It’s been a chaotic two months for central banks around the world as most have held at least one emergency meeting since the coronavirus crisis. Hence, next week’s regular scheduled meetings of the Federal Reserve (FD), European Central Bank (ECB), and the Bank of Japan (BoJ) will likely not elicit anything new. Setting that aside, policymakers have also been keeping the communication channels wide open and the possibility of major surprises appears slim. Nevertheless, markets may need calming explanations from policymakers to fall back on if flash GDP readings from the Eurozone and the United States spark fresh jitters about growth.
With Eurozone GDP expected to go into freefall; will ECB come to the rescue?
The euro dollar slipped to a one-month low this week due to terrible PMI numbers which flashed warning signs about the damage the coronavirus has inflicted on the Eurozone economy. Further fears of economic collapse will be realised on Thursday after the flash GDP report is published. Since the old continent went into lockdown, the Eurozone economy is expected to have contracted by a staggering 3.2% on a quarterly basis in the first three months of the year, pointing to a steeper recession than the 2008-09 financial crisis. Other data to watch include the Economic Sentiment Indicator on Wednesday and flash inflation figures on Thursday.
Moreover, the Eurozone will be concerned about rising debt levels and widening European bond yield spreads. The ECB’s policy committee will meet on Thursday to address these concerns regarding the ability of highly indebted countries such as Italy to claw their way out of this crisis. Italy’s inability to meet its debts has led to a sharp spike in periphery yields in recent days and if EU leaders are not able to agree to a massive recovery fund where they share the burden of at least some of the debt, the euro will likely continue to face downward pressure.
At the time time, recent moves by the ECB to accept junk bonds as collateral, has alleviated the immediate panic. This has opened the way for the bank to keep buying Italian government bonds as long as they are downgraded to junk status. Any additional measures that the ECB may announce next week to ease market stress and maintain sufficient liquidity could find some support for the single currency. Ultimately, it will be up to policy makers to sooth investor nerves on the issue of whether Europe is sufficiently equipped to recover from the crisis.
Gloomy FOMC forecasts and depressing GDP leaves the Fed out of options
The Fed has already thrown everything at the US economy in a desperate bid to avoid total mayhem as the COVID-19 outbreak has forced many businesses to go into hibernation. This has left the Fed with very few new options and policymakers are expected to sit tight when they meet on Tuesday and Wednesday for their first regular meeting since January.
Nevertheless, markets will still be interested in what the Fed has to say as the Federal Open Market Committee (FOMC) economic projections will be published. They will coincide with the advance GDP report for the first quarter, which is expected to show the economy shrinking at an annualised quarterly rate of 4.1%.
The GDP reading will be accompanied by other releases in the US next week. The Conference Board consumer confidence index for April is out on Tuesday, pending home sales are due on Wednesday, personal income and consumption will be released on Thursday along with the latest ISM manufacturing PMI on Friday.
US numbers have the potential to cause fresh sorrow among traders and investors about future prospects for the world’s largest economy. However, if risk sentiment is dampened by the data and the Fed’s forecasts, the US dollar will likely continue to act as a safe haven and gain in the currency markets, inflicting fresh downside pressure on the euro dollar and the cable.
Next week’s Japanese numbers and BoJ to be watched
Like the rest of central banks around the world, the BoJ has ramped up its stimulus program after its last emergency meeting on March 16. According to several reports, the bank will be removing the cap on the amount of government bonds it can purchase and doubling the amount of commercial paper and corporate bonds it buys, indicating further steps into unchartered territory when it meets on Monday. The fact that interest rates are in negative territory and are not expected to go any lower due to concerns about the side-effects of negative rates, the only tool the BoJ has to fight the virus pandemic is a purchasing of assets program.
Next week on the economic front, the release of important data such as retail sales numbers and preliminary industrial output for March are due on Thursday. It is expected that these figures will be almost as gloomy as those seen so far in other countries such as the United States and Europe, even though the Asian government had decided against strict isolation measures and shutdowns such as those enforced on the old continent. Nevertheless, Japan is now facing a second wave of COVID-19 cases in some regions, forcing the government to declare a nationwide state of emergency. Consequently, this data can only worsen in the coming months as Japanese exporters will struggle to sell their goods given the collapse in global demand. Exports were already previously bruised from the Sino-US trade war and a second coming of low demand could hugely affect these numbers.
Nonetheless as far as the Japanese yen is concerned, risk sentiment will remain its key driver, with any ‘surprises’ from the BoJ unlikely to produce anything other than knee-jerk reactions.