Covid-19 Is in Control Rather than Being Under Control

July 16, 2020

The best laid plans of mice and men…. Governments want to reopen economic activity, but a rising curve of new coronavirus cases both around the world and in the United States is setting other imperatives. Over the past 24 hours, there were 230.3k cases world wide, including a record 71.7k in the United States, where the death count also crossed above 140,000.

Financial markets today reflect uncertainty due to the pandemic. The dollar rose 1.2% against sterling overnight, 0.5% relative to the Australian and New Zealand dollars, 0.4% versus the Mexican peso, 0.2% vis-a-vis the euro, yen and loonie and 0.1% against the Swiss franc.

Stock markets meanwhile turned down. Share prices closed down 4.5% in China, 2.0% in Hong Kong (where Covid cases are rising alarmingly), 1.1% in New Zealand, 1.0% in Singapore and 0.8% in Japan and South Korea. Equities so far in Europe have slipped today by 0.8% in France, 0.7% in Switzerland, and 0.6% in the U.K., Spain, and Germany.

The run back into fixed income securities has seen 10-year sovereign debt yields settle back 3 basis points in Great Britain and a basis point in the U.S., Germany and Japan.

The price of WTI oil fell 1.1% and that of gold slid 0.3%.

China is playing the FIFO card, first to enter recession and first to experience recovery. Real GDP had collapsed 9.8% in the first quarter but rose 11.5% in the spring term. On-year GDP growth swung back into the black as well at 3.2%, still only half the 6.0% pace in the second half of 2019.

Other released Chinese data showed the following on-year trends:

  • Industrial production growth accelerated to 4.8% in June but posted a 1.3% decline in the first half of the year.
  • Retail sales in June were 1.8% lower than a year earlier and posted an on-year slump of 11.76% in the first half.
  • Fixed asset investment, which had risen 5.4% in 2019 but plummeted 24.5% in January-February, rebounded to record only a 3.1% on-year drop in the first half of the year.
  • Foreign direct investment was 7.1% higher in June than a year earlier but still posted a 1.3% decline in the first half as a whole.
  • House price inflation in June remained at May’s 2-year low of 4.9%.
  • Also, China’s jobless rate fell for a third time in four months to 5.7% in June from 5.9% in May and 6.2% in February.
  • Capacity utilization recovered in the second quarter to 74.4% from 67.8% in the first quarter but was 2.4 percentage points lower than in the second quarter of 2019.

Australian June labor statistics revealed a 211k increase in jobs but also a 0.3 percentage point rise in the jobless rate to a 253-month high of 7.4%. All of the employment growth and then some involved part-time workers. Full time workers fell by a further 38k.

Consumer price inflation in New Zealand dropped last quarter by a full percentage point to a 3-quarter low of 1.5%. Compared to 1Q levels, consumer prices fell 0.5%.

South African producer price inflation of 0.4% in May was the lowest since at least 2012 and down from 1.2% in April and 4.6% back in January.

French CPI inflation in June was revised 0.1 percentage point high to 0.2% but still well down from 1.5% in January.

The year-on-year drop in Italian construction output shrunk to 16.8% in May from 68.9% in April and 35.5% in March. Construction in January-May was 23.6% below the year-earlier level. Between May 2019 and May 2020, meanwhile, Italian imports and exports dropped by 30.4% and 35.2%.

Dutch unemployment of 4.3% last month was 0.7 percentage points higher than in May and constituted a 30-month peak.

A 28.1k decline in British jobless insurance claims last month is misleading due to a measurement change that now counts some people who were actually working then. In May, claims had surged by 566k. A 126k drop in employment in April was the most since the third quarter of 2011. Finally, on-year growth in average weekly wage earnings, which in January had been 3.1%, turned negative in May by 0.3%. Excluding bonuses, regular pay was up only 0.7% year-0n-year.

Euroland’s seasonally adjusted trade surplus rebounded to EUR 8.0 billion in May from just EUR 1.6 billion in April. Exports climbed 7.8% after plunging 25% on month in April, while imports rose 3.2%. The unadjusted EUR 9.4 billion trade surplus was less than half the EUR 20.7 billion surplus in May 2019 and embodied on-year drops of more than 25% in both exports and imports.

There’s been lots of action on the central banking front since last evening.

The Central Bank of Chile’s Monetary Policy Rate was left at a record low of 0.50%, a level reached after two reductions in March totaling 125 basis points. According to a statement, officials consider 0.5% to represent a technical minimum, and the MPR is likely to remain there for the duration of the policy time horizon. With subdued sub-3% inflation and floundering economic activity in Chile, officials plan to utilize non-conventional monetary tools as well as the 0.5% interest rate to lend disaster relief to the pandemic-stricken economy.

The Bank of Korea’s key interest rate happens to also be 0.5% and, as in Chile, wasn’t changed further after the latest policy review. There had been cuts of 25 basis points in May and 50 bps in March as well as 25-basis point reductions last year in July and October. With GDP sluggish and exports still contracting, officials now believe that growth in 2020 as a whole will be even lower than the -0.2% projected in May. And in light of low oil prices and continuing weak consumer demand, inflation will stay below 1% for a while.

Monetary officials at a scheduled review at Bank Indonesia agreed to their fourth 25-basis point cut their main interest rate, which at 4.0% reaches its lowest level since 2010. Overnight deposit and lending rates also were sliced by 25 basis points. The lower interest rates are being complemented by an asset purchase program and warranted in light of inflation that slipped under 2% last month to its lowest pace in 20 years.

The European Central Bank’s Governing Council agreed to continue with currently expansive monetary policy settings. According to a released statement, the refinancing rate is zero percent since its last cut of 5 bps in late 2015 and is flanked by a negative 0.50% deposit rate (last cut by 10 bps in September 2019) and a 0.25% marginal lending facility rate since March 2016. A EUR 1.35 trillion pandemic emergency purchase program will be maintained until the pandemic crisis ends and in any case not before mid-2021, and the regular asset purchase program at EUR 20 billion monthly will persist until shortly before interest rates begin to rise. That watershed in turn isn’t plannedĀ  “until the Council has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.” TLTRO III operations will be ongoing, and “The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.”

U.S. Data Just In: The Philly Fed monthly manufacturing index and U.S. retail sales convincingly beat expectations, but weekly jobless claims data disappointed. A 7.5% on-month rise in retail sales was more than a percentage point greater analyst expectations for this June figure and resulted in a 1.1% rise compared to the year earlier level. Nonetheless, sales fell 7.5% in the second quarter and was 8.1% lower than in the spring quarter of 2019. After leaping to 27.5 in June from -43.1 in May and -56.6 in April, the Philly Fed factory index only back down 3.4 index points to 24.1 in July. Street estimates hovered around +15. Even at 24.1, however, July’s reading was well below +36.7 back in February. Finally, new jobless insurance claims last week failed to drop 100k as forecast but instead dipped only by 10k to 1.30 million. This was 16th straight week in which new claims totaled over 1 million. While the smallest number in the streak, the rate of improvement is undeniably flattening out at an unacceptably high level from a social standpoint. A similar flattening is occurring in weekly continuing jobless claims, which tallied 17.338 million in the most recent reported week.

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

Tags: , , , , ,


Comments are closed.