Category: Looking Ahead

Looking Ahead – Is It Over Yet?

The concept of Election Day was already antiquated when this year’s enormous preponderance of early and mail-in voting elongated the process into an election month, while the tightness of the presidential race, as well as other key contests, has dragged the nation through an excruciating ordeal of piecemeal and halting ballot tabulation this week (though this is in no way the fault of the great people who are doing the hard work of ballot monitoring and counting). And even though a win looks highly likely for Joe Biden at this point, the Trump campaign is insisting that the race is not over, and recounts and legal challenges are sure to drag on, alongside a litany of unsubstantiated charges of fraud from the President and some of his ardent supporters.  

Our base case had long been for narrow and disputed results in the presidential race and key Senate contests, with uncertainty dragging on beyond election day. And though this is how events played out this week, it is a great relief to us, and to financial markets, that the worst case scenario of a breakdown of our obviously creaky electoral system accompanied by major civic unrest has been avoided (thus far, at least). Whether or not the final state tallies will leave any feasible room for doubt, the Trump campaign will surely continue with an array of seemingly desperate legal challenges. The next few weeks will reveal the extent to which the process will remain orderly and legitimate amid massive partisan pressures.

Even if cooler heads continue to prevail in the political arena, as we hope and expect, salient policy questions remain. Most importantly, how does this charged political environment impact the prospects for a pandemic relief bill before year-end? In this bizarre interregnum, Senate Majority Leader McConnell has indicated that passing a stimulus bill is his number one post-election priority, but he is unlikely to take a magnanimous position given the continued uncertainty over control of the Senate. Meanwhile, House Speaker Pelosi has shifting incentives as she prepares to stave off internal challenges to her leadership and eyes the possibility of a better post-transition deal. Last but not least, an obviously distracted President Trump must sign off on the agreement at a time when chief dealmaker Secretary Mnuchin is likely focused on his post-Treasury trajectory.      

The other key uncertainty involves control of the Senate. The twin Georgia runoffs in January could be the deciding factor for control of the chamber, and in that case there will obviously be a flood of money and resources into those contests. Both GOP candidates will go in as favorites but with Georgia looking like it may tip for Biden, investors should prepare for uncertainty. So while a Blue Wave certainly did not materialize, the Democrats’ tide still might go high enough to secure control of both houses of Congress and the White House.

In short, this fraught election cycle is far from over, but at least we have made it to the weekend. Cheers!

Looking ahead, next week’s calendar is mercifully light and non-market moving most likely, with third quarter earnings season pretty much a wrap. 

 

• US Price Data, Consumer Confidence & Initial Jobless Claims
• German and Australian Economic Sentiment Gauges      
• UK Q3 GDP
• EU Industrial Production

 

Global Economic Calendar: Nada Mucho

 

Monday

The week begins with German Balance of Trade for September. In August, Germany’s trade surplus declined to €12.8 bill, from €16.4 bil last year, as the coronavirus pandemic hit global demand. Exports dropped 10.2% due to lower sales to the European Union and to third countries, in particular the UK, the US and China. Imports fell at a softer 7.9%, as purchases from the EU dropped 5.4% and those from third countries tumbled 10.5%. Among these, imports fell from the UK and the US, while imports from China were unchanged. On a seasonally adjusted basis, exports rose 2.4% from a month earlier, beating expectations of 1.4%, while imports were up 5.8%, compared to forecasts of a 1.4% gain.

 

The evening brings National Australia Bank’s Index of Business Confidence. September rose to -4 from -8 in August, pointing to the highest reading since June, amid improving business activity as the economy opens up. Confidence rose in all industries except finance, business & property services which was flat. Business conditions also strengthened to levels not seen since the COVID-19 pandemic brought a nationwide lockdown. All three sub-components rose, with trading and profitability in positive territory while the employment index remaining negative as businesses were not yet ready to add new positions. Alan Oster NAB Group chief economist added, “Meanwhile, forward orders improved while capacity utilization ticked higher to 76.9%. “While the improvement in conditions and confidence in the last few months has been promising, it is important to remember that in a levels sense, things are still weak.”

 

The day closes with China’s Annual Inflation Rate. September eased to 1.7% from 2.4% in August and slightly below market expectations of 1.8%. This was the lowest reading since February 2019, amid a marked slowdown in prices of food. Furthermore, cost of non-food products was flat, after a 0.1% gain in August. There were declines in cost of transport, rent, fuel, and utilities, household goods and services, and clothing. At the same time, prices increased for health, other goods and services, and education, culture & recreation. On a monthly basis, consumer prices edged up 0.2% in September, the lowest in three months, following a 0.4% gain in August.

 

Tuesday

The day begins with UK Claimant Count Change. In August, the number of people claiming for unemployment benefits in the UK rose by 28K to 2.7 mil, following a downwardly revised 39.5K increase in July and below market expectations of a 78.8K gain. This added to a rise of 120.3% since March, or 1.5 mil, as the coronavirus pandemic hit the labor market.

 

The ZEW Indicator of Economic Sentiment for Germany for November follows. October dropped by 21.3 to 56.1, from the previous month’s 20-year high and well below market expectations of 73. Investors voiced concerns about the recent sharp rise in the number of COVID-19 cases and the prospect of the UK leaving the EU without a trade deal. The current situation in the run-up to the presidential election in the US further fuels uncertainty. By contrast, the assessment of the economic situation in Germany improved again, and currently stands at -59.5 points, 6.7 points higher than in September.

 

The day closes with the Melbourne Institute and Westpac Bank Consumer Sentiment Index for Australia. October increased 11.9% m/m to 105 points, following an 18% jump in September. This was the highest reading since July of 2018, amid the ongoing success across the nation in containing the COVID-19 outbreak and the response to the October Federal Budget. All components of the Index were higher in October, the most striking improvements were around the outlook for the economy, with the surge in the five-year outlook taken this sub-index to its highest level since August 2010. In addition, there was a stunning lift in confidence around job security, with the Index improving by 14.2% to be back around the levels of early 2019. Also, confidence in the housing market boomed, the ‘time to buy a dwelling’ index increased 10.6% to its highest level since September 2019.

 

Thursday

Thursday begins with the UK Balance of Trade for September. In August, the UK trade surplus shrank to £1.36 bil from an upwardly revised £1.69 bil in July and was the smallest monthly trade surplus in five months. Exports rose 1.5% to £51.83 bil, boosted by a 2.7% rise in services exports and a 0.4% increase in goods shipments. On the flip side, imports surged 2.2% to £50.46 bil driven by a 3.7% increase in purchases of goods, while services declined 1%.

 

At the same time, the Preliminary Third Quarter GDP Growth Rate will be released. In the second quarter the British economy shrank 19.8% q/q, slightly less than a preliminary estimate of a 20.4% drop. This remains the largest contraction ever and the second consecutive quarterly decline in GDP, officially entering a recession, due to the COVID-19 pandemic and the government measures taken to reduce transmission of the virus. Gross fixed capital formation fell, while both household consumption and government spending shrunk precipitously. Private consumption accounted for more than three-quarters of the fall in GDP, reflecting the implementation of public health restrictions, the mandated closures of non-essential shops and forms of social distancing. Net external demand contributed positively as imports fell more than exports.

 

Later in the morning Eurozone Industrial Production (IP) will be released. In August, IP rose by 0.7% m/m, following an upwardly revised 5.0% growth in July. An increase in production of durable consumer goods, intermediate goods and energy was partially offset by declines in output for capital goods and non-durable consumer goods. On a yearly basis, IP shrank by 7.2%, compared to a 7.1% contraction in July.

 

In the US, the Consumer Price Index (CPI) for October will be released. In September, Headline CPI increased 0.2% m/m, easing from a 0.4% advance in August and was the lowest reading in four months. Used cars and trucks cost jumped 6.7%, its largest monthly increase since February 1969, as people avoid public transportation. Energy prices went up 0.8%, boosted by a 4.2% climb in natural gas prices. At the same time, food cost was flat. Additional upward pressure came from shelter, new vehicles, and recreation, while declines were seen in prices for motor vehicle insurance, airline fares, and apparel. This put Headline CPI up 1.4% from 1.3% in August. Meanwhile, Core CPI, which excludes the more volatile items such as food and energy, rose 0.2% m/m after larger increases in July and August, pushing up the yearly rate from 1.3% to 1.4%.

 

Friday

Friday begins with the Second Estimate of Third Quarter Eurozone GDP. The preliminary estimate showed the Eurozone economy grew by 12.7% in third quarter, recovering from a record slump of 11.8% seen during the second quarter and easily beating market expectations of 9.4 percent. It was the steepest pace of expansion since comparable data started to being collected in 1995, boosted by a rebound in activity and global demand after European countries lifted lockdowns imposed to contain the spread of the coronavirus pandemic. All major economies in the region posted record increases in GDP.

 

At the same time Eurozone Balance of Trade will be released. In August, the Eurozone’s trade surplus widened to €14.7 bil from 14.4 bil in July. Imports fell 13.5% to €141.6 bil, due to lower purchases of mineral fuels, lubricants & related materials, machinery & transport equipment, miscellaneous manufactured articles, chemicals & related products, manufactured goods classified chiefly by material, crude materials, inedible, except fuels and food, drinks and tobacco. Export fell 12.2% to €156.3 billion, as sales went down for mineral fuels, lubricants & related materials, manufactured goods classified chiefly by material, machinery & transport equipment, miscellaneous manufactured articles and crude materials, inedible, except fuels.

 

In the US we will get the Producer Prices Index (PPI) for October. In September, Headline PPI increased 0.4% m/m, following a 0.3% rise in August. Cost of goods advanced 0.4%, after increasing 0.1% in August, led by a 14.7% rise in cost for iron and steel. Prices of services went up 0.4%, lower than 0.5% in August, led by a 3.9% advance in the index for traveler accommodation services. Year-on-year, Headline PPI went up 0.4%, after falling 0.2% in the prior month. Core PPI, which excludes food and energy, went up 0.4% m/m, the same as in August, while the annual rate increased to 1.2% from 0.6%.

 

At the same time Initial and Continuing Jobless Claims will be released. Last week 751K Americans filed for unemployment benefits, above consensus expectations of 732K but down from the previous week’s revised level of 758K. Initial claims are now at their lowest level since the pandemic began but part of the decline is due to expiration of eligibility. However, those people are still able to apply for help from the Pandemic Unemployment Assistance scheme, which runs out of funds in December if Congress does not pass another relief bill. Close to 363K workers applied for PUP assistance, compared with 359K in the previous period. Furthermore, the number of continuing jobless claims fell to 7.29 mil in the week ended October 24th, compared with market expectations of 7.20 mil, also the lowest level since the pandemic began but also due to the same expiration issue. In total, there are 21.508 mil Americans on some sort of Federal assistance, down from 22.661 mil in the previous week.

 

The week closes with the University of Michigan’s Consumer Sentiment for November. In October, sentiment was revised slightly higher to 81.8, reaching the highest since March. Still, the sentiment remains much below 101 reported in February. Improvements were seen in both expectations and current conditions. On the price front, one-year inflation expectations were revised lower to 2.6% from 2.7% and five-year expectations were unchanged at 2.4%. Surveys of Consumers chief economist, Richard Curtin added, “Consumer sentiment remained virtually unchanged from the first half of October (+0.6 points) and was insignificantly different from last month’s figure (+1.4 points). Fear and loathing produced this false sense of stability. Fears were generated by rising Covid infection and death rates, and loathing was generated by the hyper-partisanship that has driven the election to ideological extremes.”

Looking Ahead – Do You Like Surprises?

This year has featured a jarring array of unexpected events, most of them decidedly unpleasant, and market participants are bracing for more to come. To borrow Donald Rumsfeld’s now-famous formulation, “unknown unknowns” are, by definition, impossible to predict, though nobody seems to be ruling anything out at this point given what 2020 has already thrown at us. Meanwhile, the “known unknowns” are certainly still capable of producing significant shocks.

Corporate reporting for the second quarter was almost certain to produce surprises both the upside and downside given the dearth of management guidance due to impenetrable Covid-19 uncertainties. Although earnings season is still in its early stages, surprises have indeed been the norm, as US megabanks blew estimates out of the water on the trading and investment bank side, but also exceeded the expected levels of credit provisioning, highlighting downside risks to the economic outlook. This wide dispersion around estimates is expected to continue with next week’s dense calendar of earnings announcements.

Questions still surround the two high-profile fiscal packages that are in the process of being negotiated in the US and EU, with both generally expected to be finalized by the rapidly approaching month-end. The wrangling is expected to be intense on both of these pandemic relief bills, but the expectation is for eventual compromise and agreement on a significant figure for each that is capable of providing real support to both economies. The predominant risk in the EU negotiation is for disappointment if the so-called Frugal Four countries (Netherlands, Denmark, Sweden, and Austria) refuse to compromise. In the US, there is upside and downside potential for the bill given the propensity for recent budget negotiations to expand the pie rather than make tough decisions, but there is certainly a meaningful risk of disappointment as well as the House Democrats, Senate Republicans, and Trump administration are finding less common ground than in the case of the CARES Act.

The Federal Reserve is working hard not to surprise the markets, with a veritable barrage of communications on a seemingly daily basis, but investor nonetheless remain wary of anticipated details of what seems to be an impending policy pivot. The constant din of fed speakers is not entirely unanimous but appears to be pointing broadly toward a shift in favor of enhanced forward guidance, predicated upon their traditional inflation target of 2%. It does seem unlikely, particularly ahead of an election when major monetary policy making tends to be inauspicious, that the Fed would make any sudden moves to startle investors, such as unexpectedly instituting yield curve control or taking interest rates into negative territory.

Last year featured a steady diet of nasty surprises on the US-China front, but ultimately with the Phase One trade deal being signed early this year, expectations for a tense equilibrium have settled in. Recent Trump administration actions to counter China on the tech and investment fronts, as well as retaliation for Beijing’s posture toward Hong Kong and repression in western China, have increased the degree of uncertainty among market participants regarding this key relationship. Speculation over a major White House policy escalation against China tend to be linked to the belief that President Trump may have to pull a spectacular October surprise in order to close the polling gap between himself and Joe Biden.

Polling data has been likened to intellectual junk food – quick and easy to digest, sometimes quite tasty, but ultimately unsatisfying and genuinely bad for you if you consume too much. Skepticism over the validity of political polls has increases significantly due to its notoriously spotty track record in recent years, with high-profile misfires over Brexit and the US election in 2016. On its face, President Trump’s current deficit to Joe Biden looks substantial enough to subsume any statistical oddities, but market participants are well aware that polls in swing states, which will decide the outcome, look meaningfully closer. They also note that Trump voters are thought to be quite shy with pollsters about their intentions, and that races traditionally tighten into the actual election day, which is still an eternity away in from a political standpoint. In short, this race is far from over.

Still, an October surprise by President Trump is seen as highly likely and the most common areas of speculation tend to be, as mentioned above, some kind of anti-China policy barrage, with some even floating the potential for outright geostrategic confrontation. More likely, we believe, is that Trump’s major moves in the fall designed to tip the political scales will be more targeted at Joe Biden in terms of alleged dirt or announced investigations. Unlike an offensive against China, this sort of approach has less likelihood of major market blowback.

Looking ahead to next week, the economic calendar is relatively light, with global PMIs for July featuring prominently, as Q2 earnings reporting season rolls on.

 

• Corporate Earnings Reports
• Global Purchasing Managers’ Indexes
• China Central Bank
• US Initial Jobless Claims & Housing Data

 

US Second Quarter Corporate Earnings:

 

Next week is dominated by ongoing US corporate earnings reporting, with the calendar featuring results from IBM, Halliburton, Coca-Cola, Lockheed Martin, Snap, Capital One, KeyCorp, Northern Trust, CSX, Tesla, Microsoft, Southwest Airlines, AT&T, Twitter, American Airlines, Honeywell, Verizon, Schlumberger, Royal Caribbean, and Intel.

 

Global Economic Calendar: Summer lull

 

Sunday

This upcoming weekend starts the weekend with the Loan Prime Rate Decision in China. The People’s Bank of China held its benchmark interest rates steady for the second straight month at its June fixing after the central bank maintained borrowing costs on medium-term loans last week, as policymakers adopted a wait-and-see approach amid tentative signs of economic recovery. The one-year loan prime rate was left unchanged at 3.85% from the previous monthly fixing while the five-year remained at 4.65%.

Monday

The focus on Monday will be Japanese Inflation Rate for June, which comes out after markets close that day. Japan’s consumer price inflation stood at a three-year low of 0.1% year-on-year (y/y) (flat, month-on-month (m/m)) in May, in line with market estimates, as the pandemic continued to hamper consumption. Prices fell further for transport & communication (-1.7% versus -1.2% in April), amid slumping oil prices. In contrast, inflation edged up for housing (0.8% vs 0.7%) while it remained unchanged for medical care (at 0.5%); clothing & footwear (at 1.4%) and food (at 2.1%). Core consumer prices, which exclude food and energy, dropped 0.2% y/y (the same pace as in April) and compared with market consensus of a 0.1% drop.

Tuesday

Tuesday morning, the focus will be on the Chicago Fed National Activity Index for June. The index rose to a record high of 2.61 in May from a downwardly revised record low of -17.89 in April as some lockdown restrictions caused by COVID-19 epidemic were lifted. All four sub-indexes made positive contributions in May with production and employment-related indicators leading the gains.

 In the evening, Japanese manufacturing for this month will be the focus. The AU Jibun Bank Japan Manufacturing PMI was revised higher to 40.1 in June from a flash reading of 37.8, amid the prolonged impact of the COVID-19 pandemic on activity. The latest reading signaled a 14th consecutive month of contraction as new orders, output, employment and purchasing activity continued to fall at sharp rates. On the price front, selling prices dropped as businesses strived to stimulate sales, while input cost rose following a decline in May. On the other hand, sentiment jumped back into positive territory for the first time since February. Meanwhile, the Services PMI was revised higher to 45.0 compared to May’s 26.5. It was the highest reading since February as restrictions lifted.

Wednesday

The priority Wednesday will be the number of US Existing Home Sales last month. Sales of previously owned houses in the US dropped 9.7% m/m (26.6% y/y) from the previous month to a seasonally adjusted annual rate of 3.91 million units in May, below market expectations of 4.12 million. It is the lowest reading since 2010 and the steepest annual drop in nearly forty years. Declines were seen in all regions, although the Northeast experienced the greatest drop. The median existing-home price for all housing types in May was $284,600, up 2.3% from May 2019 ($278,200).

 Thursday

Early Thursday morning we’ll get a look at consumer confidence in Germany. The GfK Consumer Sentiment indicator for Germany rose to -9.6 heading into July from an upwardly revised -18.6 in the previous month and compared with market consensus -12.0. Both economic and income expectations improved, as well as propensity to buy, following the gradual lifting of restrictions imposed to contain the coronavirus. The gauge for business cycle expectations jumped 18.9 points to 8.5, the highest reading since January 2019 and far above its long-term average of zero.

 Just before markets open, Initial Jobless Claims will be released. The number of Americans filling for unemployment benefits stood at 1.30 million in the week ended July 11^th, little-changed from a revised 1.31 million claims in the prior week and above market expectations of 1.25 million. This was the smallest week-on-week decline since claims started to fall after peaking in March. The latest number lifted the total reported since March 21^st to 51.3 million.

Shortly after, we will get a look at Consumer Confidence in the Eurozone. The consumer confidence indicator in the Eurozone was confirmed at -14.7 in June, compared with May’s -18.8, on the back of households’ much improved expectations in respect of their financial situation, their intentions to make major purchases and, particularly, the general economic situation. Same as in May, households’ assessments of their past financial situation deteriorated, but on a much smaller scale.

 Friday

Friday starts with several Markit PMI datapoints, beginning with the Eurozone. The IHS Markit Eurozone Composite PMI was revised higher to 48.5 in June from a preliminary estimate of 47.5 and compared to 31.9 in May. The reading pointed to the softer contraction in private sector activity in four months, as restrictions related to the coronavirus pandemic eased. Both manufacturing output (PMI at 47.4 vs 39.4 in May) and services activities (48.3 vs 30.5 in May) shrank at the weakest pace in four months. Though the Manufacturing PMI was revised higher to a four-month high, the latest survey suggested the Eurozone manufacturing sector remained in contraction territory for the past 17 months. Output and new orders declined at a softer pace as more businesses restarted operations following weeks of closure due to the coronavirus pandemic. Backlogs of work outstanding fell for a twenty-second successive month and employment dropped for a fourteenth month in a row. Purchasing activity also remained depressed. On the price front, both input costs and output charges continued to decline. Finally, confidence about production in the year ahead returned to positive territory and services optimism hit a four-month high during June.

Not long after the Eurozone, we will get Markit PMI for the United Kingdom. The IHS Markit/CIPS UK Composite PMI came in at 47.7 in June, little-changed from a preliminary estimate of 47.6 and compared to the previous month’s 30.0. Manufacturing production rebounded 9.4 points to 50.1 and service activity contracted at a softer pace, 47.1 compared to the previous month’s 29.0, in June as the economy reopened following months of disruption caused by the coronavirus pandemic. Manufacturing production rose slightly for the first time in four months, while new order intakes and employment fell at softer rates. On the price front, input costs rose the most in a year, although at mild pace, while output charges also increased. Looking ahead, business sentiment rose to a 21-month high in June due to clients reopening, an expected further loosening of COVID-19 restrictions and hopes that markets would revive at home and overseas to help recover growth lost during the pandemic.

Coming back to an American focus, lastly, we’ll get US Markit PMI. The IHS Markit US Composite PMI was revised higher to 47.9 in June from a preliminary estimate of 46.8 and compared to the previous month’s 37.0. Much softer rates of contraction were reported across the manufacturing and service sectors as the economy began to reopen following the coronavirus-related restrictions. New order inflows stabilized, and employment fell at softer pace, while excess capacity remained as backlogs of work continued to decline. On the price front, cost burdens were up for the first time since February, with private sector firms partly passing on higher costs to clients. Finally, companies expressed optimism towards the outlook for output over the coming year for the first time since March.

Next week, our interest concludes with New Home Sales in the United States. Sales of new single-family homes in the United States jumped 16.6% m/m (12.7% y/y) to an annualized rate of 676 thousand in May, beating forecasts of a 2.9% rise. However, data for April was revised sharply lower to 580 thousand from 623 thousand. Still, May’s figure is the highest in three months. There were 318,000 new homes on the market, down 2.2% from April. At May’s sales pace it would take 5.6 months to clear the supply of houses on the market. The median new house price rose $5,200 from a year ago to $317,900.

Looking Ahead – A Lack of Discipline

Take it from us, Wall Street is not the only place where complacency can set in during a big rally in the S&P 500. US equities can seem to policymakers like a tick-by-tick opinion poll, particularly at a time like this when the fiscal and monetary might of the government is playing such a central role in driving risk asset prices. Plus, the Trump administration has more expressly tethered their fortunes to the stock market than any other in recent memory and under that formulation, buoyant equity prices can easily be taken as a validation of whatever policy prescriptions are currently being administered.

In short, policymakers can easily read too much into a stock market rally, as equities are a fickle friend. Though the S&P 500 might appear to “like” accelerated efforts to reopen segments of the US economy, that does not mean that it would not turn on a dime and head southward again if infection rates shoot up, threatening a re-imposition of lockdowns. The staunchest defender of the efficient market hypothesis still cannot claim that stocks are a crystal ball.

Even if policymakers take price action with the appropriate grain of salt, it remains the case that rising US stocks inevitably drain some of the urgency out of the proceedings in Washington DC. Market price action, particularly high profile, headline grabbing, 401K bashing stock market declines, can be very effective at focusing the minds of Congress, the Federal Reserve, and the administration on attempting to address the problems at hand. When a warning siren is blaring on Wall Street with equities in freefall, officials scurry around trying to figure how to silence it. Now, the S&P 500 is not even down 10% year-to-date and the Nasdaq is already back in positive territory for the year, so if stocks are telling everyone the coast is clear, why do we need another $1 trillion plus stimulus package?

A former Treasury official once recounted a story – during one of the later repetitions of the tedious debt ceiling showdowns, Wall Street had completely tuned out and stocks were rallying steadily even as Tea Party rabble rousers threatened a sovereign US default. A concerned member of Congress asked why stocks were so upbeat in the face of this significant threat, and the Treasury official explained that investors had seen this movie before a few times and figured they knew how it would end. The response was “don’t investors know that the less they worry about a debt ceiling accident, the more likely it becomes?” In other words, without the market performing a disciplinary function, policymakers are more apt to misbehave.

There seems to be a similar dynamic developing with regard to the next version of a pandemic relief bill (the latest CARES Act sequel). One of the key pillars of the turnaround in market sentiment is the massive fiscal response from Congress, but the very existence of the rally makes additional follow-through on the fiscal response less likely. Without conspicuous stock market losses to hold Congress’ collective feet to the fire, the less likely anything further gets done. The partisan armistice that was achieved during the torrid weeks of March and April looks like it may not hold as the House Democrats, Senate Republicans, and Trump administration officials head back to their entrenched positions and prepare for battle over policy turf while unemployment is at Depression levels. Earlier today, National Economic Council Director Kudlow said that negotiations are officially on pause for this month.

For policymakers looking for a more accurate market-based gauge of economic expectations, we would suggest focusing on the prescient Treasury market, which is signaling deep and persistent US economic doldrums, rather than on flighty and emotional equities, which are notorious for overshooting at inopportune times.

Looking ahead to next week, market participants will attempt to look past more horrendous economic data amid an overriding focus on the prospects for recovery.

 

• US Retail Sales, Industrial Production & Consumer Confidence
• US Initial Jobless Claims
• China’s April Economic Readings
• UK Q1 GDP

 

 

Global Economic Calendar

 

Monday

The week begins in Australia with the National Australia Bank’s Business Confidence Index. In March the index crashed to a record low of -66 from -4 in February. The index of business conditions plummeted to -21 from 0 the prior month, dragged down by sharp declines in sales, profits and employment. April is expected to be -70.

 

Tuesday

Tuesday’s focus will be on the Consumer Price Index for April. In March Headline CPI fell 0.4% m/m to 1.5% y/y. This is the lowest level since February 2019 and the largest monthly drop since January 2015, driven by a 10.2% slump in gasoline and a 1.6% drop in apparel prices. Core CPI, which excludes the more volatile food and energy components, fell 0,1% m/m putting it up 2.1% y/y but below market consensus of a 2.3% advance. March marked the first monthly drop in Core CPI’s since January 2010.

In Australia on Tuesday the focus will be on the Melbourne Institute and Westpac Bank Consumer Sentiment Index. In April the index fell 17.7% to 75.6, the biggest monthly fall in survey history, taking the index to its lowest level since February 1991. Outlook on Economic conditions for the next 12 months dropped 31% to 53.7 points, the lowest since the Financial Crisis, and conditions for the next 5 years fell 3.8% to 87. In addition, time to buy a major household item tumbled 31.6 % to the lowest on record of 76.2.

 

Wednesday

Wednesday brings the first estimate of First Quarter GDP in Great Britain. 4Q19 GDP was flat as household consumption was unchanged, marking the first period that it has not increased since the 4Q15, while gross fixed capital formation dropped the most in nearly two years, led by a contraction in business investment. Meanwhile, government consumption rebounded firmly, driven by education and health, and net trade contributed positively to the GDP as exports rose more than imports. On the production side, services activity grew at a softer pace, while production output fell due to declines in manufacturing, and mining and quarrying. In addition, construction output dropped into contraction territory. Expectations are for a 2% contraction in the first quarter as the UK implemented a lockdown to battle the virus.

In the US we will see Producer Price Index (PPI) for April. In March PPI fell 0.2% m/m but increased 0.7% y/y, after declining 0.6% m/m but increasing 1.3% y/y in February. March PPI was the lowest level since September 2016. Cost of goods fell 1%, mainly due to a 6.7% drop in energy costs. In contrast, prices of services increased 0.2%, mainly due to an 8.1% rise in margins for apparel, jewelry, footwear, and accessories retailing. Core PPI came in 0.2% m/m higher, after falling 0.3% in February, and above forecasts of a flat reading.

Wednesday also features the Australian Employment Report for April. In March the Australian economy added 5,900 jobs to 13,017,600, following a 25,600 gain in the previous month and easily beating market forecasts of a 40,000 fall. Australia’s seasonally adjusted unemployment rate edged up to 5.2% in March from 5.1% in February but less than market expectations of 5.5%. The number of unemployed people rose by 20,300 to 718,600. By the end of this quarter, the Employment Change in Australia is expected to be a loss of 65,000 persons and the Unemployment Rate in Australia is expected to be 9.00%.

 

Thursday

Thursday brings a host of data on the Chinese economy starting with Industrial Production for April. March production dropped by 1.1% y/y, after a 13.5% plunge in January-February, but far less dire than market expectations of a 7.3% fall. Output fell at a softer pace for both manufacturing and utilities, while a rebound was seen in mining.

We also will see Retail Sales for April. March sales declined 15.8% y/y in March, following a 20.5% slump in January-February, worse than market expectations of a 10% fall. Sales continued to decline for most categories, while sales rebounded for personal care, office supplies, and telecoms.

On Thursday in the US the focus will be on Initial Jobless Claims. Last week 3.169 mil Americans filled for initial unemployment benefits, compared to 3.846 mil in the prior week and above market expectations of 3.0 mil. Last week’s filings lifted the total reported since the beginning of the coronavirus crisis to 33.5 mil, equivalent to a 22% unemployment rate. The largest increases were seen in California, Texas, Georgia, and New York, while continuing jobless claims hit a new record of 22.647 mil. Tomorrow the BLS will release the April Employment Report where consensus expectations are for a loss of 22 mil jobs and a 20% unemployment rate.

 

Friday

Friday’s focus will be on US Retail Sales for April. March sales plunged 8.4% m/m and 5.8% y/y and was the largest monthly decline on record and the largest decline in trade since 2009. Excluding autos, retail sales fell 4.2% m/m. The biggest decreases were seen in clothing, furniture, restaurants & bars, motor vehicles & parts, sporting goods, hobby, musical instrument & books, and electronics & appliances. Receipts at gasoline stations also fell sharply as consumers cut back spending on fuel and as oil prices plunged. On the other hand, sales of food & beverages and health & personal care products rose.

We will also see Industrial Production for April. March production slumped 5.4% m/m and 5.5% y/y, the largest monthly drop since January 1946, and worse than market expectations of a 4% dive. Manufacturing output fell 6.3%, the most since February 1946. The declines were led by a 28.0% tumble in motor vehicles and parts output.

Finally, the week ends with the Michigan Consumer Expectations Index for May. In April the index fell to 71.8, the lowest reading since 2011. Surveys of Consumers chief economist, Richard Curtin stated that “In the weeks ahead, as several states reopen their economies, more information will reach consumers about how reopening could cause a resurgence in coronavirus infections. The necessity to reimpose restrictions could cause a deeper and more lasting pessimism across all consumers, even those in states that did not relax their restrictions.”

 

 

 

 

 

 

 

 

 

The coronavirus outbreak may not yet fit the scientific definition of a pandemic but it is clearly heading in that direction, according to some leading public health officials. Global financial markets are certainly not waiting for the official notification. Price action this week in Treasury markets is consistent with an exceedingly grim economic outlook and acute risk aversion, while the previously resilient S&P 500 is under increasing pressure.

Policymakers are not standing idly by. This week has seen a raft of rate cuts from global central banks, including an emergency 50 basis point reduction from the Fed on Tuesday. Meanwhile, the Trump administration is deploying an $8 billion spending package, which the President signed this morning after its swift trip to approval in Congress, and National Economic Council Director Kudlow is indicating that more fiscal measures are in the pipeline.

Meanwhile, US politics played out as a side-plot to the main narrative of the unfolding outbreak and the official responses being marshaled against it. There was plenty of debate among market participants over the extent to which US politics played a role in last week’s selloff, as Senator Sanders gained momentum in the Democratic field, and this week’s twin rallies on Monday and Wednesday, of 4.6% and 4.2%, respectively, which bookended a storming Super Tuesday comeback for Joe Biden, who is back as the presumptive frontrunner.

Many market contacts opined that Wednesday’s surge in the S&P 500 was specifically driven by Biden’s big win, and we certainly agree that healthcare stocks in particular received a boost given Biden’s opposition to Medicare-for-all. Shares of UnitedHealth and Anthem, two managed care giants, are up 9.2% and 6.8% this week despite all the chop in broader indexes. The degree of Joe-mentum in broader indexes and financial markets, however, is debatable.

Whether Medicare-for-all and other more radical healthcare reform proposals really are going to disappear with the Sanders campaign is also not so clear. Analysts are noting that a true pandemic has the power to shape societal norms and ideas, supporting (as one put it) “collectivist notions.” Calls from even Republican quarters that coronavirus patients should receive free treatment even if not insured may be just politicking, or it may represent a real shift. Bailouts for the service sector are unworkable, so perhaps direct payments to service sector workers (aka “helicopter money”) might be considered. It is certainly the time for policymakers to try to think creatively about responses to the epidemic, some of which might be difficult to entirely reverse when the coronavirus mercifully abates.

Looking ahead to next week, the European Central Bank is set to ease and global economic data will be scrutinized for any impact from the coronavirus epidemic.

• US Economic Data
• European Central Bank
• EU Economic Data
• China Economic Data

US Economic Data: Focus on consumer sentiment for virus impact  

Wednesday’s focus will be on the US Consumer Price Index (CPI) for February. January Headline CPI rose 0.1% m/m, coming in below forecasts of 0.2%. Shelter accounted for the largest increase, with cost of food and medical care services also rising. These increases offset a 1.6% decrease in the gasoline index. On a year-over-year basis CPI climbed to 2.5% from 2.3% in December and is the highest rate since October of 2018, mainly boosted by a 12.8% jump in gasoline cost. Core CPI, which excludes volatile items such as food and energy, increased 0.2% m/m, following a 0.1% gain in December and matching market expectations. Core CPI has risen 2.3% y/y, the same as in December.

The Producer Prices Index (PPI) for February will be released on Thursday. In January the PPI jumped 0.5% m/m, coming is well above market expectations of 0.1% rise. This was the largest monthly gain since October 2018, as services prices rose 0.7% and boosted by apparel, jewelry, footwear, and accessories retailing. On the other side, goods cost only advanced 0.1%. Year-on-year, the PPI rose 2.1%, the largest advance since May 2019. Core PPI also rose 0.5%, also well above the 0.1% forecasted.

On Friday the University of Michigan Consumer Sentiment Index for March will be released and will provide one of the first readings on how the coronavirus is affecting the consumer. February was revised slightly higher to 101 from a preliminary 100.9 and is the highest reading since March of 2018. The gauge for current conditions was higher than expected, while expectations rose less. One-year inflation expectations were 2.4%, while the five-year outlook was 2.3%. The coronavirus was mentioned by 8% of all consumers in February although on the last days of the February survey, 20% mentioned the coronavirus due to the steep drop in equity prices, as well as the CDC warnings about the potential domestic threat of the virus. While too few cases were conducted to attach any statistical significance to the findings, it is nonetheless true that the domestic spread of the virus could have a significant impact on consumer spending.

European Central Bank: No time to waste 

On Thursday the ECB will hold their Interest Rate Decision. At its January meeting the ECB left the key interest rate on the main refinancing operations steady at 0%, which was widely expected. The marginal lending facility was also kept at 0.25% and the deposit facility at -0.50%. During the press conference, ECB President Lagarde failed to provide any new information on the monetary policy, economic outlook and strategic review. Lagarde added that incoming data is in line with the ECB baseline scenario and there are some signs of moderate increase in underlying inflation. She added that the governing council stands ready to adjust the instruments if needed. At a subsequent speech in February, Lagarde called for fiscal stimulus measures in the Eurozone, warning that monetary policy isn’t “the only game in town” and the longer the accommodative measures remain in place, the greater the risk that side effects will become more pronounced.

EU Economic Data: Feeling contractions 

Thursday begins with Eurozone Industrial Production (IP) for January. December IP plunged 4.1% y/y, following a 1.7% contraction and compared to market forecasts of a 2.3% decline. The latest figure matched the December 2018 drop, which was the biggest since November 2009. Capital goods output led the fall, followed by intermediate goods, energy and durable consumer goods. Among the bloc’s largest economies, there was a contraction in Germany, Italy and France, while Spain’s output was little changed. For full year 2019, IP shrank 1.7%, the steepest contraction since 2012.

Chinese Economic Data: Price check  

The week begins with China’s Consumer Price Index (CPI) for February. January CPI jumped to 5.4% y/y from 4.5% in December and above market consensus of 4.9%. This is the highest inflation rate since October 2011 due to rising pork prices, stronger demand during the Lunar New Year holiday and the ongoing coronavirus outbreak. Food prices went up 20.6% y/y, the most since April 2008, with pork prices rising for the 11th month in a row and at a steeper rate. Pork prices have been rising during the last year amid a prolonged African swine fever epidemic and in January 2020, several lockdowns and transport restrictions due to the coronavirus outbreak weighed on the pork cost even more.

Friday begins with Chinese Foreign Direct Investment (FDI) for February. In January FDI into China rose 4% y/y to CNY 87.57 bil, or 2.2% to $12.68 bil. In yuan terms, foreign investment in high-tech industries went up 27.9 percent and accounted for 35.8 percent of the total FDI, with investment in high-tech service increasing 45.5 percent. Among the main sources of investment, FDI into China rose mainly from Singapore (40.6 percent), South Korea (157.1 percent), and Japan (50.2 percent); while FDI from the countries along the “Belt and Road” and ASEAN advanced by 31.3 percent and 44.8 percent, respectively.