After the S&P500 closed down 5.9% yesterday, declines in Asian markets today were gradually pared back as the day went on. So, in Japan, where the yen eventually depreciated back through ¥107/$ but data showed that the drop in industrial output in April was even steeper than previously thought, the Topix closed down just 1.2% on the day to end the week 2.6% lower. Similarly, elsewhere for example, the Hang Seng is also currently down close to 1.1% to be down 2.3% on the week. And with US stock futures turning upwards, European equities have opened the day higher, with gains upwards of ½% in the euro area. So far, the laggard is the UK, where the April GDP figures added to evidence that the economy is the worst affected by the pandemic of all countries in the region (see detail below).
In bond markets, meanwhile, the better risk appetite has seen USTs reverse some of yesterday’s gains at the long end – 10Y yields are currently up a couple of bps to 0.68%. JGBs also made modest losses at the longer end today. But euro govvies and Gilts are currently little changed, although the periphery is underperforming slightly once again (yields on 10Y BTPs are up a couple of bps to about 1.51%, reversing roughly half of yesterday’s drop).
With lockdown measures applying throughout the month, UK GDP plunged 20.4%M/M in April to hit its lowest level since July 2002. Given the decline of 5.8%M/M in March when restrictions were first introduced, as well as a slight drop in February, economic output was down a little more than 25% from the pre-covid peak in January. That compares to a peak-to-trough decline of “only” about 7% during the global financial crisis.
Almost all categories of production inevitably fell sharply in April. Output in construction was down 40.1%M/M (and 43.6% from February), while manufacturing dropped 24.3%M/M (and 27.8% from February) and services fell 19.0%M/M (24.0% from February) – all (inevitably) declines of record proportion.
Among the various services, with pubs, restaurants, etc. shut, hospitality was down almost 90%M/M in April. With schools closed, education was down more than one third, as were the arts and leisure subsectors. Activity in wholesale, retail, transport and storage was down more than one quarter. And even output of health and social care was down by more than one fifth.
Within the manufacturing sector, with car factories effectively shut, output of motor vehicles was down more than 90%M/M in April. But capital goods production was also down more than one third, and all major categories fell bar pharmaceuticals, which rose by almost one fifth.
In terms of trade, exports of goods fell almost 15%M/M while goods imports fell almost 22%M/M. And services trade was even more significantly affected, with exports down more than 24%M/M and imports down more than 37%M/M.
Of course, with the gradual easing of lockdown measures, output in May and June will be stronger. However, as suggested by high-frequency data related to travel, footfall and credit card spending, with most non-essential stores, pubs and restaurants, and other face-to-face services still shut, UK GDP still looks likely to decline by more than in other European countries in Q2. We continue to pencil in a drop of around 20%Q/Q in Q2, somewhat better than the BoE’s initial estimate of a fall close to 25%Q/Q but woeful nonetheless.
Revised Japanese industrial production figures for April, published overnight, similarly confirmed a marked contraction at the start of Q2. In particular, output declined a larger-than-previously-estimated 9.8%M/M in April, the second steepest monthly drop since the series began in the early 1970s (only exceeded by the 16½%M/M slump after the 2011-quake). This left output down 15% compared with a year earlier at its lowest level for almost eleven years. Among the steepest declines, production of transport equipment was down a further 34.8%M/M, with output of passenger vehicles down 43.1%M/M following a cumulative fall of more than 9½% in the previous two months. Meanwhile, general and electrical machinery fell almost 10%M/M and 11%M/M respectively.
The drop in output was inevitable given reduced operations at factories in light of the government’s containment measures. And so today’s release also indicated that production capacity fell sharply in April, down more than 13%M/M to its lowest since the 2011-quake, with the decline most striking in the autos sector, down almost 38%M/M and 45%Y/Y. But while Japan’s state of emergency was lifted during May, survey’s including the manufacturing PMI suggest an even steeper contraction in output that month. And other detail in today’s release suggests ongoing significant weakness in the manufacturing sector – and autos output in particular – over coming months too. For example, the inventory-shipment ratio jumped a further 13½%M/M in April, following an 8½%M/M increase previously, with a near-80%M/M rise in the autos sector close to the highs seen during the global financial crisis.
Like in the UK and Japan, today will also bring euro area industrial production numbers for April. Following the record falls in manufacturing output recorded in the large euro area member states this week, the aggregate measure is expected to reveal a massive drop of about 20%M/M in production, following a fall of 11.3%M/M in March, leaving it roughly 29% lower compared to a year earlier. And while survey data suggest that industrial output was able to rebound somewhat last month as controls were eased and factories tentatively reopened, with demand set to remain very subdued over coming months, we expect euro area production to remain well down from its pre-coronavirus level well into next year and likely beyond.
Final May CPI data for France, published this morning, came in above expectations. In particular, the 0.2ppt drop initially estimated in the EU-harmonised measure was revised away to leave headline inflation unchanged on the month at 0.4%Y/Y, admittedly still the joint-softest reading since August 2016. Meanwhile, inflation on the national measure was now estimated to have edged slightly higher on the month, by 0.1ppt to 0.4%Y/Y. The upwards revision in the national measure in part reflected higher food price inflation (up 0.4ppt from the flash to 3.5%Y/Y), as well as stronger services inflation, which rose to 1.2%Y/Y in May, up 0.2ppt from the flash and 0.6ppt from April. As such, while prices of manufactured goods continued to decline (-0.7%Y/Y), national core inflation rose 0.3ppt to 0.6%Y/Y.
In contrast, final Spanish inflation was unrevised in May, confirming that inflation fell further on the back of lower energy prices, by 0.2ppt to -0.9%Y/Y, the lowest since the first half of 2016. Indeed, excluding energy and food, core inflation moved sideways at 1.1%Y/Y.
In the US, import and export price data will be released today, as well as the University of Michigan’s preliminary consumer confidence survey results for June.