Strong Equity Rally and Dollar Downtrend Pause

June 4, 2020

Stock markets mostly rose in the Pacific Rim and Europe but only modestly for the most part in contrast to yesterday’s sharp advance. Just prior to the release of U.S. data this morning, U.S. stock futures were suggesting a downtick at the open.

The dollar is unchanged from Wednesday closing levels against the euro, yen, kiwi and yuan. The greenback has risen 0.3% against the peso, 0.2% relative to sterling and the Aussie dollar and 0.1% vis-a-vis the loonie but is down 0.2% versus the Swiss franc.

Ten-year sovereign debt yields rose two basis points in Japan and a basis point in the United States but slid a basis point in Germany and are unchanged in Great Britain.

The price of West Texas Intermediate oil settled back 0.9%, while that of gold rose 0.4%.

There’s been some push-back from the military against Trump’s use of active forces for riot control in the current situation. Defense Secretary Esper doesn’t believe such deployment is currently warranted, and former Defense Secretary Mattis gave a broader rebuke of the president’s behavior this year.

The Governing Council of the European Central Bank left its interest rate structure as is but took further steps towards a more accommodative stance via changes in forward guidance and a big increase of the pandemic emergency purchase program (PEPP), which was raised from EUR 750 billion to EUR 1.35 trillion. The PEPP program will run at least through mid-2021, and the older monthly APP (asset purchase program) at a pace of EUR 20 billion per month will continue through end-2022. The trio of interest rates (a negative 0.5% deposit rate and a 0.25% marginal lending rate flanking a zero percent refinancing rate) was last modified at the September 2019 Governing Council meeting when the deposit rate was cut by 10 basis points. The Governing Council again affirmed that rates will not be raised until officials are confident that inflation is converging robustly on the target of “below but close to 2%.” CPI inflation in May was at only 0.1% and down from 1.2% a year earlier.

Retail sales volume in the euro area recorded back-to-back monthly plunges of 11.1% in March and 11.7% in April reflecting stay-at-home restrictions, and sales in April were 19.6% lower than a year earlier.

Retail sales in Austria posted a similar 18.1% on-year drop in April, attesting to the highly synchronized global recession. Austrian sales had fallen 13.7% on month in March before April’s 6.1% monthly slide.

Australian retail sales fell by a record 17.7% on month in April.

Greek real GDP sank 1.6% on quarter in 1Q, accelerating from the prior quarter’s 0.7% drop. GDP was 0.9% below its year-earlier level, its weakest drop in 19 quarters.

Euroland’s construction purchasing managers index recovered to a 3-month high of 39.5 in May from April’s record low of 15.1 but remained significantly in contractionary territory. Before the pandemic, such had crested in February at 52.5. May’s construction PMI readings for Germany and France printed at 2-month highs of 40.1 and 32.4. The big surprise involved Italy’s construction purchasing managers index which soared from a record low of 4.8 in April to a 13-month high of 51.0 in May.

Great Britain’s construction PMI rose to a 2-month high in May but at 28.9 signaled a persistently steep trend of contraction. The U.K. also posted on-year plunges in new car sales of 97.3% in April followed by 89% in May.

Swedish industrial production posted its largest-ever monthly drop (16.4%) during April.

French retail sales plummeted 20% on month and 31.1% on year in April.

Ireland’s service-sector PMI printed at 23.4 in May, its second lowest reading since 2000, only beat by April’s score of 13.4. Ireland composite PMI (manufacturing and services) was 25.7 last month compared to 56.7 in February.

Consumer confidence in Thailand broke a long streak of steadily eroding consumer confidence readings. Such increased 1.0 index point to 48.2 in May but remained far beneath the reading of 76.4 in June 2019.

U.S. labor productivity fell 0.9% last quarter as the 6.5% slide in output surpassed the 5.6% drop in hours worked. The combination of a 0.9% drop in productivity and a 4.2% rise in compensation per hour caused unit labor costs to jump 5.1% on quarter, but the on-year increase dipped to a benign 1.9% from 2.0%.

U.S. new jobless insurance claims equaled 1.877 million last week, and that was the smallest increase in the past 11 weekly reports. New claims over the past dozen weeks totaled over 43 million workers, and last week’s 1.877 first-time claims were accompanied by news that continuing jobless insurance claims in the prior week had risen to 21.487 million.

The U.S. trade deficit had been shrinking coming into this year but has responded poorly during the pandemic. In the two months between February and April, exports of goods and services dived 28.6%, easily outpacing an 18.6% decrease in imports, and the trade deficit accordingly swelled from $34.672 billion in February to an 8-month high of $49.408 billion in April.

Canada’s trade deficit has also risen sharply, totaling C$ 3.251 billion in April versus C$ 1.526 billion in March and C$ 1.332 billion in April 2019. Year-on-year drops in exports and imports amounted to 35.2% and 30.5% in April.

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

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