U.S. Fiscal Deal Gives Stocks Only Brief Lift

March 25, 2020

Today will be a very important day to watch U.S. stocks. There has yet to be two consecutive up sessions since the market peaked in mid-February. The big overnight news was a tentative accord between President Trump and the U.S. senate on a $2 trillion fiscal stimulus, which moves next to a full-senate vote today.

In the wake of Tuesday’s biggest percentage increase in the DOW since 1933, equity markets in the Pacific Rim had climbed advanced 7.0% in India, 8.0% in Japan, 5.9% in South Korea, 5.5% in Australia, 6.1% in Singapore, 3.9% in Taiwan, 3.8% in Hong Kong and 2.2% in China. There are gains so far of between 0.5% and 1% in France, the U.K. and Switzerland. But the German Dax has lost 1.7%, the Spanish Ibex is off 0.4%, and U.S. futures have relinquished all the initial gains after news of the fiscal deal.

In spite of the liquidity-injecting measures taken by the Federal Reserve, signs of a global shortage of dollars can be seen in large sovereign debt yield increases in Hong Kong, South Korea and, to a lesser extent, New Zealand. The 10-year German bund and Japanese JGB yields firmed 2 and 1 basis points.

The dollar overnight lost 1.4% versus the peso, 1.3% against the Australian dollar, 1.1% versus sterling, 0.7% relative to the loonie, 0.6% vis-a-vis the kiwi, 0.4% against the euro, and 0.3% versus both the yen and Swiss franc. But the yuan retreated 0.5% against the dollar.

Key commodity prices have traded downward — WTI oil by 1.5% and gold by 2.5%.

Globally identified cases of the Covid-19 virus now exceed 435k, and the death count stands at 111,878. New York City by far has become America’s epicenter, but many states are in a lockdown. India with the world’s second largest population went on a 21-day lockdown. Cases in Spain have spiked badly. President Trump, who wants to relax the ban on business activity and travel right after Easter, and medical authorities are sending confusing mixed signals on how best for the public to proceed.

The preliminary German business climate indices prepared by the prestigious IFO Economic Institute got revised down further for March. The overall index fell 1.6 points further in the final week to 86.1. Its drop from 96.0 in October was the largest since 1990, and the level printed at the lowest since July 2009. Expectations printed at 79.7 compared to a preliminary estimate of 82 and February’s 93.1 score. Summing up Germany’s business climate, IFO officials said “the German economy is in shock.” The silver lining is the Covid-19 cases in Euroland’s largest economy remain less pronounced than in other European countries.

Switzerland’s ZEW expectations index of investor sentiment swung from +7.7 in February to a 61-month low of -45.8 in March.

In contrast, the British monthly distributive trades survey only fell 4 index points to -3 in March. Analysts were looking for a decline to greater than minus 10.

A slew of British price data were reported. February CPI inflation of 1.7%  was down from 1.8% in January and associated with a core CPI pace of 1.7% as well. Retail price inflation dropped 0.2 percentage points to 2.5%. Producer output prices fell 0.3% last month and to a 12-month increase of just 0.4% versus 1.0% in January, and producer input price inflation swung from 1.6% in January to -0.5% in February. The house price index of the government fell 1.1% on month and slowed 0.4 percentage points to 1.3% in its year-0n-year comparison.

In the twelve months to February, producer prices fell 2.2% in Spain (most since November) and by 1.2% in Sweden, which was the largest decline in 3-1/2 years.

Revised Dutch GDP data showed a 0.4% quarterly advance and a 1.6% on-year increase in 4Q. The Dutch current account surplus widened 79% to EUR 19.3 billion last quarter and totaled about EUR 78 billion for all of 2019.

Malaysian consumer price inflation was at a 2-month low of 1.3% last month.

New Zealand recorded a slightly larger-than-forecast trade surplus of NZD 594 million last month versus deficits of NZD 414 million in January and NZD 94 million in February 2019.

Confidence in Turkey’s manufacturing sector dropped from a 2-year high of 106.9 in February to a 6-month low of 99.7 in March.

On the central banking front, a summary of the this month’s Bank of Japan Board meeting expresses concern that the economy may have trouble even after the Covid-19 crisis leaves and reveals a predisposition by some committee members to ramp up quantitative stimulus further if needed.

Hungary’s¬†central bank base rate and overnight deposit rate were left unchanged at 0.90% and -0.05%, respectively. A press release by Magyar Nemzeti Bank observes falling inflation expectations and observes that there have been interest rate cuts recently at other eastern European central banks like the in Poland, Romania, and the Czech Republic.

The Bank of Thailand‘s Monetary Policy Committee, which approved its fourth 25-basis point 1-day repo rate cut just a few days ago at an emergency session, did not cut the 0.75% further at today’s scheduled review. However, the decision to keep the status quo was not unanimous. Four committee members supported the decision, but two others voted for another 25-basis point reduction. Real GDP in Thailand is forecast to drop over 5.0% this year. The majority favors targeted measures to provide liquidity where most needed and strongly endorses fiscal stimulus. The statement expresses readiness to act further and in a timely way if necessary.

U.S. durable goods orders grew unexpectedly in February and by 1.2%, producing a 0.4% on-year increase for the first two months of 2020. The FHFA house price index went up 0.3% in January, keeping the 12-month rate of increase at 5.2%. Not surprisingly in light of the Covid-19 restrictions on economic activity, U.S. mortgage applications last week dived 29.4%, which was the greatest weekly collapse since 2009.

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


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