Economic Outlook – 14 June 2020

US

• The Fed released the FOMC meeting minutes which reveled the participants’ similarly grim growth outlooks. This which showed most participants believed the Fed would keep the rate at the zero lower bound through at least 2022, hence reiterating the Fed’s dedication to supporting the economy through the crisis and its willingness to adjust policy as needed as the Fed expects a gradual recovery. In terms of inflation, FOMC members expected the head­line personal consumption expenditures (PCE) deflator to increase by just 0.8% in 2020 and 1.6% in 2021. The out­look for the core PCE measure was not much different.

• The Fed plans on providing monetary aid for at least the next couple of years. The federal funds rate is expected to remain near zero through 2022. But monetary policy alone cannot hold up the economy during this crisis. More fiscal support is likely to be needed once unemployment benefits provided by the CARES Act expire at the end of July. Congress has taken up the issue and Treasury Secretary Mnuchin has backed the idea. Mnuchin also said that while the Trump administration supports further targeted aid for the economy, talks will not begin on the matter until after the July congressional recess.

• The number of initial filers for unemployment insurance last week was the lowest it has been since March, but it was still well-north of a million, and while continuing claims have come down over 20 million people remain out of work.

• Consumer prices fell for the third consecutive month in May, as retailers grappled with the plunge in consumer demand. Energy prices posed the greatest drag on headline prices, declining by 1.8% on the month. Food prices, on the other hand, rose by 0.7% reflecting the havoc COVID-19 was having on production facilities. Exclud­ing food and energy, prices still declined by 0.1% in May.

• The Business Cycle Dating committee of the National Bureau of Economic Research, the arbiter on recession dating in the United States, declared that the economy has been in recession since February. The downturn could be the shortest on record if the recovery in labor markets seen in May is borne out in other data in the months ahead.
• President Trump plans to sign a bill sanctioning Chinese officials for their treatment of Uighurs in China, potentially adding to mounting tensions between the two counties. 

• US stocks suffered their worst weekly decline in almost three months, as investors appeared to harvest recent gains and respond to a worsening of the pandemic in parts of the country. Slower-growing value stocks surrendered their recent market leadership and recorded the steepest drops, and smaller-cap shares also underperformed. Relatedly, two prominent value sectors, energy and financials, fared worst within the S&P 500 Index, while the fast-growing information technology sector held up best. Reflecting the renewed virus fears, Amazon, Netflix and other “stay at home” stocks easily outperformed airlines and other shares reliant on the reopening of the economy.

• The risk-off response to renewed pandemic fears sent the yield on the benchmark 10-year Treasury note sharply lower, reversing most of the previous week’s surge. The broad municipal bond market posted positive returns through most of the week but underperformed the rally in Treasuries

• In terms of data release, this week the Fed’s chair Powell will speak on Wednesday while during the week several Fed speakers will clarify Fed’s stance

• On Thursday, the US initial jobless claims are released.

UK

• GDP data revealed what could have been expected: the COVID-19 lockdown has resulted in the most severe recession on record. The 20.4% month-on-month decline in GDP in April (consensus: -18.0%) comes on the back of a 5.8% month-on-month decline in March (these are not annualised figures). The peak-to-trough fall in output since February was 27.8% in manufacturing (-24.3% in April), 43.6% in construction (-40.1% in April), and 24.0% in services (-19.0% in April). In the worst-hit parts of the services sector, firms were only able to do a tiny fraction of their usual trade: air transport fell 92.8% and travel and tourism fell 89.2%, while output of the accommodation and food services sector was down by 91.8%. The only periods of even close comparison are the Global Financial Crisis of 2008 and the 1930s Great Depression, which saw GDP fall by 7.0%. Consensus is expecting an overall decline in UK GDP for 2020 of 8.9%

• The British public’s long-term expectations for inflation slumped to a record low in May as the coronavirus hit the economy according to a quarterly Bank of England survey. The BoE said the public’s average estimate for inflation in five years’ time fell to 2.6% in May from 3.4% in February, the lowest since the survey began in 2009. Expectations for inflation in two years’ time tumbled to 1.9% from 2.9%, matching a record low set in February 2009, while inflation expectations for the year ahead edged down to 2.9% from 3.0%. The BoE looks at public inflation expectations as a guide to the likely future inflation pressure from wage demands and businesses’ price-setting decisions.

• British company directors’ investment and hiring intentions sank to their lowest in more than three years last month, even as their broader confidence edged up slightly from a record low struck last month when COVID-19 restrictions were greatest.  The Institute of Directors said its monthly sentiment survey showed business leaders’ confidence in the economy at -60 in May from -67 in April, which was the lowest reading since the survey began in July 2016. But both investment and hiring intentions sank to their lowest in the survey’s history. IoD chief economist Tej Parikh said that “revenue isn’t expected to pick up, ​which means investment and hiring plans are very much on hold.”  The IoD figures are broadly in line with other business surveys which have shown a small pick-up in activity since April, when coronavirus restrictions were heaviest.

• British Prime Minister Johnson and European Commission President von der Leyen will hold trade talks on 15 June. On Friday, the Financial Times reported that the United Kingdom is prepared to put a temporary “soft border” with the European Union in place at the end of the transition period, slated for 31 December, and institute a temporary light-touch regime governing customs checks for a period of six months. Also on Friday, the UK formally rejected an extension of the Brexit transition period.  

EU

• German industrial output and trade data were much worse than expected, shaking confidence in a quick recovery from the pandemic. Output plunged by a record 17.9% in April from March and more than 25.0% year on year, official data showed. Seasonally adjusted exports dropped 24.0% on the month, and imports fell 16.5%. The trade surplus shrank to EUR 3.2 billion, which was much smaller than consensus estimates. However, the Bundesbank said at the start of the week that the economy had already bottomed out in April and was starting to grow again.

• The Bank of France estimated that the eurozone’s second-biggest economy would shrink by 15.3% in the second quarter, after a contraction of 5.3% in the first three months of the year. It also anticipated a 10.3% contraction this year, although a recovery would start in the second half. The economy would then rebound 6.9% in 2021 and 3.9% in 2022. However, the forecasts do not include a recovery plan that is being considered by the government.

• The European Systemic Risk Board, which is hosted by the European Central Bank (ECB), recommended that the ban on dividend payments, bonuses, and share buybacks by banks in the European Union should be extended by another three months, which would be at least until the end of 2020. The ban is designed to help banks build buffers to withstand the coronavirus-induced economic slump.

• Equities in Europe fell, snapping four weeks of gains, on fears of a resurgence of coronavirus infections and a delayed economic recovery. The pan-European STOXX Europe 600 Index ended the week 4.99% lower. Among European markets, Germany’s Xetra DAX Index fell 6.13%, France’s CAC 40 Index declined 6.05%, and Italy’s FTSE MIB Index dropped 5.77%.

• In terms of data release, ZEW in Germany is out on Tuesday. According to ZEW, the euro economy has already moved into an upswing quadrant, but it is interesting to understand whether the rise in expectations of the past two months continues and the current situation assessment follows suit.

China

• China rejected the idea that it is legally bound to maintain the autonomous status of Hong Kong under the 1984 agreement made with the UK to hand over the territory in 1999. A Chinese official described the agreement as a statement of policy and not a commitment.

• Over the past month, the People’s Bank of China allowed interbank rates to rise by around 30 basis points. Meanwhile, a one-month rolling average of the overnight repo rate rose to 1.3% at the start of June from around 1.0% in early May. Among longer-dated securities, the yield on five-year government bonds increased by 70 basis points, while the yield on the 10-year sovereign bond rose 30 basis points.

• In a welcome sign that China’s economy is returning to normal, the central government welcomed the return of street vendors across the nation. The change, which was initiated in Chengdu in the Sichuan province, is expected to help absorb some of China’s newly unemployed, particularly among the migrant and rural workers who are excluded from official unemployment measures. The number of China’s unemployed is expected to increase from 10 million to 30 million this year, according to brokerage forecasts. 

• China’s broad credit growth, as measured by total social financing, rose to 12.5% year-on-year in May compared with 10.7% last December, though a surge in net issuance of government debt appeared to drive the increase. Analysts said that China’s strong credit growth could overstate the prospects for an economic recovery as it includes short-term corporate bonds and coronavirus relief loans from the central bank, in addition to new loan demand from enterprises and households. 

• Stocks in China declined amid disappointing credit data and weaker global sentiment. The domestic large-cap CSI 300 Index was unchanged from the previous week, while the benchmark Shanghai Composite Index slipped 0.4%.

• In terms of data release, Industrial production and retail sales for May will be out on Monday.

Sources: T. Rowe Price, Reuters, MFS Investment, TD Economics, Danske Bank, Wells Fargo, M. Cassar Derjavets.