Market Hopes Hinging on a Big U.S. Fiscal Stimulus

March 24, 2020

Republicans and Democrats in the U.S. congress have still not reached agreement on fiscal policy, but markets are apparently more hopeful that it will get done soon. As a result, stock markets, commodity prices, and sovereign debt prices are up, while the dollar gave up some recent gains overnight.

The global count of confirmed coronavirus cases is closing in on 400,000, and 17,148 deaths have resulted. About 4% of currently active cases involve patients in severe or critical condition. President Trump wants social distancing to end sooner than the medical community is recommending.

The dollar since Monday’s closing levels, has fallen 2.0% against the Mexican peso, 1.8% versus sterling, 1.1% relative to the Australian and New Zealand dollars, 1.0% vis-a-vis the euro, 0.7% against the Swiss franc, 0.4% versus the Chinese yuan, 0.3% relative to the yen and 0.1% against the loonie.

Stock markets rebounded 8.6% in South Korea, 7.1% in Japan, 5.8% in Singapore, 7.2% in New Zealand, 4.7% in Australia, 4.5% in Hong Kong and Taiwan, and 2.3% in China. Share price gains in key European centers range from 4% to 6.5%, and U.S. stock futures hit their upside limit.

Ten-year sovereign debt yields rose 9-10 basis points in Iberia, 3 bps in the United States, 2 bps in Germany and a basis point in Great Britain.

Comex gold jumped 6.3% to above $1,670 per ounce and WTI crude oil is 1.8% higher.

Preliminary March purchasing manager surveys revealed overall faster rates of private sector contraction than during the Great recession, better-than-forecast conditions in manufacturing, but much worse-than-projected service sector activity.

Euroland‘s composite PMI sank 20.2 index points to a data-series low of 31.4 in March. The service sector PMI reading of 28.4 after February’s 52.6 was also at a record low and well below the Great Recession’s low point of 39.2. While the manufacturing PMI dropped 4.4 points to a 92-month low of 44.8, analysts had anticipated a reading in the high 30s. Taken together, these findings suggest that GDP this quarter will have dropped 2.0% of somewhat more (and about 10% at an annualized rate). Conditions next quarter are apt to be even more severe than in 1Q.

Germany’s PMI news dovetails Euroland’s as a whole and also points to a 1Q-over-4Q19 GDP decline of about 2.0%. The composite PMI fell 23.1 points to a 133-month low of 37.2, including a record low 34.5 reading on services but only a 2-month low of 45.7 in manufacturing.

France‘s composite PMI score of 30.2 was down from February’s reading of 51.9 and the lowest score ever in that data series. Manufacturing posted an 86-month low of 42.9, and services slumped 23.6 points to a record low of 29.0.

The preliminary British composite PMI reading fell from 53.0 in January to an all-time low of 37.1 in March. This data was begun in January 1998. Services also plunged to a record low, but manufacturing printed at only a 3-month trough of 48.0.

The CBA-compiled Australian composite PMI sank 8.3 points to a record low of 40.7. This data series only was started in 2016. Manufacturing managed to barely stay above the 50 line that separates improvement from deterioration, but services dropped 9.2 points to a reading of 39.8.

Japan’s composite PMI reading of 35.8 in March was the lowest since the tsunami/earthquake of 2011. Manufacturing fell to a 131-month low of 44.8, and services printed at 32.7, weakest since at least 2007.

Other Japanese data released today revised the index of leading economic indicators up 0.2 points, which at 90.5 was still the weakest since November 2009. The index of coincident economic indicators earned a trend designation of “worsening” for a sixth straight month. Japanese department store sales in February notched a record 40% on-year decline, but machine tool orders that month recorded a smaller-than-30% on-year drop (29.6% to be precise) for the first time in nine months.

The British industrial trends survey of March, compiled by the CBI, fell 11 index points to a 5-month low of -29.

Czech consumer confidence fell 3.6 index points to a 73-month low of 100.5 in March, and business sentiment printed at a 78-month low of 93.1.

Brazilian consumer confidence sank 7.6 index points to a 38-month low in March.

Finnish PPI deflation deepened to 2.8% in February, its most negative point in 42 months. However, Icelandic PPI inflation more than doubled to 3.0%, a 5-month high.

Factory output in Hong Kong even before the coronavirus recorded its first on-year decline in the final quarter of 2019, which was a drop of 0.5%.

Several U.S. indicators are due today: the IHS-compiled PMI surveys, new home sales, and the Case Shiller house price index. Germany’s high court is expected to announce its ruling on the constitutionality of ECB quantitative stimulus. This issue was decided previously in favor of being legal but was subsequently reopened.

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



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