Market Strains in Spite of Some Better-than-Feared Economic Data

April 1, 2020

The second quarter and Japan’s new fiscal year began on a difficult note for world financial markets. The Japanese Nikkei slumped 4.5%, while markets in India, South Korea, Hong Kong, Indonesia, and Singapore closed down 4.1%, 3.9%, 2.2%, 1.6% and 1.4%. The German Dax and Paris Cac are currently each 4.1%, while share price losses amount so far today to 3.8% in the U.K., 2.5% in Switzerland and Spain and 2.3% in Italy. The DOW lost 2.8% and over 600 points in its first hour of trading.

WTI oil fell 0.9% as Saudi Arabia rejected overtures to end the price war.

Ten-year sovereign debt yields fell 7 basis points in the U.K., 6 bps in the United States, 3 bps in Germany and a basis point in Japan.

The dollar continues to benefit from Covid-19 related risk aversion. The U.S. currency rose overnight by 1.2% against the loonie, 1.0% relative to the kiwi, 0.9% versus the Australian dollar and euro, 0.7% against the Swiss franc, 0.4% vis-a-vis sterling and 0.2% against the yen. The yuan is little changed.

Pandemic news remains frightening. The counts of identified global cases and deaths now stand at 877,744 and 43,569, and 5% of still active infections involve patients in serious or critical condition. The U.S., Italy, and Spain each have over 100K confirmed infections, and U.S. authorities are preparing people to accept the possibility that the final death count in America could be close to a quarter million people. Investors are preparing for the worst but hoping the worst-case scenarios do not result.

Ironically, there were several economic data releases today that were better than forecast.

  • ADP estimates that U.S. private sector jobs only fell 27K last month.
  • Unemployment in the euro area fell to 7.3% in February, the lowest since March 2008.
  • German retail sales volume, which was expected to be about flat in February, instead jumped 1.2% on top of a 1.0% increase in January, and this lifted its on-year increase to a 7-month high of 6.4%. The data appear to have been goosed by hoarding behavior.
  • The Bank of Japan’s quarterly Tankan survey of 9,653 companies revealed a smaller-than-forecast deterioration in the business conditions faced by large and small manufacturers and non-manufacturers. Also, planned investment spending in fiscal 2020, which began today, was not as weak as feared.
  • China’s Caixin-compiled manufacturing purchasing managers index rose 9.8 points from a record low of 40.3 in February to a 2-month high of 50.1 in March.
  • Although at a 92-month low, Euroland’s manufacturing PMI was revised down only 0.2 points beyond its preliminary estimate to 44.7.
  • Higher PMI readings in manufacturing were reported for Australia’s AIG index of 53.9, Taiwan of 50.4 and South Africa of 48.1, and the British score (47.8) was above forecasts and only a 3-month low.
  • U.S. mortgage applications leaped 15.3% last week, as homeowners took advantage of a huge decline in the 30-year mortgage rate to refinance.

To be sure, the overall picture on the PMI front was depressing, and it should be noted too that due to record deterioration in supply deliveries, which affects overall PMI scores in a positive way, many economies are in worse shape than the data suggest. It’s quite clear that a global recession is beckoning. A number of countries yield manufacturing record lows last month, including Vietnam, Canada, Thailand, Indonesia and Hungary.

Within the euro area, the PMIs of Italy, Ireland, France and Greece — all below 50 — showed the fastest rates of contraction in 131, 127, 86, and 55 months, respectively.

Among other reported manufacturing PMI scores, Sweden and Switzerland’s were at 131- and 128-month lows. In oil-producing Norway, the PMI sank almost ten points to a 130-month low. The Polish and Czech PMIs were the lowest in 131 and 130 months. South Korea’s PMI was at a 134-month low, and the Filipino index was under 50 for the first time since 2016 including a 93-month low in the orders subindex. Denmark’s PMI dropped 1.6 points to a 9-month low. Turkey’s fell 4.3 points to a 7-month low. Malaysia’s index was at a 6-month low, and Russia’s fell to a 3-month low. Brazil’s PMI of 48.4 was 3.9 points lower than in February and at a 21-month low.

British shop prices were 0.8% lower than a year earlier in February, marking the biggest on-year drop in 22 months.

CPI inflation in Indonesia edged marginally lower to 2.96% in March and was associated with a core inflation rate of 2.87%.

On the central banking front, the Reserve Bank of India announced several additional stimulus actions to complement the 75-basis point interest rate cut on March 27. Also minutes from the Reserve Bank of Australia‘s unscheduled March 18 emergency meeting were published.

U.S. figures just in: Construction spending fell 1.3% on month in February, its largest drop in 22 months. The IHS-compiled U.S. purchasing managers index got revised down 0.7 points to 48.5 last month following a 50.7 reading in February. And the more widely followed ISM-compiled U.S. PMI fell only 1.0 point to a 3-month low of 49.1 but was distorted by a 7.7-point jump in supplier delivery times (production and orders fell by 2.6 and 7.6 points, and jobs were 3.1 points lower).

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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