Cautious optimism but is it warranted?
For today’s session, it is possible that better economic data drowns out the noise from rising covid cases globally. Survey indices (European PMIs, US ISM) in particular have a tendency to revert to the mean after their sharp drop in recent months but only due to a stabilisation of activity at low levels. The risk of another spike in EUR or USD interest rates on these data today is not negligible but we do not expect it to be sustained.
As we noted yesterday, there is a trend, amid general caution, towards central bankers striking a more upbeat tone of late. It is no doubt a reflection of the stabilisation in some economic indicators mentioned above. We do not infer from this that the bar to further easing has risen, especially not in the Eurozone, but this display of optimism comes at a time the risk of further damage from the epidemic is growing. Granted, reaction to a second wave would perhaps entail more localised lockdown measures than in the first, but we would expect a more forceful response in EU states than in the US states currently in the news.
Haldane of the BOE was the latest central banker to voice his hope of a V-shaped recovery, based in part on high frequency indicators. As the sole dissenter to last month’s decision to boost QE, his optimism is perhaps not surprising. Among the reasons invoked for stopping QE was the sharp improvement in market conditions. We agree that the dynamics prevalent at some point in March of Gilts selling off on risk-off days was particularly worrying, and that money market conditions have improved. The ability of interest rates markets to withstand another shock depends largely on the assumption that central banks would step in quickly however.
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July 01, 2020 at 01:17PM
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