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Stimulus floods Europe

While Angela was waiting

As she waited for the rest of Europe to sign up for the EC’s €750 billion “Repair and prepare” support proposal for Covid-19-hit countries, Chancellor Angela Merkel busied herself with domestic matters. On Wednesday she unveiled €130 billion of stimulus measures to reboot the German economy.

The package is 30% bigger than expected and includes a cut in VAT from 19% to 16% (worth $20bn), a €300 per capita child subsidy (€4.3bn), €25bn of bridge financing for SMEs and €5.9bn aid for local authorities. Its announcement caused scarcely a ripple and the euro is unchanged on the day against the US dollar and Swiss franc. Wednesday’s European ecostats were adequate, in that they avoided doing any damage to the euro. The services sector purchasing managers’ indices, whilst still deep in the recession zone, were all better than forecast and the Euroland composite at 31.9 was up by more than 18 points – 135% - from its low.

The next watershed moment for the euro comes after lunch, when the European Central Bank president is generally expected to set out the next phase of monetary stimulus. Although there is no guarantee of jam today, the consensus is that the ECB will bump up its asset purchase programme by another €500bn. The risk is that too much too soon could encourage EU governments to sit back and let the ECB do their work for them.

 

Better but not good

As in the euro zone, the services sector PMIs were generally better than expected and, at the same time, still negative. Britain’s 29 was only a point or so ahead of forecast and represented a continuation of the “severe downturn in services sector activity”.

The US readings from Markit and ISM were both higher on the month with ISM’s 45.4 outpacing Markit’s 37.5, as it tends to do. ADP reported a 2.8 million monthly decline in US employment, a smaller than expected drop, but analysts still expect nonfarm payrolls to have fallen by eight million in May when the employment report comes out on Friday. US factory orders fell 13% in April, their second successive double-digit drop.

Overnight Australia reported a narrowing of the trade surplus as exports fell by more than imports. Retail sales fell 17.7% in April after March’s panic-buying spike, much as expected. The news was not itself damaging but the Aussie is still the day’s joint loser alongside the yen, a millimetre behind the pound.

 

Data on the cards

Today’s highlight will be the ECB president’s press conference. Tomorrow’s is the employment data from North America. They have the potential to get the euro and the US and Canadian dollars moving, though they are not certain to do so.

There are three sets of UK data on the card. Today’s construction sector PMI for May has got to be better than April’s 8.2: 29.7 is pencilled in. Consumer confidence from GfK tonight is forecast to be six points lower on the month at -40. Friday’s Halifax index is expected to show house prices falling 0.7% in May.

With Canada’s employment data for May analysts expect another half-million jobs to have disappeared after a two million drop in April. The unemployment rates for Canada and the States are optimistically estimated at 15% and 19.7%.

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