More Concern than Hope in Thursday’s Marketplace

June 18, 2020

It’s been a busy day for central bank watchers, as monetary policy was reviewed in the U.K., Norway, Switzerland, Brazil, Taiwan, and Indonesia. Released statements and some new data adhere to the baseline view that economic activity contracted even more sharply in the second quarter than the first but that the rate of slide began to lessen sometime in May. Inflation, meanwhile, is going to stay very low for some time, and very expansive monetary and fiscal stances are appropriate.

That’s the good news. The bad news is that even before the first wave of Covid-19 was allowed to recede fully out to sea, new surges of the infection are occurring in Beijing and several U.S. states. Global cases and deaths from the virus have climbed to 8,467,178 and 451,954, and the U.S. has nearly identical shares of both tallies, which is 26.5%. No other country comes close to those ratios.

The pendulum between investor hope and fear regarding the outlook for Covid-19 and its impact on economic activity has swung to the negative, as attested by overnight slides in stock markets totaling 1.3% in Indonesia, 1.4% in Malaysia, 1.1% in New Zealand, 0.9% in Australia, 0.5% in Japan and 0.5% in Japan. Selling intensified in Europe, where share prices so far show losses on the day of 1.6% in Spain, 1.1% in France, 0.8% in the U.K. and Germany, and 0.6% in Italy. U.S. stock futures also are down.

The  dollar has risen 0.5% against the British pound and 0.4% versus the Mexican peso but shows little net change in its other major relationships.

The price of gold is down 0.4%, while that of WTI crude oil has firmed 0.7%.

The 10-year U.S. Treasury yield fell 3 basis points, just the opposite of the British gilt yields rise of 3 bps.

Real GDP in New Zealand contracted 1.6% last quarter, slightly more than forecast, and was 0.2% lower than a year earlier. That’s down from on-year growth of 2.5% in the first quarter of 2019.

Australian unemployment jumped 0.7 percentage points in May to a 223-month high of 7.1%. Employment fell by 227k on top of April’s slid of 607k. Labor market participation dropped to a 232-month low of 62.9%.

Dutch unemployment rose to 3.6% last month from 3.4% in April and 2.9% in March.

The collapse of construction output in Italy intensified to an on-year drop in April of 67.8% from a slide of 35.4% in March. Back in January, construction was 8.4% higher than a year earlier.

Between April 2019 and April 2020, Italian exports and imports plummeted 41.6% and 33.7%.

On-year growth in Polish wages slowed to 1.2% in May from 1.9% in April and 7.7% as recently as February. A record 3.2% on-year drop in jobs was recorded in May as well.

Spain recorded its smallest trade deficit in nearly three years during April. At EUR 1.520 billion, such was similar in size to Italy deficit of EUR 1.157 billion that month. In Italy’s case, it was the first deficit since the first month of 2018.

The Bank of England by a vote of 8-1 increased its asset buying ceiling from GBP 645 billion to a new level of GBP 745 billion. The Monetary Policy Committee members expect to hit that ceiling by the end of 2020. The program was raised back on March 19 by GBP 200 billion from a previous ceiling of GBP 445 billion total of gilt securities and non-financial investment-grade corporate bonds. The Bank rate was left unchanged today at 0.1%, having been cut twice during March, first by 50 basis points on the 11th and then by 15 bps a week later. Officials in a released statement characterized the economic situation as “unprecedented” but conceded that GDP this quarter probably will not contract quite as sharply as assumed in the May quarterly Inflation Report.  The latest on-year CPI inflation rate is 0.5% and likely will dip into the red for a while.

As was expected, Brazil’s monetary policy committee known as Copom cut its Selic interest rate by another 75 basis points to 2.25% and matching the reduction made in May. A pair of 25-basis point reductions were done earlier in February and March. In a released statement from the Central Bank of Brazil, however, officials noted that the room for additional easing is now limited, and they urged more fiscal economic support.

Indonesia’s policy interest rate has been reduced 25 basis points to 4.25%. This was the third such drop in 2020 following 25-basis point cuts in February and May. Officials at Bank Indonesia likely was sliced 25 basis points from their overnight deposit and lending rates to create a new corridor that runs from 3.5% to 5.0%. A released statement from Bank Indonesia leaves the door open to additional interest rate relief, contingent upon the evolution of the global pandemic and the behavior of Indonesia’s currency. Like other central bank statements today, officials note that downward pressure on growth seems to have passed an inflection point recently, but they nonetheless anticipate a 0.9% to 1.9% average contraction of GDP in 2020.

The People’s Bank of China two-week reverse repo rate was reduced 20 basis points today to 2.35%, and a net of CNY 40 billion has been added to the money market. The 2.2% 1-week reverse repo rate was not adjusted.

Officials at the Bank of Norway decided unanimously to keep that central bank’s key interest rate at zero percent, a level reached after three earlier cuts this year of 50 basis points in early March, 75 bps some 12 days later and 25 basis points last month. Economic conditions since that third rate cut have been  not as dire as was assumed at the time, but a released statement notes that the level of GDP is nonetheless substantially below its end-2019 level, and they warn that a great amount of uncertainty about the outlook persists. A very expansionary monetary stance will be needed for quite some time longer, ruling out a rate hike for a few years. Even after then, the return to normalcy will be quite gradual.

The scheduled quarterly monetary policy review at the Swiss National Bank ended with officials leaving their policy rate unchanged at negative 0.75% and doubling down on the need for forceful currency market intervention to counter safe-haven demand and limit the franc’s appreciation. GDP is projected to drop 6% this year in a released statement, and CPI inflation is forecast to slide on average by 0.7% this year and 0.2% in 2021 before edging up 0.2% in 2022. The revised forecast path of on-year CPI inflation is significantly lower than that estimated in the March review, starting with a forecast -1.2% in the current quarter versus the prior estimated of -0.6%. A return to positive inflation was projected in March to likely occur in the first quarter of 2021 but is now not seen happening until the second quarter of 2022. As late as the first quarter of 2023, officials expect inflation to be only 0.4%. No interest rate hikes are anticipated in the forecast horizon.

Taiwan’s discount rate was left at 1.125% by the Central Bank of the Republic of China. It had been cut by 25 basis points to that level at the previous quarterly review in March. A released statement enumerates several uncertainties such as financial market fragility and precarious relations between China and the United States. Inflation this year should be around 0.00%, and the eventual upturn of growth will be mild.

U.S. data released earlier today were mixed. The Philly Fed manufacturing index improved much more than anticipated to print at a 4-month high in June of +27.5 following negative readings of -43.1 in May, -56.6 in April and -12.7 in March. However, the downtrend in new jobless insurance claims flattened considerably and at 1.508 million last week remained painfully high.That was down just 58k from 1.566 million in the prior week and represents the 13th consecutive week with over 1.5 million new jobless insurance claims. More than 20 million continuing jobless insurance claims were again filed in the week of June 6. Still to come is the U.S. index of leading economic indicators, which previously declined 7.4% in March and 4.4% in April.

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


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