Economic Outlook – 5 April 2020


  • Employers reported payrolls declined by 701K workers in March. This was much worse than expected, yet it only hints at what’s to come. The report “predated many coronavirus-related business and school closures that occurred in the second half of the month,” due to the timing of the Bureau of Labor Statistics (BLS) survey (March 8 to 14). The March report, therefore does not include the roughly 10 million people who have filed for unemployment insurance in the past two weeks. From this it can be concluded employers’ confidence faltered earlier than expected, and they likely stopped hiring before they started making layoffs. The BLS report said survey response rates were significantly below typical levels, which may suggest revisions will eventually be in store. As many firms have temporarily closed their doors, however, response rates will likely remained subdued over the next couple of months, which may weigh on the data reliability.
  • Survey evidence showed some initial strain in March activity, but the ISM manufacturing and non-manufacturing surveys both did not decline as much as expected. That was largely thanks to a jump in the supplier deliveries components (typically a measure of increased demand but in this case an indication of supply bottlenecks). Both are expected to plunge next month.
  • Oil prices bounced when President Trump tweeted that the major oil production countries (US, Russia and Saudi Arabia) are back on speaking terms. Despite these favorable comments, it is unclear if coordinated production cuts will occur. Oil prices have recently tested lows they have not seen in two decades as supply deluge meets unprecedented levels of low demand.
  • The US Federal Reserve took additional steps to support lending to households and businesses, but the actions paled in comparison to the sweeping efforts undertaken in recent weeks. The Wall Street Journal reported that the Fed is exploring ways to support financing for state and local governments amid a freeze-up of municipal bond markets. The Fed also eased regulations by excluding holdings of US Treasuries and deposits from its supplementary leverage ratio. The move frees up funds for additional lending. In order to alleviate an extraordinary demand for dollars that was prompting sales of Treasuries and other US fixed income securities to raise liquidity, the Fed instituted a new repo facility for foreign central banks that allows them to pledge Treasuries as collateral in exchange for dollar funding that they can in turn lend to local banks.
  • With the ink on the CARES Act barely dry, lawmakers in Washington have begun to sketch out a “phase four” relief package. President Trump has proposed taking advantage of low interest rates to fund a $2 trillion infrastructure package while Democrats have put forward a series of environmental proposals as well as a repeal of the cap on the deductibility of state and local taxes. With a presidential election looming next fall, major new initiatives seem unlikely to pass unless they are targeted at offsetting the impacts of the COVID-19 crisis. On that front, additional aid to small businesses and to state and local governments is being discussed.
  • Any hope that parts of the US will begin to be freed from the need to practice social distancing by mid-April faded away last week as the White House extended its guidelines until the end of the month and some states extended stay-at-home advisories into May. Schools in Virginia will remain closed for the rest of the academic year, it was announced. President Trump acknowledged that the nation faces a very painful next few weeks amid estimates that deaths attributable to COVID-19 could range between 100,000 and 240,000. A second wave of coronavirus outbreaks in Asia is strengthening the case for the cautious approach already being taken by officials.
  • The major indexes closed lower for the week and rounded out their worst monthly and quarterly performances since 2008. The smaller-cap benchmarks trailed by a large margin, with the small-cap Russell 2000 Index falling by around 7.0% in a sell-off last Wednesday. Energy shares handily outperformed within the S&P 500 Index. Oil prices surged following a Thursday tweet from President Trump that he expects Saudi Arabia and Russia to cut production. Investors also reacted to reports that the Saudis had called an emergency OPEC meeting, while China was moving forward with plans to buy oil for its emergency reserves. A renewed decline in longer-term bond yields weighed heavily on interest rate-sensitive sectors, including financials and real estate shares. Consumer discretionary stocks were also especially weak, with shares of cruise line operators tumbling to new multiyear or even multi-decade lows.
  • Almost 50 US companies announced the suspension of buybacks totaling $190 billion. Higher volatility and lower valuations will likely be a ripple effect of the stop.
  • The yield on the benchmark 10-year Treasury note fell back to its lowest level in almost a month, driven by Federal Reserve purchases and concerning economic data. Yields modestly increased for Treasury bills with maturities under one year, however, as the federal government increased bill issuance to finance fiscal stimulus spending.
  • In terms of data release both the US consumer confidence and initial jobless claims are due out on Thursday.


  • The coronavirus outbreak showed up significantly in this month’s inflation release. The March flash annual consumer price index was 0.7% year-on-year, slightly below expectations and compared to 1.2% in the previous month, the weakest for five months. Core inflation was 1.0%, also slightly below expectations, compared to 1.2% in the previous month. Lower energy inflation pushed the headline number down significantly and lower service inflation weighed significantly on core inflation this month. Headline inflation fell significantly in all core eurozone countries. France, Germany, Italy, and Spain saw headline inflation rates of 0.7%, 1.3%, 0.1%, and 0.2% year-on-year respectively in March. The largest one-month falls were observed in France (-0.9%) and Spain (-0.7%). In both France and Italy, headline inflation is now at or below the 25th percentile of the post-2010 distribution.
  • Final purchasing managers’ data showed that the eurozone composite output index posted its biggest monthly fall in business activity in March, a record low due to the coronavirus, according to IHS Markit. Both this index and the services activity indexes were notably weaker than the flash estimates. The four largest nations covered by the survey all registered record declines in activity, with Italy and Spain experiencing the sharpest reductions. Manufacturing signals were similarly dire. Confidence in the future reached its lowest ebb since the series began in July 2012. IHS Markit’s Chief Business Economist Chris Williamson said the data indicate that the eurozone economy is already contracting at an annualized rate of about 10%.
  • The European Central Bank bought nearly €20 billion worth of bonds last week, its fastest pace of buying ever. That total does not include purchases for the Pandemic Emergency Purchase Program, which bought €16.6 billion over two days at the end of last week, helping narrow periphery spreads.
  • German Finance Minister Olaf Scholz told ARD TV that eurozone states that need aid from the European Stability Mechanism (ESM), the European Union (EU) bailout fund, because of the coronavirus should get it quickly and not first be subjected to visits from officials proposing policies, as happened during the global financial crisis. He said he was convinced that the ESM had instruments suitable for use during the outbreak. Financial aid would be tied to rules, but these needed to be appropriate for the current situation, he added. He also said he was willing to offer Italy and Spain ESM aid without the same conditions used in the financial crisis.
  • French Finance Minister Bruno Le Maire said he would back the idea but that only minimal conditions should be attached to such financing, and calling on it for help should be free of stigma. EU finance ministers are set to decide on Thursday how to finance recovery. Other proposals include a rescue fund with time-limited joint bond issuance (France’s idea) or use of the EU budget mechanism. Meanwhile, the EU also unveiled a €100 billion lending plan to help governments pay firms to keep workers in jobs.
  • Italy’s Economy Minister Roberto Gualtieri was cited by Reuters as saying that a forecast of a 6.0% contraction in gross domestic product (GDP) this year by the business lobby Confindustria is realistic. However, at the end of March, two sources told Reuters that the Italian Treasury expected the economy to contract 3.0%. Gualtieri said that new stimulus, due to be approved this month, would be much larger than the €25 billion package passed in March and would include an extension of state-backed guarantees for firms and support for people on low incomes. He dismissed the need for Italy to resort to using the ESM.
  • Stocks in Europe lost momentum over the week, ending little changed as data indicated that the economy would suffer a severe recession this year triggered by the coronavirus. The STOXX Europe 600 Index ended 0.45% lower. Germany’s Xetra DAX Index declined 1.0%, France’s CAC 40 Index fell 4.26%, and Italy’s FTSE MIB slipped 1.75%.
  • There are no market movers in the EU.


  • Fitch cut the United Kingdom’s credit rating to AA- from AA. The move reflects a significant weakening of the UK’s public finances caused by the impact of the COVID-19 outbreak and the fiscal loosening approach taken before the scale of the crisis became apparent. In addition, the credit rating agency cited the likely deep near-term economic damage, along with uncertainty about the post-Brexit UK-EU trade relationship.
  • Britain’s economy looks set for a slump that in the short term could be deeper than during the depression of the 1930s, as a survey showed the coronavirus crisis caused a record downturn among services and manufacturing firms in March. The survey data were collected between 12 and 27 March, covering the period after Prime Minister Johnson ordered the closure of bars, restaurants, gyms and other services businesses to slow the coronavirus outbreak.
  • British finance minister Rishi Sunak will on Friday address a gap in its support for businesses trying to survive the seismic economic hit from the coronavirus outbreak, by allowing medium-sized companies access to government-backed loans. The move comes on the back of warnings that many businesses risk collapse soon, up to 18% of all small- and medium-sized enterprises (SMEs), according to the Corporate Finance Network of accountants. Under the new loan scheme, companies with an annual turnover of between 45 million pounds and 500 million pounds can apply for loans of up to 25 million pounds from banks with an 80% government guarantee, the finance ministry said.
  • Britain’s housing market is grinding to a halt after the government’s shutdown of much of the economy, cutting short a nascent recovery that saw prices rise at their strongest pace in more than two years in March, mortgage lender Nationwide said. Prices grew by 3.0% compared with March 2019, Nationwide said, their biggest rise since January 2018 and stronger than a median forecast for a 2.0% increase in a Reuters poll of economists.
  • The UK’s FTSE 100 Index weakened 1.3%, partly due to a stronger UK pound, which weighs on exporters, a significant part of the benchmark.
  • There are no market movers in the UK this week.


  • The Caixin/Markit manufacturing PMI bounced back into expansion mode, rising from a record low of 40.3 to 50.1 in March (50.1 and above indicate expansion). Earlier, the National Bureau of Statistics reported that the official manufacturing PMI had surged from 35.7 to 52. The rebound in the PMI readings is consistent with the ongoing recovery trend in high-frequency data through March. A number of these indexes, such as electricity production, road transport, and home sales, have basically returned to their normal ranges.
  • Chinese companies continued to increase their operational levels as quarantines and travel restrictions eased. Among major industrial firms, 98.6% had resumed operations, according to a Xinhua report citing a press briefing by the Ministry of Industry and Information Technology. The report added that just over three-quarters of small and medium-sized enterprises nationwide have also restarted work.
  • On Monday last week, China’s central bank cut the interest rate on reverse repurchase agreements while also cutting the required reserve ratio (RRR) for smaller rural and city commercial banks. Many observers note that the central bank appears to be moving at a fairly slow pace, given the size of the shock to aggregate demand from the coronavirus. In another minor easing step, the central bank cut its interest rate on excess bank reserves from 0.72% to 0.35% for the first time since 2008, in a signal to banks to increase their lending.
  • There are no market movers in China this week.

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