The weekly macro review for w/c 11 May 2020 – Data this week provided more robust confirmation of the scale of the decline in economic activity – especially in Apr. The Apr data reflects at least one full month of restrictions across most countries, except China where restrictions have been lifted since Mar.
“The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased.” US Fed Chairman Powell
In the US, the 11% decline in industrial production in Apr was led by all areas of manufacturing. Manufacturing production levels fell to the lowest levels recorded during the GFC. Motor vehicle production all but stopped in Apr with production falling 70% in the month.
Regional manufacturing activity in NY for May recorded a slower pace of decline. There at least appears to be some slow down in the decline of employment. Firms also expected stronger growth in six months, albeit from this low base of activity.
US initial unemployment claims continued to be measured in the millions. Now eight weeks since the beginning of restrictions, over 36m people have filed an initial unemployment claim.
Retail sales were extremely weak for Apr with sales declining by $80bn versus the $43bn decline in Mar. Only one segment in retail recorded a month-on-month increase – non-store sales. Sales in segments such as clothing stores are now down by 90%.
Prelim consumer sentiment in the US for May was little changed overall, increasing by a few points. Sentiment around current conditions improved as income support started to make its way through to households. Consumers noted that health remained their largest concern. But that social isolation had overtaken concerns over personal finances (finances became less of an issue due to support received). Yet expectations about future economic conditions continued to deteriorate.
In Europe, Q1 data reflected accelerated declines in activity. Industrial production across the Eurozone fell sharply in Mar and PMI’s indicate that this is likely to be even worse in Apr. The Eurozone GDP contracted in Q1 by 3.3%. The German economy is likely already in recession as Q4 GDP growth was revised to negative and Q1 GDP declined by 2.2%.
In Aus, the Apr labour force report provided the first view of the impact of restrictions on the labour market. The sharp increase in unemployment was moderated by a large decline in participation as workers were limited in their ability to look for work. Significant labour market slack now exists. Despite that, consumer sentiment in May rebounded strongly (but still negative) due to fiscal support but also the “worst fears” for the virus have not been realised.
The focus will start to shift to recovery as many countries commence lifting domestic restrictions. In some cases, sovereign borders will remain closed for the meantime. In the US, the vast majority of states are now reopening (as of 18 May 2020), regardless of the status of new case counts. Domestic restrictions are being relaxed across Europe, Australia, and parts of Asia.
Recoveries will rely heavily on; the number of countries (especially larger trading partners with interconnected supply chains) relaxing restrictions, maintaining low case counts to enable further easing of restrictions and the extent to which fiscal support is available and maintained.
Data from late May (high frequency) and June will likely start to provide insight on the pace of recovery for most countries from a production and consumption perspective. It will be a process.
“Returning to normal lives as workers versus returning to normal lives as consumers” , M.Pettis https://twitter.com/michaelxpettis/status/1262055347365138432
Activity in China for Apr saw few signs of improvement. Firms noted that the global nature of weaker demand, as well as weaker domestic conditions, were still impacting the Chinese economy.
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 18 May 2020 – It will be a busy week of central bank minutes, US Fed speeches and the prelim PMI’s for May.
Important highlights for this week –
Central bank meetings minutes this week for the US FOMC, RBA, and ECB.
Speeches and testimony by US Fed Chairman Powell and Vice Chair Clarida.
The prelim PMI’s for May will be released for the US, Europe, Japan, and Australia. This will provide some insight into how manufacturing and services activity is rebounding as some markets start to ease restrictions.
Late in the week, the annual Chinese National Peoples Congress will commence. This will occur with the backdrop of rising trade and diplomatic tensions among China and some of its trade partners.
The US Fed will continue to reduce purchases of Treasury and Mortgage securities. This week, the NY Fed will purchase approx. $30bn in Treasury Securities (last week $35bn, prior week $40bn) and approx. $22bn in MBS (last week $25bn and prior wk. $30bn).
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. $478bn in ST Bills this week. This includes, so far, four (4) Cash Management Bills (CMB’s). The US Treasury will raise approx. $149bn 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
