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Bank of Japan Summary: High downside risks for prospects of economic recovery

  
Analysis, Economy

Bank of Japan ‘Summary of Opinions’ from April’s monetary policy meeting

Summary headlines via Reuters:
  • Japan’s economy likely to remain in severe state for time being, downside risks high on prospects for recovery
  • short-term slump blamed on pandemic may not necessarily determine medium-, long-term path of Japan’s economy
  • Japan’s economy likely to improve, see prices pick up once pandemic subsides
  • timing of hitting price goal to be delayed as Japan’s economy may face contraction as sharp as during the great depression in 1930s
  • must take steps focused on liquidity provision, also guard against further deterioration in economic conditions
  • must closely monitor financial system, keeping in mind risk some japan bank loans could turn sour
  • appropriate to change BOJ’s forward guidance to one tied to impact of pandemic as economy already lost momentum to hit price goal
  • policymakers must act boldly to avoid repeat of great depression, there is room for more fiscal, monetary policy coordination as Japan faces risk of deflation
  • BOJ must re-examine effectiveness of its current policy to prevent japan from slipping back into deflation
  • BOJ must guide monetary policy keeping in mind chance pandemic may not subside quickly
  • Japan may face ‘reversal rate’ situation earlier than expected if interest rates fall further while financial institutions’ balance sheet becomes eroded by pandemic fallout
 Bank of Japan 'Summary of Opinions' from April's monetary policy meeting 

US Nonfarm payroll for April tumbled -20500K vs -22000K

  
Analysis, Economy

The US jobs report for April 2020

us
  • change nonfarm payroll -20500 vs -22000K. Prior month revised to minus 870K from -701K previously reported
  • 2 month payroll revisions-214K
  • private payrolls felt -19520K versus -22000K estimate
  • unemployment rate 14.7% vs 16.0% est
  • change manufacturing jobs -1330K vs -2500K est
  • average hourly earnings MoM 4.7% vs 0.4% est
  • average hourly earnings YoY 7.9% vs 3.3% estimate
  • average weekly hours 34.2 vs 33.5 hours
  • labor force participation rate 60.2% vs 61% estimate
  • Labor Department said large number of workers classified as employed, but absent. That likely The unemployment rate at 8 number better than estimated him

The numbers came out remarkably near the estimates (give or take 1.5 million).  The unemployment rate was better-than-expected however the Labor Department did say that large number of workers classified as employed, but absent. If those tilt to unemployed the unemployment rate would be higher.

The US labor department is out saying that the unemployment rate would be 5% higher if that workers were classified correctly. That would take the unemployment rate to near 20% (19.7%).
The initial reactions:
  • USDJPY moves higher. The EURUSD and GBPUSD moved lower.  AUDUSD move marginally higher but as rotated back lower
  • US stocks are higher. The Dow is up 319 points.  The NASDAQ index is up 110 points
  • US yields are higher with the 2 year up 2.1 basis points the 30 year is up 3.0 basis points

Fed’s Harker warns of a second US recession in 2021 if too quick to reopen

  
Analysis, Economy

Philadelphia Federal Reserve Bank President Patrick Harker speech

  • could see robust growth in H2 if US economy reopens in June with smart measures to contain virus
  •  says that without effective mitigation measures, economy could severely contract again in 2021
  • US economy will underperform until virus is under control
  • Fed is considering facilities that would lend directly to colleges, non-profit hospitals
  • banks should not issue large dividends at the moment
  • sees ‘brutally painful’ second quarter
  • says factories may be able to bounce back, but damage to travel, hospitality may be long-lasting

Headlines via Reuters

Philadelphia Federal Reserve Bank President Patrick Harker speech

UK April construction PMI 8.2 vs 21.7 expected

  
Analysis, Economy
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Latest data released by Markit – 6 May 2020

  • Prior 39.3
Construction activity in the UK crashes to an all-time low last month as clients freeze spending plans amid the fallout from the virus outbreak and business shutdowns. The real worry here is that this could lead to long-term disruptions and cause construction activity to be more subdued for a longer period than the drop seen in April. Markit notes that:

“The rapid plunge in UK construction output during April stands out even in a month of record low PMI data for the manufacturing and service sectors. Widespread site closures and business shutdowns across the supply chain meant that vast swathes of the construction sector halted all activity in response to the COVID-19 pandemic.

“Around 86% of survey respondents reported a fall in business activity since March, while only 3% signalled an expansion. House building and commercial work were unsurprisingly the hardest hit, but civil engineering activity also fell at by far the fastest pace since the survey began in April 1997.

“A drop in construction activity of historic proportions in April looks set to be followed by a gradual reopening of sites in the coming weeks, subject to strict reviews of safety measures.

“However, the prospect of severe disruption across the supply chain will continue over the longer-term and widespread use of the government job retention scheme has been needed to cushion the impact on employment. Looking ahead, construction companies widely commented on worries about cash flow, rising operating costs and severely reduced productivity, as well as a slump in demand for new construction projects.”

Eurozone April final services PMI 12.0 vs 11.7 prelim

  
Analysis, Economy
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Latest data released by Markit – 6 May 2020

  • Composite PMI 13.6 vs 13.5 prelim
The preliminary release can be found here. A tad better than initial estimates but again, it doesn’t take away the fact that the euro area economy saw a record contraction in business activity during the month of April. A summary to wrap your head around:
Markit notes that:

“The extent of the euro area economic downturn was laid bare by record downturns in every country surveyed in April, with output falling at unprecedented rates across the region’s manufacturing and services sectors.

“With a large part of the region’s economy shut down while COVID-19 infections spiked higher, the economic data for April were inevitably going to be bad, but the scale of the decline is still shocking. The survey data are indicative of GDP falling at a quarterly rate of around 7.5%, far surpassing the worst decline seen in the global financial crisis. Jobs are also being lost at a rate never previously seen.

“Hopefully, with coronavirus curves flattening and governments making moves to ease lockdown restrictions, many sectors should start to see output and demand pick up. The process will be only very gradual, however, as governments juggle between reviving economies and preventing a second wave of infections. Most companies will inevitably need to work at levels well below full capacity and sectors such as retail, travel, tourism and recreation – already the hardest hit – will continue to be badly affected by social distancing.

“While the rate of decline may ease in coming months, we do not expect to see any material signs of recovery until the second half of the year, and it is likely to be several years before the output lost due to the 

Goldman Sachs: Lockdown measures have reduced global GDP by an estimated 16%

  
Analysis, Economy
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Will countries even consider lockdown measures a second time?

Lockdownh/t @ tracyalloway

One of the most heated debates across the world still is whether or not the cure is more damaging than the disease itself. The cure of course being lockdown measures implemented by governments to contain the spread of the coronavirus.
You have to wonder, if we are on the cusp of a secondary outbreak in some major economies, can governments so easily make a decision to go into lockdown again?
As much as it is a health concern, the political pressures from an economic perspective could be a major consequence for a lot of governments if we do see such a scenario happen.
Just some food for thought. But yes, as warranted as the lockdown measures are to contain the spread and to not overburden medical capacity, it does come with a heavy cost.

Economists see Eurozone GDP contracting by 5.5% this year – ECB survey

  
Analysis, Economy

ECB releases the results of its latest survey of professional forecasters

  • 2020 GDP growth forecast -5.5% (previously +1.1%)
  • 2021 GDP growth forecast +4.3% (previously +1.2%)
  • 2022 GDP growth forecast +1.7% (previously +1.4%)
  • 2020 inflation forecast +0.4% (previously +1.2%)
  • 2021 inflation forecast +1.2% (previously +1.4%)
  • 2022 inflation forecast +1.4% (previously +1.5%)
The long-term inflation expectations remain anchored at +1.7%, though I would think that is slightly more optimistic given that it will take a considerable amount of time for the virus saga to pass us by and for the ECB to wean off recent easing measures.
Once again, much like other forecasts, just take all of this with a pinch of salt. This is all evolving day-by-day depending on the virus developments globally.

Eurozone April final manufacturing PMI 33.4 vs 33.6 prelim

  
Analysis, Economy

Latest data released by Markit – 4 May 2020

The preliminary release can be found here. Not much change to the initial estimate as euro area manufacturing activity experiences an unprecedented decline amid lockdown measures in the region to contain the virus outbreak. A summary:

Markit notes that:

“Euro area manufacturing output plunged to an extent greatly exceeding any decline previously seen in the near 23-year history of the PMI survey in April, reflecting a combination of factors including widespread factory closures, slumping demand and supply shortages, all linked to the COVID-19 outbreak.

“All countries suffered record falls in factory output, with Italy reporting the sharpest decline, as measures to contain the coronavirus intensified during the month.

“With virus curves flattening and talk now moving to lifting some of the pandemic restrictions, April will have hopefully represented the eye of the storm in terms of the virus impact on the economy, meaning the rate of decline will now likely start to moderate. Barring any second wave of infections, which would throw any recovery off course, the news should start to improve as we see more people and businesses get back to work.

“However, the PMI is indicating an industrial sector that has collapsed at a quarterly rate of decline measured in double digits, and any recovery will be frustratingly slow. Steps needed to keep workers safe will mean even businesses that are able to restart production will generally be running at low capacity, and most will be operating in an environment of greatly reduced demand. Not only will household spending remain historically weak, not least due to ongoing shop closures, but business spending on inputs and machinery and equipment will also remain subdued for some time.”

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