The weekly macro review for w/c 27 April 2020 – Demand remains firmly in contraction. Pressure is mounting on governments and states to lift distancing restrictions in order to address/reverse the severe economic impact of those restrictions. While infection curves are flattening, in places such as the US, levels of infection remain stubbornly high. This is likely to remain an ongoing issue.
US GDP contracted by 1.2% in Q1. The decline in services expenditure made the largest contribution to the decline, but most other areas also contributed to the decline. Durable goods expenditure decline, non-residential investment declined for the fourth quarter in a row and imports and exports declined at an accelerated pace. “Net exports” recorded a positive contribution to GDP growth because the decline in net exports was smaller than the prior quarter. Residential fixed investment expenditure was one of the few areas that continued to grow.
More recent data indicates that the most severe declines in activity have occurred so far in Apr.
In the US, manufacturing activity contracted at a record pace in Apr as evidenced by the ISM and regional manufacturing surveys. The ISM highlighted that industry breadth also deteriorated. Of the eighteen (18) manufacturing industries covered by the survey, only two reported growth in Apr. Surveys out of the Dallas Fed and Richmond Fed also highlight extreme pessimism in the outlook.
The number of initial unemployment claims in the US continued to increase. The total number of people making a new claim over the last six weeks is now over 30m people.
As expected personal incomes declined sharply in Mar in the US – led by a fall in wages and salaries. This was barely offset by an increase in transfer payments in Mar, but we expect this to change in Apr. There was a much larger decline in expenditures (compared to the decline in income) though – mostly across services (health care expenditure), as well as durable goods. As a result, there was an increase in the surplus between disposable income and expenditure. The saving rate increased to 13.1%.
Other regions also continue to experience falls in demand. Eurozone GDP declined by 3.8% in Q1. This means its likely that some of the larger member states entered into a recession this quarter. China manufacturing slipped back into slight contraction – despite the easing of local restrictions, weak global demand continued to drag on activity.
There were several central bank meetings during the week. Both the BoJ and ECB added programs to further ease financial conditions. The US Fed made no changes to policy. The FOMC statement noted declines in activity, increased job losses and “muted inflation pressure”.
For the moment, inflation is being held down by weaker oil prices. There was some pull back across headline inflation growth reported this week as energy prices declined sharply.
There is some indication of underlying food price inflation. In the US, a recent Nielsen grocery report cited larger increases in prices across grocery categories and there was news of limits placed on some meat purchases due to supply issues (Kroger Supermarkets). In the US, annual growth in food prices for in-home consumption accelerated in Mar to +1.1%.
In Aus, Q1 growth in food prices was +1.9% (while overall all-items CPI increased by +0.4% in the quarter) due to some impact from drought and bushfires. Overall annual growth in consumer prices in Aus came in stronger than expected for Q1 – despite weaker energy prices.
In the Eurozone, unprocessed food prices increased by +3.5% just in Apr.
While food prices don’t officially make up a large weight in CPI indexes, it is a fairly sensitive area of expenditure when it comes to meeting basic needs.
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 4 May 2020 – The focus this week will be on US non-farm payrolls. With over 30m new unemployment claims over the last six weeks, the Apr report is likely to be an extremely negative result.
The release of the final PMI’s for Apr will continue across the US, Asia, and Europe this week – both manufacturing and services.
The RBA and BoE meet this week on monetary policy.
Other important events this week include –
US; ISM Non-Manufacturing PMI for Apr, Initial Jobless Claims for last week and of course, Non-Farm Payrolls for Apr.
Australia; Retail Sales for Mar. The prelim reading was strong at +8% growth for the month.
The UK and US commence trade talks this week. These initial talks will run for two weeks and in parallel with the EU Brexit trade negotiations.
The US Fed will continue to reduce purchases of Treasury and Mortgage securities. This week, the NY Fed will purchase approx. $40bn in Treasury Securities (last week $50bn, prior week $75bn) and approx. $30bn in MBS (last week $40bn and prior wk $50bn).
There will be two term repo operations this week. The twice daily O/N operations remain unchanged.
At the same time, US Treasury issuance remains heavy amid increased fiscal spending. This week w/c 4 May, the US Treasury will settle approx. $426bn in ST Bills, raising approx. $163bn in new money for the week, still somewhat below recent weeks. 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 27 Apr was $589bn raising approx. $270bn 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
