Politicians Between a Rock and a Hard Place, and Investors Lack Confidence that the Right Choices Will Be Made

May 13, 2020

Investors are concerned about the grim warnings from medical experts yesterday about the dangers of reopening business prematurely and without a plan for dealing with localized flare-ups of the pandemic. Hong Kong reported a new case after weeks without one. At the same time, frightening data continue to be reported, and worries are mounting that a prolonged shutdown of activity could transform a deep V-shaped recession into a depression. Opinion polls suggest that consumers lack confidence to resume social mingling, and businesses are confused over the do’s and don’ts of this new environment. In many countries, the crisis has exacerbated cultural rifts rather than providing a unifying challenge over which to drop partisan differences.

A number of stock markets in Asia and Europe extended recent losses overnight. Share prices fell 0.8% in Indonesia and Hong Kong, 0.5% in Japna, and 0.2% in New Zealand. Equities are down 1.4% in Germany, 1.6% in France, 1.1% in Italy 0.9% in the U.K., and by 0.8% in Spain and Switzerland.

The dollar dropped about 1% against the peso and slipped overnight by 0.6% against the Australian dollar, 0.5% versus sterling, 0.4% relative to the loonie, and 0.2% vis-a-vis the Swiss franc, yen, and euro. The dollar also firmed 0.3% against the kiiw and 0.1% versus the yuan.

Ten-year German bund and British gilt yields slid 2 basis points and 3 basis points, while their U.S. and Japanese counterparts stayed unchanged.

The price of WTI oil is 0.8% higher, and that of gold rose 0.3%.

Industrial production plummeted in Euroland by 11.3% in March, its greatest on-month drop ever. This resulted in the 17th consecutive on-year decline and, at -12.9%, the largest 12-month decrease of the bunch. Output fell 3.3% on average in the first quarter and by 5.8% from the first quarter of 2019. Among the four largest economies using the euro, Italy suffered the largest monthly drop (28.4%), but the other three also had double-digit monthly declines.

Japan’s economy watchers index, a measure of service sector workers’ impressions of economic activity, printed at a record low for a second straight month in April. At 7.9, such was down from 14.2 in March, 27.4 in February and 41.9 in January. The low point during the Great Recession, by comparison, at been a reading of 15.9 in November 2008.

Japan’s seasonally adjusted current account surplus shrunk to JPY 942 billion in March from JPY 2.552 trillion in February, as merchandise exports cratered 9.9% on month. The unadjusted current account surplus of JPY 1.97 billion was 32% smaller than a year earlier.

British real GDP slumped 2.0% between the final quarter of 2019 and first quarter of 2020. That was the largest quarterly contraction in 45 quarters and resulted in a 1.6% year-on-year drop compared to positive growth of 1.1% between the final quarters of 2018 and 2019. A 5.8% dive in monthly GDP for March paints a very abrupt suspension of economic activity at the end of the quarter and foreshadows a much more severe implosion in the current quarter.

British industrial production plunged 4.2% in March, its biggest decline since early 1972. Compared to a year earlier, a drop of 8.2% was the largest 12-month rate of slide in 127 months. British construction output dropped 5.9% on month and 7.1% on year in March; as recently as November, such had risen 2.4% on month and 2.0% on year.

March also saw the British goods and services trade deficit extended more than fourfold on month to GBP 6.676 billion as exports plunged 12.9%.

Malaysian real GDP fell 2.0% last quarter. That was the first quarterly contraction in 11 years and depressed on-year growth to a 42-quarter low of 0.7% from 3.6% in the last quarter of 2019 and 4.5% registered between the final quarters of 2018 and 2019. A Malaysian current account surplus of MYR 9.5 billion last quarter was 44% narrower than a year earlier.

Romanian industrial production slumped 12.4% in March, and the 14.5% rate of decline from a year earlier was the most pronounced in the data’s history going back to 2001.

A microwaved global re/depression is fanning disinflation and threatening deflation.

  • U.S. producer prices plunged 1.3% on month, more than twice expectations and the largest monthly decline since December 2008. This was also the third straight monthly decline and left the 12-month rate of PPI change at negative 1.2%, a 54-month low.
  • Czech consumer prices fell in both March and April. The 12-month CPI rate remained well in the black at 3.2% last month, but that was a 4-month low.
  • Portuguese consumer prices in April were 0.2% lower than their year-earlier level. That’s a 9-month low.
  • Romanian CPI inflation of 2.7% in April was down from 4.0% at end-2019 and its lowest in 30 months.
  • Swedish CPI inflation swung into the red last month for the first time since August 2015. Both total and core inflation were at negative 0.4%.
  • Australian wage price inflation of 2.1% last quarter was the lowest since the second quarter of 2018.

On the central banking front,

The Reserve Bank of New Zealand‘s official cash rate, which in March was slashed by 75 basis points to 0.25%, was left at that level. Such was also cut by 75 basis points in two steps during 2019 and has been lowered by a total 325 basis points since June of 2015. In a released statement, New Zealand monetary officials announced an expansion of their quantitative stimulus known as the large-scale asset purchase program from NZD 33 billion to NZD 60 billion and proclaimed

The global economic disruption caused by the COVID-19 pandemic is expected to persist and lead to lower economic growth, employment, and inflation both in New Zealand and abroad. Even if New Zealand successfully contains the spread of disease locally, reduced world activity will mean lower demand for many of New Zealand’s exports. Monetary policy will continue to provide significant support through keeping interest rates low for the foreseeable future. The Committee agreed that it will stand ready to deploy further tools as needed, should the need for stimulus continue to increase. Tools available include further reductions in the OCR; a term lending facility; and adding other asset classes, such as foreign assets, to the LSAP program.

The National Bank of Belarus cut its refinancing rate to 7.5% from 8.0% at today’s quarterly policy review. This easing marks the fourth straight decline following cuts of 50 basis points in August and November last year and of 25 basis points three months ago.

Several Fed officials spoke yesterday, warning of downside economic risks. Their comments reinforced the warnings in Dr. Fauci’s congressional testimony of relaxing restrictions without a plan to handle inevitable virus outbreaks in the future.

India unveiled a fiscal stimulus equal to a tenth of GDP.

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

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