Pessimism Gaining Upper Hand in Financial Marketplace

April 15, 2020

Projected contractions in real GDP this year embodied in the IMF’s World Economic Outlook would make this the weakest calendar year economic performance since the early 1930s. The Washington-based group foresees activity falling by 3.0% in the world, 5.9% in the United States, 7.5% in Euroland, 6.5% in the U.K., 6.2% in Canada, and 5.2% in Japan. Positive growth in India of 1.9% and China of 1.2% has been penciled in, but collective growth of all developing and and emerging economies is seen falling by 1.0%. Moreover, the IMF assumes improving conditions improving after the current quarter and gaining progressive upward momentum in 2022 — confidence that may prove premature.

The tentative reduced oil production deal brokered over the weekend with the aid of President Trump has failed to halt the slide in energy prices. The price of West Texas Intermediate crude oil slumped 2.3% overnight and touched its lowest level since February 2002. Gold fell 1.0%.

Trump also put U.S. funding of the World Health Organization on hold.

Amid renewed risk aversion, ten-year sovereign debt yields fell by 7 basis points overnight in the United States and Germany, by 4 bps in France and by 3 bps in Great Britain.

And equities dropped 1.2% in Hong Kong, 1.7% in Indonesia, 1.1% in Singapore, 0.6% in China and 0.5% in Japan. Selling has intensified in Europe, where stock markets are currently down by 2.8% in Spain, 2.6% in Italy, 2.3% in the U.K., 2.1% in France and 2.2% in Germany.

The flight into safety has lifted the dollar by 2.2% and 2.1% against the Australian and New Zealand dollars, 1.3% versus the loonie and sterling, 0.9% relative to the peso, 0.8% against the euro, 0.7% versus the Swiss franc, just just 0.3% vis-a-vis the Japanese yen.

A number of price reports released this Wednesday underscore the disinflationary effects of the global recession. Swedish CPI inflation dropped to a 43-month low of 0.6% in March. Spanish consumer prices fell 0.4% on month and were unchanged from their March 2019 level. French CPI inflation was halved to a 32-month low of 0.7% last month. Revised Italian CPI inflation of 0.1% in March was the lowest in 40 months and associated with a core trend of 0.7%. Indian wholesale price inflation fell to just 0.9% in March from 2.26% in February and 3.1% in January.

Other data accentuates the collapse of economic activity around the world.

  • The U.S. Empire State manufacturing index compiled by the regional Fed plunged to -78.2 in April from -21.5 in March and +12.9 in February. The result is more than twice as negative as the previous record low of -34.7 in March 2009.
  • U.S. retail sales dived 8.7% on month in March, swinging the year-on-year change to -6.2% from +4.6% in February. Sales in the first quarter fell 2.4% versus the final quarter of 2019 and were just 1.1% higher than in 1Q19.
  • U.S. industrial production fell 5.4% on month in March and by 5.5% from a year earlier. Capacity usage dropped 4.3 percentage points to 72.7%. These data were not quite as bad as had been feared, but closures on began in the second half of last month.
  • The Westpac index of Australian consumer confidence posted its biggest month-on-month decline ever in April and, at 75.6, was at its weakest level since February 1991.
  • Swiss quarterly consumer confidence according to the government’s measure slumped 33 index points to -40, lowest since at least the Great Recession.
  • Chinese foreign direct investment, which ended 2019 5.8% above its year-earlier level, recorded on-year drops of 8.6% in February and 10.8% in March.
  • Indonesian imports and exports in March were respectively 7.3% and 0.2% weaker than a year earlier.
  • On-year growth in Hungarian industrial production for February was revised downward.

On the central banking front, the People’s Bank of China cut its one-year lending facility rate by 20 basis points to a record low of 2.95% and did reverse repos to augment liquidity by CNY 100 billion. China’s interest rate cut exceed the previous reductions of 10 basis points in February and 5 bps last November. Also, the Central Bank of Uzbekistan slashed its policy interest rate by a full percentage point to 15%. The rate had been at 16% since a two percentage point hike in September of 2018.

South Korean parliamentary elections were held today in spite of the pandemic. South Korea is on the downward part of the infection curve, but voters were widely spacing themselves and wearing protective gear. The party of President Moon Jae-in is likely to strengthen its mandate. Markets in South Korea were shut today.

The Bank of Canada, which cut interest rates three times in March, is holding a scheduled policy review and will release its quarterly Monetary Policy Report later this morning. Governor Poloz will hold a press conference.

U.S. data coming later today include the NAHB monthly housing market index and Treasury-compiled capital flow data. The Fed Beige Book of regional economic conditions will be published, too.

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



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