The Great Re-Opening Debate

As markets shift attention to the details of reopening global economies, FX trading was dealt a jolt from Germany's constitutional court ruling, ordering the German government to ensure the ECB carried out a “proportionality assessment” of its latest asset purchase programs. More on that  below. The market shrugged off the escalation in US-China tensions once again Monday and the focus has now shifted to how economies will reopen and what will happen when they do. The US sevrices ISM is up next.

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Economic data Monday showed US factory orders falling 10.3% compared to 9.4% expected. It was the worst report on record, dating back to 1957. Ominously, the decline was almost entirely focused on the transportation sector. The aircraft and auto orders aren't coming back any time soon but it means that other orders still face heavy downward pressure.

More importantly, the market shrugged off another data point. If anything, risk trades ticked higher just after the release. Traders have decided that economic data right doesn't matter at present. It will be horrific and we're undoubtedly in the worst quarter of our lifetimes.

Where the debate starts is on the recovery. The baseline right now appears to be that governments and central banks will absorb much of the losses this quarter and then the economy will start to bounce back.

How much is the big question. Morgan Stanley was out with a report Monday drawing parallels to the China experience. In particular they look at the consumer sector, which is a smaller part of China's economy but the bulk of developed countries. Extrapolating from that experience, they forecast that in Aug-Oct, discretionary retail sales will be down just 10-15% year-over-year.

It's hard to say if that's the market's baseline but that is a tough number to believe. There's no doubt that unemployment in that period will still be in double digits and COVID uncertainty isn't going to go away. Moreover, the comparison with China is a stretch. That country has virtually eradicated the virus so the risks around going out shopping there are low. Few other countries will be able to say the same thing in Q3.

In terms of data, expect the market to tune in progressively as countries and regions open, as we try to sort out exactly how demand and spending will evolve.

With regards to the upcoming services ISM, since services have always outperformed their manufacturing counterpart, we expect more suprises to the upside, expecially as the gig ecomomy flex its muscles during the Covid-19 shutdown.