Risk assets enjoyed another strong week up until last Friday’s close, led by US equities. It is almost incomprehensible to think that the S&P 500 and the US dollar were almost back to the same levels seen at the beginning of 2020. Positive data helped spur the rally; US non-farm payrolls surprised to the upside, climbing 2.5 million in May, a very different outcome to the 7.5 million loss that analysts had forecast, and unemployment also fell to 13.3%, defying expectations of a rise to 19%.
The ECB continue to do ‘whatever it takes’ to support the Eurozone; following the announcement that Germany had agreed a stimulus package of €130 billion. Christine Lagarde, Chairwoman of the ECB, announced that they would raise the Pandemic Emergency Purchase Programme, PEPP for short, by a further €600 billion, taking the programme to €1.35 trillion in total. The programme has also been extended and will run out in June 2021 at the earliest.
In the UK, there has been a step change in the Government’s view on the hospitality industry, specifically pubs, restaurants and hotels. Previously, the sector was due to open in July at the earliest, but a new plan outlined by the Government, means that pub gardens could be open as soon as 22nd June. The ‘Save Summer Six’, led by Chancellor, Rishi Sunak, has a clear mission to get the economy up and running after being warned by the Business Secretary, Alok Sharma, that 3.5 million jobs are at risk.
However two important publications have been released since Monday. Firstly, we had the OECD’s (Organisation for Economic Co-operation and Development) Economic Outlook, which was predictably gloomy.
As part of our macroeconomic monitoring, we track the OECD’s Composite Leading Indicators on a monthly basis which gives us a broad-based indication of where each economy sits in the business cycle. As expected, we have seen a sharp slowdown in economic activity with the data for the UK looking particularly poor. The recent surprise unemployment numbers in the US has shown however, that it is currently extraordinarily difficult to measure or forecast the impact of the Coronavirus shutdown.
Secondly, we had the latest meeting of the Federal Open Market Committee, the group within the Federal Reserve who decide on US monetary policy. As we fully expected there were no surprises, however, Jerome Powell has erased all doubt around the short-term future of US interest rates. In the projections that accompany their statement, the consensus amongst the committee members is for rates to remain between zero and ¼ percent until the end of 2022.
So, the markets are faced with a dire warning of an historic 6% decline in world GDP, which is not a surprise to anyone, and conversely being told that central banks will be in accommodative mode for the foreseeable future.
Markets are reacting to the ambiguous outlook, reflecting the current macroeconomic uncertainty and unclear guidance on the next phase of combating the virus. Uncertainty remains for the short term and we are not out of the woods by any stretch and so a careful and evidence based approach to investment management remains prudent.