Looking Ahead 7-17-2020

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



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%.


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 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.


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).


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 11th, 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 21st 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 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.

Morning Market Brief 6-22-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning amid ongoing concerns that the Covid-19 resurgence will impede reopening plans, while analysts are noting various China-related headlines. S&P 500 futures point to a choppy open after the index struggled for direction last week and closed Friday on a downbeat note to take its year-to-date loss to 4.1%. Equities in the EU and Asia were mixed overnight in muted trading, with the Hong Kong index underperforming on news regarding China’s impending security law for the territory (more below). The dollar is slightly lower, while longer-dated Treasury yields are flat, with the 10-year yield at 0.69%. Crude oil prices are hovering near three-month highs after last week’s OPEC compliance review reaffirmed the cartel’s commitment to supply curbs.

Coronavirus Concerns Keep Investors on Edge

A steady drumbeat of worrisome figures suggests that coronavirus resurgences could impede reopening plans. US equities surrendered early gains on Friday and then dipped into negative territory after Apple announced that it would be temporarily re-closing some of its stores in developing Covid-19 hotspots like Florida and Arizona. That ended a week of generally positive developments on a sour note, and global risk assets remain choppy this morning after the weekend brought more concerning news on the pandemic. The infection data continues to worsen in some areas, with seven states registering new record high cases, though the previous epicenter of the US outbreak, New York City, is showing low and stable transmission rates that have allowed the Phase 2 of reopening to commence this week. Oklahoma is among the burgeoning hotspots, which had raised concerns about President Trump’s campaign rally in Tulsa over the weekend that was held in an indoor arena. Also, shares of cruise lines slid on Friday as operators disclosed that they would voluntarily cease all voyages from US ports until September 15. Thus far, however, no mass lockdowns have been re-imposed in the US. Overseas, cases are continuing to rise in Germany after the EU’s largest country escaped the worst of the initial wave, while reports of another outbreak in Rome are also being noted by analysts, and Australia’s state of Victoria extended its state of emergency for another four weeks. On a more positive note, reports from China indicate that the recent outbreak that resulted in re-imposed restrictions in some areas of Beijing is slowing.

Investors Note China Headlines

Though market reactions have been modest, China-related developments are providing little cheer to investors this morning. Over the weekend, the People’s Bank of China retained its interest rates as expected and provided no indication that it is set to deviate from its current wait-and-see approach. Analysts have noted the steady climb in Chinese bond yields since their springtime low, which is in sharp contrast with most developed market sovereigns. For context, the US 10-year Treasury yield is languishing barely 15 basis points above record lows at 0.69%, whereas China’s 10-year yield is 2.92% after having risen 44 basis points since April. Meanwhile, on the US-China relations front, analysts are noting headlines that China has banned chicken imports from a particular Tyson’s plant that suffered a coronavirus outbreak, with this coming just a week after China reportedly reaffirmed its US farm good purchase commitments under the Phase One trade deal. Also, the US has rejected Beijing’s proposal on increased flight routes for Chinese carriers unless some reciprocal changes are made. Neither of these developments are considered a serious escalation of US-China tensions but keep attention on the frayed relationship. Lastly, Hong Kong’s benchmark Hang Seng stock index underperformed overnight as China confirmed that the new security law it is imposing on the territory explicitly allows Hong Kong laws to be overridden in some cases. The Hang Seng slipped 0.5% to extend its year-to-date (ytd) underperformance against regional peers to -13.1%, with the Nikkei down 8.3% ytd and the Shanghai Composite only 2.8% lower by comparison.

Additional Themes

Bank of England Policy Pivot – After meeting market expectations for additional quantitative easing but keeping interest rates on hold at last week’s BoE meeting, Governor Bailey indicated in an op-ed today that he would focus on shrinking the central bank’s balance sheet before commencing with rate hikes. Gilts and the pound are rallying on this dovish shift.

Geopolitical Tensions Remain a Backburner Issue for Markets – Concerning developments in Libya over the weekend, as Egypt threatened to intervene in that civil conflict, are having scant apparent impact on oil prices this morning. Meanwhile, investors continue to monitor the situation on the Korean peninsula after a week of bellicose rhetoric from Pyongyang, which prompted South Korea to vow retribution for continued provocation. The Korean won fell another 0.5% overnight, though disappointing export figures were another headwind, as the currency has lost 2.0% versus the dollar since North/South tensions flared.

Looking Ahead – A Lack of Discipline 5-8-2020

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



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’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 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 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’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.”










Looking Ahead – Twelfth of Never 4-9-2020

Looking Ahead – Twelfth of Never

This week featured some brightening glimmers of hope from the frontlines of the battle against the coronavirus pandemic – flattening infection curves and encouraging declines in mortality rates in a few key Covid-19 hotspots, as well as some (cautious) indications from respected public health officials that while the worst may not yet be behind us, the trends are showing the way to real improvement over the coming weeks and months. Some of the grimmest estimates for the human toll of the virus are being revised lower and the race for a vaccine is supplying a dose of hope that the world will be back to the status quo ex ante soon enough.

The narrative of a quick return to normal is understandably harder to believe for individuals that are over 50, are immunocompromised, or have family members under the same roof that fall into those vulnerable categories – for these many millions of Americans, the light at the end of the tunnel is far more distant. Even for the young and healthy, much care must still be taken in resuming normal activities lest secondary infection spikes occur. This dispiriting second wave of Covid-19 has hit Singapore, for instance, despite robust testing data, contact tracing, symptom tracking, etc. all of which is still a work in progress here in the US.

There is broad criticism that not enough was done in the US to prepare for a pandemic of this magnitude and policymakers cannot afford to compound the problem by failing to plan for the possibility of a “long tail” of the virus fighting effort, as we discussed in last week’s Looking Ahead. Fed liquidity provisions may be unlimited but they cannot solve a private sector and household solvency crisis. Muscular fiscal expenditures can provide an offset but, for example, with only a relatively small percentage of US small businesses able to access the PPP loans, and an average loan size of $150k, it is easy to see how more long-range planning will be needed if the economy is only able to recovery gradually and fitfully, as overseas evidence suggests.

The White House and Congressional leaders have already flagged infrastructure spending as a potential part of the pandemic relief packages, but more immediate needs, like topping up the small business lending facility, have pushed it down the list of priorities thus far. We believe infrastructure will not fall off the agenda this time and should be a feature in CARES 2.0 – but in what form?

“Infrastructure week” has been a laugh line in DC for the past few years, as anyone with an appreciation of the impaired political incentives, lengthy timelines, technical challenges, and myriad of other difficulties knows just how impossible a major federal infrastructure program has seemed, beyond another run-of-the-mill highway bill. We too believed that a major federal infrastructure push would not happen until the twelfth of never, but that is what time it is now.

Wrangling over allocation of trillions of dollars among specific projects is a bridge too far (pardon the pun) and giving money to the states directly for infrastructure outlays would understandably see that cash spent to fill short-term budgetary gaps. The Treasury should instead seek relatively more modest funding to establish a federal infrastructure bank as part of the CARES 2.0 package, find some office space for it at 1500 Pennsylvania and start staffing it up, doing planning, identifying projects, seeking approvals, etc. This is less splashy than a big dollar amount but more effective over the medium-term. Anyway, the projects themselves are too long-range to be part of any short-term relief but would come in very handy if the US economic restart needs some additional impetus six months to a year from now.

Critics say that it is impossible to start infrastructure projects in the middle of a pandemic, and they are right – the long timelines involved in these massive undertakings ensure that the infection peak will be behind us before anything really gets going on the ground (nothing is shovel-ready, as the Obama administration discovered). And what better time to fix public transportation when far fewer people are taking it or bridges and roads when there is less traffic? The same goes for our parks and recreation areas. Anyone who has tried to do a video conference for work while their children are engaged in remote-learning on their iPads knows connectivity is a big issue. The list of needs is long, as everyone knows.

In short, planning for adverse medium-term economic outcomes is not defeatist – it is prudent. There is an unacceptably high risk that the massive job losses we are experiencing will extend into a more chronic condition. Infrastructure can be part of the solution, but the groundwork needs to be started as quickly as possible. And if not now, then truly never.

Looking ahead to next week, US and China economic data is in focus. Stay safe and well!


  • US Economic Data
  • Bank of Canada
  • China Economic Data


US Economic Data: Brace for impact

The Covid-19 shutdown has made certain datapoints more important than in the past, MBA Mortgage Applications, being a perfect example, which will be released on Wednesday. In the week ended April 3rd applications declined 17.9%, following a 15.3% rise in the previous week. Refinance applications dropped 19.4% and applications to purchase a home fell 12.2%, the lowest since 2015.

Later in the morning Retail Sales for March will be the focus of the market. February sales dropped 0.5% month-on-month (m/m), following an upwardly revised 0.6% increase in January and missing market expectations of 0.2%. This was the largest decline in trade since December 2018, as consumers cut back spending on a range of products, including motor vehicles & parts, furniture, electronics & appliances, building materials and clothing. Receipts also declined at gasoline stations and restaurants & bars. Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged after increasing by 0.4% in January.

Industrial Production for March follows. IP in February increased by 0.6% m/m, recovering from a revised 0.5% in January. Manufacturing activity edged up 0.1%, boosted by a large gain for motor vehicles and parts, while production of civilian aircraft fell sharply. In addition, utilities output jumped 7.1%, as temperatures returned to more typical levels following an unseasonably warm January.

Wednesday also includes the NAHB Housing Market Index for April. March fell to 72 from 74 in February. The current single-family sub-index declined to 79 from 81; the sub-index for home sales for the next six months dropped to 75 from 79 and prospective buyers also went down to 56 from 57. It is important to note that half of the builder responses were collected prior to March 4, so the recent stock market declines and the rising economic impact of the coronavirus will be reflected more in this report.

Thursday brings the now all-important Initial Jobless Claims. In the week ended April 4th, the number of 6.6 mil Americans filed for unemployment benefits, compared to the previous week’s record high of 6.87 mil, well above expectations of 5.25 mil. The latest increase brought the total reported in the last three weeks to close to 17 mil, as the coronavirus crisis deepened. Continuing jobless claims hit 7.46 mil in the week ended March 28th, also the highest on record. The last week’s number may be underestimated as many states are struggling to process high volumes of claims.

Bank of Canada: Rates gone south in the great white north

Wednesday brings the Bank of Canada (BoC) Interest Rate Decision. On March 27th the BoC slashed its benchmark interest rate by 50bps to 0.25% in an emergency meeting. The move follows a similar margin cut on March 13th and brings borrowing costs to its effective lower bound aiming to support the economy and the financial system amid the coronavirus pandemic. The Committee also launched a Commercial Paper Purchase Program to help to restore a key source of short-term funding for businesses and said that will begin acquiring government securities in the secondary market until the economy recovers. Policymakers added that they are closely monitoring economic and financial conditions, in coordination with other G7 central banks and fiscal authorities and will take further action if necessary.

Chinese Economic Data: GDP = growth destroying pandemic 

On Monday we will begin with China Balance of Trade and Foreign Direct Investment (FDI) data for March. February unexpectedly showed a trade deficit of $7.09 bil in January-February 2020, missing market expectations of a surplus of $24.6 bil. This was the first trade gap since March 2018, reflecting the severe impact of the rapid spread of COVID-19 outbreak to the country’s economy. Year-on-year, exports slumped 17.2% to $292.5 bil, while imports shrank 4% to $299.54 bil. China’s trade surplus with the US for the first two months of the year stood at $25.37 billion, much lower than a surplus of $42.16 billion in the corresponding period a year earlier. Meanwhile, FDI tumbled 8.6% y/y $19.26 bil, in the first two months of 2020 due to Covid-19 outbreak and the Lunar New Year holiday. For February, FDI plunged 25.6%.

Thursday’s focus will be on First Quarter 2020 Chinese GDP. In the fourth quarter 2019 the Chinese economy grew 6.0% y/y, the same as in the previous quarter. This remained the weakest growth rate since the first quarter of 1992, amid trade pressure from the US and sluggish demand from home and abroad. For the full year 2019, the economy grew by 6.1%, the slowest pace in 29 years, but still within the government’s target of 6 to 6.5%. Consensus expectations are for growth to remain at 6%.

Looking Ahead – Political Economics of a Pandemic 3-6-2020

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.

Looking Ahead – Increase the Dosage

With the outbreak widening in the US and our lives facing an increasing degree of disruption, the obvious priority is the public health response, and of course any meaningful improvement on slowing the spread of cases or widening the diagnostic net (let alone finding more effective treatments or a vaccine) would induce a chain reaction of positive developments…

Looking ahead to next week, the Fed will be in the white hot spotlight, while the Chinese central bank is also likely to ease and some economic data is due. Stay safe and well!

  • Federal Reserve
  • US Economic Data
  • China Central Bank
  • EU Economic Data

Looking Ahead – Political Economics of a Pandemic

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.

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

Looking Ahead – When the Going Gets Tough…

In times like these, as the saying goes, the tough get going. In financial markets, though, when the going gets tough, the Fed gets going, with rate cuts, accommodative forward policy guidance, even asset purchases (aka quantitative easing or QE). This is what market participants have come to depend on over the years, with the post-global financial crisis years cementing this concept of the “Fed put,” because the Fed has given them every reason to expect support in times of market volatility.

Looking ahead to next week, the calendar features US nonfarm payroll data, global purchasing managers’ indexes (PMIs), and central bank meetings in Australia and Canada.

Looking Ahead – Trigger Warnings

Skeptics assert that the ability of the S&P 500 to register a series of record highs in recent weeks despite the ongoing coronavirus outbreak is proof that a mix of investor complacency, programmatic trading, passive investing, and permissive central bank liquidity is preventing rational price discovery in equity markets. Although we do not dismiss this viewpoint, there is an alternate explanation rooted in fundamentals – assuming reasonably timely success of containment efforts, lost output will be paid back with interest in a ü-shaped rather than not V-shaped recovery, Beijing will be engaged in vigorous stimulus efforts, and global central banks will have eased policy to an even more accommodative level then before the epidemic…Sign up for Markets Policy Pro to read the full piece.

Looking ahead to next week, the calendar features some key US economic data.

  • US Economic Data
  • US Housing Data
  • EU Economic Data

Looking Ahead – Bizarre Love Triangle

In a year that has already featured a seemingly disproportionate degree of disquieting developments, this Valentine’s Day provides a timely opportunity to pause and reflect upon those we care about. In the financial world, love is in the air as well, with market participants entangled in a torrid and potentially complicated love triangle with two very different assets.

Looking ahead to next week, the calendar features global manufacturing data.

  • Global Factory Data
  • Fed Minutes
  • US Housing Data
  • China Central Bank
  • EU Economic Data