Fractious Politics Magnifying Fear Over the Covid-19 Pandemic

May 15, 2020

The Trump Administration’s harsh rhetoric against China has been elevated to trade sanctions. Semiconductor shipments to the Chinese firm Huawei are being prevented. In another disturbing political development, British Prime Minister Johnson reaffirmed and with more force that there will be no post-Brexit negotiations with the EU beyond the end of this year. In 2020, the biggest market worry involved acrimonious trade relations. The global pandemic and abrupt world recession had overshadowed that concern in 2020, but now investors face both risks. Prior to the New York stock market opening, stock market movements had been slight, but U.S. futures now point to a more decidedly difficult open.

Chinese April statistics reported today beat expectations. Industrial production rose 3.9% on year, almost three times the expected rebound. Fixed asset investment, which recorded a 24.5% on-year collapse in January-February and was down by 16.1% in the first quarter, now shows a drop of 10.3% on-year for January-April. Retail sales in April recorded a 7.5% on-year decline after 12-month decreases of 20.5% in January-February and 15.8% in March. The jobless rate in China edged only 0.1 percentage point higher last month to 6.0%. Foreign direct investment had dropped 10.8% on year in the first quarter but posted its first on-year rise of 2020 in April.

European GDP figures for the first quarter painted a dire picture as expected, and conditions are expected to be even worse in the current quarter.

  • Real GDP contracted 3.8% on quarter in the euro area, a record drop and roughly three times faster than in the United States, and was 3.2% lower than its level a year earlier.
  • Real GDP in Euroland’s four largest economies fell 2.2% in Germany, 5.8% in France, 4.7% in Italy and 5.2% in Spain. This was the second straight contraction in the first three instances, resulting in year-over-year slides of 2.3% in Germany, 5.4% in France, and 4.8% in Italy.
  • First quarter over 4Q19 GDP declines in other European economies amounted to 3.9% in Belgium and Portugal, 3.6% in the Czech Republic, 2.5% in Austria, 2.0% in the U.K., 1.9% in Denmark, 1.7% in the Netherlands, 1.5% in Norway, 1.3% in Cyprus, 0.5% in Poland, and 0.4% in Hungary. Finland was a rarity with positive 0.1% quarter-on-quarter growth and a 0.4% GDP rise from a year earlier.

In other Euroland economic news, employment fell 0.2% last quarter, their first drop since 2013, and the year-on-year jobs growth fell to 0.3% from 1.1% in 4Q19 and 1.4% in the first quarter of 2019. Also, the seasonally adjusted EUR 23.5 billion trade surplus in March was most newsworthy for the huge 8.9% and 9.0% monthly collapses of exports and imports. Unadjusted imports were 10.1% lower than in April 2019, and exports fell 6.2%.

Other trade data released today showed a 32.2% contraction in South Korea’s January-April trade surplus from a year earlier that included a 25.1% on-year collapse of exports during April. The Dutch trade surplus in March of EUR 6.15 billion was 11.4% wider than a year earlier because imports (-7.7%) fell more sharply than exports (-5.4%). India’s trade deficit fell for a third consecutive month to $6.76 billion in April, which represents a 47-month low. Norway’s surplus of only NOK 3.249 billion in April was down sharply from NOK 15.1 billion a year earlier, reflecting drops of 24% in exports and 11% in imports. And in Indonesia, a $2.25 billion surplus in January-April flipped around from a $2.35 billion deficit a year earlier. Imports in April were 18.6% below Indonesia’s year-earlier level.

Japanese domestic producer prices for goods fell 1.5% on month and 2.3% on year. Import prices fell even more sharply, 6.0% from the prior month and 10.9% compared to April 2019.

Italian CPI inflation fell to zero percent last month, lowest in 53 months, and French CPI inflation of 0.3% in April was its lowest in 44 months.

German producer prices dropped 0.7% on month in April, and the 1.9% on-year decline was the largest 12-month decrease in 45 months. The energy component was 7.3% below a year earlier. All other producer prices dropped 0.3% collectively on year.

Hong Kong had been experiencing a recession long before the Covid-19 outbreak, with real GDP contractions of 0.2% in the second quarter of 2019 followed by -3.0% in the third quarter and 0.5% in 4Q19. All that was dwarfed by a 5.3% record quarterly plunge in 1Q20. The on-year GDP drop last quarter of 8.9% also marked a record.

New Zealand’s manufacturing purchasing managers index sank to at least an 18-year low of 26.1 last month from readings of 38 in March and 53.2 in February.

The Bank of Mexico late Thursday cut its policy interest rate to 5.5% from 6.0%. (see review).

And today, the People’s Bank of China failed to reduce its 2.95% medium-term funding rate target further, but did inject plenty of short- and long-term liquidity in an easing move.

Just in: U.S. industrial production plummeted 11.2% in April on top of a 4.5% decline in March. The decline from a year earlier was 15.0%, and capacity utilization fell sharply to 64.9% in April from 76.7% two months earlier.

Still ahead: U.S. JOLTs index and U. Michigan consumer sentiment.

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

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