Market News – 15 May

Disinflation sets in around the world

• April inflation reports show slowing inflation/outright deflation across most countries, leading economists to forecast headline global inflation as negative by 2H 2020. US headline CPI fell -0.8% over the month (core -0.4% mom), one of the largest monthly declines on record. Core service prices, transport and apparel saw the largest price contractions over the month, whilst medical services, personal computers and food at home prices increased. In China, headline CPI fell -0.6% over the month (core CPI flat). Food prices normalised after they spiked during the shutdown and consumer goods prices fell for the second consecutive month.
• Oil prices saw a sharp decline in April, down ca 40% from the average price in March. Most forecasts indicate that April was likely the lowest level for energy prices, although crude prices are likely to remain under pressure given the current global supply surplus and unknown timing/pace of recovery.

Data better than expected (though still awful)

• In the US, the NFIB small business survey fell -5.5 points to 90.9 in April (consensus: 84.8, previous monthly fall: -8.1). Sales expectations for the next six months fell to -42, the lowest level on record. However, business owners are optimistic that the recession will be short-lived, hopeful that the level of federal aid will enable them to survive the coming months.
• UK GDP fell by -2% in Q1, better than what was expected (consensus: -2.6%, BofE “illustrative scenario”: -3%). Services saw the worst declines in March, -6.2% over the month, but construction and manufacturing output were also weak, down -5.9% and -4.6% respectively over the month. Net exports had a -1.9% impact on GDP over the quarter, as exports (-10.8%) fell more than imports (-5.3%) over the quarter. Q2 will likely be worse given the lockdown only fully began on 23rd March and with 7.5m employees registered for the government-funded Job Retention Scheme so far.

Stocks on the back foot again

• Equities fell over the week on renewed trade tensions between the US and China, dragging credit with them. The initial optimism over the tentative relaxation of lockdown restrictions has faded, to be replaced by concern over the possible shallowness of the recovery given strict social distancing measures remain in place.
• Consistent with this was the strength in currency havens (US dollar, Japanese yen, gold).
• However, risk markets ended the week on a slightly stronger footing aided in part by the strong rally in the US WTI crude oil marker.