When we look back at April 2020, it could very well be the worst month ever for the global economy. Across the globe, governments took the unprecedented step of ordering their citizens to stay at home and shutting down all non-essential businesses. Most businesses were closed. Central banks around the world warned about the significant weakness in April data with the jobless rate expected to hit double-digit levels. Millions of people were put out of work as economic activity ground to a halt. Yet, for the markets, April wasn’t a terrible month. In fact, the Dow Jones Industrial Average rose more than 15% after falling sharply in February and March. The U.S. dollar, which rose sharply in March, limited its gains to the euro and Swiss Franc in April. Instead, it fell against all other major currencies, including the Australian and New Zealand dollars. Aggressive monetary and fiscal stimulus from all corners of the world helped to stabilize markets that had gone haywire in February and March.
Central banks continue to increase support for consumers and businesses. The big announcement today came from the Federal Reserve, which said it will be expanding its Main Street lending facility to accommodate larger businesses with a lower minimum loan size. This follows a steep decline in personal income and spending along with a slightly higher than expected jobless claims report. Despite softer data and more stimulus from the Fed, USD/JPY ended the day sharply higher as end-of-the-month flows triggered big moves.
Meanwhile, the European Central Bank kept its main refinancing rate unchanged, cut the lowest rate on its targeted loan operation and announced new operations for banks. This new program called the Pandemic Emergency Long Term Refinancing Operation, or PELTRO for short, provides loans at ultra-low interest rates (minus 1%). The ECB also said it was prepared to increase the size and adjust the composition of its pandemic emergency bond purchase program. These steps are in response to ECB President Christine Lagarde’s worry that the economy could shrink as much as 12% this year and 15% in Q2 on a quarterly. She felt that the speed and scale of the recovery is highly uncertain, so they are “fully committed to doing everything possible” within their mandate to support every citizen of the Eurozone. Earlier this morning, we learned that Eurozone GDP contracted by 3.8% in the first quarter, which was right in line with expectations. Initially the euro sold off after the rate decision and Lagarde’s comments, but the single currency recovered strongly into the London close on month-end buying.
The main takeaway from all three of this week’s monetary policy announcements is that central bankers did not sugar coat their economic outlooks. They are taking the downturn in their economies very seriously. They are worried that their contractions will deepen. They have not only taken steps this week to offset the decline, but also pledged to do more.
The commodity currencies were mixed, with the New Zealand dollar extending its gains, while the Canadian and Australian dollars pulled back slightly. NZD benefitted from upward revision to business confidence and ANZ activity. Chinese PMIs were also better, with improvements in non-manufacturing PMI offsetting a decline in manufacturing. According to the latest monthly GDP report, even before COVID-19 hit North America in a meaningful way, Canada’s economy was slowing. In the month of February, Canadian GDP stagnated, which was weaker than the forecast for 0.1% growth. No major economic reports were released from Australia, but the currency fell hard during the New York session. Australian manufacturing PMI numbers are scheduled for release this evening along with first quarter producer prices.