US-China tensions up again

Chris Scicluna
Emily Nicol

Overview:
While Japan and China were on holiday, it’s been a torrid start to the week for the other main Asian stock markets, with the return of US-China tensions (President Trump’s pledge to publish a ‘conclusive’ report on the source of the pandemic and allusion to possible new tariffs) adding to renewed pessimism about the outlook for economic recovery and corporate earnings. Ahead of the release of Hong Kong’s Q1 GDP report later today (likely to show a year-on-year decline of more than 6%), the drop in the Hang Seng is currently approaching 4% and the major Korean and Taiwanese indices are down 2½%. US and European futures are down too. In the bond markets, USTs have opened firmer, with 10Y yields edging down closer to 0.60%, but European govvies are weaker across the board, with Italy underperforming on diminished risk appetite (10Y BTP yields up about 8bps to above 1.83%).

Looking ahead, after last week’s policy announcements from the Fed, ECB and BoJ, this week it’s the turn of the BoE (Thursday) and RBA (tomorrow), which are also both set to provide updates on their respective assessments of the economic outlook. Neither is likely to deviate from their current policy-settings, but the BoE in particular might signal the likelihood of an expansion in its asset purchase programme as soon as next month. Data-wise, Friday’s US labour market report will be the main attraction, but the likely rise in the unemployment rate to the highest since the 1930s will be cause for major concern.

UK:
All eyes in the UK this week will be on the BoE’s monetary policy announcement, to be published earlier than usual at 07.00 BST on Thursday. This will be accompanied by an updated economic assessment in its quarterly Monetary Policy Report, to be presented at the post-meeting press conference later that morning and for the first time by new Governor Bailey. Since the outbreak of the crisis, the MPC has already announced a comprehensive package of easing measures, including a cut in Bank Rate to a record low of 0.10%, a commitment to purchase an additional £200bn of Gilts and corporate bonds, and the launch of a new Term Funding scheme. And with the BoE having so far conducted only a little more than one third of these additional asset purchases, we wouldn’t expect a further expansion of its QE programme just yet. This notwithstanding, the MPC will no doubt indicate its willingness to ease policy further should it be required, with a decent probability that the BoE will signal the likelihood that it will increase its Gilt and coporate bond purchase target at its next meeting on 18 June.

Indeed, while the Bank’s quarterly Monetary Policy Report might well adopt a different format to normal with respect to its economic forecasts – perhaps presenting a range of potential outcomes under various scenarios for the near-term outlook – the scenarios will present the sharpest contraction in the UK economy for at least a century and the risks to both growth and inflation seem likely to be skewed to the downside. Separately, the BoE will also publish the FPC’s Interim Financial Stability Report and meeting record on Thursday. But while Boris Johnson’s cabinet will also that day discuss when and how to ease the UK’s lockdown, his strategy will not presented until Sunday/

Data-wise, likely of most interest at the start of the week will be new car registrations figures for April (due tomorrow), which, with showrooms having remained shut for the entire month, seem bound to report a much steeper pace of decline than the 44.4%Y/Y drop recorded in March. Certainly, the dramatic hit to activity in the services sector last month will be illustrated in the final PMI release (also tomorrow) – the flash estimate showed the headline activity index fell a record 22.2pts to just 12.3, the lowest in the survey 22-year history. The latest construction PMI (Wednesday) will also fall to record low from the 39.3 reading March. And April’s GfK consumer confidence survey (Thursday) is expected to confirm that households were extremely pessimistic, but perhaps no more so than in March.

Euro area:
The euro area’s economic data calendar kicks off this morning with the release of the final manufacturing PMIs for April. These are expected to confirm the dire outturns in the preliminary estimates, which inevitably pointed towards a marked contraction in both sectors throughout the region. And a similarly downbeat message is expected from the final services PMIs on Wednesday. Indeed, the flash composite PMI dropped 16.2pts to a record low of just 13.5. Meanwhile, after data published on Friday showed that French car registrations in April slumped by a record-89%Y/Y, national figures from the other large member states due throughout the week, including Italy’s today, will also report record drops as car showrooms remained closed during the lockdowns. And following last week’s first estimate of Q1 GDP growth (-3.8%Q/Q), Wednesday’s release of euro area retail sales figures for March will shed more light on consumption at the end of the first quarter. With most countries entering into lockdown over the course of that month, sales are expected to have fallen at a record pace (down more than 10%M/M).

Over the latter part of the week, industry releases are also expected to reveal record falls in demand and output. In Germany, Wednesday’s factory orders data are forecast to show a double-digit percentage monthly drop in March while industrial production numbers due the following day are expected to show output fell by 7%M/M in March. A similarly weak trend will be evident in the French and Spanish IP releases on Thursday and Friday respectively. March trade figures from France (Thursday) and Germany (Friday) are also due.

In other news, the ECB will publish its annual report on Thursday, with Vice President de Guindos due to present an updated economic assessment, no doubt based on the scenarios published today, by videoconference before the European Parliament’s Committee on Economic and Monetary Affairs. That day will also bring the publication of the European Commission’s spring economic forecasts which will give an insight into how deep the EU executive currently expects the euro area’s recession to be this year and the subsequent pace of recovery thereafter.

US:
In the US, this week’s data are expected to suggest that the economy continues to deteriorate. At the start the week, the main focus will be on tomorrow’s release of the non-manufacturing ISM and final services and composite PMIs, which are forecast to fall to levels consistent with an extremely deep contraction in activity – indeed, the flash headline services index fell in April to 27.0, the lowest level on record. That day will also bring final trade figures for March, which are likely to confirm a sharp fall in imports and weaker exports, while today will bring final factory orders data for the same month.

Focus over the second half of the week shifts to the labour market where the situation is unsurprisingly dire. The ADP measure of non-farm employment (due Wednesday) is expected to drop sharply in April, an outturn likely to be confirmed by Friday’s more comprehensive labour market report. In particular, non-farm payrolls are forecast to decline an unprecedented 22mn. Consequently, Friday’s unemployment rate is expected to rise significantly in April, to 16.3%, which would be the highest rate since the 1930s. And Thursday’s weekly jobless claims figures are likely to confirm that firms continued to lay off staff despite support from the Paycheck Protection Program.

Japan:
When Japanese markets reopen after the Golden Week holidays, the end of the week will bring a couple of releases of note. In particular, household expenditure figures are expected to report a significant decline in March as discretionary spending fell sharply against the backdrop of heightened economic uncertainty, with headline and core spending likely to have contracted over the first quarter as a whole for the second successive quarter. And the marked deterioration in the near-term outlook for consumption growth seems bound to be highlighted by the latest labour earnings figures (also due Friday) – which are expected to show (at best) no increase in average wage growth compared with a year earlier – as well as the final services PMI for April. Indeed, like the manufacturing survey, this could be even weaker than the preliminary release, in which the headline index fell a further 11pts on the month to a record-low 27.4. And while the downward trends in Japan’s coronavirus case and death numbers have been relatively encouraging, the government is set to extend the state of emergency (albeit with a non-legally binding national lockdown) through to the end of May. So, we would expect domestic demand, and economic activity more generally, to be much weaker in Q2.

Australia:
The conclusion of the RBA’s latest monetary policy meeting tomorrow seems highly unlikely to deliver any amendments to its key policy initiatives, with the cash rate to be unchanged at 0.25% and the current yield curve control target to be maintained at 0.25% for 3Y yields. But with the RBA set to publish updated economic forecasts in its quarterly Monetary Policy Statement on Friday, Lowe’s statement tomorrow seems bound to note to the extremely weak near-term economic outlook, a significant upwards revision to its unemployment rate projection and a marked downwards revision to its inflation outlook. On the data front, this week will bring revised retail sales and trade figures for March on Wednesday and Thursday respectively.

China:
Thursday will also bring the only release of note from China, with April’s trade report likely to show a sharp decline in exports as global demand weakened considerably at the start of Q2 with many European countries and the US having entered official lockdowns. Imports are also likely to have declined on the back of still subdued domestic demand.

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