Unsugarcoatable Truth: Worse To Come
WEAK Q1 GDP ONLY A TASTER FOR Q2 PLUNGE
A number of countries report first estimates of Q1 GDP, although attention has already turned to the scale of the downturn in Q2 with full lockdowns in place, not to mention speculation about the shape of any recovery in the second half. Analysts expect US Q1 GDP (Wed) to show an annualised fall of 4.0%. Weekly initial jobless claims (Thu) will continue to attract attention as a timely guide to the labour market. The past five weeks has already seen initial claims rise by more than 26 million in total. Forecast are for another rise of 3 million for the latest week. The Conference Board’s consumer confidence index (Tue) for April is also expected to fall. In the Eurozone, expectations are for Q1 GDP (Thu) to decline by 3.0%q/q, with France, Italy and Spain also releasing their individual country estimates. The big hit, however, is expected in Q2. Estimates for 2020 full-year growth are highly speculative at present, but – as noted above – ECB President Lagarde reportedly mentioned a potential contraction of 15% for the Eurozone. Flash estimates for CPI inflation are also due. Forecasts for Eurozone April CPI (Thu) to fall to just 0.2%y/y, reflecting both lower energy prices and core inflation. Also worth looking out for is German unemployment claims (Thu) which we predict to rise sharply by 40k. As China came out of lockdown earlier, its economic indicators may serve as a possible template for other parts of the world. China’s economy contracted by 6.8%y/y in Q1, but the official PMI surveys for April (Thu) are expected to show further signs that activity is tentatively improving, albeit from a low base. Markets expect the manufacturing index to ease back to 51.0 (still above 50) from 52.0 and non-manufacturing PMI to rise to 52.8 from 52.3.
WEIGHING POTENTIAL RECOVERY PROSPECTS
Financial market risk assets seemed relatively unfazed by the past week’s deluge of depressing economic data releases, including the plunge in Eurozone and UK April services PMIs to record lows of only 11.7 and 12.3 respectively. Global equity markets were slightly lower on the week, 10-year gilt yields fell below 0.3% and the pound underperformed the US dollar and the euro. A dreadful outcome for world economic activity in the current quarter is already anticipated. The data so far confirm those expectations, which central banks and national governments have reacted to with the aim to support a recovery once lockdown measures begin to be gradually eased. If anything, surveys may be underestimating the scale of the short-term hit to output, but they will continue to be watched closely in the coming months as the timing and strength of a potential upturn in the second half of the year remains highly uncertain. Here in the UK, the lockdown will be reviewed on 7 May, as the government balances demands to reopen the economy with risks of a second wave of infections. Meanwhile, March retail sales, covering the start of the lockdown, fell sharply by 5.1%m/m, with stronger grocery sales more than offset by a plunge in non-food store sales, particularly clothing. GfK consumer confidence was steady after plunging to -34 last month. The ONS BICS survey also revealed that 27% of the workforce had been furloughed as of 5 April. The figure was particularly high in ‘accommodation and food service activities’ (80%) and ‘arts, entertainment and recreation’ (68%). Also in the UK, the CBI retail survey (Tue), consumer credit and mortgage approvals (Fri) and the final reading of the manufacturing PMI (Fri) will be released.
CENTRAL BANKS PREPARED TO DO MORE
A number of major central banks announce their latest policy decisions next week, including the Bank of Japan (Mon), US Federal Reserve (Wed) and the ECB (Thu). The Bank of England will review its policy in the week after. As noted above, policymakers have already reacted to expectations of a sharp drop-off in economic activity, hence tweaks rather than major changes are expected for policy settings. The Bank of Japan may reportedly consider unlimited asset purchases rather than the current annual target, while the Fed will stand pat for now but promise further action if necessary. The Fed may discuss two policy options. One is an amendment to their recent announcement of purchasing municipal bonds, but that would be a pretty minor tweak probably yielding little market impact. A more substantive change would be a move to yield rate targeting, although that seems unlikely right now. There is also the question of whether they are prepared to commit to a longerterm timetable for QE beyond the current week-to-week programme. In the Eurozone, EU leaders agreed that a longer-term recovery fund is “needed and urgent”, but failed to agree on its details including how it would be funded. So far, national governments and the ECB have done most of the heavy lifting in supporting the economy. According to ECB President Lagarde, the Eurozone economy could contract by as a much as 15% this year. An outcome in that ballpark would likely increase the pressure for more policy stimulus. The ECB has already committed to buying €1.1 trillion of bonds this year, including €750bn in the Pandemic Emergency Purchase Programme (PEPP). There is a risk it may expand the PEPP next week, but for now it is probably more likely to send a strong signal that it is willing to do more and to indicate greater flexibility in its purchases (i.e. buy more peripheral debt than the capital key would imply).
See you next week!
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