The weekly macro review for w/c 18 May 2020 – The prelim PMI’s for May suggest that the pace of the falls in output may have started to abate across the US, Eurozone, and UK.
The ‘slower pace of decline’ in this case means that more firms are starting to record increases in output (from a low base) and less firms are recording declines in output. But for the moment, the firms reporting declines still outnumber the firms reporting increases. Those declines are also on top of the severe Apr contraction.
In the US, output across services declined at a slightly slower pace than in manufacturing. The weekly initial claims data is yet to show any recovery. The initial claims for wk ending 15 May remained extremely elevated with 2.4m new initial claims recorded. There was a similarly large increase in the number of continuing claims for the prior week. While existing home sales fell sharply in Apr, housing market conditions, and mortgage applications data suggests that the market likely stabilized in May.
This “improvement” in the PMI’s in the form of a slower pace of decline was far less pronounced in Japan and Australia.
The prelim Japanese PMI for May indicated that activity continued to decline at a similar severe pace as in Apr. The services output index remained in the 20’s, indicating that services activity continues to contract at an extremely sharp pace. Manufacturing output continued to decline at an accelerated pace. The decline in Q1 GDP indicates that in all likelihood, Japan is already in a recession. So far Q2 performance appears to be worse. Exports declined by over 20% in Apr (value). The PMI’s for Apr and May indicate an even more severe contraction in output. The National emergency was issued in Apr and it’s likely that this will end by early Jun. Stimulus payments were approved in Apr and its likely that a further round of support will be announced shortly.
The prelim PMI for Australia was also concerning with the composite output index remaining in the 20’s. Services output recorded a slightly slower pace of decline, from a low output index level of 19 in Apr. But manufacturing output continued to decline at an accelerated pace. High frequency payrolls data indicates that employment declined at a slightly faster pace in the first week of May. The prelim Apr retail turnover shifted sharply negative in the month with retail sales likely declining across most segments. Quarantine restrictions continue to be eased across the country in late May and are planned to ease further from early Jun.
A further blow to the Aus economy will the exports impacted by measures recently announced by China on barley tariffs, beef export restrictions, and slower thermal coal exports. This week the Aus government also announced that benefits of the JobKeeper program had been significantly overstated – more like 3.5m rather than 6m recipients or a $60bn spend rather than a $130m spend. Whilst that might reflect a “saving” to the budget, it also means less people receiving support during a significant economic downturn.
Since the GFC especially, spending by China had been an important driver of global growth. At the National People’s Congress over the weekend, and for the first time since 1994, the growth target was omitted. In a speech, Premier Li Keqiang explained why;
“because our country will face some factors that are difficult to predict,” pointing to the coronavirus and uncertainties around trade. But Mr. Li said the lack of a target “will enable all of us to concentrate on ensuring stability…and security.”
This comes at a time when China has been increasingly singled out for its role in the spread of Covid-19, as well as now for the renewed security crackdown on Hong Kong.
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 25 May 2020 – A short week this week due to the US Memorial Day holiday. Expect to hear some anecdotal information regarding activity over the US holiday weekend. Tensions regarding China are likely to continue.
Important highlights for this week –
US data will be in focus this week. The important highlights providing some early insight into May activity; initial and continuing jobless claims, several important regional manufacturing surveys for May, and the final University of Michigan consumer sentiment survey for May.
The US advance durable goods orders data for Apr will help to confirm the scale and scope of the contraction in orders as indicated by the PMI’s. The personal income and expenditure data for Apr will provide some insight into income impacts and shifts in expenditure and saving.
So far, a somewhat quieter week for US Federal Reserve speeches. US Fed Chairman Powell will speak on Fri.
In Japan, the first view of Apr industrial production will be released. Again, this will provide confirmation of the level of impact on production in Japan during one of the worst months as measured by the PMI’s.
Aus data of note this week will be Q1 capex in preparation for the GDP release. As well, the month end private sector credit data for Apr will be released – also providing some insight into the scale of contraction in spending and investment across business, housing, and personal expenditure.
The US Fed will continue to reduce purchases of Treasury and Mortgage securities (shorter week also). This week, the NY Fed will purchase approx. $20bn in Treasury Securities (last week $30bn, prior week $35bn) and approx. $18bn in MBS (last week $22.5bn and prior wk. $25bn).
There will be one term repo operation this week and overnight operations have been reduced to one per day.
US Treasury issuance remains heavy amid increased fiscal spending. The offer amounts, across the CMB’s especially, have started to increase as more of the earlier issuance matures. The US Treasury will settle approx. $509bn in ST Bills, TIPS and FRN’s this week. This includes, so far, five (5) Cash Management Bills (CMB’s). The US Treasury will raise approx. $228bnbn in new money for the week. The US Treasury Q2 borrowing requirement is $2.999 trillion USD in new money. The quarter to date value of new money raised currently stands at $1.825 trillion USD. This is 61% of the requirement for the quarter and we are 61% of the way through the quarter (in weeks).
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
