Below trend growth to continue
Another 5.2 million jobless in the US.
“Ain’t got no tears left to cry; So I’m pickin’ it up, pickin’ it up; I’m lovin’, I’m livin’, I’m pickin’ it up”, Ariana Grande 2018
Focus continues to be on hopes of countries gradually rolling back containment measures, with the hope outweighing dire economic data – at least for stocks. The S&P500 rose 0.6% in a volatile session, even as the 4 week total of US jobless claims amount to 13.5% of the labour force. Reinforcing the view of hope following the lifting of containment, the Philly Fed Manufacturing Survey recorded optimism about growth over the next six months (see chart below), even as the headline index fell to its lowest levels since the 1980s. The USD though did get some support from the figures with the narrow DXY +0.4% (EUR -0.7%; USD/Yen +0.5%; AUD -0.2%). USD/NOK the exception to USD strength, -0.5% with Brent oil +2.1%. Yields though were little moved after having moved sharply on Wednesday, US 10yr yields were -1.8bps to 0.61%. Today all focus will be on the Chinese Activity figures with little else on the radar – upside risks might be prevalent given anecdotes from luxury goods house LVMH and from the Chinese press yesterday (see coming up for details).
Jobless claims in the US rose by 5.2m, taking the four week increase in claims to 22m and equating to 13.5% of the US labour force filing for unemployment benefits. To put that number in context, the US economy added a net 22.4 million jobs in the decade that followed the GFC, which has now been wiped out in the space of a month. A rise in the unemployment rate to the high teens in April now looks almost a certain and could creep above 20% in May. Although initial claims have likely peaked, they are likely to remain at uncomfortably high levels with the WSJ reporting second round layoffs now starting.
The Philly Fed Manufacturing survey confirmed the bleak US outlook in the near term with headline activity coming in much worse than expected at -56.6 against the -32.0 consensus and -12.7 prior; the fall takes it to the lowest levels since the 1980s. However, what is more interesting is that firms are still optimistic about growth over the next six months and reinforces the view that there is hope for a sharp rebound in activity once containment measures are gradually lifted (see chart below).
How quickly can we expect some containment measures to be lifted in the US? President Trump is due to unveil plans later today with the WSJ noting some states would be able to re-open businesses and schools before May 1, though this would be up to the discretion of individual states (see WSJ piece for details). The pace of re-opening is likely to be varied with New York extending its own measures to May 15, while states are likely to be very measured in rolling back measures out of fears for a second wave of infections.
The talk continues of rolling back measures and also of further fiscal stimulus that is necessary for growth to recover. In Australia PM Morrison hinted strongly that some rolling back is likely to occur by mid-May, laying out three necessary criteria (more testing, robust health system, and a contact tracing system). Some easing in measures will occur before then with a lifting on a ban of elective surgery likely on Tuesday, while state governments could ease restrictions that went beyond federal guidelines. PM Morrison also stated “we are going to have to have economic policy measures that are going to have to be very pro-growth, that are going to enable businesses to employ” (see AFR for details). NZ also unveiled details of what an easing in restrictions may entail, though has left the decision of easing restrictions until next week. There is also some though that once the virus is controlled in both Australia and NZ that some travel could resume in a containment bubble with Singapore, though that is still likely some months away.
It was a story of USD strength with DXY up 0.4% overnight; gains were broad based. The AUD shook off the better than expected employment figures yesterday, being seen as pre-dating COVID-19 containment measures, and fell up to -0.9%, but has edged back to be just -0.2% to 0.6315. For the record, employment was +5.9k against expectations of -30k, while unemployment only ticked up by one-tenth to 5.2% against expectations of a rise to 5.4%. The main driver of the AUD today will be the China activity figures where risks appear to be to the upside. Luxury goods house LVMH reported growth has turned positive in China y/y with very high growth rates recorded in April “sometimes in excess of 50%…really shows the appetite of Chinese people after two months of lockdown to come back to stores and come back to their previous patterns of consumption” (see WSJ for details).
The NZD is one of the worst-performing of the G10 currencies over the past 24 hours, down 0.6%, to around 0.5964. The underperformance in the NZD appears related to RBNZ Governor Orr’s comments at yesterday’s parliamentary hearing in which he said the RBNZ hadn’t ruled out negative rates (once the next 12 months is up) and was prepared to upsize its QE programme if required. While nothing new in the comments the net result was an immediate fall in the NZD and small decline in NZ rates. The 2-year swap ended yesterday’s session down another 3bps at a new record low of 0.39%.
In equity markets, the S&P500 closed 0.6%, recovering from falls earlier in the session. Tech (+1.2%) and healthcare (+2.2%) are driving gains with industrials (-0.8%) and financials (1.7%) lower. Morgan Stanley was the latest to report with earnings falling 30%.
All focus on Chinese GDP and March activity numbers with little else on the radar domestically or internationally. Q1 GDP is expected to contract sharply, but more focus is likely to be given to the March activity indicators to see how quickly China is rebounding following the gradual easing of containment measures in March. Chinese state media yesterday were hinting at upside risks. Key prints today:
For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.