Economic Outlook – 26 April 2020


  • Oil prices went negative for the first time in history as the evaporation of demand collided with supply that literally cannot be shut off quickly enough. Specifically, the expiring front-month WTI contract price fell below zero, as holders of the security squirmed to avoid having to take physical delivery with oil storage space scarce and expensive. Yet it would be a mistake to write this collapse off as merely the result of technical factors, or the over-financialisation of commodities markets. The evaporation of demand is very real, TSA screenings are running -95% year-over-year, as just one example, and the plunging price of the world’s most economically important natural resource is surely telling something. The combination of very weak demand due to coronavirus lockdowns and a positive supply shock as a result of the Saudi-Russian price war has left the market saturated with crude. US Secretary of the Treasury Steven Mnuchin said that the government is considering a lending program for energy companies that would see the US take a financial stake in exchange for loans.
  • In the US, in the past five weeks, 26.5 million people have filed for unemployment insurance, or more than one out of every seven workers. The flow of workers into employment has slowed for three straight weeks, but that is unsurprising and not insightful (entire sectors of the economy were forced to shut down at once) that obviously cannot repeat. The focus is on the cumulative number of layoffs and on how broadly the labor market collapse spreads beyond the most directly affected industries of leisure and hospitality, and retail. Another focus is the eventual flow out of unemployment (people dropping off of continuing claims) to get a sense of employers’ willingness and ability to get their operations back up and running in coming months. The good news is that the augmented unemployment benefits under the CARES Act should be helping the 16.0 million people already receiving unemployment benefits the week ended 11 April.
  • Two weeks after the small business–focused Paycheck Protection Program ran out of funding, the US Congress passed a $484 billion package that includes $310 billion to reconstitute the program designed to keep employees of small and medium-sized enterprises on company payrolls. An additional $60 billion was set aside to be doled out by small, community banks. On top of that, $60 billion was earmarked for economic injury disaster loans to further aid small businesses. The bill provides $75 billion in funding for hospitals and health care providers while $25 billion was appropriated to accelerate coronavirus testing. A new spending package is being negotiated but faces a more difficult path to passage due to mounting concerns over the ballooning national debt.
  • Flash purchasing managers’ indices fell to record-low levels, demonstrating the depth of the global downturn in economic activity as a result of the coronavirus outbreak. Composite PMIs in the US reading fell to 27.4. IHS Markit, which conducts the surveys, noted that firms in the United States which remained open for business saw the steepest drop in demand on record while also facing twin headwinds from staff shortages and supply chain delays. With major economies likely to come back on line slowly once the number of coronavirus cases declines sufficiently, analysts increasingly worry that the economic wound caused by the pandemic could take many quarters to heal.
  • Capital spending plans clearly took a hit in March, with durable goods orders falling 14.4%. The weakness was centered in transportation, but core capital goods orders, which fared surprisingly well, will fall markedly in coming months.
  • Residential real estate transactions were also smothered by stay-at-home orders, as existing and new home sales fell by 8.5% and 15.4%, respectively.
  • Most of the major indexes fell moderately as investors reacted to first-quarter earnings reports and oil prices’ unprecedented plunge into negative territory. Investors may have also sought to consolidate recent gains with the Dow Jones Industrial Average recording its best two-week return (15%) since 1938 over the period ended 17 April. Ironically, energy stocks outperformed within the S&P 500 Index after a sharp rally on Thursday, while consumer staples, financials, and utilities shares fared worst. The small-cap Russell 2000 Index outperformed and recorded a small gain.
  • The mixed data appeared to have little impact on longer-term Treasury yields, which ended modestly lower for the week. The broad municipal market generated negative returns over much of the week as credit concerns deepened. Senate Majority Leader Mitch McConnell stated that Senate Republicans would be unwilling to bail out underfunded state pension systems and expressed that he would instead favor allowing states to file bankruptcy
  • In terms of data release, the reading of the Q1 GDP figures release on Wednesday a will give some insights about the magnitude of the economic damage in the early stages of the outbreak. The Fed will be meeting on Wednesday and the focus will be on annulments on possible changes to the existing credit facilities.
  • US ISM manufacturing is out on Friday.


  • Preliminary numbers for the UK PMI surveys in March signal the fastest downturn in private sector business activity since the series began in January 1998. The Services PMI fell to 35.7 in March, from 53.2 in February, while the manufacturing PMI fell to 48.0 in March, from 51.7 in February. The composite fell to 37.1 in March, from 53.0 in February. Things are set to get worse as the latest PMI figures were compiled in advance of the UK government’s decision to order pubs, restaurants and other leisure businesses to close by midnight on 20 March.
  • The services sector reportedly received the largest blow as citizens reduced their social activity and leisure activities were abandoned. The steepest downturns in activity were signalled by hotels and restaurants, hair salons and other leisure activities. In the manufacturing sector, the fall in the PMI index was softened by a slower decline in stock purchases and a survey-record lengthening of suppliers’ delivery times. Still, output dropped at the sharpest pace since July 2012, with the transport goods sector registering the largest slump in output. Only producers in the food/drink and chemicals/plastics sectors reported positive growth. The former reflected higher demand due to stockpiling by households, while the latter was driven by a surge in production within the pharmaceuticals sector. The PMI surveys in March signalled a fall in employment across the manufacturing and services to an extent not seen since July 2009.
  • British retail sales fell by the most on record in March as a surge in food buying for the coronavirus lockdown was dwarfed by a plunge in sales of clothing and most other goods, and the slump is likely to be even worse in April. Official figures showed sales volumes plunged by 5.1% in March from February, the sharpest drop since the Office for National Statistics’ records began in 1996. It was also a bigger fall than the median forecast for a drop of 4.0% in a Reuters poll of economists. The 1 March to 4 April data covered only two weeks of the government’s shutdown of much of the economy.
  • British consumer confidence held at its lowest since 2009 this month after tumbling in late March, as the country remained in coronavirus lockdown and on track for a deep recession. GfK, a polling firm, said its consumer confidence index held at -34 during the 1 to 14 April survey period, unchanged from the last survey for 16 to 27 March but still down very sharply from -9 earlier that month. “It is impossible to say if this is at the bottom after weeks of adjustment to the reality of lockdown life, or if further falls are to come,” GfK’s client strategy director Joe Staton said.
  • There are no market movers in the UK this week.


  • The Eurozone Flash Composite PMI was 13.5 in April compared to 29.7 the previous month. Meanwhile, the Manufacturing PMI was 33.6 compared to 44.5 the month before, and the Services PMI was 11.7 compared to 26.4. All indices were widely below expectations. The lockdown measures taken in the euro region brought economic activity further into uncharted contraction territory, with levels at their lowest for the whole period of data collection. Service industries such as hospitality, accommodation, restaurants, travel and tourism saw especially steep falls in activity, although manufacturing was deeply affected as well. The largest falls were seen in current output as well as new orders and incoming business for the manufacturing and service sector respectively. Expectations of new businesses and future output remained close to last month’s low levels. Headline manufacturing PMI continued to understate the true contraction in the sector due to how supply chain disruptions are included in the headline index.
  • The German Flash Composite PMI was 17.1 in April compared to 35 in March, the Manufacturing PMI was 34.4 compared to 45.4, and the Services PMI was 15.9 compared to 31.7, with all indices below expectations. The largest falls were seen in the service sector, and contractions were observed across the board, although there were signs that short-time work measures were having an impact as employment fell much slower than output.
  • The French Flash Composite PMI was 11.2 in April compared to 28.9 in March, the Manufacturing PMI was 31.5 compared to 43.2, and the Services PMI was 10.4 compared to 27.4 a month earlier. All series were significantly below expectations. Business closures and reduced demand driven by the lockdown measures brought both sub-components to their largest contractions in the series history. Both new orders and employment also fell significantly.
  • European Union leaders signed off on a €480 billion emergency rescue package and agreed on the need for a “recovery fund” to offset the economic shock caused by the coronavirus pandemic. However, they remained divided over the size of such a fund and whether it would hand out grants or loans, dashing hopes of a near-term fiscal response to the crisis. European Commission President Ursula von der Leyen said after the meeting, “We are not talking about billion[s], we are talking about trillion[s].” The fund would be part of the 2021–2027 budget, or the multiannual financial framework (MFF), which Brussels will need to adjust. The Financial Times noted that reconfiguring the MFF to include the recovery fund is likely to prove politically difficult because of divisions between northern and southern states over the form that aid should take. Angela Merkel, Germany’s chancellor, told the leaders that her country was prepared to make a substantial contribution to support an economic recovery.
  • The European Central Bank (ECB) decided after an unscheduled call of its governing council to allow below investment-grade debt in its repurchase operations until September 2021. The ECB added that it might take additional measures to further mitigate the impact of ratings downgrades to ensure the smooth transmission of monetary policy. The move is designed to limit a market seizure that might be caused by an expected wave of credit rating downgrades in response to the pandemic.
  • In terms of data release, ECB will be meeting on Thursday and the focus is on any possible changes to the concerns about Italian yields and hints about its next policy steps.


  • China’s top policy body, the Politburo, met on 17 April, after the poor first-quarter GDP data release. The policy statement after the meeting appeared less dogmatic about achieving this year’s growth target, though it did not indicate that it was no longer possible. Politburo statements tend to focus on general aspirations or broad policy direction rather than specific measures, and this one’s emphasis was on the need to ensure stability in six areas, including employment, basic livelihood, food and energy security, and stable supply chains. On China’s policy intentions, the Politburo statement was quite clear. What was described at the 27 March meeting as “enlarging” policy stimulus has changed to “greatly enlarging” policy stimulus. Still, some observers believe that China’s countercyclical policy response will be more measured and gradual than the response to the 2008 global financial crisis, even though the economic shock that it is responding to is even greater.
  • China’s industrial sector has largely completed its process of normalisation, according to the National Bureau of Statistics, which reported that over 97.0% of larger industrial enterprises were operational as of 9 April. Over half were operating above 80.0% of their normal level, with more than 80.0% of enterprises operating above 50.0%.
  • Press reports on Monday said that China was keen to restore some international contact. Officials began to discuss with officials in other countries how to begin easing restrictions on business travel. This is another sign that Beijing believes it has defeated the coronavirus and wishes to normalize the economy, including cross-border links, as speedily as possible. The ASEAN+ 3 (China, Japan, South Korea) summit in Vietnam voiced similar views on the need to restore “the essential movement of people, including business travels while safeguarding public health.” China currently has some of the strictest travel curbs in the world, as Beijing seeks to prevent renewed domestic outbreaks of COVID-19 from imported new cases. China is reported to have opened discussions with South Korea and Singapore on facilitating essential travel, such as opening a fast track for foreign businessmen.
  • The travel bans and reduction in flights have also cut China’s capacity to export high-value items, such as consumer goods and electronic components, causing disruption to global supply chains. China has the world’s second-largest air freight market, but air freight capacity was down 35.0% year on year in early April, with the international airports of Beijing, Shanghai, and Hong Kong suffering the sharpest declines in Asia. Air China and other airlines are reported to be temporarily converting many of their passenger planes for cargo use.
  • While China’s shipping industry is largely recovered, port and trucking restrictions due to lockdowns in the US and Europe have led to widespread reports of export order cancellations. Foreign importers have also put orders from China on hold, delaying payment and raising the pressure on China’s export-oriented private sector companies. Many of these businesses are SMEs (small and mid-size enterprises) that operate in highly competitive sectors with razor-thin profit margins and limited access to financial markets. Lockdowns and home quarantines in the US and Europe have seen spikes in online orders for some items, including electronic goods and home office equipment, but logistics and supply chain disruption is preventing many of these orders from being fulfilled.
  • Official Chinese PMIs for April are also out on Thursday and especially the services index will be of interest as it better reflects the demand side.

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