Economic Outlook – 31 May 2020


  • The May consumer confidence report was one encouraging signal. Consumer confidence rose 0.9 points to 86.6 in May, after sharp, back-to-back monthly declines in March and April. Overall, the level of consumer confidence remains well-below readings from the past several years, but for now, it appears the free-fall in confidence has ended. The forward-looking expectations component continued to recover in May, rising for a second straight month to 96.9 from 94.3. Consumers’ assessment of current business and labor market conditions, on the other hand, declined further to 71.1, the lowest level in seven years, and has plunged roughly 100 points since the virus outbreak. Moreover, the proportion of individuals seeing jobs as “hard to get” or “not so plentiful” exceeded 80.0%. Thus, it remains clear that majority of consumers are still concerned about their own financial conditions amid widespread layoffs and an uncertain path to US economic recovery.
  • Personal income soared in the US in April, rising 10.5%, while spending declined 13.6%. A surge in government transfer payments pushed a tremendous amount of money into consumers’ pocketbooks last month, but COVID-19 lockdowns limited their ability to spend it. As a result, the savings rate nearly doubled its historical high, coming in at 33.0%. The data suggest that consumers will have plenty purchasing power as the economy reopens, though economists will closely watch levels of precautionary savings to gauge consumer confidence.
  • The number of Americans filing initial unemployment claims continued to decline, with ‘only’ 2.1 million claims filed for the week ended 23 May, the lowest amount filed since the pandemic-induced job loss began in March. Continuing claims, or the number of individuals who remain unemployed and receiving benefits, also showed some improvement, falling 3.9 million for the week ended 16 May, the first decline during the pandemic period. While the number of people filling for and receiving unemployment remains at a gut-wrenching level, it appears to be moving in the right direction.
  • US durable goods orders sank 17.2% in April, one of the largest declines on record. Core capital goods orders, which exclude aircraft and military hardware, fell 5.8% while shipments of those goods declined 5.4%. However, there may have been some offsets as orders for computers/electronics products fell only 0.3%, as businesses tried to supply employees to work from home.
  • The second estimate of Q1 real GDP showed a 5.0% annualized rate of decline, worse than the 4.8% decline that was originally reported, due to a larger drawdown in inventories. That said, incoming data still suggest an even sharper decline in Q2.
  • The US House of Representatives passed amendments to the Paycheck Protection Program granting businesses more flexibility. The amendments lower the percentage of funds allotted that must be used for payroll to 60.0% from 75.0% and extend the time for borrowers to use the funds to 24 weeks from the eight weeks set out in the initial bill. Senate passage is expected.
  • The US Congress passed a bill that would sanction Chinese officials responsible for human rights violations against China’s Uighur ethnic minority. If signed by President Trump, the law would likely be an additional source of US – China friction.
  • Stocks recorded a second consecutive week of solid positive returns, with slower-growing value stocks again gaining ground against more highly valued growth shares. At its peak Thursday, the S&P 500 Index moved within 10.0% of its all-time high, pulling it out of correction territory, according to some definitions. Meanwhile, the technology-heavy Nasdaq Composite Index climbed within almost 3.0% of its February peak before falling back. Utilities stocks outperformed, while energy stocks moved lower on reports of an increase in domestic crude inventories. Markets were closed on Monday in observance of Memorial Day.
  • Longer-term bond yields ended the week slightly lower as US – China tensions counterbalanced optimism about economies reopening. The broad municipal market extended its May rally, generating positive returns and outperforming Treasuries through most of the week.
  • This week is a big one on the economic front, with ISM data and the employment report for May. Jobless claims data continue to show a fall in new applications, but a high number of continuing claims, especially after including those who qualified under expanded benefits, suggests that May could see the unemployment rate rise from April.


  • A proposal from the European Commission dubbed “Next Generation EU” takes a dramatic step toward creating a more federal Europe in which fiscal transfers flow from richer regions to poorer ones.  The proposal consists of grants of €500 billion and loans totaling €250 billion from the European Union to member states such and Italy and Spain, which were hit hard by the coronavirus. Germany, historically an opponent of fiscal transfers, has spearheaded the plan, though the idea is still encountering resistance from the so-called “frugal four”:  Austria, Denmark, the Netherlands and Sweden. In order to come into effect, the proposal would need the unanimous approval of all EU member states. If adopted, Next Generation EU is likely to support markets on Europe’s periphery. The matter will be debated at the next European Council meeting in mid-June.
  • The May flash annual consumer price index was 0.1% year-on-year, in line with expectations, compared to 0.3% (0.4% flash estimate) in the previous month. It was the lowest reading in four years. Core inflation remained flat compared to the previous month, at 0.9%, and slightly above expectations. Continued low non-energy goods inflation kept core inflation at its current level, whereas further falls in energy prices outweighed the positive contributions from food inflation.
  • Stocks in Europe posted strong gains, as optimism fueled by reopening economies and proposals for more European stimulus offset fears of a second wave of coronavirus infections and increased US – China tensions. The pan-European STOXX Europe 600 Index ended the week 3.0% higher. Germany’s DAX Index climbed 5.01%, the CAC 40 in France advanced 6.02%, and Italy’s FTSE MIB Index gained 4.9%.
  • ECB President Christine Lagarde warned that the eurozone economy will shrink by 8.0% to 12.0% this year, in line with the more severe scenario outlined by the ECB last month, because of the “sudden stop of activity” caused by the coronavirus. The ECB is widely expected to increase its asset purchase programs for this year at its policy meeting on 4 June. Executive Board member Isabel Schnabel hinted as much in an interview with the Financial Times, when she said that “if we judge that further stimulus is needed then the ECB will be ready to expand any of its tools.” Her comments came after Villeroy de Galhau told an online conference that low inflation provides room to act rapidly and that, in line with the ECB’s mandate, policymakers will probably need to go even further.
  • President Emmanuel Macron announced an €8 billion plan to revive France’s motor industry, with €5 billion destined for Renault. The plan includes increased subsidies for buyers of electric and hybrid cars and support for research into hydrogen power and self-driving cars. It aims to ensure that the country’s automotive assemblers and suppliers survive the crisis and emerge in the years ahead as leading global manufacturers and exporters of clean vehicles.
  • The German government approved a €9 billion bailout for airline Lufthansa, the largest airline rescue in Europe. However, unlike other rescues, the state will take a 20.0% stake in Europe’s second-biggest airline and will have two supervisory board seats. The aid will have to be approved by the EC. 
  • In terms of data release, the unemployment data for April in both the euro area and Germany will be out this week.


  • In an article for newspaperThe Guardian, Bank of England Governor Andrew Bailey said that the UK economy risks taking longer to recover from the impact of the coronavirus than the central bank expected earlier this month. He stressed that the BoE stands ready to provide further support for the economy if needed as the UK begins to reopen.
  • British finance minister Rishi Sunak offered fresh help to employers hammered by the coronavirus shutdown on Friday in the form of a gradual phase-in of contributions by them to the government’s hugely expensive wage subsidy scheme. The government has been paying since March 80.0% of the wages of workers who are temporarily laid off, and who now total 8.4 million, to limit a surge in unemployment. In August the companies will have to resume pension and social security payments, building up to 10.0% of wage costs in September and 20.0% in October, a lesser requirement than reported by media before the announcement.
  • British business confidence fell to its lowest since the 2008 financial crisis in May, according to a survey for Lloyds Bank which contrasts with other surveys which have shown a small improvement since the initial shock of the coronavirus lockdown. Lloyds said its monthly business barometer dropped to -33, matching the historic low set in December 2008, reflecting reduced optimism about the economy and weaker hiring intentions. “Despite the results partly capturing the period since the government’s announcement of an initial easing of restrictions, trading conditions remain difficult for most firms,” Lloyds economist Hann-Ju Ho said.
  • This week, the fourth round of Brexit negotiations is set to begin on Monday. No major breakthrough are expected, as the EU and the UK remain far apart on the most important subjects. The ambition is to have concluded the negotiations on fishery and financial services by 1 July.


  • Profits at China’s major industrial firms improved in April, according to official data released last Wednesday. April’s annual decline narrowed to 4.3% after a much steeper 34.9% drop in March. On a year-to-date basis, the profit squeeze eased from -29.5% in March to -17.2% in April for private enterprises but was unchanged at -46.0% for state-owned enterprises. Government statistician Zhu Hong warned that April’s improvement was unlikely to last given a slow recovery and falling industrial prices.
  • Last Wednesday, US Secretary of State Mike Pompeo told Congress that Hong Kong was no longer sufficiently autonomous to merit special treatment. Many analysts agree that the potential withdrawal of US trade privileges would have a negligible direct impact on Hong Kong as its main focus is on merchandise trade. Hong Kong’s domestic exports are much smaller than in 1997, when the post-handover US trade regime for Hong Kong was agreed upon. Trade in the services category, which is far more important, is not affected. Investors worry that there may be longer-term implications for Hong Kong’s future as an Asian financial services hub and business center for the 1,300 American companies operating there. In April, Fitch cut its ratings for Hong Kong to AA-/Stable, citing rising economic, financial, and sociopolitical linkages with China as justification.
  • MSCI announced a deal with Hong Kong Exchanges & Clearing Ltd. (HKEX), the listed company that manages the local stock exchange, to sell 37 futures and options contracts based on its Asian and emerging market indexes. It will stop licensing indexes for most derivatives products with HKEX’s counterpart in Singapore, SGX, which saw its share price fall 12.0% on the news. MSCI’s Chief Executive Officer Henry Fernandez said Hong Kong’s attractions were a larger customer base, particularly access to Chinese institutional and retail investors, and the large market for index options that HKEX has developed.
  • The annual NPC provides the Chinese Communist Party leadership with an opportunity to showcase its achievements to the nation. After the review of economic policies and announcement of a new national security law for Hong Kong on day one of the NPC, the sessions last week were of more interest to a domestic audience than to overseas investors. The NPC Finance Committee suggested that company and criminal law be revised to support China’s new securities law, increasing the penalties for financial fraud and other offences. China’s more assertive geopolitical and foreign policy stance under President Xi Jinping was clearly visible at the 2020 NPC. Defense Minister Wei Fenghe criticized the US for its “suppression and containment” of China since the start of the coronavirus pandemic. Beijing will increase China’s defense budget by 6.6% in 2020, while central government spending on education, science, and public services will be cut.
  • In terms of data release, PMIs in May are due out, which will be interesting given China is ahead of most countries in terms of opening up. There was a big dispersion between the two PMI indices for services, NBS (53.2) and Caixin (44.4).

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