A deal is done. The White House and Senate agreed to a historic $2 trillion stimulus package and this agreement should pass the House easily. Equities and currencies traded sharply higher in response as investors applauded the speed of approval. The plan provides increased jobless benefits, direct payment to taxpayers and funding for businesses hit hard by COVID-19. This comes after aggressive monetary easing by central banks, the Families First Coronavirus Response Act and equally powerful fiscal stimulus measures abroad. The question now is will it work, will it be enough to prevent a recession? 

Few will argue that for a durable recovery in stocks to occur, one of 2 things needs to happen – permanent flattening of the curve or an effective vaccine. None of this can be achieved by April 12th, President Trump’s targeted date for easing restrictions on non-essential businesses. If countries like South Korea, China and Singapore who have effectively reduced caseloads are experiencing a second wave, restarting business activity before the virus peaks could lead to devastating results.

With that said, the market is responding well to the stimulus bill. Sterling rallied even as the Prince of Wales became the latest figurehead to test positive for coronavirus thanks in part to the uptick in core consumer prices. As reported in the PMIs, shortages have led to higher prices in the manufacturing and service sectors. The Canadian dollar rallied the most as oil prices rebounded 3%. We are actually surprised that the New Zealand dollar underperformed A$ because the trade balance exceeded expectations, rising to 594M from -414M. 

USD/JPY is still holding steady while the greenback eases its gains against other currencies. Thursday’s jobless claims report will be a big test for the dollar’s safe haven status. Economists are looking for claims to rise to 1.5 million but they could be much worse. In Canada there are reports that claims are closer to 1 million, which is 5% of the workforce.  There are approximately 160 million people in the US workforce and 5% of that is 8 million. Its within everyone’s imagination that at least 5% of the US workforce are out of work. If jobless claims is in the 2 to 3 million range, which is completely feasible, we could see a significant sell-off in the US dollar that could take USD/JPY well below 110. So far US data hasn’t been terrible. We’ve seen some signs of weakness but the declines in areas such as retail sales and new home sales have been modest. Revisions for fourth quarter GDP are also due for release but they will take a backseat to jobless claims. 

The Bank of England also has a monetary policy announcement on Thursday. Last week, the BoE cut interest rates to 0.1%, its lowest level ever and started Quantitative Easing. The minutes from that meeting will be released along with tomorrow’s. Having just rolled out an emergency liquidity measure to stabilize the financial markets on Tuesday, it is not clear if the BoE plans to do more on Thursday or wants to take the opportunity to reassure investors that support for the economy and the market will keep coming. This will be first ever scheduled meeting led by Andrew Bailey, the Bank of England’s new Governor who inherits a country facing a major economic crisis. Retail sales are also due and like many countries spending in February wasn’t terrible. 

The pandemic battle in Europe is growing and yet euro traded higher versus the US dollar for the fourth day in a row.  The German IFO report was revised lower, many EU states are apparently facing shortages in stockpiles, medical gear and devices. Spain has overtaken China in deaths. Italy exceeded China’s amount a week ago. Eurozone is headed for a deep recession and euro bonds won’t help. The EU is holding an emergency summit tomorrow to discuss further measures to fight the virus. For all of these reasons, we are still looking for a reversal in EURO.

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