Last Week’s Highlights
US Q1 activity drops the most since the last recession
The first-quarter economic activity in the world’s largest economy fell at a rate of 4.8%. This was the fastest contraction seen since the last economic recession in 2008. The declines came as most parts of the economy were shut due to the Coronavirus situation.
The contraction comes on the back of a 2.1% increase in the last three months of 2019. Consumer spending fell 7.6% during the period led by a steep drop in services, healthcare, and goods.
Fed keeps policy steady amid citing medium-term risks
The Federal Reserve held its monetary policy meeting last week. As widely expected, interest rates were unchanged at 0.00% – 0.25%. The central bank said that it will continue its aggressive policy until the US economy is up and running.
Fed Chair Jerome Powell said that medium-term risks remain over the coming year alongside the global economy as well. The Fed cut interest rates to near zero since the start of this year and relaunched massive asset purchases to stem the economic impact due to the pandemic.
Eurozone economic activity contracts at worst pace in history
Economic activity in the eurozone fell as the sharpest rate since record-keeping began. Data from Eurostat released last week showed that the eurozone economy contracted 3.8% in the first quarter. This was after the economy posted a modest 0.1% increase in the previous three months.
In another report, flash estimates on inflation showed that consumer prices slowed 0.4% in April, down from 0.7% in February. The declines were largely due to a 9.6% drop in energy prices.
ECB keeps policy unchanged, disappointing markets
The European Central bank held its monetary policy meeting last week. Investors felt disappointed as the ECB failed to announce any further measures to stem the economic decline. However, ECB Chief Lagarde said that the central bank was prepared to take any measure necessary.
The bank laid out plans to cut interest rates on its TLTRO II program if required. The euro rebounded, rising to the strongest levels in four weeks.
Upcoming Economic Events
RBA to keep policy steady amid tapering its bond purchases
The Reserve Bank of Australia will be holding its monetary policy meeting this week. Economists forecast that the RBA will leave interest rates at 0.25%. However, expectations are rising that the central bank will likely taper its bond purchases, following hints from the previous meeting in April.
Nevertheless, the central bank will need to do a balancing act so as not to sound too hawkish which will bolster the AUD’s strength.
Bank of England to remain on the sidelines for now
The Bank of England’s monetary policy meeting this week will be a non-event. The central bank meeting will also have a fairly limited impact on the pound sterling. This comes as interest rates are near zero and the bank bolstered its QE purchases.
Focus will be on how the UK economy will limp back to normalcy. PM Johnson has been hinting at following a phased approach to reopening the economy.
Big week ahead for USD
A number of economic events scheduled for the week ahead will be critical for the US dollar. Data includes manufacturing and non-manufacturing PMI from the Institute of Supply Management. Later in the week, the labor market reports from ADP and the nonfarm payrolls will be the big items on Thursday and Friday respectively.
All in all, the outlook remains grim as the US economy was in a lockdown for the month of April. Manufacturing activity is forecast to hit the lowest level since the financial crisis. Meanwhile, the unemployment rate is forecast to rise to 16% with the economy likely to shed 21 million jobs during the month.