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by Charalambos Pissouros

Weekly Outlook: Apr 06 – Apr 10: RBA Meets, US Jobless Claims Under the Radar Again

For another week, market participants are likely to keep most of their attention locked on numbers and headlines surrounding the spreading of the coronavirus around the globe. With regards to central banks, we have only one deciding on interest rates this week, and this is the RBA. As for the data, for another week, the most important release may be the initial jobless claims for the week ended on April 3rd.

Monday appears to be a relatively light day in terms of economic data and releases. Chinese markets are closed due to the Ching Ming Festival, while the only release worth mentioning is the UK construction PMI for March. The forecast suggests a slide into contractionary territory, to 44.0 from 52.6, which due to the effects of the coronavirus outbreak to the global economy appears more than normal to us. After all, both the manufacturing and services indices for the month slid into contractionary territory, with the latter recording its fastest decline since the survey’s inception.

Speaking about the virus, for another week, investors are likely to pay more attention on numbers and headlines concerning that front. Over the weekend, the numbers of new infected cases and deaths have slowed and it remains to be seen whether the slowdown will continue in the days to come. The slowdown allowed some Asian markets to trade in the green this morning, suggesting that if we continue getting less and less cases day by day, equity markets may set the stage for a decent recovery. That said, another round of record numbers may be enough to turn things upside down again. This would mean that the worst is not behind us yet and that the economic wounds could still deepen and drag longer than previously anticipated.

Coronavirus new cases and deaths on a day by day basis

On Tuesday, we have a central bank deciding on interest rates and this is the RBA. At an out-of-schedule meeting on March 18th, the Bank cut interest rates to a new all-time low of 0.25%, and announced it will start QE purchases for the first time in its history. That said, the minutes of this ad-hoc meeting showed that although all members supported the proposed policy change, they also agreed that the cash rate reached its effective lower bound, which suggests that a cut to zero may be off the table, at least for now. Thus, even if the ASX 30-day interbank cash rate futures implied yield curve suggests a 42% chance for another rate cut, we don’t think that Australian policymakers will touch interest rates at this meeting. They could just expand their QE purchases, or they may prefer to wait for a bit longer before making any new adjustments in policy. After all, it’s only been three weeks since their latest action.

ASX 30-day interbank cash rate futures yield curve

As for Tuesday’s data, during the Asian morning, we have Japan’s household spending and Australia’s trade balance for February. Japan’s household spending is forecast to have slid 0.2% mom after tumbling 1.6% in January, while no forecast is currently available for Australia’s trade balance.

Later in the day, we get the US JOLTs job openings for February, which are expected to have declined somewhat, to 6.476mn from 6.963mn. Following the skyrocketing of the initial jobless claims for the week ended on March 27th to a new record of 6.65mn, investors may treat February’s job openings as outdated and wait for the March number, as during March the virus damages had been much more severe. From Canada, we get the Ivey PMI for March but there is no forecast at the time of writing.

On Wednesday, although the Norwegian stock market will be closed, we get the nation’s CPIs for March. Both the headline and core CPIs are expected to have held steady at +0.9% yoy and +2.1%, which is unlikely to alter Norwegian policymakers’ view around monetary policy. On March 19th, at an extraordinary meeting, the Norges Bank decided to reduce its policy rate to 0.25%, and noted that the Committee does not rule out further reductions. Norway’s economy depends largely on oil exports and if the lockdowns and restrictive measures around the globe continue to hurt demand for the black gold, officials may not hesitate to bring interest rates down to zero at their next ordinary meeting, scheduled for May 6th and 7th. After all, the effects of low oil prices are clearly visible on consumer prices. Although the core rate stands a tick above the Norges Bank’s inflation target, the headline one, which includes prices of energy items, is much lower.

Norway CPIs inflation

Later in the day, the FOMC releases the minutes of their second extraordinary meeting, held on March 15th, when officials decided to reduce the Federal funds target range by 100bps, to 0-0.25%. Having said that, we expect the minutes to pass unnoticed, as investors may treat them as outdated. Since then, the Fed already proceeded with additional measures in order to ease the economic damages from the fast spreading of the coronavirus, while on March 26th, Fed Chair Jerome Powell said that the Fed still has room for more policy action and that they are not going to run out of ammunition. We believe that market participant may stay on guard for Thursday’s initial jobless claims for the week ended on April 3rd.

As for other data released on Wednesday, during the Asian trading, Japan’s current account balance for February is coming out, while later in the day, Canada releases its housing starts and building permits for March and February respectively. Japan’s trade surplus is expected to have increased to JPY 3.062 trillion from JPY 0.612 trillion. No forecast is available for Canada’s building permits, while housing starts are expected to have declined to 165k in March from 210.1k in February.

On Thursday, the spotlight is likely to fall on the initial jobless claims for the week ended on April 3rd. Last week, initial claims more than doubled the previous record of 3.3mn, hitting a new one at 6.65mn. Now the forecast points to another 5mn claims, but bearing in mind that the virus situation in the US is worsening day by day, we wouldn’t be surprised if we get a new record. This would confirm that the damages in the US job market are worse than previously anticipated and may trigger another round of risk aversion. The preliminary UoM consumer sentiment index for April may also attract special attention, as it may reveal how much consumers’ morale has been impacted. Expectations are for a slide from 89.1 to 75.0, which will be the lowest since April 2013, and may add more fuel to investors’ flight to safety.

US initial jobless claims

In Canada, focus could be on the nation’s job data for March. Expectations are for the unemployment rate to have surged to 7.0% from 5.6%, while the net change in employment is forecast to show that the economy has lost 350k jobs after gaining 30.3k. This would be the worst print in Canada’s history, at least since we can find data from, and may raise speculation for more stimulus by the Bank of Canada.

Canada unemployment rate

On March 27th, the Bank decided to slash interest rates to 0.25% and to launch a QE program in order to safeguard its economy from the effects of the coronavirus’s spreading. The Governing Council highlighted its readiness to take further action to support the economy and the financial system, but similarly with the RBA, they noted that the policy rate is now to its effective lower bound, which means that they are not willing to cut interest rates further. Maybe they will decide to expand their QE program if the spreading of the virus threatens even more the outlook of the Canadian economy.

Having said all that though, even if the Canadian dollar slides on potentially disappointing employment data, its broader direction may depend primarily on movements in oil prices, as Canada is among the world’s biggest oil producing and exporting nations. Last week, both Brent and WTI skyrocketed on speculation that Saudi Arabia and Russia may eventually agree on new production cuts to stabilize the energy market and thus, it remains to be seen whether this will be the case and if so, whether the new cuts will be enough to offset the tumble in global demand due to the pandemic outbreak. According to media reports, an OPEC+ meeting could take place on Wednesday and Thursday.

USD/CAD vs WTI

 As for the rest of Thursday’s data, in the UK, we have the monthly GDP, the industrial and manufacturing production, and the trade balance, all for the month of February. No forecast is available for the GDP rate, while both industrial and manufacturing productions are expected to have grown 0.2% mom from -0.1% and +0.2% respectively. The nation’s trade deficit is expected to have widened to GBP 6.00bn from GBP 3.72bn. In any case, we believe that pound traders will prefer to pay more attention to data referring to the month of March, during which the coronavirus probably left more marks on the UK economy.

The ECB meeting minutes and the US PPIs for March are due to be released as well, but bearing in mind that the ECB has already proceeded with more measures after its latest ordinary meeting, and that investors may prefer to focus on the initial jobless claims with regards to the US data, we expect both of these releases to pass largely unnoticed.

On Friday, it is Good Friday in most nation under our radar and thus, the respective markets will be closed.

With regards to the data, we only get China’s CPI and PPI for March, and the US CPIs for the same month. China’s CPI is expected to have slowed to +4.9% yoy from +5.2%, while the PPI rate is anticipated to have entered negative waters. Specifically, it is expected to have slid to -0.1% yoy from +0.8% in February.

As for the US inflation numbers for March, the headline rate is expected to have fallen to +1.6% yoy from 2.3%, while the core rate is anticipated to have ticked down to 2.3% from 2.4%. The case for the headline rate to fall more than the core one is supported by the yoy change in WTI, which slid further into the negative territory. Let’s not forget that the difference between the headline and the core CPIs is volatile items, like energy.

US CPIs vs yoy change in WTI

Following the disappointing NFPs last Friday, and potentially another extremely huge increase in initial jobless claims for last week, slowing inflation may add to speculation for more action by the FOMC. That said, with the Committee bringing rates to the 0-0.25% range, and announcing unlimited amounts of QE purchases, the big question is: What other measures can they adopt? Will they opt for negative interest rates? The Fed has never been in favor of the “negative rates” regime, but it remains to be seen whether the coronavirus outbreak will force them to make an exception. According to the yields of the Fed funds futures, investors do not anticipate something like that at the moment.

Fed funds futures market interest rate expectations

 

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