Central banks remain easy...
- Further to their extended stimulus package announced last week to cushion the economy during the pandemic, the ECB have set up a task force to look into creating a “bad bank”. The rumoured project is being put into place to protect commercial banks from having to absorb bad debts where payments have failed due to Coronavirus. The ECB are under increasing pressure to support the financial sector, as high unemployment and pressure on business cash flows cause further debt defaults
- The Fed were more dovish than most investors were expecting at the FOMC meeting this week, committing to do everything in their power to proactively support expansion. The focus was on supporting the economy during the recession with no signs of phasing out stimulus anytime soon – asset purchases will continue ‘at least at the current pace’ in the coming months, the ‘dot plot’ median was unchanged at 0 for the full forecast horizon, and Powell dismissed concerns about forming asset bubbles. Chair Powell also announced that the Fed is likely to adopt some control of the yield curve which will be discussed in the coming meetings – no detail was provided but this will likely be applied to front-end rates. On the outlook for the coming few months, unemployment and inflation estimates were left unchanged, but the committee noted an improvement in financial conditions and recent strong job gains
Data from March/April awful; more recent data shows some recovery from the Covid crash
- Trade data from China showed another month of improved activity in May, surprising to the upside with only -3% YOY decline in exports but a larger -17% YOY decline in imports. Exports were boosted by increased demand for COVID-19 related products, such as medical equipment, materials for PPE and computer hardware with many overseas employees still working from home. Lower imports were driven by the dramatic fall in energy prices in recent months (contributed c.-7pp of the -17% decline) – oil / gas / coal imports account for c.15% of Chinese imports. China is expected to have fallen far short of the $250bn Phase-1 purchase agreement in Q1, signed by the US and China earlier this year. The agreement has been challenging to uphold given the significant changes in goods prices / consumer behaviour caused by the pandemic. However incoming data shows that China has increased spending on US imports in April and the agreement is not to be met until the end of the year. The trade surplus in China reached $62.9bn in May – a record high
- As expected, European industrial production figures were weak again in April. French industrial production fell -20.1% over the month (March: -16.2%) – the worst decline on record. Production of transport equipment, construction and machinery / equipment goods were among the worst hit, -47.5%, -32.7% and -24.6% respectively over the month. The French manufacturing survey released this week showed capacity utilisation at just 61.5% in May (LT average 80.9%), increasing pressure for French authorities to come up with a third fiscal package. Germany similarly saw a record monthly decline in industrial production, -17.9% in April (March: -32.1%). Manufacturing, intermediate goods and capital goods were down -22.1%, -13.8% and -8.7% over the month, but the auto sector was most shocking -74.6% over the month, leaving the annual decline in car and car parts down -83.3%
- German trade data was also weak in April, moving from surplus to a deficit for the first time in more than 40 years. Exports fell -23.6% over the month and imports fell -14.9%. Over the month, shipments to China were down -12.6%, exports to France down -48% and to Italy -40%
- The US NFIB small business survey improved 4.5 points to 94.4 in May, recovering some of the earlier declines. The expectations index moved 5 points higher to 33.7% (after a 24.1 point increase in April) and hiring plans also improved to 7.7% confirming the improved payroll readings in May
- UK GDP fell -20.4% in April (March: -5.9%, consensus: -18.7%), as the full effects of the lockdown were measured. Among the worst hit sectors were construction, -40.1% over the month, and services output -19.0%. The latest high-frequency indicators are signalling a pickup in activity in Q2 as lockdown measures are gradually eased
Markets have worst week since March as 'second wave' anxiety rises
- The city of Houston, TX, was said to be evaluating whether to reimpose stay-at-home orders as spate of new Covid cases were reported, leading to fears of a second wave as lockdown measures are eased. The WHO also commented on the risk of an escalating pandemic, which it said was accelerating in low- and middle-income countries
- Equities globally were down over 4%, led by value sectors such as banks and energy, as government bonds reversed all of the previous week’s sell-off and Brent crude dropped 8%
- Emerging market currencies were particularly hard hit amid a broader USD rebound, particularly the big recent outperformers in Latam. Gold rose 3% in USD terms despite the dollar strength