Daily Brief

Happy days are here again

Investors cheer the CCF

As if to raise a metaphorical victory sign to its detractors, sterling took a comfortable third place on Monday behind the NOK and AUD. The JPY was out at the back, with the USD and CHF in penultimate and antepenultimate place. Yes, it was risk-on again and the equity bulls were raging in America.

Once again it was that omnipresent saviour of the equity market, the US Federal Reserve, that pumped up the market. Back in March it established the Secondary Market Corporate Credit Facility to “support credit to employers by providing liquidity to the market for outstanding corporate bonds” (i.e. buying bonds). Until now the SMCCF has only bought shares of broad-based exchange-traded funds. In an announcement yesterday the Fed said it would create its own portfolio of corporate bonds, buying them directly.

The difference is more than semantic: the Fed will also activate its Primary Market Corporate Credit Facility to buy corporate paper at issue. As ever, more cheap money injected into the system means higher share prices and increased risk-appetite. It also helped yesterday when the administration floated the idea of a trillion-dollar spend on infrastructure. The safe-haven yen was 1.5% lower on the day and dollar lost 1.2% to the pound.


A deal by July

The Prime Minister emerged victorious from an hour-long telephone conversation with EU leaders, having fixed the end of the Brexit transition period for 31 December. He said “there is no reason why the outline of a deal cannot be sealed by the end of July”.

Investors cautiously took Johnson at his word, despite the European Council president’s repeated insistence on the “level playing field” to which, until now, Downing Street has been implacably opposed. They might have their doubts but at least the light of a possible Brexit deal was not entirely snuffed out. Sterling strengthened by an average of 0.4%, adding two thirds of a euro cent.

Not much was to be learned from Monday’s few ecostats. The New York Fed’s manufacturing index rebounded by 48 points from a record low. Canadian manufacturing sales tanked in April. Consumer sentiment in New Zealand was less pessimistic than some had predicted.


Not quite what it says on the tin

This morning’s UK employment statistics threw out a 3.9% rate of unemployment, lower than the 4.5% that analysts had plucked out of the air. The other components were all over the place as a result of the fluidity created by lockdown and the job retention scheme.

The unemployment rate and the 529k rise in jobseeker numbers do not properly reflect the real employment situation. In particular they take no account of almost nine million people on furlough, at least some of whom will be out of a job when the job retention scheme ends. The employment picture is likely to get worse before it begins to recover.

Other data today covers German inflation (steady at 0.6%), German and Euroland investor sentiment and US retail sales for May. This afternoon Federal Reserve chairman Jerome Powell makes the first of two appearances on Capitol Hill when he addresses the Senate Banking Committee. His testimony will be important to sentiment.

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