Sentiment settles

Emily Nicol
Chris Scicluna

After yesterday’s weaker showing (the S&P500 closed down 2.2% to reverse most of the previous day’s gain), markets appear to be somewhat more measured today, e.g. with the main Asian equity indices posting a mix of smaller losses as well as a smattering of gains and somewhat diminished risk aversion reflected in bond markets too. Among other things, suggestions that the US has now passed the peak in new coronavirus cases, and President Trump’s signal that he will today announce his guidelines for easing the US restrictions on activity – with some states expected to be given the green light to reopen before next month – appears to have offered comfort.

Japanese markets admittedly appeared still to be weighed by the relentless flow of negative economic data, with yesterday’s record drops in US retail sales and IP followed with a very downbeat Fed Beige Book and a pessimistic Japanese Reuters Tankan survey today (see below). The Topix eventually closed down 0.8%, still firmly within the range of the past week.

Elsewhere, however, South Korea’s KOSPI closed unchanged on the day after President Moon Jae-in's ruling Democratic Party won yesterday's general election with the biggest parliamentary majority since the country's move to democracy more than 30 years ago. Australia’s main index closed down 0.9%, but the drop was tempered somewhat by some better-than-expected labour market data (more on those figures below) even as PM Morrison suggested restrictions on activity could extend a further four weeks. But as China reported less than 50 new coronavirus cases and no additional deaths, its main stock indices ended the day higher. And while the number of new German cases and deaths rose yesterday, the authorities signalled the likelihood that they will also soon likely take some baby-steps to ease the lockdown. So, with US stock futures higher, European equity markets have started the day on the front foot too.

In the bond markets, following yesterday’s gains, USTs were only a touch weaker (10Y yields are up a couple of bps close to 0.65%, still little more than 10bps above last month’s record low). JGBs remained relatively little changed, with 10Y yields still close to the BoJ’s target of zero percent. But in the euro area, Bunds have also reversed some of yesterday’s gains (10Y yields up almost 4bps to above -0.44%). And while the ECB’s PEPP reaction function remains unclear, BTPs are thankfully a tough firmer after the sell-off of the past couple of days, with 10Y yields down about 5bps to 1.83%, having yesterday risen above 1.97% for the first time since the ECB unveiled its €750bn unrestrained purchase programme four weeks ago.

Looking ahead to the rest of the day, the high-frequency economic data are bound to remain extremely downbeat today. Most notably, the latest US weekly jobless figures will post another multi-million reading in initial claims, likely taking the cumulative total over the past four weeks to well above (a frightening) 20mn.

Today’s release of Japan’s latest Reuters Tankan survey was predictably downbeat, albeit perhaps to a lesser degree than might have been expected. In particular, the headline non-manufacturing index fell 13pts in April to -23, to leave it 37pts lower than its level at the start of the year and its weakest reading since February 2010. But this index was still considerably higher than the trough during the global financial crisis. And this was the same for the manufacturing DI, which declined an additional 10pts in April to -30, the lowest since October 2009 (but remained 48pts above the post-Lehman low). Inevitably most sub-sectors saw the number of pessimists considerably outweigh the optimists as concerns about Covid-19 weighed on sentiment. And firms anticipated a significant worsening of conditions over the coming three months – the headline non-manufacturing and manufacturing DIs were forecast to decline to -44 and -47 respectively.

Of course, today’s survey consists of a relatively small sample of large firms. Certainly, conditions at SMEs would be considered more challenging and expected to remain so for some time to come. So, we would expect to see a more significant deterioration in conditions – particularly in the services sector – reported in next week’s flash PMI for April, likely to a new record low and consistent with a deep recession in Japan through the first half of the year.

Indeed, yesterday’s overseas visitors figures for March illustrated the significant hit to Japan’s tourism sector seen even before Abe declared a state of emergency in several prefectures. In particular, the number of overseas arrivals plummeted 93%Y/Y last month to just 193.7k, the lowest level since the series began in the early 1990s. This left total visitors in Q1 at 3.9mn (down 47%Y/Y) at the lowest level since 2014. And so it was perhaps unsurprising to see a marked drop in the amount spent by overseas visitors, with total tourism expenditure down a whopping 41%Y/Y last quarter.

The headline figures of the BRC’s latest retail sales survey, released overnight, were inevitably weak, but perhaps not quite as bad as might have been feared. Indeed, while the reported drop in total sales of 4.3%Y/Y in March was steep, it was slightly less marked than the recent Brexit-related trough in November (-4.4%Y/Y). And, on a like-for-like basis, ‘same store’ sales were down a more moderate 3.5%Y/Y.

Of course, those aggregate numbers masked very significant swings in sales across the range of items, and over the course of the month, as the UK lockdown only kicked in from 23 March. Indeed, the BRC reported that sales of food and essentials saw an unprecedented surge in demand in the early part of the month but dropped significantly after the lockdown and introduction of social distancing in stores. Overall, food store sales were up 5.1%3M/Y in March. In contrast, the closure of non-essential shops led to high double-digit declines in sales of non-essential items – the sharpest on record – for which the reported rise in online shopping failed to compensate. Sales of non-food items were down 6.6%3M/Y even though online sales of such items were up 8.6%3M/Y. With high streets now deserted due to the lockdown, the extent of the decline in non-essential sales will be far more extreme in the April data.

This morning will also see the release of the ONS latest bi-weekly survey, focussing on the impact of Covid-19 on business conditions. This will be the first to fully reflect the UK’s official lockdown since 23 March and so seems bound to see a significant worsening compared with two weeks ago. Indeed, ahead of the lockdown, almost 40% of respondent firms signalled that turnover was unaffected, while 5% suggested that it was higher than normal. So, alongside an anticipated steep reappraisal of conditions reported in these readings, we would also expect to see a larger share of firms reporting that they would temporarily lay off staff than the near-30% reported previously. And despite the various funding support channels, we might also see a drop in the share of firms that were confident (previously 40%) they had had sufficient financial resources to continue operating through the current crisis.

At face value, the overnight release of the Australian labour market figures by ABS might have appeared relatively encouraging. For example, contrasting with an expected decline, the number of people employed rose 5.9k in March. Admittedly, this was the softest increase for five months and fully reflected an increase in part-time employment. Indeed, the annual increase in full-time employment fell more than 50k to its lowest for three years. Nevertheless, the increase in the unemployment rate was also smaller than expected, up by 0.1ppt to just 5.2%, bang in line with trend.

However, Australian labour market data are collected in the first two weeks of each month and so will not yet reflect increased restrictions in response to the spread of coronavirus in Australia – non-essential businesses were advised to close on 23 March, while stricter lockdowns were implemented on 31 March. So, while the government has also introduced a Jobseeker Payment scheme to protect employment, we would expect to see a very significant deterioration in April’s labour market report. And with PM Scott Morrison having suggested that the lockdown might extend a further four weeks – to give time first to develop an adequate testing and tracing regime – the labour market weakness is bound to persist next month and beyond too.

Certainly, today’s Westpac consumer confidence survey revealed a marked worsening of conditions this month. In particular, the headline sentiment index plunged 17.7pts – the largest monthly drop in the survey’s 47-year history – to 75.6, the lowest reading since the deep recession of the early 1990s. The weakness was unsurprisingly widespread, with the biggest declines seen in the ‘near-term economic outlook’ and ‘willingness to buy a major household item’ components – with the relevant indices down 31pts to 53.2 and 31.6pts to 76.2. And responses with respect to employment prospects were particularly gloomy. Indeed, 7% of those surveyed reported that they had already lost their job over the past month, with a further 14% on unpaid leave. Overall, the survey’s unemployment expectations index once again jumped in April to its highest in five years.

Euro area:
Yesterday’s data from the large member states shone a light on the extent to which government-funded furlough schemes are absorbing the labour market impact of the Covid-19 shock. In particular, in France more than 730k firms (more than half of the total) have taken advantage of the government’s scheme, with 8.7mn workers (more than a quarter of employees) now temporarily laid off on such a basis. In Germany, a similar number of firms (725k, up 12%W/W) have applied for support under the government’s kurzabeit scheme for subsidised reduced (or zero) working hours. While the number of workers affected is not yet clear, several millions, likely accounting for more than one fifth of the labour force, are probably now ‘shadow’ unemployed.

This morning’s final German inflation data for March provided no surprises, with the headline rate on the EU-harmonised measure confirmed at the flash estimate of 1.3%Y/Y. That marked a drop of 0.4ppt from February due not least to falling energy prices. The impact of lower oil prices will become more marked in April and beyond. And so we expect overall inflation in the euro area – for which the flash headline rate fell 0.5ppt to 0.7%Y/Y last month – to slide into negative territory over the near term.

Today’s remaining euro area dataflow will be less informative with respect to the current conjuncture. In particular, industrial production numbers for February are likely to be little changed from January, when output leapt a vigorous 2.3%M/M to suggest a much improved growth trend before Covid-19 took its toll.

All eyes today will be on the latest US weekly jobless claims numbers. A fourth consecutive astronomical number for initial claims is expected, with the Bloomberg survey median of 5.5mn down slightly from the readings above 6.6mn in each of the prior two weeks, but still more than enough to push the total number of job losses over the past four weeks to above 20mn. March housing starts are also due and are likely to post a double-digit percentage decline following recent elevated readings.

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