PMIs slump to extreme lows

Emily Nicol
Chris Scicluna

With President Trump having refuelled tensions with Iran – tweeting that he had instructed the US Navy “to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea” – oil prices have firmed slightly further today. And last night’s announcement by the ECB of a second round of collateral easing measures – in particular a decision to accept as collateral in its operations until September 2021 assets of entities downgraded to junk status as long as they had at least one investment grade rating on 7 April – also gave a modest boost to risk appetite. So, while the economic dataflow remained highly negative, there was just about enough to support further gains in most Asian equity markets today (e.g. the Topix rose 1.4% despite some predictably awful Japanese flash PMIs) while European and US stock futures are up too.

In bond markets, USTs have weakened only slightly, however, with 10Y yields currently up just 1bp to 0.63%. And JGBs were relatively little changed. But following the ECB’s collateral announcement, and indications that the central bank had yesterday been supporting BTPs, euro area periphery government bonds are firmer – 10Y yields on Italian, Spanish and Portuguese sovereigns are all about 5bps lower so far this morning. In contrast, Bunds have weakened after the German government announced additional fiscal stimulus plans. And Gilts are down too, after the UK DMO announced plans to sell a whopping £180bn of paper over the coming three months. On top of the £45bn pencilled in for this month, the plans imply that the DMO will sell roughly as many gilts over the first four months of the present fiscal year than it did over the previous record year in 2009/10.

After some horribly weak German and French economic surveys released earlier today (more on these and the day’s other data below), the euro area flash April PMIs are due for release shortly and are bound to make awful reading. Likewise, today’s weekly claims data are bound to show a further multi-million rise in US joblessness. But later in the day, hopefully EU leaders will make some progress in agreeing key parameters for the proposed Recovery Fund.

With the coronavirus crisis having escalated in Japan over the past month and Prime Minister Abe having extended the state of emergency in seven key prefectures to the whole country in the middle of the month, today’s flash PMIs for April were predictably poor. This was particularly true for services, for which the headline PMI dropped a further 11pts to 22.8, down a whopping 28pts since January to a record low and signalling an extreme contraction in activity in the sector at the start of Q2. And the detail inevitably suggested continued weakness ahead, with double-digit monthly declines in the new orders and business expectations components similarly to a series low.

While the decline in the headline manufacturing PMI was less marked (down 1.1pts), at 43.7 it was still the weakest reading since April 2009. And the degree of the drop last month was once again in part reduced by a further lengthening of delivery times (which counter-intuitively boosts the headline rate). Indeed, other detail implied a steeper pace of contraction in April with the output PMI declining to 37.8, while a further notable drop in new orders – in particular from overseas – offered a predictably gloomy outlook. Overall, the composite PMI was down almost 8½pts in April to a record-low 27.8. And with new orders declining and business expectations for the outlook weak, today’s survey suggested that Japanese firms were scaling back their workforces by the most since mid-2011.

In Australia, the overnight release by ABS of preliminary goods trade figures for March suggested a significant widening of the trade surplus at the end of the first quarter, as the value of exports surged that month. Indeed, the 29%M/M increase more than offset the 3½%M/M declines seen in the first two months of the year, not least reflecting a rebound in the value of exports to China. Imports from China also resumed last month, albeit only reversing a small chunk of the 41%M/M drop in February. Overall, the value of imports was up 10%M/M. On balance, today’s figures would imply a significant positive contribution to GDP growth from net trade in Q1 (exports up more than 4%Q/Q and imports down 3½%Q/Q).

Of course, these trade data exclude services, for which exports will have collapsed in March as tourism numbers plummeted. Certainly, the hit to services activity in April was illustrated by today’s flash PMIs, which showed the headline index plunge 18.9pts to just 19.6. The drop in the manufacturing index was less pronounced (down 4.1pts to 45.6) but still implied marked contraction. And overall, the composite PMI fell 17pts in April to 22.6.

EU summit:
A key focus in the euro area today will be the EU videoconference from 3pm CET, when leaders will discuss proposals to create a Recovery Fund to support economic activity once the covid-19 pandemic has passed. A fortnight ago, Finance Ministers agreed that the Recovery Fund should be “temporary, targeted and commensurate with the extraordinary costs of the current crisis and help spread them over time” to reduce refinancing risks over coming years. The leaders were asked to agree practical aspects, including its sources of financing and whether to use “innovative financial instruments”.

Southern member states have since called for a fund to provide roughly €1½tn, about three times the volume of funds available to euro area member states via the ESM, EIB and Commission to deal with the current crisis. They also want the support to take the form of grants financed via common debt issuance. Inevitably, northern member states are far less ambitious, and would prefer to make support available via loans rather than grants. Ultimately, a combination of grants and loans, financed by a mixture of existing budget lines and loan mechanisms as well as some new borrowing, would seem the most likely outcome. But little detail seems likely to be agreed today.

To be meaningful, the Fund would significantly reduce refinancing risks in Italy and other southern member states over the coming few years as recovery is established. And so, it would also help those countries to increase their near-term fiscal support closer to the levels provided by Germany. Indeed, while the amount of support in terms of immediate stimulus, tax deferrals, liquidity and credit guarantees provided by the German government was already far larger than in any other member state, earlier today the ruling coalition agreed to increase further the amount of stimulus, by about €10bn. In particular, Germany’s government aims to increase the levels and duration of benefits paid to furloughed workers, and provide extra support through the tax system for ailing sectors and SMEs, including a temporary 12ppt VAT cut for restaurants, to last for twelve months from 1 July 2020.

Euro area data:
Like other major economies, today’s flash euro area PMIs for April are bound to signal economic contraction of record magnitude for the post-War period. With lockdown measures remaining in place across much of the region, the indices will report further sharp declines in both the headline services and manufacturing indices, with the former to drop to a new record low and the latter likely to reach its weakest since the global financial crisis. And so the composite euro area PMI will similarly fall further from last month’s series low of 29.7. Indeed, the flash French indices released a little while ago were unprecedentedly weak. The services PMI fell a further 17pts from March to just 10.4, a record low for all countries. And while the manufacturing PMI dropped a smaller 11.7pts to 31.5, the composite PMI fell more than 17pts to a paltry 11.2.

The latest French INSEE business survey, also released this morning, was similarly commensurate with a record pace of contraction. Indeed, the headline business climate index fell the most on the series dating back to 1980, to a record low of 62, some 7pts below the trough during the global financial crisis. With more than 10mn workers already signed up to the government’s temporary unemployment wage subsidy scheme, the employment climate index also unsurprisingly fell to a series low. And the survey also suggested that the industrial capacity utilisation rate has dropped more than 15ppts over the past three months to a record low of 67%. INSEE noted that much manufacturing activity had been temporarily shut down because of the lockdown, but that the agri-food sector had seemingly got off most lightly, with capacity utilisation at a somewhat more respectable 75%.

This morning’s results of Germany’s latest GfK consumer confidence survey, conducted in the first two weeks of April, also illustrated the case for the further fiscal support announced by the government overnight. While consumers’ overall expectations of the outlook did not deteriorate quite so much, GfK reported a marked fall in income expectations and propensity to buy. As a result, its headline index (published as a forecast for the coming month) fell by a record 25.7pts to -23.4, almost 25pts below the low during the global financial crisis.

With the number of daily Covid-19 cases seemingly now only surpassed by the US, the UK flash April PMIs seem highly unlikely to be materially better than those elsewhere. Indeed, the extent of the shock to economic activity was illustrated yesterday by new data revealing that 2.2 million workers from 309k firms were now registered for the Government’s Job Retention Scheme. So, with large swathes of the sector temporarily closed due to the lockdown, the headline services PMI is once again likely to see the most striking decline in April having fallen by a record 18.6pts to 34.5 last month. The manufacturing PMIs will also point to marked contraction, although the headline index will be held up to some extent by a further lengthening of supplier delivery times. The CBI’s industrial trends survey – also due to be published later this morning – will similarly point to a marked decline in output and the steepest drop in manufacturing orders for decades. Overall, the composite PMI is bound to fall to a new record low and a level consistent with a deep contraction at the start of Q2.

Beyond the data, external MPC member Vlieghe will give a webcast speech on BoE monetary policy and the central bank’s balance sheet.

In the US, the latest weekly jobless claims numbers are likely again to be alarming. While perhaps down on the past few weeks, initial claims are likely again to reach several millions, while continuing claims are likely to rise above 16mn. The flash Markit PMIs and Kansas Fed manufacturing activity indices for April are highly likely to report further significant declines.

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