Monday, 18 May 2020 P. 1 Rates All major central banks reduced rates virtually to 0% and introduced a wide range of (new) policy measures to smoothen corporate and government bond market functioning (cf. the Fed’s unlimited bond buying), provide massive (dollar) liquidity and ensure credit flows to corporates (SMEs included) and households in order to help them withstand the coronavirus shock. Risk repricing during the mid-March panic caused US money market rates to spike before easing again as the Fed flooded markets with liquidity. Euribor rates in the EMU eased from recent highs towards - 0.25%. The ECB eased collateral rules and announced a liquidity backstop with its PELTROs, which are issued at a price of 25 bps below the MRO (ie -0.25%). US yields continue to discover new historic lows as the Fed went all-in to keep rates depressed for the foreseeable future. Markets brace for what probably is going to be the steepest recession on record. The return to pre-March lows in the EMU occurs only very gradually. Markets
Transcript
Monday, 18 May 2020
P. 1
Rates
All major central banks reduced rates virtually to 0% and introduced a wide range of (new) policy measures to smoothen corporate and government bond market functioning (cf. the Fed’s unlimited bond buying), provide massive (dollar) liquidity and ensure credit flows to corporates (SMEs included) and households in order to help them withstand the coronavirus shock.
Risk repricing during the mid-March panic caused US money market rates to spike before easing again as the Fed flooded markets with liquidity. Euribor rates in the EMU eased from recent highs towards -0.25%. The ECB eased collateral rules and announced a liquidity backstop with its PELTROs, which are issued at a price of 25 bps below the MRO (ie -0.25%).
US yields continue to discover new historic lows as the Fed went all-in to keep rates depressed for the foreseeable future. Markets brace for what probably is going to be the steepest recession on record. The return to pre-March lows in the EMU occurs only very gradually.
Markets
Monday, 18 May 2020
P. 2
Rates
The Euribor 3M strip curve suggests lower Euribor rates back to their pre-coronavirus levels of around -0.4% by early 2021 as (liquidity) risk premia ebb only gradually. Current Euribor rates (-0.25%) are in line with the ECB’s liquidity backstop programme.
The swap curve bull flattened the last few weeks with the bulk of the move coming after the ECB failed to convince markets during its April policy meeting at which it kept its monetary (PEPP) response to the pandemic unchanged.
The ECB-driven decline in peripheral spreads proved short-lived. Weak public finances (eg. in Italy) combined with doubts about the ECB’s strength and flexibility after a German court ruling challenged its PSPP programme causes investors to focus on country fundamentals.
Monday, 18 May 2020
P. 3
Currencies
Dollar appetite remains strong while the euro struggles amid European indecisiveness and institutional uncertainty. EUR/USD 1.08 acts as support which probably only holds because of the aggressive dollar liquidity measures taken by the Fed.
Sterling staged an impressive comeback following an aggressive sell-off during the March turmoil. However, the UK lags in its way out of the lockdown measures while Brexit – and the deadline for an extension – has returned to the spotlights keeping a floor (around 0.87) under EUR/GBP.
The Japanese yen slowly reclaims its status as safe haven currency. The yen strengthened more against the euro than to the dollar though. Investors still refuse to reduce dollar exposure in current uncertain times.
Monday, 18 May 2020
P. 4
Currencies
The Czech krona remains on the weak side while the coronavirus wreaks havoc on the economy. The currency lost its interest rate advantage all but completely (0.25% base rate). The central bank even explores options for negative rates.
The central bank’s measures (de facto limited tightening) continues to keep the forint well of its record lows. That said, the upside potential for these kinds of lesser liquid currencies is still limited. EUR/HUF 350 acts as key support.
Similar to other Central-European currencies, the Polish zloty doesn’t succeed in a sustained rebound after the March sell-off. Low policy rates and bond buying by the central bank keep rates low and turn the zloty less attractive.
Monday, 18 May 2020
P. 5
Others
Oil prices fell off a cliff and are still at multidecade lows despite a recent rebound. Demand is suppressed while storage facilities for excess supply are close to full. It caused the American WTI-equivalent even to trade negative!
Gold prices hover near recent highs, suggesting investors still seek shelter in what is considered to be a safe haven. At the same time low rates globally reduce the opportunity cost of holding non-interest bearing assets, such as gold.
Overall commodity prices initially tanked even further before recouping some of the losses made. Especially soft commodities (sugar, soybeans, wheat) remain under pressure.
Monday, 18 May 2020
P. 6
Others
Market stress measured by the VIX Index eased considerably as monetary and fiscal authorities around the globe stepped in. Lingering uncertainty about the coronavirus puts a bottom under the index however.
Stock markets continued to recover from the violent sell-off with ongoing relative underperformance on European indices. Several indices are hitting key resistance (eg.2 800 in the S&P500).
Ratio of polled US market bulls over bears: investor optimism continues to hover near recent and multiyear lows with a less than 1 to 2 ratio.
Monday, 18 May 2020
P. 7
Eurozone
The EMU economy contracted 3.8% q/q in the first quarter of 2020 with the worst to follow. Details are not available yet. However, it is clear that consumption and investments were a major drag on growth as the lockdown measures forced both to a standstill.
EMU PMI’s extended their slide in April to new unprecedented levels. Services are particularly hit hard as most of them are forced to shut. According to IHS Markit, these PMI levels correspond to a quarterly growth rate of -7.5% q/q.
Core inflation remained on a downward path, falling below 1% in April. Headline readings are further decimated to 0.4% as oil prices at dumping prices filter through.
Economic Overview
Monday, 18 May 2020
P. 8
Eurozone
Unemployment ticked up to 7.4% in March as companies began putting personnel on furlough in the second part of the month. A further, significant rise in the unemployment rate is all but certain.
As factories closed doors due to the coronavirus, industrial production slumped 11.3% m/m (-12.9% y/y) in March. Ongoing lockdown measures in April suggest the worst is yet to come.
With shops closed and consumers ordered to stay at home, EMU retail sales declined a whopping -11.2% m/m (-9.2% y/y) in March. Among the hardest hit is the clothing sector (-40% m/m) and fuel (-20% m/m). Internet orders rose by 2.6% m/m.
Monday, 18 May 2020
P. 9
Eurozone
Surprise index: measures the difference (in standard deviations) between the (median) Bloomberg consensus and the actual outcome of EMU economic data.
Data misses continue to be sizeable as the pandemic makes economic assessments very difficult. We see this in particular in sentiment indicators.
Monday, 18 May 2020
P. 10
United States
The US economy slumped -4.8% q/q as Covid-19 started to take its toll, though only by the end of the quarter. Private consumption fell off a cliff. Net exports contributed positively as imports declined faster than exports.
The steep and sudden decline in business confidence is spread both across company sector and size. That said, the ISM indicators, although at low levels, hold relatively well compared to their EU counterparts (PMI).
US on the brink of deflation as headline CPI inflation continued its drop amid the ongoing slump in oil prices. Excluding energy, the decline in core inflation is less pronounced. At 1.4% y/y inflation remains well below the Fed’s 2% target however.
Monday, 18 May 2020
P. 11
United States
The April job report (-20 million jobs) wiped out a decade of employment growth in a single month. Unemployment soared to 14.7% and is expected to rise well above 20% in the coming months with businesses hesitant to hire as long as the pandemic circulates.
Industrial production fell another record 11.2% m/m (-18% y/y), surpassing the slump in the wake of the second World War’s ending. The automotive sector declined another 70% after already being decimated 30% in March.
The March decline in retail sales was nothing compared to the record-breaking double digit fall in April (-15.6% m/m, -21.6% y/y). Almost every category printed steep declines, with clothing (-80%) and electronics (-60%) being the laggards. Non-store retailers, ie online shops, were the only ones eking out a rise (+8.4% m/m).
Monday, 18 May 2020
P. 12
United States
Surprise index: measures the difference (in standard deviations) between the (median) Bloomberg consensus and the actual outcome of US economic data.
The latest data releases have been mixed in terms of positive/negative surprises. However, the error margin is significant.
Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85
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