After yesterday’s rally in Europe and the US, Asian stock markets picked up the baton with solid gains across the board, with investors in the region similarly encouraged by easing of lockdowns and vaccine hopes. Further cause for optimism came from yesterday afternoon’s joint proposals from Macron and Merkel to support economic recovery in the EU through €500bn (about 4% of GDP) of European Commission borrowing – of which the ECB would be permitted to buy more than half – to fund budget transfers to regions most affected by the coronavirus.
So, with no notable new economic data from the region to upset the mood, deepening US-China tensions – which Huawei now views as an existential threat – were put to one side. Among others, Japan’s Topix ended the day up 1.8% at its best close for more than two months, while China’s CSI300 closed up 0.8%. Despite the vigour of yesterday’s moves, US futures are also currently in positive territory. But European stock markets have so far posted a mix of modest gains and losses.
In bond markets, USTs are only slightly firmer after yesterday’s significant curve steepening, which saw 10Y yields peak close to 0.74%, the highest in a month. JGBs weakened slightly across the curve. And euro area periphery bonds have made further gains as the Franco-German proposals (which nevertheless would still need to find unanimous support from all other member states) sink in. Yields on 10Y BTPs are currently down a further 4bps to close to 1.62%, more than 20bps below Friday’s close, to take the spread over Bunds to about 210bps, around the lowest levels in more than a month. That’s a positive backdrop for the Italian government’s BTP Italia issue, which yesterday already received subscriptions of €4bn in its first day.
Of course, the most timely economic data are still exceptionally weak, with euro area car registrations figure chalking up a record decline this morning, while the (largely out-of-date) UK labour market figures nevertheless confirmed at record leap in jobless claims as well as a collapse in vacancies and notable weakening in wage growth (see below). So, Jay Powell will no doubt remain in dovish mode when he testifies before the Senate Banking Committee later today, while ECB Chief Economist Lane will also no doubt echo Lagarde’s reiteration yesterday that the Governing Council won’t hesitate to adjust the size, duration and composition of its PEPP programme if necessary.
With much of the euro area having remained in lockdown for the whole of April, this morning’s new car registrations figures for that month inevitably reported the steepest decline on record. We already knew that registrations in Italy and Spain had fallen more than 96%Y/Y, while those in France had dropped almost 89%Y/Y and sales in Germany were down 61%Y/Y. And while the pace of decline in some of the smaller member states was somewhat more moderate, today’s figures showed that registrations of new cars in the euro area fell a whopping 79.6%Y/Y to just 203k units, the lowest level by a considerable margin on record. So, having declined in each of the first four months of the year, this left registrations down 40%Y/Y so far in 2020, with sales in France, Italy and Spain all down by around half compared with last year. While April is likely to represent the trough, with the relaxation of the lockdown measures across the region only gradual, joblessness astronomical and uncertainty about the economic outlook still high, we expect new car registrations to remain particularly subdued for some time to come.
Germany’s ZEW survey for May will be released later this morning. And just as the Bundesbank was yesterday broadly upbeat about signs of recovery post-lockdown, this seems highly likely to show an improvement in investor optimism about conditions in the euro area’s largest economy. Euro area construction output figures for March are also due and likely to be extremely weak – indeed, while Germany saw positive growth that month (1.8%M/M), France reported a whopping decline of more than 40%M/M. In addition, ECB Chief Economist Lane will speak at an IMFS policy webinar on the ‘Economic outlook in the coronavirus pandemic and policy response’.
A focus in the UK today was the release of the latest labour market data. The headline employment and ILO unemployment data can be quickly ignored as they are both smoothed and out of date. But the jobless claims figures were awful, surging 856.5k in April to more than 2mn, almost ½mn above the peak during the global financial crisis. This saw the claimant count rate jump from 3.5% to 5.8%, the highest since early 1997. And these figures do not include the 7.5mn workers furloughed under the government’s Job Retention Scheme.
While the economy only went into lockdown towards the end of March, there was also a marked decline in the number of job vacancies that month, which were down more than 50%M/M to just 351k, the lowest for decades (and compared to a peak late last year of more than 900k). The number of weekly hours worked also fell sharply in the final week of the month, to leave the month as a whole marking the steepest annual decrease in ten years. Indeed, the ONS suggested that the total number of hours worked in the final week of March was around 25% lower than in other weeks in the first quarter.
Meanwhile, among the other detail of today’s report, there was a further notable weakening in wage growth in the three months to March. In particular, regular earnings growth eased 0.2ppt to 2.7%3M/Y, the softest since mid-2018. And when including bonus payments, total earnings were down to 2.4%3M/Y, the weakest since September 2017. Moreover, the (admittedly always volatile) single-month figures showed a more dramatic slowing that month, with total wage growth of 1.5%Y/Y, a rate last weaker more than five years ago, with private sector earnings down to just 1.1%Y/Y, the softest since August 2014. And with more than one fifth of those in employment having been furloughed and plenty more made permanently unemployed, we expect further significant downwards pressures on wages over coming quarters too. Indeed, in its Monetary Policy Report, the BoE expected average weekly earnings in Q2 to be around 5% lower than a year earlier – roughly double the steepest decline seen during the global financial crisis.
In the US, today brings the release of April housing starts and building permits data. But all eyes will be on the Senate testimonies of Fed Chair Powell and Treasury Secretary Mnuchin on the quarterly CARES Act report.