Market news – 4 May 2020

Central banks reiterate commitment to further easing if needed

• The FOMC voted to hold the target fed funds target rate at 0-0.25% at their meeting this week. In the press conference following the meeting, Chair Powell said that the Fed is in no rush to increase rates, committing to hold rates lower until they are confident that the economy has “weathered recent events” which have brought the US economy to an “abrupt halt”.
• The pace of asset purchases has been reduced considerably since the last meeting a month ago – from $125bn per day at its peak to $18bn per day this week as the US economy gradually re-opens. However, Powell reassured that they will move “forcefully, proactively and aggressively” to support the economy, confirming that emergency corporate borrowing support, such as the Primary Market Corporate Credit Facility (PMCFF), are near being finalised.
• The ECB also left policy rates on hold and maintained current asset purchase programmes (€20bn per month + €120bn temporary purchases until the end of the year). However, in an effort to boost financing available from credit institutions, the ECB cut interest rates on TLTROs to -0.50% (previously -0.25%) and launched further pandemic emergency longer-term refinancing operations (PELTROs) at negative interest rates, effectively paying backs to borrow money.
• Current ECB growth projections indicate that the eurozone could contract by 5-12% this year, dependent on the success of virus containment measures. Whilst acknowledging the unprecedented economic contraction and deteriorating labour conditions, President Christine Lagarde said “Let us understand the whole firepower the ECB has available, which is north of €1tn,” and reassured that they are “fully prepared to increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed".

US data still very weak, whilst in Asian countries where recovery from Covid is underway picture is more upbeat

• The US Conference Board consumer confidence index fell -31.9pt in April to 86.9, representing the largest decline on record but largely in line with consensus. The labour differential fell by -43.1pt over the month, with the majority of respondents saying that jobs are hard to get, whilst the household perceptions of present economic conditions worsened to 76.4 (-90.3).
• The Richmond Fed manufacturing index followed earlier sentiment surveys in tracing new record lows, -55pt to -53pt in April, below consensus. Shipments, new orders and employment components all decreased over the month, -83pt, -51pt and -14pt respectively. The services revenue index also declined over the month, -88pt to -87 and the employment component declined -37pt to -34.
• April PMIs continued to indicate expected expansion in China this month – manufacturing PMI 50.8 (March: 52.0), non-manufacturing 53.2 (March: 52.3). Whilst domestic demand recovered, weaker export orders were a drag on manufacturing as many US / European economies remain in lockdown (new export orders: 33.5, March: 46.4). The construction sector led the majority of the non-manufacturing increase, +4.6pt in April (to 59.7), and services PMI increased 0.3pt over the month led by catering and IT.
• South Korea reported particularly strong industrial production numbers, +4.6% in March (February: -3.8%, consensus: +1.5%). Manufacturing gains (+45.1% mom) were driven by a rebound in auto production, much of which was a normalisation from weaker February activity, but also helped by electronic components production +12.7% over the month. Services output declined -4.4% over the month, following many other countries reporting weakness hotels and restaurants (-17.7%) and transport (-9.0%).

Markets end the week on the back foot as US administration turns up anti-China rhetoric

• After a strong start to the week motivated by the moves from several European countries towards gradually reducing lockdown measures, equities faded into the weekend as President Trump and other administration officials voiced the possibility of punishing China for the Covid outbreak with further trade sanctions.
• Since the Covid crisis has been formally deemed a national emergency, the President can deploy a broad range of sanctions under the International Emergency Economic Powers Act (IEEPA), including freezing the assets of organisations and individuals.