Confidence Hit by Concerns Over China, Coronavirus, and Economic Outlook

July 24, 2020

The last thing the world needs in the middle of a recession is an escalation of Sino-U.S. trade and foreign policy strains, but that became an even likelier prospect as Beijing officials closed down the U.S. consulate in Chengdu.

The day’s coronavirus data have been again alarming, although not quite to the extent of the prior day. Globally reported cases went up more than 275k over the past 24 hours, and there have been over 6,200 associated deaths. U.S. deaths should cross above 150k by Monday. The Republicans have eliminated holding any convention activities in Florida, which remains one of the biggest Covid-19 hotspots.

Preliminary July purchasing manager surveys point to further economic recovery in output as lockdown restrictions eased but also highlight downside risks. Jobs continue to get shed, new orders have been hesitant, and order backlogs are shrinking. Most worrisome, the coronavirus spread has intensified since the surveys were taken.

Republicans continue to squabble over a U.S. pandemic relief fiscal stimulus, and the $1 trillion total they are considering is far short of what House Democrats seek. Time is getting very short to avoid a substantial fiscal drag on the economy next month.

Risk aversion is reflected in share price slides of 1.2-1.5% in Germany, France, Spain, Italy, Switzerland, France, Australia, Indonesia, and Singapore. The Chinese and Hong Kong equity markets tumbled 3.9% and 2.2% Friday, while Japan’s market remained closed for Sports Day.

The price of gold touched a high of $1,896.7 per ounce intra-day, which is a mere $21.2 below the all-time peak reached on August 22, 2011. The price of West Texas Intermediate crude oil is unchanged at just over $41 per barrel.

Ten-year German bund and British gilt yields rose 2 and 1 basis points earlier today.

The dollar continued to perform in a fragile manner, dropping 0.5% against the yen and 0.1% versus sterling and the Swiss franc, while hovering around $1.16 per euro.

With a warning that “in the context of prevailing disinflationary factors, there is a risk that in 2021 inflation might deviate downwards from the 4% target,” officials at the Central Bank of the Russian Federation enacted their fourth one-week repo rate cut of 2020 to 4.25%. Together with reductions of 25 basis points in February, 50 bps in April, 100 bps in June, today’s action brings to two full percentage points the total drop so far this year. Although only 25 basis points in magnitude, a released statement indicated that further down-moves could become necessary. The baseline forecast for Russian growth foresees only a gradual economic recovery. Russian lately has experienced one of the world’s nastiest infestations of Covid-19.

Japan’s composite purchasing managers index rose 3.1 points in July but remained below the 50 level for a sixth straight month. That threshold divides economic expansion from contraction, and with a July reading of 43.9, Japan continued to experience a pretty significant recession as 3Q got underway.

Euroland’s composite PMI jumped much more than forecast to a 25-month high in July of 54.8 according to preliminary results but contained some elements of concern such as declining employment and a widening gap between output and demand. “The fear is that increased unemployment and damaged balance sheets, plus the need for ongoing social distancing, are likely to hamper the recovery.” As in Japan whose manufacturing PMI was only 42.5, service sector activity with a PMI of 55.1 grew faster than manufacturing (51.1).

The composite PMI readings of Germany and France printed at a 23-month high of 55.5 and a 50-month high of 57.6 in July. Both results surpassed analyst forecasts.

Likewise, Britain’s composite purchasing managers index jumped nearly 10 index points to a 61-month high in July of 57.1. Services scored 56.6, a 60-month high, but manufacturing advanced by a lesser 3.5 points to 53.6, which represents a 16-month high.

Other British economic data released today revealed a 13.9% monthly jump in retail sales volume in June, but such was still 1.6% lower than a year earlier and left the second quarter-over-first quarter retail sales change at negative 9.5%. Consumer confidence in the U.K. was at -27 no better in July than June. Sentiment had deteriorated from -7 in February to a low of -34 in both March and April.

The CMA-compiled Australian purchasing managers index rose 5.2 points in July to a 39-month high of 57.9, with a 50-month high in services of 58.5 but an 18-month high of 53.4 in manufacturing.

Italian manufacturing sector confidence rose 5 index points to 85.2, which remains almost as far from February’s 98.8 reading as from May’s 71.1 score. Consumer confidence in Italy printed 0.7 points lower in July than June at 100. Analysts had forecast a more optimistic reading.

Czech business sentiment (84.7) and consumer confidence (96.0) in July still compare unfavorably to last December’s readings of 96.8 and 110.0.

Austrian industrial production was 13.5% lower than a year earlier in May.

Industrial production in Singapore had tumbled 15.8% in May but rebounded by a mere 0.2% in June to leave such 6.7% below its year-earlier level.

Mexico’s index of economic activity dropped another 2.6% on month in May to 22.7% below its year-earlier level.

Over the 12 months to June, producer prices fell 6.1% in Spain, 3.8% in Sweden, 4.4% in Finland, and 1.2% in Iceland. Icelandic consumer price inflation, however, rose 0.3 percentage points to a 10-month high of 3.0% in July.

U.S. data releases today include new home sales and the IHS-compiled purchasing manager survey.

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



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