While it brought no surprises, the Fed was firmly in dovish mode yesterday evening. Retaining its forward guidance on interest rates – that the current FFR target range will remain unchanged until it’s confident that the economy is on track to achieve its employment and price stability goals – the FOMC also pledged to maintain its asset purchases at least at the current pace over coming months, while it will continue to study other central banks’ experiences of yield curve control.
The Committee’s updated projections also made clear that Fed officials expect the journey back to economic normality to be a long one – GDP is not expected to return to the pre-Covid level before 2022, the unemployment rate will remain well above the long-run equilibrium level into 2023, and inflation is also expected to remain sub-target by end-2022. So, it’s hardly surprising that all but two members of the Committee expect rates to remain unchanged at least until end-2022 too.
While that assessment of the economic outlook should hardly have raised eyebrows, it was enough to trigger a rally in USTs and other major government bonds, and a sell-off in equities. So, yields on 10Y USTs this morning are down to 0.70%, some 25bps below Friday’s peak, with yields on Bunds and Gilts with the same maturity down about 5bps apiece this morning. And JGBs (10Y yields down about 1bp to close to zero per cent) and particularly ACGBs (10Y yields down about 10bps to 0.91%) were firmer too. Meanwhile, the Topix closed down 2.2%, with the Hang Seng currently down only a little less than 2.0% and all other major Asian indices in the red too.
Data-wise, today’s handful of economic releases published so far (see detail below) have mostly been consistent with a global economy that is still struggling to cope with the impact of the pandemic. Certainly, the latest Japanese business survey was very downbeat, reporting downwards revisions to expected sales, profits and investment. While a lagging indicator, French data confirmed a record drop in payrolls (see below). And although the latest UK housing survey was consistent with greater stability in the market, expectations of price declines persist. The best release of the bunch was the latest report on South Korea’s exports, which jumped by about 20%Y/Y in the first ten days of June. While the growth is welcome, this appears largely to be the result of a calendar effect and we won’t be holding our breath for a fully-fledged rebound in global trade just yet.
The Japanese government’s latest quarterly business sentiment survey was unsurprisingly downbeat about economic conditions over the past quarter. Indeed, the headline sentiment diffusion index for large firms fell a whopping 37.5pts to -47.6, the weakest reading since the height of the global financial crisis. And the manufacturing index fell to its lowest on record, not least as the autos sector was significantly impacted by factory closures and weak demand. The non-manufacturing index similarly fell sharply, with particular weakness predictably focussed in the services sector. The overall diffusion indices for medium- and small-sized firms reported similar pessimism, both at their weakest since the series began.
Firms were explicitly more downbeat about domestic economic conditions too, with the relevant DI for large firms declining more than 50pts to -71.2. But with the government having been discussing the easing of containment measures at the time the survey was conducted (15 May), firms were less pessimistic about the outlook for the second half of the year. Admittedly, there was still a greater share of firms that expected a further deterioration in conditions than improvement in Q3 - the DI was forecast to remain in negative territory for the fourth consecutive quarter (-6.6). And while the survey reported an expected positive DI in Q4, almost half of respondents were still uneasy about the outlook that far ahead.
Against the current backdrop, the survey inevitably signalled a marked deterioration in expected sales growth for the current fiscal year, with firms forecasting a decline of more than 5%Y/Y (compared with growth of 1%Y/Y forecast three months ago). As such, expectations for profit growth were revised sharply lower too, with a forecast decline of 23½%Y/Y, which would mark the steepest drop since FY09.
So, firms also revised down markedly their investment intentions, projecting a drop of more than 7 ½%Y/Y in FY20. This principally reflected a double-digit annual decline in investment by non-manufacturers, with particular weakness in the retail, hospitality and transportation sub-sectors. Among manufacturers, auto firms were expected to provide the largest drag on investment growth. When excluding land purchases, investment was forecast to decline almost 4½%Y/Y. But despite the significant deterioration in conditions and the highly uncertain economic outlook, for now at least, the survey’s employment indices surprisingly still pointed to firms having insufficient staffing levels for their needs.
Data released this morning confirmed that French payrolls dropped at the end of Q1 by a record 2.0%Q/Q and 502.4k, to its lowest level since Q417. The decline was almost entirely concentrated in the private sector, where the number of jobs dropped by 2.5%Q/Q and by more than 497k. Given decent job creation ahead of the pandemic, compared to a year earlier, payroll employment was down by a somewhat more moderate 1.2%Y/Y and 304.7k.
Net job losses in France in Q1 came principally from the marketed services sector, where the decline of more than 468k and 3.7%Q/Q was more than four times the size of the largest quarterly drop on the series dating back almost 50 years. Perhaps inevitably, payrolls in the hospitality sector were among the worst hit. Of course, these figures exclude the impact of the government’s partial unemployment furlough support scheme, which by end-Q1 was already providing support to roughly 4mn workers, and now has more than 13mn workers registered.
Looking ahead, today brings Italy’s industrial production figures for April. Given the marked drop already registered in March (-28.4%M/M), unlike in Germany and France, Italian production might have avoided a new record decline in April. Nevertheless, the fall is bound to have been steep, and will likely leave the level of output down more than 40% from a year earlier.
The latest RICS Residential Market Survey, released overnight, pointed to greater stability in the housing market after estate agents in England were able to reopen from 13 May. However, the sector remains unsettled by the pandemic, and further price declines are expected over the coming year. Moreover, the housing markets in Scotland, Wales and Northern Ireland, where estate agents remain closed due to lockdown rules, remain firmly in the doldrums.
At least demand conditions in England certainly appear more ‘normal’, with the survey index of new buyer enquiries up from the record low of -94% in April to a near-neutral -5% last month. On the supply side, the net balance of new sale instructions rose 77pts to -20%. While it remained more deeply in negative territory, the index of newly agreed sales rose almost 60pts to -35%. Moreover, the survey measure of near-term sales expectations rose 54pts to a broadly-neutral -4%. And 12-month sales expectations now suggest modest growth, with the respective index up 16ppts to show a net balance of +10% of respondent forecasting a pick-up in transactions.
In terms of house prices, the survey’s headline price indicator, which reflects changes over the past three months, fell 10ppts to -32%, the weakest since 2010. Expectations of price declines over the coming three months moderated only somewhat, with the respective net balance up 30ppts to a still-deeply negative -43%. And twelve-month price expectations also remain negative, with a net balance of -16% (up 10ppts from April) forecasting price declines over the coming year.
Later this morning, the ONS will provide an update on its experimental high-frequency data on the impact of the coronavirus on the UK economy and household spending.
Following Friday’s stronger-than-expected labour market report, the latest weekly jobless claims figures will take centre-stage again today. As ever throughout this crisis, there is a wide range of predictions for initial claims, with the median view around 1.5mn, down from 1.877mn in the previous week. Continuing claims are expected to drop close to 1.5mn to about 20mn. Meanwhile, after yesterday’s further negative readings in the headline and core consumer price inflation data, today will bring producer price data, also for May. In the markets, the US Treasury will sell 30Y Bonds.