about the costs and benefits of the measure, and “many” remarked that as long as forward guidance was credible, the measures may be unnecessary. Interestingly, the Committee seemed most receptive to control of the front end of the yield curve of the sort implemented by the RBA. This seems to us to be a measure best suited to preventing unwarranted tightening of monetary conditions during a cyclical upswing in the economy – with 3 year yields barely above the Federal Funds rate, the measure may have a limited easing impact at present.
  • Friday’s jobs figures were noisy, and left the most important questions about the US labour market almost completely unanswered. Hospitality, leisure and retail services comprised almost 3 of the 4.8 million jobs created on net, while wages fell. Taken together this suggests that the workers re-hired in June were from lower-wage roles that may prove sensitive to further regional lockdowns. Of the workers reporting unemployment, the number reporting temporary unemployment fell 4.7m to 10.6m, while the number of permanent job losses continued to rise, to 2.9m. The increase in permanent unemployment suggests, at a high level, that behind the impressive headline figure significant scarring is still occurring in the US labour market. A high rate of temporary layoffs has historically suggested a quicker recovery; the evolution of this number will therefore be of very high interest in future reports. The report left several important questions unanswered. Firstly, although many workers laid off in March and April have been re-hired, we know little about how buoyant future reports will prove amid rising case counts. Secondly, with case counts still rising in much of the US, we don’t know how labour markets will respond to the re-imposition of lockdown measures – and if the impact of a second wave will be far more lasting than the first.


G10 currencies mostly up vs USD over last 10 days
Exchange rates have been normalised to a value of 100 on June 22nd. 100 value marked in red; currencies above the line as of 03/07/20 have appreciated.




Speaking at a daily briefing in mid-June, Prime Minister Trudeau announced that the government will release a fiscal “snapshot” on July 8th in lieu of the more extensive budget that was scrapped on March 30th due to the impact of Covid. The snapshot is only meant to outline short-term projections for the fiscal shortfall and compare the cost of Canada’s governmental support programmes relative to Canada’s peers. The spending measures of the liberal government have come under some political scrutiny of late, mainly due to Bill C-13 passed in March which allows the minority government to continue spending up until September without parliament’s consent. The bill was initially passed to speed up the fiscal support for households in response to the pandemic, but has left many questioning the lack of accountability.

Canada’s parliamentary watchdog, the Parliamentary Budget Office (PBO), expects the budget deficit to increase to at least C$260bn, the largest in history. This would see total federal debt quickly approach the $1trn mark and would see a fiscal deficit of around 12% of GDP. The PBO also projected an increase in the cost of some programmes from previous estimates, with the Canada emergency response benefit (CERB) programme now estimated to cost C$61.1bn compared to the original estimate of $40.6bn. However, the PBO’s report pre-dates the government’s eight-week extension of its main income support programme, with the cost of the CERB now estimated at C$80bn, with overall direct support measures totaling C$174bn alone according to the latest Treasury report.


Net debt is set to reach the 1trn mark with the fiscal deficit projected at 12%

With the initial projections chopping and changing and the underlying economy starting to recover at an uneven pace, the fiscal snapshot will be welcomed by markets as a source of clarity. The current confusion in estimates is also mimicked in the latest sovereign debt ratings by Fitch and S&P. The former cut Canada’s sovereign credit rating to AA+ from AAA on June 24th, citing the deterioration in public finances as the main cause. Fitch expects the coronavirus response to raise Canada’s debt-to-GDP level to 115.1% in 2020, up from 88.3% in 2019, with 12.8% of the fiscal deficit in 2020 attributed to income support and wage subsidy measures. S&P on the other hand reaffirmed Canada’s top credit rating on Wednesday of last week, while revising its GDP forecasts to -5.9% in 2020 and 5.4% in 2021. Standard and Poors also predict that the aggregate budget deficit is on track to reach 11.6% in 2020 and 2.6% in 2021.

Realistically, cost estimates of the CERB programme depend on the extent to which the economy and thus the labour market can recover. The release of June’s labour market data on Friday will be key for assessing this, with the unemployment rate set to decline by a percentage point from May’s reading of 13.7%.

With this being the main top-tier data release for the loonie next week, it is likely to draw much attention, but we go into the release with a sense of caution given the lessons learnt from the US labour market data seen last week. The devil is likely to be in the detail again, with emphasis on flow as opposed to stock variables.




A supportive narrative for EM currencies and assets in the medium and long run relies on the idea that investors will be keen to chase attractive yields once coronavirus-related volatility in markets and forward-looking data has eased. In the search for real returns among high-yielding assets, the observance of inflation and inflation expectations becomes crucially, since the price growth in these economies is typically high and volatile. At the onset of the pandemic, market-based measures of long-term inflation expectations spiked at a fast rate in high-risk economies. For most cases, the swing in inflation expectations followed similar patterns in current inflation, long-term bond yields and CDS spreads, while inflation expectations in developed markets also played a role. In the aftermath of the Covid-19 shock in Q1, however, inflation expectations have bounced back, and for a large number of EMs, fresh record lows are being registered. Investor´s reassessments of the trajectory for price growth is in the spotlight this week, with most emerging markets reporting ongoing inflationary dynamics as economic activity gradually resumes from long lockdown periods.


Market-based inflation expectations in emerging markets warn of a weak economic outlook. (Implied 10-year breakeven rates from inflation-linked bonds.)

Central banks across many developing economies have stressed the large uncertainty prevailing in domestic inflation outlooks. On the upside, price dynamics are supported by unprecedented fiscal and monetary easing, taking the rate of money supply growth to record-high levels. The supply disruptions triggered by lockdown measures, both domestically and in terms of world trade, add further upwards pressures on prices. Massive devaluation of EM currencies also translate on high inflation risks. However, concerns on the wide output gap the coronavirus crisis will bring to emerging markets makes a case for prevailing downward pressures on prices. The sharp demand shock triggered by abundant unemployment and private investment contraction has already reflected in low long-term inflation expectations, despite the aggressive policy stimulus put in place in many advanced and developing economies. The consensus view on a slower-than-expected global economic recovery is fed by concerns that continued lockdown measures will need to be reinstated in several spots across the globe.

While slowing inflation dynamics add attractiveness to high-risk currencies in terms of real yields, subdued price growth also suggests constraints on the growth outlook, translating into weaker fundamentals for real exchange rates in the long run. Higher expectations of future real yields amid a backdrop of economic uncertainty encourage investment diversion towards long-term fixed income assets, which in turn, removes steam from the economic recovery. In this sense, underperforming economic growth poses a challenge for EM currencies in the long-run, especially since the ability of high-risk economies to flatten bond yield curves is relatively limited.

A fresh review inflation data is in the spotlight this week, with a wide set of emerging markets pinned in the economic calendar:


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



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