For some time, everything that happened on the market yesterday was quite understandable and clear. But at some point, the logic stopped working. Market participants yielded to panic once again, and the market began to behave not according to the rules. At the same time, it is becoming more and more obvious every day how deep a hole the world economy is sliding into. It is just that we can see all this only in the example of the United States, which most quickly provides statistics. And these same data do not cause anything but horror. And oddly enough, it is this fact that becomes the reason for the strengthening of the dollar. As in the example of yesterday, and in general for a long period of time. Major investors are well aware of how the global economy works, and they are well aware that if the American economy is just wild, then they will inevitably spread to the rest of the world. But for now, we simply do not see this, since only the United States actively publishes March data. The rest are just starting to do it. And we will see a lot of data only next month and no one will guarantee that the situation in other countries will be better than in the United States. Rather, everyone comes from the fact that it is even worse. Moreover, many understand that the United States will do anything to improve the situation in its economy as soon as possible including tough protectionist measures. That is, many countries will not be able to take advantage of the inevitable future recovery of the US economy, and their economies will remain in ruins. Against this background, investments in the American economy look very good, since many companies have fallen in price, but when economic recovery begins, they will seriously increase in value. Thus, it just seems that the market in the evening behaved inappropriately. It's just the opposite. There is logic in everything that happens. Another thing is that this is an extremely cruel logic.
So, it all started with the weakening of the single European currency, and after it the pound. The initial reason was weak inflation data in several eurozone countries, which, as usually happens, did not quite coincide with preliminary estimates. For example, inflation in Spain fell from 0.7% not to 0.1%, but to 0.0%. This, of course, is not deflation, but already one foot in it. In Italy, the data coincided with forecasts and inflation fell from 0.3% to 0.1%. The only thing that is at least pleasing is in France. The fact is that inflation fell from 1.4% not to 0.6%, but only to 0.7%. However, this is still a decrease, and quite important. Thus, it is not surprising that the single European currency slightly declined.
Inflation (France):
At the same time, the pound declined a little more actively, although no data were published in the UK. In part, this is due precisely to the single European currency, which also pulled the pound. But much more important is that the market simply worked out the extension until May 7 of the restricted quarantine regime in the United Kingdom. This news appeared on Tuesday, but is closer to the market closure, and then they did not have time to win it back.
The single European currency and the pound went down with renewed strength literally half an hour before the publication of American statistics. Given that the data was expected to be quite weak, it looked quite strange but this is only at first glance. Oftentimes, the market goes in the opposite direction from forecasts before the publication of significant data, after which it quickly turns around. Something similar was observed yesterday. As soon as the data were published, the dollar began to rapidly lose its position. And the data was not just bad. They were terrible. Industrial production, which only in February stopped declining, amid showing zero growth, showed a decline again. In annual terms, the decline was -5.5%. At the same time, no one had any illusions, and everyone expected a decline, but only by -1.5%. Given that the United States is almost the first to publish data for March, you can imagine what the results will be for other countries. So, yes, the decline in industry in the world will be very, very deep. But the worst thing is another. The basis of the American economy is consumer activity. One might even say that consumer demand in the United States is the foundation of the entire global economy. And it is clear that against the backdrop of a crazy increase in unemployment, as well as restrictive measures to combat the spread of the coronavirus epidemic, this same demand should have been significantly reduced. And the best reflection of this very demand is retail sales. So, retail sales growth of 4.6% was to be replaced by a decline of -2.0%. This is a fairly significant decline. But in fact, it turned out that the decline in retail sales was -6, 2% And this despite the fact that an unprecedented increase in unemployment began only in mid-March and unemployment continues to grow. This is possible only if all those who have just lost their jobs do not even dream of finding a new one as soon as possible. Consequently, they greatly reduce their costs. And as soon as all these wonderful data were published, the dollar logically began to lose its position. But literally a couple of hours later, the direction of movement changed by one hundred and eighty degrees, and the dollar appreciably strengthened at the end of the day. The reasons for this behavior are described at the very beginning. Investors understand that the recession in other countries may be much deeper and they will get out of it much longer.
Retail Sales (United States):
Today, data on industrial production in the euro area was published. However, not for March, but only for February. Prior to this, we must pay attention to inflation in Germany, which declined from 1.7% to 1.4%. So we see a rapid decline in inflation in all the largest countries of the euro area, which means you should not expect anything good from tomorrow's pan-European data. As for industry, it has already been declining for fifteen consecutive months. This, by the way, indicates that the coronavirus itself is not the cause of the economic downward reversal. At most, the coronavirus epidemic has made it worse and sped up at the beginning. So, the rate of decline in industrial production should accelerate from -1.9% to -2.2%. And yes, this suggests that the decline has been going on for sixteen consecutive months. At the same time, it is obvious that the decline will be even more impressive in March.
Industrial Production (Europe):
The next batch of labor market data is published today in the United States and the data on initial applications for unemployment benefits as much as April 11. That is, they will reflect the dynamics of the labor market in April rather than March. So, the initial calls should be 4, 720 thousand. This is not 6, 606 thousand last week but still very, very much. It must be remembered that the normal for the United States is approximately 200-300 thousand initial visits per week. The labor market is able to digest such a quantity, and there is no need to talk about any lingering nature of unemployment. But the current number of initial requests goes beyond all imaginable limits. And this situation has been going on for at least three weeks. And most likely, it will continue for a considerable amount of time. But much greater concerns are caused by repeated applications for unemployment benefits, which should be as much as 10 500 thousand. Some forecasts suggest that there may be 14,000 thousand. At the same time, the data for April 4 captured the current month to a large extent. And of course, the expected number of repeat applications is a record. Moreover, significantly exceeding the previous record of 7,455 thousand which was established just last week. So the situation in the labor market of the United States does not think to improve. It is only getting worse. And without the normalization of the labor market, one should not think about any economic growth. The economic situation will only worsen and we will see a further decline in retail sales, and so on. In addition, the number of new construction projects should decrease by 19.6%, and the number of issued building permits by another 10.9%. But something tells me that no one will pay attention to the state of affairs in construction. It is largely a consequence of the situation on the labor market. Which has long been catastrophic. Moreover, it is most likely that events will develop according to yesterday's scenario, and as a result, the dollar will only strengthen. And the logic here is exactly the same as yesterday. Investors understand that in other countries, if it has not gotten worse, it will become very soon.
Repeated Unemployment Insurance Claims (United States):
The euro/dollar currency pair showed an intense downward movement from the area of the psychological level of 1.1000, towards the previously overcome level of 1.0850. We can assume a temporary chatter within 1.0850/1.0915, where the downward interest may resume if the price consolidates lower than 1.0850.
During a strong downward movement, the pound/dollar currency pair managed to go down to the area of 1.2440, where it locally formed a rebound, but then the downward interest continued. We can assume that in the case of consolidating the price lower than 1.2440, the direction towards the level of 1.2350 is expected. Otherwise, a temporary side swing of 1.2440/1.2500 is expected.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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