The weekly macro review for w/c 20th April 2020 – The Mar data has continued to show the first downside impacts to economic activity from the Covid-19 shutdowns.
The frontline of the US durable goods manufacturing impact in Mar was motor vehicles and non-defense aircraft. Both recorded severe declines in orders and shipments. Most of the decline in new orders for Mar can be traced back to a -$16bn print in new orders for non-defense aircraft – likely order cancellations. Excluding transport, the declines were more muted. The total value of unfilled orders across durable goods industries remained elevated in Mar.
But the start to Q2 looks to be even worse. The Apr PMI data is indicating an acceleration in output declines compared to Mar. The prelim PMI’s across most of the major regions recorded new series lows in the pace of output contraction. This has also been reflected in US regional manufacturing surveys for Apr.
In many cases, the decline reflects the first full month of restricted trade for many businesses. We are now almost at the start of May and many regions/countries/states are wary, and even unable, to lift quarantine restrictions at this stage – possibly setting up for an even worse Q2 unless something changes.
Extremely high levels of unemployment – now over 26m people in the US have filed an initial unemployment claim in the last five weeks – is placing greater pressure on governments around the world to begin to ease restrictions.
Sentiment remains fragile. There is an expectation across businesses and households that economic conditions are likely to improve once restrictions are lifted. But a resurgence in virus infections, and the re-imposition of restrictions, could see a further negative shift in sentiment.
“The risks associated with these decisions are not equally balanced, with an incorrect decision to reopen having serious repercussions.”
Stimulus will likely start to have an impact on households and income from mid-late Apr. Retail sales globally exhibit a similar pattern – extremely strong sales for grocery items (stockpiling included), some household goods and home office supplies. Weaker sales have been recorded across more discretionary categories such as clothing as well as those areas under greater social distancing restrictions, such as food service. Spending patterns will likely shift for a while a) while restrictions remain in place and 2) while incomes remain constrained.
The USTR announced this week that the new USMCA agreement would enter into force from 1 Jul 2020. From that statement (emphasis added);
“The crisis and recovery from the Covid-19 pandemic demonstrates that now, more than ever, the United States should strive to increase manufacturing capacity and investment in North America.”
Likely to see greater focus on reconfiguring US manufacturing supply chains – driving more ‘local’ rather than ‘global’ solutions.
The other point to note this week was the more negative tone of Brexit trade talks. Whether or not this is posturing, the deadline for the extension of the trade deal negotiation is coming up at the end of Jun. The UK has been consistent in saying that it would not request an extension.
There are more data releases covered in the review document. Use the links on the contents page to navigate to different country sections. Download the review here;
The outlook for w/c 27 April 2020 – The focus this week will be on central bank meetings of the BoJ, the US Fed and the ECB as well as the prelim Q1 GDP releases for the US and the Eurozone.
The release of the final PMI’s for Apr will commence at the end of the week. The Chinese National Bureau of Statistics will also release the NBS Manufacturing and Non-Manufacturing PMI’s for Apr.
Other important data releases this week will be;
US; ISM Manufacturing PMI for Apr, Initial Jobless Claims for last week and several more regional manufacturing surveys for Apr.
Australia’s Q1 CPI.
The US Fed will continue to reduce purchases of Treasury and Mortgage securities. This week, the NY Fed will purchase approx. $50bn in Treasury Securities (last week $75bn, prior week $150bn) and approx. $40bn in MBS (last week $50bn and prior wk $75bn).
The number of term repo operations has also been reduced to one (1) this week. The twice daily O/N operations remain unchanged.
At the same time, US Treasury issuance remains extremely heavy amid increased fiscal spending. This week w/c 27 Apr, the US Treasury will settle approx. $559bn in ST Bills, Notes and TIPS, raising approx. $240bn in new money for the week. It is possible that additional Cash Management Bill’s will be added this week. The final total of US Treasury issuance settling last week w/c 20 Apr was $443bn raising approx. $254bn in new money for the week.
More detail (including a calendar of key data releases) is provided in the briefing document – download the file here;
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
