Economic Outlook – 19 April 2020

US

• Retail sales plunged 8.7% in March, as a 26.0% surge in grocery store sales was drowned out by historic declines in both durable (furniture -27.0%, autos -26.0%) and nondurable (clothing -50.0%, restaurants -27.0%) discretionary spending. Even this understates the decline in personal consumption, as retail sales do not include hotel stays, airline or movie ticket sales, all of which fell to near zero by the middle of the month. This end of the quarter drop-off in activity means Q1 GDP growth will likely be mildly negative, but Q2 will be a disaster.

• In the past four weeks, 22 million people (nearly 15.0% of the US workforce) have filed for unemployment insurance. Layoffs in the directly affected industries have likely already peaked (a barber shop cannot close twice) but they are also likely picking up in non-directly affected industries as firms come to terms with the extent of the hit to aggregate demand and cut back on expansion plans. And while it is true services are being hit harder, manufacturing is getting pummeled too (industrial production fell 5.4% in March, the most since the United States demobilized after the Second World War).

• The New York and Philly Fed indices point to the ISM manufacturing index falling to between 30 and 35. Even housing starts fell 22.0%, despite bustling activity in the first half of the month, while homebuilder confidence posted its largest one-month drop ever.

• Only 69.0% of apartment tenants paid rent from 1^st to 5^th April, compared to 82.0% in the same period last year, while the share of mortgage loans in forbearance leaped from 0.25% to 3.74%. Fortunately, those who have lost their job and successfully filed for unemployment insurance (a cohort totaling 12 million the week ended 4^th April)are receiving the additional $600 per week allocated by the CARES Act, which should do a respectable job plugging the sudden income hole in many households’ finances.

• The $350 billion Paycheck Protection Program, designed to keep small businesses afloat by means of forgivable loans if small companies keep their employees on payroll, ran out of funding as lawmakers failed to reach agreement on adding an additional $250 billion in funding. In return for the additional funding, Democratic leaders are seeking more aid for hospitals and state and local governments. Republicans argue that billions of dollars’ worth of funding is already being disbursed to those entities and that additional funding can wait until a phase four stimulus package is crafted in the weeks ahead.

• Attention has now begun to shift to when the economy can ‘re-open.’ Moreover, focus on who has the authority to open the economy, the White House or governors, is perhaps not relevant. The question is who has the ability. The answer is consumers and businesses. Things will only get back to normal when people feel safe. Safety in turn depends on the public health response.

• The White House Coronavirus Taskforce announced guidelines for a phased reopening of the US economy on a state-by-state basis after certain epidemiological benchmarks are met. The guidelines call for the economy to be reopened in three phases but does not suggest specific reopening dates. President Trump said there are as many as 29 states that meet the criteria for reopening soon. Final reopening decisions will fall to each state’s governor. Hard-hit New York State announced that it had extended its stay-at-home order until at least 15^th May.

• Last week brought the unofficial start of earnings reporting season, with some major banks reporting first-quarter profits. JPMorgan Chase and Wells Fargo reported profit declines of 70.0% and 89.0%, respectively, while Citigroup reported a drop of 46.0%. While bank earnings are feeling the pinch of lower lending margins due to falling interest rates and the prospect of rising loan defaults, analysts polled by FactSet expect other sectors to fare somewhat better, with overall earnings for the S&P 500 declining 14.5%.

• Oil prices came under pressure again from $35 to $29 per barrel (Brent). It is still higher than the low point of $21.7 reached on 30^th March. OPEC managed to strike a deal with a record big reduction in oil supply of around 10.0% of global supply. This brought some stability to the energy segment, where credit-specific news drove much of the week’s movement.

• US Treasury yields edged up early in the week on news of an agreement to cut oil production but fell back to end the week lower in response to the poor economic data.

• In terms of data release, attention goes to the US jobless claims on Thursday.

EU

• French President Macron warned that the eurozone could collapse unless a joint virus recovery fund is established. Macron said in an interview with the Financial Times that there was “no choice” but to set up a fund that “could issue common debt with a common guarantee” to finance member states according to their needs rather than the size of their economies. A failure to act would fuel a further rise of populism in southern Europe, the French president said.

• Some European countries extended their lockdowns while outlining plans to reopen economies amid signs that the coronavirus crisis was abating:
  • France will continue its lockdown until 11^th May and then open schools.
  • Italy, which extended containment measures until 3^rd May, has reportedly begun considering how to reopen its economy. Italy opened some bookshops and small stores.
  • The UK said the lockdown could last at least another three weeks, with ministers split on whether to encourage people to go back to work.
  • Meanwhile, children in Denmark are back in nurseries and primary schools.
  • Austria allowed home improvement shops to open.
  • The Czech Republic lifted restrictions on communal sports.
  • Germany’s automakers are set to resume production next week.
  • Spain allowed workers in nonessential industries to return to work.

• Eurogroup finance ministers agreed on a €500 billion package of measures supporting businesses, workers, and sovereigns through the coronavirus crisis. Agreement was reached after the Dutch backed away from demands that lending by the bailout fund should be subject to tougher conditions. The new measures include revised pandemic credit lines from the European Stability Mechanism, a boost to the lending capacity of the European Investment Bank, and a new €100 billion unemployment insurance scheme. The package is mostly reliant on loans that would add to already large debt burdens. Ministers also agreed to create a recovery fund designed to help the single-currency area bounce back after the coronavirus crisis, but Paris and Berlin are divided over how it will be financed.

• European Central Bank (ECB) President Lagarde repeated at an International Monetary Fund (IMF) meeting that the ECB is willing to do everything necessary within its mandate to help the euro area pull through the coronavirus crisis. She said the ECB is fully prepared to increase the size of its asset purchase programs and adjust their compositions by as much as necessary and for as long as needed. Lagarde also said that the ECB will explore all options and all contingencies to support the economy through this shock. The ECB is bracing for a “large contraction” of the economy and, at least initially, falling inflation, she said.

• Italian bonds came under pressure again after the idea of ‘corona bonds’ failed to gain traction among EU finance ministers and Italy updated its issuance guidelines for 2020. On Thursday EU leaders will meet to discuss the next steps in the fight to kickstart the economy and the size and funding of the Recovery Fund.

• In terms of data release, Tuesday brings the German ZEW, on Wednesday the Euro consumer confidence print is out, while Thursday delivers the Euro PMI.

UK

• The United Kingdom has extended by a month until the end of June the furlough scheme for workers at companies hit by the coronavirus outbreak, finance minister Sunak said. The announcement comes a day after Britain lengthened its nationwide lockdown for at least another three weeks to prevent the spread of the novel coronavirus outbreak which has already claimed over 140,000 lives globally.

• Bank of England Governor Bailey told Britain’s banks on Friday to “put their backs into it” and speed up lending to small companies, saying the coronavirus crisis was likely to deliver a historic blow to the economy. Bailey said banks needed to fix the “serious strain” from tens of thousands of applications for state-backed loans that are key to Britain’s bid to limit the impact of its coronavirus shutdown. He suggested checks on small loans were at fault. “Notwithstanding the stress that we’re all operating under in terms of the current working environment, they have got to put their backs into it and get on with it, frankly,” Bailey told reporters.

• A quarter of companies in Britain had temporarily closed or paused trading by early April due to the coronavirus lockdown, according to a survey published by the official statistics office on Thursday. “For responding businesses who were still trading, an average of 21.0% of the workforce had been furloughed (under the terms of the UK government’s Coronavirus Job Retention Scheme),” the Office for National Statistics said.

China

• The dramatic impact of necessary shutdowns in China lead real GDP to decline 6.8% in the first quarter versus a year ago. This is China’s worst single quarter since it started publishing comparable data in 1992, and the first contraction since 1976 (end of the Cultural Revolution). On the upside, activity in March was better than the first two months of the year as activity gradually re-opened.

• Fixed asset investments (current prices) fell 16.1%. March retail sales fell 15.8% from a year ago. Industrial output was something of an outlier, only falling 1.1% versus a Bloomberg consensus of a 6.2% decline.

• Industrial production rebounded sharply, in line with the high frequency data suggesting that large industrial enterprises had been the first to restart and recover activity levels after the coronavirus lockdown ended. Services and retail sales, in contrast, remained well below normal levels.

• While a deep first-quarter GDP shock was expected, there is a strong consensus among both international and local analysts that since it was the first country to be hit by the coronavirus, China will also be the first economy to lead the way out. Earlier in the week, China’s customs trade data for March were welcomed as being better than consensus. Total exports in value terms declined 6.6% year-on-year, much better than their 17.2% contraction during January and February.

• Bank lending and credit data released on 10^th April showed strong signs that China’s monetary policy has accelerated. To some extent, the rise in monthly new credit may represent pent up demand following the lockdown. But it is also likely to represent a stronger, more determined push to ease monetary policy by the authorities. March saw record-high corporate bond issuance of RMB 995 billion and a rebound in both household and corporate borrowing. Importantly, the growth in China’s broad measure of money supply, M2, picked up significantly to 10.1% year-on-year, the fastest rate of increase since March 2017.

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