Market Update – 7th May 2020.

This morning’s attention has all been on the BoE.

Although the decision by the BoE policymakers to leave interest rates unchanged at 0.1% was fully expected, it was their economic forecasts that stole the show.

While the BoE expects UK unemployment to jump to 8% and business investment to drop by 26% as the UK economy shrinks by 14% this year, they expect the economy will bounce back strongly next year with the economy expanding by 15%.

This is a relief as it confirms that we are not alone in expecting a sharp and painful, but short, downturn followed by a sharp acceleration on the other side of this horrible coronavirus outbreak:  a V-shaped economy recovery – and hence why we have been saying that it is best to focus on the likely duration of the economic decline rather than the depth (please see here).

Additionally, two of the 9 BoE policymakers voted to increase the size of the central bank’s QE program.  So, while it is therefore being maintained at the current level of £645bn, it suggests to us that policymakers are potentially open to the idea of increasing the size in the coming months, which will coincide nicely with the UK government’s expected increase in gilt issuance!  Hopefully we will get some more information at today’s BoE press conference.

The market has taken this announcement positively and as we write, the FTSE-100 is currently up just over 0.5%, or 30 points.

Outside of the UK, the Japanese stock market reopened after three days of public holiday.  The Topix index ended the day down 0.32%, while the Nikkei 225 was up 0.28%.

In addition to the BoE press conference, our attention today will be on the weekly US payroll data.  And although tomorrow is a bank holiday here in the UK, other markets are open.  Consequently, we will be closely watching the market’s reaction to tomorrow’s US employment data, which covers non-farm payrolls, the unemployment rate, average hourly earnings and the participation rate – and any ‘not-so-bad’ numbers are likely to be taken positively.

Investment Management Team