Good Morning.. While we didn’t get anything new in policy from the Fed, What did come across to me was that he used the term “medium term” a lot. In fact through the statement he seemed less than convinced of a V-shaped recovery to me. He called on the government to do more and Trump is talking of bailing out the oil industry and this with the lower USD has seen my USDCAD position almost hit its stop. But we have the ECB to consider today and to be honest I see no reason to do more. Buying more bonds is not going to create growth and has been proven in the past but at this rate, the PEPP programme will run out in October. Cutting rates further would probably do more damage and with the 6th May looming large for a decision on the 7yr budget and some hope of an agreement on how to deliver the rescue package, they my hold. But I am not hearing the same confidence in a V-shaped recovery from the central bankers and I think that theory is about to be tested. We have quite a bit of data to consider, including US weekly jobless claims where another 3.5mln are expected to be signing on but apparently it is meaningless. Look for the US spending and income numbers and PCE data too.
Keep the Faith..
Data.. All Times BST
08:55.. Germany Unemployment Chg Cons:76k Prev:1k
Germany Unemployment rate Cons: 5.2% Prev:5.0%
10:00.. Eur CPI Core y/y (Prelim) Cons:0.7% Prev:1.0%
Eur CPI Estimate y/y Cons:0.1% Prev:0.7%
Eur GDP q/q (Adv) Cons:-3.2% Prev:0.1%
EUR Unemployment March Cons: 7.7% Prev:7.3%
12:45.. Eur ECB Deposit Facility Rate Cons:-0.50% Prev:-0.50%
Eur ECB Main Refinancing Rate Cons:0.00% Prev:0.00%
Eur ECB Marginal Lending Facility Cons:0.25% Prev:0.25%
13:30.. US Initial Jobless Claims Cons:3.5mln Prev:4.427mln
US Personal Income Cons:-1.5% Prev:0.6%
US Personal Spending Cons:-5.0% Prev:0.2%
US PCE Core m/m Cons:-0.1% Prev:0.2%
Speakers:..
13:30.. ECB Chair Lagarde press conference
Details 30/04/20
As expected not much new from the Fed but it seems they do not see a V-shaped recovery: ECB have probably done as much as they can. Time for EU leaders to stand up and unite.
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Basically, Fed officials restated their pledge to hold the benchmark interest rate near zero and will keep buying bonds, judging that the coronavirus pandemic “poses considerable risks to the economic outlook over the medium term.” Those words “medium term” came up a lot and seems to have been missed by many. But we got more or less as expected to be honest as they have done a lot and that still needs to feed through. After the official announcement we saw the USD drift lower but markets were not spooked by this reference to the recovery possibly taking longer to establish and stocks held solid gains on the Gilead story. Just after the Fed announcement, the S&P was still up 2.5% and I think that is because the Fed clearly stated that it “will use its tools and act as appropriate to support the economy” and liquidity is all that investors are focused on. They certainly are not interested in bad data. Housing in the US is looking in dire straits. After new home sales suffered their biggest March drop ever, pending home sales were expected to decline by a record amount mom (-13.7%) in March. However, pending home sales was far worse than expected – plummeting 20.8% mom and 14.5% YoY!
Housing may take some time to recover and associated job losses look likely.
Again, it seems that this data is totally irrelevant. The fact is that many cannot get to see a house let alone buy one so this is expected to some degree but can the recovery be quick if so many have lost their jobs? Is this the time to leverage up? Of course, GDP was totally ignored and to be honest it is backward looking and these markets are certainly looking well forward for a recovery but the US is cruising into recession and the question is how long it lasts. Markets also got a boost from better than expected oil inventories which took oil and equities higher. But during the press conference, Powell said his view was that at some point the Fed may need to do more and he suggested they would be looking at fighting this issue over the medium term; that does not sound like a V-shaped recovery to me! He reiterated that there were “considerable risks to the economic outlook over the medium term” But of course, the markets picked up on the “can do more” part. He said “this is not the time to worry about debt”; OK when is? It seems to me the MMT is here to stay in the US as a lot of this will not be unwound.
However, listening to him last night, it almost sounded like he was concerned of permanent damage. He also seemed to call on Congress to do more and he must be extremely concerned about where the US economy is right now and suggested it will take some time to get back anywhere near normal. Regarding what they can do to help with loans, what did come across is that these are loans and they need to be paid back and those that do not qualify (some of whom need it) will be passed over. Those that need it less will get the loans and some will not be saved. Again, the Fed is helping to wrong end. Grants are not an option for the Fed on a legal basis (which is strange as they have broken just about every rule in the book recently). But this caught my attention: “Looking out over the “next year or so”, there was still huge uncertainty over whether the virus itself could be defeated, there was the risk of “damage to the productive capacity of the economy”, there was a “very negative” global dimension to the problem, and consumers would be cautious as they started spending again”. Does that sound like a V-shaped recovery to you and I wonder at what point markets realise a V is shaping up to be something completely different; a month? There is a huge amount of shocking data still to come and central bankers certainly do not share the optimism of equity investors.
So the focus for equity investors is the fact that the Fed stands to possibly do more and the fact that science is starting to propose a drug for this virus but that also may arrive late like the global recovery. Today is another big day for asset markets with the ECB meeting and a host of important data, including another set of US weekly jobless claims to consider, with another 3.5mln expected to be claiming benefits. These numbers of unemployed are really starting to stack up and not just in the US. Even if the claims data beats expectations, this is a human and economic disaster. Overnight we saw some rather disappointing manufacturing PMI data from China with April Manufacturing PMI coming in at 50.8 vs 51 cons and April Caixin Manufacturing PMI at 49.4 vs 50.3 cons while retail sales were about as expected at -4.6%. Japan saw April Consumer Confidence fall to 21.6 vs 27.6 cons and I think we need to monitor the consumer confidence levels around the globe. In NZ we saw April Business Confidence fall to -66.6 from -63.5 previous.
The top 5 shares in the US keep producing decent results and Facebook was another last night that beat forecasts and these 5 are propping up the whole index. Revenues in the first three months of 2020, which come largely from advertising, rose 17 per cent year on year to $17.7bn, just above analysts’ expectations of $17.2bn. But this is company whose model is based solely on advertising and in my experience, advertising is dramatically cut back in recessions. These 5names, so far seem to be benefiting from the lockdown and we see Amazon earnings tonight and I would think they have had a bumper time with on-line deliveries. After the close, Facebook shares were up about 10% after a 6% rally during the day! So here we are, facing a severe recession and the S&P is closing in on 3000. Trump is also talking of bailing out the appallingly run US oil industry and this has helped oil rise and this, with the lower USD has seen USDCAD almost down to my stop. It looks very vulnerable.
But the ECB will be the main event today but to be honest, I think they have done about all they can and cutting rates further is not going to help. They already seem to be turning Japanese and following the same path to nowhere. The ECB has been very active under Lagarde to date but Europe is heading for its deepest post-war recession and government debt levels are expected to balloon. The ECB has already spent about €100bn of the €750bn PEPP programme it announced last month and at that pace, it will only last until October! But asset buying clearly does not promote growth as we have seen proven in so many places including the EU to date. In fact it is now believed it may cap it. The ECB is pushing free money to the banks to lend and rates below the deposit rate but the issue here is not the supply of loans but the lack of demand. They never seem to get that. Lagarde warned EU leaders last week that eurozone GDP could fall 15 per cent this year.
On Tuesday, Fitch downgraded Italy’s credit rating to one notch above “junk” status. Buying bonds is only part of the cure, the EU leaders need to unite and agree to whether this is a union or not. On that note, I remind you of May 6th, the deadline for getting this bail-out package delivered and for the setting (agreement) on the 7year budget. This is a real test of the unity within the union. I think EUR stays offered into this deadline and remain bearish EURJPY and EURAUD. French Consumer spending fell 17.9% this morning after -5.0% expected. Again, keep an eye on the consumer. France looks particularly weak.
Column chart of % change on previous quarter showing Coronavirus plunges French economy into worst post-war slump
The ECB is clearly committed to the EU bond markets and is there in case of downgrades but that does not promote growth. Investors need to realise that. The EU is facing a dreadful recession and political uncertainty if EU leaders cannot agree how to help the weaker nations. As an investor, I would be looking elsewhere for a while. Today, I think the ECB will probably hold and wait and see if the EU leaders can finally agree how to deliver the rescue package.
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Strategy:
Macro:.
Long USDCAD 1.4140. Stop 1.3850ish.
Short EURJPY @ 116.13.. Stop above 117.25
Short EURAUD @ 1.6625.. Stop above 1.6740
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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