Attention is squarely going to be on efforts to open up economies in the days and weeks ahead. Most US states are opening up to varied degrees while the same is happening across Europe. The risk of course is that a second or even third wave of Covid-19 emerges for some countries, as is being seen in some parts of Asia, for example Korea where renewed social distancing measures have been put in place after a fresh cluster of cases in clubs and bars there.
However, governments will need to weigh up these risks against the growing economic costs of lockdown, which will by no means be easy. Even as social distancing and lockdown measures are eased, it will likely be a gradual process, with activity likely to remain under pressure. This is when the real test for markets will take place. While markets have clearly been buoyed by unprecedented stimulus measures, especially from the Federal Reserve, which could continue for some time, fiscal injections will run their course over the next couple of months.
As revealed in April US jobs data at the end of last week the costs in terms of increased unemployment has been severe. The US unemployment rate hit a post war high of 14.7% while 20.5 million people lost their jobs. This news will be echoed globally. Markets were expecting bad news and therefore the reaction was limited, but the data will nonetheless put more pressure on policy makers to keep the stimulus taps open. Discussions are already in place between US Republican and Democrats over a new package, though disagreements on various issues suggest a deal may not happen soon.
Another spanner in the works is tensions between the US and China. The US administration has become more vocal on blaming China for the virus, over recent weeks. This had threatened to undermine the “phase 1” trade deal agreed a few months ago. However, there were some soothing remarks on this front, with a phone call between senior US and Chinese officials last week, highlighting “good progress” on implementing the deal. Despite such progress, it may not calm tensions over the cause of the virus, especially ahead of US elections in November and markets are likely to remain nervous in the weeks ahead.
This week there will be more evidence on tap to reveal the economic onslaught of the virus, just as many countries are finally flattening the virus curve itself. Q1 GDP releases will reveal weakness in several countries. Chinese activity data including retail sales and industrial production as well as credit metrics will give further evidence of the virus impact and how quickly China is recovering. If anything, China’s recovery path will likely show the pain ahead for many economies that are easing lockdown measures. In the US, inflation data and retail sales will garner attention. In terms of central banks attention will be on the Reserve Bank of New Zealand (RBNZ). While no change in policy rates is likely a step up in the RBNZ’s asset purchases may take place.