Following a week where risk appetite improved due to additional stimulus packages by the Fed and the US government, investors may keep their gaze locked on developments and data pointing to how deep are the marks left by the coronavirus on the global economy. In this respect, this week, we will closely monitor the Chinese and US PMIs, Eurozone’s preliminary inflation data, as well as the US jobs data, all for March, during which the virus spreading outside China got out of control.
Last week was marked by an improvement in risk appetite as the Fed proceeded with more stimulus measures and the US Parliament approved a 2 trillion spending package in order to support businesses and households hit by the coronavirus outbreak. That said, fears that the spreading could last for longer than previously anticipated returned on Friday, with major EU and US indices closing their trading in negative waters. The negative sentiment rolled over into the Asian session today, with Japan’s Nikkei 225 and China’s Shanghai Composite sliding 2.01% and 0.88% respectively.
This confirms our stance not to trust a long-lasting recovery in investor morale. Despite both infected cases and deaths from the virus slowing on Sunday, Saturday was marked with new daily records, which suggests that, overall, the virus continues to spread at a fast pace. With no vaccine ready to be distributed to the world yet, it would be premature to assume that we have reached a peak. If the spreading continues at an exponential pace, the economic damages could deepen and the wounds could drag much longer than investors currently anticipate. Thus, we would still see decent chances for risk-linked assets to continue trading south and for the safe-havens to shine again.
On Monday, during the Asian morning, we already got the Summary of Opinions from the latest BoJ monetary policy meeting, where officials increased their ETF purchases in the wake of the coronavirus outbreak which threatens the global economic outlook. In the summary, it was revealed that Japanese policymakers are willing to strengthen monetary easing in order to prevent worsening of corporate and household confidence and that Japan’s economy may continue to stagnate even after other economies recover, as the impact of the virus spreading could be enormous. With an ultra-loose policy, including negative rates and massive asset purchases, it would be interesting to see what kind of additional measures could officials introduce. Will they start thinking about cutting short-term rates further into the negative territory?
As for the European session, we get the preliminary German CPIs for March. The forecasts suggest that both the CPI and HICP rates have declined to +1.4% yoy from +1.7% in February, which will raise speculation that Eurozone’s headline rate will slide as well.
In the US we have pending home sales for February, which are expected to have declined 1.0% mom after rising 5.2% in January.
On Tuesday, Asian trading, we have Japan’s end of month data dump. The unemployment rate is forecast to have remained unchanged in February, at 2.4%, while the jobs-to-applications ration for the month is expected to have declined to 1.47 from 1.49. Preliminary data on industrial production for the month are expected to show a slowdown to +0.1% mom from +1.0%, while retail sales are anticipated to have fallen 1.2% yoy, after sliding 0.4% in January.
The Chinese PMIs for March are also due to be released. The manufacturing index is forecast to have risen to 45.0 after hitting a record low of 35.7 in February, while no forecast is available for the services index, which also fell to an all-time low, at 29.6. With China being the only nation to have controlled to a large extent the spreading of the coronavirus during the last month of Q1, we would expect the services PMI to have rebounded as well, even if it stays below the boom-or-bust zone of 50. That said, the spreading in Europe has been worse day by day and thus, we don’t expect a small recovery in the PMIs of the world’s second largest economy to boost investors’ morale.
Speaking about Europe, Eurozone’s preliminary CPIs for March are due out during the European session. The headline rate is expected to have declined to +0.8% yoy from +1.2%, something supported by the forecast of the German CPI rate, which is also expected to have fallen. No forecast is available for the core rate, but we see the case for a slide here as well. March was marked with lockdowns in most members of the bloc and thus, with people staying home and refraining from spending, consumer prices in several products may have come under pressure. The exceptions may be pharmaceuticals and essential products, like food.
Although the ECB has not cut rates, with the Euro-area economy hit by the virus outbreak, it adopted a range of emergency stimulus measures, including very cheap loans to banks and asset purchases worth of EUR 1.1 trillion. Last Monday, Governing Council member Ignazio Visco said that the adopted measures are sufficient and effective but he and his colleagues stand ready to do more if necessary. So, having that in mind and following the disappointment in the preliminary PMIs for March, declining CPI rates, well below the Bank’s objective of “below but close to 2%”, may increase the chances of more stimulus. Officials may decide to increase the size of their bond purchases or even cut the deposit rate further into the negative territory. Although the former appears more likely, with the Bank’s Chief, Christine Lagarde, saying “There are no limits to our commitment to the euro”, we cannot totally rule out the latter.
From the UK, we get the final GDP, business investment and current account data, all for Q4. The final GDP print is forecast to show that the British economy stagnated during the last three months of 2019 after growing 0.4% qoq in Q3, while business investment is expected to have declined 0.6% yoy from +0.9%. The nation’s current account deficit is forecast to have narrowed to GBP 7.0bn from GBP 15.9bn. Given that these releases are referred to a period before the virus outbreak, we expect them to pass largely unnoticed.
Later in the day we have more GDP data, this time from Canada and for the month of January. Expectations are for the monthly rate to have slowed to +0.1% mom from +0.3% in December. To be honest, we don’t expect this release to prove a major market mover either. The Bank of Canada has already slushed rates to 0.25%, the lowest level in a decade, in order to safeguard the Canadian economy from the coronavirus pandemic. We believe that February and March data may be much more important, as they will reveal to which extent did the virus spreading affected the Canadian economy, which is a major oil exporter. If the hit proves much more than anticipated, BoC policymakers may not hesitate to cut rates to zero.
From the US, we get the Conference Board consumer confidence index for March, which is expected to have declined to 112.0 from 130.7.
On Wednesday, during the Asian trading, Japan’s Tankan survey for Q1 is coming out. Both the large manufacturers and non-manufacturers indices are expected to have declined to -10 and +2 from +5 and +18 respectively. This may be the first set pointing to how the Japanese economy may have performed during the first quarter of this year, and thus, following the contraction in Q4 2019, bad numbers may raise more concerns with regards to a technical recession and may also increase speculation with regards to more stimulus by the BoJ.
China’s Caixin manufacturing PMI for March is also coming out and in line with the official PMI for the month, expectations are for the index to have rebounded, but to have stayed within the contractionary territory.
We get more manufacturing PMIs later in the day. We get the final prints from the Eurozone, the UK and the US, but as it is usually the case, expectations are for confirmations of the initial estimates. Investors may pay more attention to the US ISM index for the month, which is expected to have declined to 45.0 from 50.1.
In the US, the ADP employment report for March is also coming out. Expectations are for a decline of 154k following a 183k increase in February. Coming on top of the astonishing surge in initial jobless claims for the week ended on March 14th, this could raise speculation that the NFPs, due out on Friday, may also reveal a tumble.
On Thursday, the calendar appears relatively light. The only releases worth mentioning are the US initial jobless claims for last week, as well as the US and Canadian trade balances for February. After skyrocketing to 3.283mn, initial jobless claims are expected record another extremely high figure. Although not higher than the last print, expectations are for another 3mn of new claims, something that could add to expectations with regards to further stimulus by the Fed.
With regards to the trade data, the US deficit is expected to have narrowed to USD 40.0bn from USD 45.3bn, while the Canadian one is expected to have widened to CAD 2.14bn from CAD 1.47bn.
Finally, on Friday, the spotlight is likely to turn to the US employment report and the ISM non-manufacturing index, both for March. Nonfarm payrolls are expected to have fallen 100k after rising 273k in February, while the unemployment rate is forecast to have risen to 3.9% from 3.5%. Average hourly earnings are anticipated to have slowed to +0.2% mom from +0.3%, which, barring any deviations to the prior monthly prints, would keep the yoy rate unchanged at +3.0%. The ISM non-manufacturing index for the month is forecast to have declined to 44.0 from 57.3. If both the ISM forecasts are met, this will drive the 3-month rolling average of our ISM weighted composite index sharply lower, which could mean a steep slowdown, or even a contraction, for the US economy during Q1 of this year.
Combined with a potential decline in the ADP report for the month, and another surge in initial jobless claims, a disappointment in these releases may prompt market participants to increase even further bets with regards to more stimulus by the Fed. After all, Fed Chair Powell himself noted on Thursday that the Fed is not going to run out of ammunition and that the Committee has policy room for more action. Given that officials have already slashed interest rates to the 0-0.25% range, and also that they announced unlimited amounts of QE purchases, this raises the question: Will they go for negative rates? The Fed has never been in favor of the “negative rates regime”, but it remains to be seen whether the economic damage caused by the coronavirus will force them to make an exception. At least, according to the yields of the Fed funds futures, investors do not expect something like this at the moment.
As for the rest of Friday’s releases, we have the final Markit services and composite PMIs for March from the Eurozone, the UK and the US, and as it is the case most of the times, they are expected to confirm their preliminary estimates. Eurozone’s retail sales for February are also coming out and the forecast suggests a slowdown to 0.1% mom from +0.6%. This may keep the yoy rate unchanged at +1.7%.
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