U.S.-Sino Tensions Mount but Dollar Steady and Equities Mostly Higher

May 28, 2020

The Chinese National People’s Congress passed the proposed Hong Kong security bill, disregarding President Trump’s warnings against doing that. Secretary State Pompeo said America will no longer consider the former British colony as autonomous, and the Trump Administration is mulling a range of sanctions against Beijing and had its call for a special UN Security Council meeting about Hong Kong blocked by China, which holds a permanent seat and thus veto power in that body. In a separate move to sow chaos and distract attention from America’s mounting Covid-19 death toll (102,116 and 28.5% of the global total), President Trump is said to be planning lawsuits against social media like Twitter for fact-checking him. Protests in Minneapolis turned violent overnight against the videotaped police killing of a black civilian.

In spite of America’s seeming unraveling on many fronts, dollar movements overnight against other major currencies were trivial, and equity markets continued to rally. Share prices closed up 2.3% in Japan, 1.9% in India, 1.6% in Indonesia, and 1.3% in Australia. Stock markets in Europe are up 1.8% in Switzerland and Italy, 1.1% in Great Britain and France and 0.6% in Germany.

Japan’s government approved a second supplementary budget, bringing fiscal relief against the economic damage of the Covid-19 pandemic to about 40% of GDP. The European Union has meanwhile proposed a EUR 750 billion package of macroeconomic support, but the Republican-controlled U.S. Senate with the support of President Trump are resisting calls for further fiscal relief in the United States.

The 10-year German bund yield slid two basis points to minus 0.44%. Preliminary German CPI figures reported today showed a 0.3 percentage point decline in inflation to a 44-month low of 0.6%. Such began 2020 at 1.7%. The British 10-year gilt yield ticked a basis point higher.

WTI oil has settled back 0.3%, while the price of gold firmed 0.7%.

More data was reported to suggest that economic activity and confidence around the world remains extremely depressed but is no longer deteriorating at an ever-accelerating pace. For instance, economic sentiment in the euro area ticked up from April’s record low reading of 64.9 to a score of 67.5 this month, which is still far beneath readings of 94.2 in March and 103.4 in February. Sub-indices for the industrial and retail sectors and for consumer confidence bounced higher, but that for services unexpectedly fell by a further 5.0 points to a new record low of -43.6 (it had been +11.1 as recently as February).

The ANZ business confidence index for New Zealand recovered from a 32-year low in April of -66.6 to -41.8 in May.

Business confidence in Austria and Greece rebounded to 2-month highs in May. So did both Swedish business sentiment and consumer confidence. Dutch business confidence likewise rose to a 2-month high but at -25.1 was the second worst reading in 35 years.

Australian private business investment dropped 1.6% last quarter and by 6.1% compared to the first quarter of 2019, but the on-quarter decrease was smaller than the 2.6% drop in the final quarter of last year.

Some other indicators reported today continued to trend lower such as

  • Portuguese consumer confidence (a 75-month low) and business sentiment, which fell to an 85-month low.
  • Spanish retail sales plunged 20.4% in April and recorded the largest 12-month rate of decline (31.6%) of the 21st century.
  • Taiwanese consumer confidence that dropped 11.6% to a 126-month low.
  • Greek business confidence that fell to 88.5 in May form 113.2 as recently as February and Greek consumer sentiment that edged marginally further below zero.
  • Danish business confidence that dropped 4 point to -26.
  • Cypriot industrial production, which tumbled 13.0% on month and 12.7% on year in May.
  • An 827K jump in French unemployment during April was the most in over 24 years.

Another central bank interest rate cut was announced today, this time by the Bank of Korea, where by a unanimous decision the 7-day repo rate was lowered 25 basis points to 0.50%. This was the second cut of 2020 following a 50-basis point reduction back in March. The 0.50% level represents what officials have considered an “effective” floor. A released statement explaining today’s action includes a sharp downward revision of projected 2020 growth from 2.1% previously to around zero percent. “Consumer price inflation and core inflation are forecast to run at the lower-0% and mid-0% level this year, respectively, due to the drop in global oil prices and weakening demand-side inflationary pressures.” The statement from the central bank Board promises to “maintain its accommodative monetary policy stance” without getting into specifics if additional interest rate cuts are not a likely tool.

Yesterday’s Federal Reserve Beige Book not surprisingly reported that firms around the country remain bearish about the slope of the post-Covid economic recovery.

Price data including the aforementioned German CPI reported today accentuated strong disinflation. Spanish CPI deflation swelled to -1.0% in May. Italian PPI deflation of -5.1% was the most negative in 10-1/2 years. South African PPI inflation dropped 1.2 percentage points to a 4-month low of 3.3% in March. Belgian consumer prices were just 0.5% higher this month than in May 2019.

Quarterly U.S. real GDP growth in the first quarter was revised from -4.8% annualized to -5.0%. Positive contributions from net exports (due to plunging imports), residential investment, and government spending were overwhelmed by the drags of consumption, non-residential business investment, and inventories. The personal consumption and core PCE price deflators were 1.6% and 1.7% greater than a year earlier. Inflation will be even lower this quarter.

U.S. new jobless insurance claims totaled 2.123 million last week, the 10th straight time to exceed 2.0 million. The total number of first-time jobless insurance claims over the last 11 weeks has been 41.2 million workers, which is more than the entire population of California.

U.S. durable goods orders tumbled 17.2% on month in April to record a 29.4% on-year drop.

Canada’s current account deficit widened to a 2-quarter high of C$ 11.093 billion last quarter, reflecting a deterioration of the merchandise trade balance.

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

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