Good Morning,

The markets were on hold for most of last week, as they awaited the release of the latest employment figures from the US. When they arrived, on the surface, all looked good. However, delving into them it became clear that private-sector employment gains were quite a lot softer than the market had hoped for. The shortfall has been filled by temporary government hiring for the 2020 Census thus boosting the headline figure. High-frequency daily data, from payroll tracking firm Homebase, also suggests that the pace of jobs gains has slowed sharply in recent weeks. The current environment of poor consumer confidence, employment staying weak and the cut in unemployment benefits means there are major challenges for the US economy as it tries to recoup all its lost output, these factors should continue to weigh on the dollar.

Despite these ongoing problems in the US, the dollar gained ground against both sterling and the euro last week for two reasons. Most importantly, the euro was weakened by several voices from within the ECB and closed the week at $1.1800. With markets sensing that the ECB does not feel comfortable with the euro rate above $1.2000, we can expect more of the same from the ECB council meeting this coming Thursday. Secondly, the weakness in stock markets, particularly the Nasdaq, has changed risk sentiment and encouraged a flight to safe-haven currencies such as the dollar. Recently the pound has been trading in tandem with the euro against the dollar and with the euro’s price being encouraged down there is little upside potential for sterling against the greenback at the present time. The pound is also likely to stay under pressure as another round of Brexit talks starts this week.

GBP
Sterling steadily eased back last week, as the dollar strengthened, losing almost a one and a half cents before closing at $1.3270. Several officials from the BoE spoke during the week, whilst giving testimony to a parliamentary select committee and were unanimous in warning about the slowness of the recovery.  As the eighth round of Brexit negotiations starts on Tuesday, with little sign of any breakthrough, more posturing is expected from both sides. In the coming weeks, nervous eyes will be watching the daily COVID numbers for any upswing attributable to the recent reopening of schools. One last concern for pound watchers will be any continuing weakness in stock markets and a continuing flight to the safe haven of the dollar. Its a very quiet week on data, with only monthly Gross Domestic Product (GDP) released on Friday, which is expected to show a strong rebound.

EUR
Over the last week, several ECB members told the Financial Times that the euro’s rise against the dollar, together with weak demand, risked hampering the Eurozone economic recovery. With the ECB meeting on Thursday, there is an expectation of more verbal intervention to try and cap the euro’s recent strength. The markets will be watching for any reaction to the deflationary environment which now threatens to engulf Europe and the ECB may start dropping hints about further easing measures. Away from the ECB, the market will be nervously watching the current sharp upswing in COVID cases in both France and Spain as to whether the cases start spreading elsewhere in Europe as holidaymakers return home. We will be studying Germany’s latest data on industrial production, which are released on Monday, and the Eurozone’s second-quarter GDP figures which are released on Tuesday.

USD
Along with the lacklustre employment figures, last week’s Federal Reserve Beige Book warned about “slowing jobs growth and increased hiring volatility” indicating that it is a long way back for the economy. This week starts with the Labor Day which traditionally marks the end of summer. Having seen volatility and volume return to the markets at the back end of the week it feels as if some traders had left their holiday homes in the Hamptons early and jumped the gun! If the stock markets continue to slide, the dollar will gain from its safe-haven status which will limit the pound’s upside. With the presidential opinion polls starting to narrow, we could have a week dominated by politics and all the unpredictability that ensures. US inflation numbers, released on Friday, will be under the spotlight given the Federal Reserve’s recent discourse on the subject. Apart from these, the only other noteworthy data is the weekly unemployment figures on Thursday.

Scandis
Towards the end of the week, beta currencies suffered during the flight to safe havens, with the Swedish krona being one of the currencies that weakened as the Nasdaq and OMX in Stockholm tumbled. With thin volume due to the Bank Holiday in the USA, the Budget Balance data released this morning may be the catalyst for further krona weakening.  On Wednesday, we will get the CPI data, an indicator closely watched by the Riksbank followed by the Household Consumption figures. From Norway, we are eagerly anticipating the Industrial Production figures out this morning, the official GDP figure on Tuesday and the CPI figures on Thursday. Quite an eventful week in other words for two economies very much dominated by Nasdaq related tech and oil.

ROW
Last week the G10 currencies were dominated by the return of dollar strength more than domestic considerations. The yen has been under pressure and will continue until Japan’s political future is settled. At present, it is looking increasingly likely that Shinzo Abe will be replaced by Cabinet secretary Suga, who will probably carry on with the same loose economic policies. Elsewhere, the aussie ignored improving reports on domestic COVID outbreaks and suffered instead from the global drop in risk appetite as did its Canadian cousin, the loonie. All looks quiet for the week ahead, in terms of data, with only Japanese second-quarter GDP on Tuesday and its Consumer Price Index on Friday.

Question of the week – What do all the letters mean?

As the world suffers a recession, unlike any other, a bunch of letters has entered the market’s vocabulary as they attempt to describe the approaching recovery. The letters being used are shorthand interpretations of the various possible recovery patterns that economists are predicting. We thought a short guide might help clarify the abbreviations.

K is the letter of the moment, visualising what many people think we are experiencing now. The line headed upwards symbolises the trajectory of the company sectors that have benefitted from the recession i.e. technology, pharma, and home working companies such as Zoom. The downward sloping line represents the ills that much of the rest of the economy is suffering such as airlines and hospitality.
L is for an L-shaped recovery which is characterized by a slow rate of recovery, with persistent unemployment and stagnant economic growth.
N is for a Nike swoosh which epitomises a scenario that allows for businesses and spending to slowly resume to pre-recession levels.
U is for U-shaped recovery. This describes a type of economic recession and recovery that charts a U shape. Typically, this happens after the economy suffers a sharp decline and then remains depressed for a year or so before bouncing back.
V is for a V-shaped recovery which occurs after the economy suffers a sharp economic shock but quickly and strongly, recovers.
W is for a W-shaped recovery on which involves a sharp decline followed by a sharp rise back upward, followed again by a sharp decline and ending with another sharp rise.

Have a great week.