Disconnection Thursday Between Recessionary Data and Buoyant Stocks

May 7, 2020

Equities were mixed in Asia but have risen more impressively in Europe this morning. There were drops of 0.8% in India, 0.7% in Hong Kong and 0.2% in China but advances of 0.6% in Taiwan, 0.3% in Japan and 0.5% in New Zealand. The British Ftse, German Dax, and Paris Cac each have risen at least 1.0%. The DJIA rose 1.4% in the first hour and ten minutes of trading.

The roller-coaster ride of oil prices continues. West Texas Intermediate jumped 10% today. Gold is 0.8% higher, too.

Ten-year sovereign debt yields are down two basis points in both Germany and the United States but up 3 basis points in Japan and a basis point in Great Britain.

A mixed dollar performance shows the greenback up against other safe havens (0.4% relative to the yen and 0.1% versus the Swiss franc), unchanged relative to sterling and the euro but down 1.0% against the peso, 0.7% versus the Aussie dollar, 0.4% against the loonie and kiwi, and 0.2% versus the Chinese yuan.

Australia AIG-compiled service sector and composite purchasing manager indices printed at record lows of 4.8 and 27.1 in April. Such had been 50.5 and 47.0 as recently as February.

Euroland’s construction PMI experienced the largest month-to-month down-move ever last month and printed at a data series low of 15.5 versus 33.5 in March and 53.5 in February. Germany’s 31.9 reading was down from 42.0 in March and 25-month high of 53.8 in February but still above the Great Recession and all-time low of 28.9. But the French and Italian construction-sector PMI readings cratered to record lows of 3.8 and 4.8 versus 50.2 and 50.5 just two months earlier.

The Russian services and composite purchasing manager indices fell to data series lows of 12.2 and 13.9 in April versus readings of 52.0 and 50.9 two months earlier. The data go back to the final quarter of 2001.

Even more spectacularly, an all-time low was hit in South African business confidence, a data series begun 35 years ago. And in parts of Asia, data are well below levels during the Great Recession and revisiting conditions in the late 1990s during the regional debt crisis.

  • On-year GDP growth in the Philippines slipped under zero for the first time since the last quarter of 1998 as a result of a 5.1% quarterly plunge in 1Q20. Quarterly growth hadn’t even been been below zero since the Great Recession.
  • Consumer confidence in Thailand sank 14.5 index points to its weakest level since October 1998.

German industrial production plummeted 9.2% on month in March, the most since Germany reunified in the early 1990s, and that resulted in 11.6% year-on-year drop, most since 1990.

Italian retail sales also set a record pace of decline, plunging 20.5% on month in March and 18.4% on year.

There were 3.169 million first-time U.S. jobless insurance claims last week, bringing the total number over the past seven horrendous weeks to 33.7 million workers. The number of continuing jobless insurance claims made last week was 22.6 million.

The Covid-19 pandemic has accentuated the slowdown of two-way trade flows, due to plunging demand and interrupted supply chains. French exports and imports fell 16.7% and 18.5% in March. Australia reported a record A$ 10.6 billion trade surplus due to a spike in exports but a 4% decline in imports. Chinese imports in April were 14.2% lower than a year earlier, marking the fourth straight month to show an on-year decline.

It has not taken long for the vacuum of aggregate demand to depress inflation. Mexican CPI inflation fell over a percentage point to 2.15%, a 52-month low, in April. In Cyprus, consumer prices fell 1.2% on year that month, their largest year-on-year drop in 41 months. Austrian wholesale prices fell 1.7% on month and 6.9% on year in March. Britain’s Halifax house price index posted a second consecutive month-on-month drop, this time of 0.6% in April.

U.S. labor productivity had climbed 1.9% on average in 2019 but fell 2.5% last quarter. As a result, productivity was only 0.3% above its year-earlier level and associated with a tepid 1.5% year-on-year rise in unit labor costs.

Thursday has been a very busy day for central bank watchers.

The Bank of England kept its monetary policy settings as is. Two reductions of the Bank Rate were earlier made of 50 basis points on March 11 and 15 bps a week later. The rate is now pinned at 0.1%. A released statement foresees consumer spending falling about 30%, and business investment dropping even more sharply. Inflation is below the 2% target and seen falling below 1.0% in the second half of this year before turning gradually upward. There was also a vote to continue asset purchases with a limit of GBP 645 billion, but it was not unanimous. Two of nine policymakers wanted to increase the limit ot GBP 745 billion. For now, officials consider policy settings appropriate, but they are prepared to do further stimulus if needed.

The Bank of Norway‘s policy interest rate was cut 25 basis points to zero percent. That’s down from 1.5% prior to reductions of 50 basis points on March 13 and 75 bps one week later. Officials at the central bank observe an abrupt drop in the economy, accentuated by lower oil prices for this energy exporter and krone depreciation. Monetary stimulus cannot prevent a downturn in Norway’s economy but hopefully will dampen its severity and promote a faster rate of eventual recovery.

The Central Bank of Chiles policy interest rate was left unchanged at 0.50%. As in Norway, officials in Chile cut the rate twice in the latter half of March, initially by 75 bps and later by a further 50 bps. Recent data have been along lines assumed in the last review, and expected inflation is aligned with the 3% target. An expansionary policy stance will continue “for an extended period of time” and other unconventional policy tools will be utilized if the situation seems to so require.

Brazil’s Selic interest rate was cut yesterday by 75 basis points to 3.0%. Copom, the Central Bank of Brazil’s monetary policy committee, has been escalating the incremental size of its reductions, having cut the Selic rate by 25 basis points in February and 50 bps in March. According to a released statement, two of nine policymakers actually favored a full percentage point reduction this month, and the committee anticipates that the rate will be 2.75% later this year. Officials call the pandemic especially challenging for emerging economies and consider core inflation too low to be compatible with their inflation target. Projected GDP growth has been revised even more deeply into the red, but note is made that forecasts risks are both unusually high and two-sided.

At the National Bank of Serbia, officials left the 1.5% policy interest rate unchanged today, having cut such by 50 basis points in March and 25 bps last month. Officials expect inflation to hover near the floor of their 1.5-4.5% target range this year.

The Czech National Banks two-week repo rate was slashed by a greater-than-forecast 75 basis points to 0.25%. The Lombard rate has been lowered to 1.0%, and the deposit rate will stay at 0.05%. In spite of a 25-basis point hike of the repo rate announced February 6, the key rate is now 175 basis points lower than its end-2019 level. Two cuts during March had totaled 125 basis points in size.

It seems ironic that U.S. officials have labeled the Covid-19 pandemic the Chinese flu, since evidence is suggesting that China unlike most other economies may actually be experiencing a V-shaped business cycle. China’s service and composite PMI’s rose to 3-month highs in April of 44.4 and 47.6 versus record lows in February of 26.5 and 27.5. And China’s trade surplus swelled to a 10-month high in April of $45.34 billion thanks in part to an unexpected 3.5% on-year rise in exports that fooled analysts predicting a double-digit decline instead. The yuan is back on the weak side of 7 per dollar, but Chinese international reserves grew by $31 billion last month.

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

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