Policy Support Overriding Covid-19 and Geopolitical Concerns at Least for Now

June 16, 2020

The weakness of stock markets early Monday dramatically reversed direction when the Federal Reserve announced an expansion of its corporate bond purchases. That turnaround extended overnight into trading in the Pacific Rim, where markets closed up 4.9% in Japan, 5.3% in South Korea, 3.9% in Australia, 2.4% in Hong Kong, 2.0% in Singapore, 1.8% in Taiwan, and 1.4% in China.

Fed Chairman Powell will begin his semiannual Humphrey-Hawkins testimony on the U.S. economy with today’s session before the Senate Banking Committee. Investors are also fired up about reports that the Trump Administration is considering a $1 trillion infrastructure spending stimulus. Also, important U.S. data get released today: retail sales, industrial production, capacity utilization, and the National Association of Home Builders housing index.

The strength of Asian stock markets was passed on to European trading, where stocks in Germany and Italy have risen over 3.0%, and gains in the U.K., France, Spain and Switzerland exceed 2.0%.

Korean geopolitics took a disturbing turn overnight, nonetheless, when the North blew up the Joint Liaison Office between the North and South, which happens to be located in Kaesong, North Korea. Kim Jong Un has accused Trump of broken promises and declared the goal of denuclearization all but dead.

U.S. coronavirus cases and deaths now total 2,183,126 and 118,321. U.S. VP Pence dismissed the faster rise in the number of cases to more widespread testing, but the death count, which represents 27% of the global total, is unaffected by testing.

In other market news, the prices of WTI crude oil and Comex gold climbed 2.1% and 0.7% today so far.

Ten-year sovereign debt yields today rose 3 basis points in Germany, 2 bps in Britain and the United States, and one basis point in Japan.

The dollar has firmed 0.2% and 0.1% overnight against the euro and Australian dollar but has slipped also very marginally relative to other key currencies.

The Bank of Japan held a three hour 37 minute policy review over two days that ended with no change in settings of -0.1% for the key short-term interest rate and around 0% for the 10-year JGB yield. Amid and extremely severe economic situation and core consumer price inflation that is expected to be negative for the time being, the program of quantitative and qualitative easing with yield curve control was reaffirmed. Such will continue until core inflation rise above 2% and officials feel such will stay above 2% in a stable manner. In press conference, Governor Kuroda said he expects ultra low interest rate to be maintained into 2023.

Published minutes from the Reserve Bank of Australia‘s policy meeting earlier this month promise not to lift the official cash rate of 0.25% before there is progress towards meeting the central bank’s employment growth and inflation target goals. Australia is experiencing its deepest recession since the 1930s, and an increase in quantitative stimulus isn’t being ruled out.

The path traced by U.S. retail sales in April and May unexpectedly was V-shaped. After a 14.7% drop in the earlier month, analysts had anticipated a partial 8% revival in May, but instead sales jumped 17.7% last month. That being said, the bigger picture is still down. Sales in March-May were 12.7% weaker on average than those in December-February, and the latest three-month total was 10.5% below its year-earlier level.

The same applause cannot be given to U.S. industrial production, which after drops of 4.6% in March and 12.5% in April rose by a smaller-than-expected 1.4% in May. The year-on-year decline of production last month remained huge at 15.3%, and capacity utilization remained quite depressed at 64.8% compared to 73.2% in March and 76.8% in January.

Investor expectations regarding Euroland’s economic outlook continued to reverse direction according to the June monthly ZEW Institute survey. Such printed this month at a 2020 high of 58.6 following readings of 46.0 in May, 25.2 in April and -49.5 in March. The index of perceived current conditions remain quite depressed, however, at -89.6 in June after -95.0 in May and -93.9 in April. Regarding Germany’s economy, the ZEW expectations index rose to 63.4 in June from 51.0 in May and -49.5 in March, while the current situation index printed at negative -83.1 in June after -93.5 in May.

Swiss government authorities revised projected 2020 GDP growth up 0.5 percentage points to a decline of 6.2% from last year’s level. They expect real GDP next year to recover 4.9%.

German consumer prices, according to the final estimate, edged down 0.1% on month in May and recorded a year-on-year advance of 0.6%, which is the smallest 12-month advance in 44 months and down from 1.7% in both January and February. These comparisons match the preliminary findings. German May wholesale prices dropped 0.6% on month and 4.3% on year.

Jobless insurance claims in Great Britain went up 529k last month, about half the size of April’s increase and were accompanied by a pronounced deceleration of wage inflation. Average weekly earnings in the three months to April were 1.0% higher than a year earlier, down from a 2.3% on-year rise in the first quarter. The deceleration of wage growth when excluding bonuses was from 2.7% to 1.7%.

Consumer confidence in New Zealand continued to weaken in the second quarter of 2020. According to the Westpac estimate, such fell to 97.2 from 104.3 in the first quarter and 109.4 in the final quarter of 2019.

Home prices in Australia increased 1.6% on quarter and 7.4% on year in the first quarter of 2020.

Indonesian retail sales dived 13.3% on month and 16.9% on year in April.  Unemployment in Hong Kong rose 0.7 percentage points to a 181-month high of 5.9% in May.

Israeli GDP contracted 6.8% annualized between the final quarter of 2019 and the first quarter of this year. That shaved year-on-year growth to 0.6%, down from 3.2% in the first quarter of 2019.

Retail sales in Brazil plunged 16.8% on April, about a quarter more than had been forecast.

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

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