Hope springs eternal
With bulls in the ascendency, are bears going to have their day as the COVID-19 crisis turns hopes of a V-shaped recovery on its head?
Markets Weekly
15 May 2020
4 minute read
Week ahead
Pandemic developments and data on its economic impact remain the focus of investors’ attention.
On Tuesday, May’s IHS Markit flash purchasing managers’ indices (PMI) for the eurozone and UK are published. In April, the services sector shrunk further, to record lows, in both areas. The eurozone figure fell by 16.7 points to 11.7 (where a figure below 50 indicates economic contraction) while the UK reading plummeted by 23.4 points to 12.3. Manufacturing worsened too, with the data dropping to 33.6, from 44.8, and 32.9, from 48.0, respectively.
In the US, the impact on the economy of quarantining measures being lifted should be seen in May’s IHS Markit’s flash PMIs for services and manufacturing. Last month’s reading showed falls in both sectors to 27.0, from 39.1, and 36.9, from 49.2, respectively.
Markets will also be focused on the UK’s March International Labour Organisation (ILO) unemployment rate on Tuesday. The ILO data is likely to surge given the introduction of a full lockdown in March.
The US initial jobless claims data on Thursday will be watched after setting a string of record highs recently. The Philadelphia Federal Reserve business index data for May, on the same day, will help show how much the pandemic is hitting confidence. The index was noticeably weak (-56.6) last month as the COVID-19 outbreak worsened.
Chart of the week
Largest monthly drop in US CPI
US inflation fell at great speed in April, as quarantine measures to fight the COVID-19 pandemic bit. The consumer price index (CPI) dropped more than at any time in 20 years. Core inflation, which excludes food and energy as they tend to be relatively volatile, was 1.4%, down from 2.1% in March. This is the largest monthly decline, year-on-year, seen since 2000.
The annual growth rate remains above the low points seen in the aftermath of the tech bubble in the late nineties and the financial crisis of 2008. But core inflation is likely to slow further over the next few months.
As we wrote in one article in our latest monthly “Market Perspectives”, inflation in the short-term is likely to come under pressure. Despite the several fiscal packages approved by the US Congress and the White House, demand is likely to be subdued.
The large increase in the unemployment rate, to 14.7%, with a more accurate figure likely to be around 20% according to the Bureau of Labour Statistics, paints a grim picture for household consumption in coming months. In the short-term it looks like the biggest risk remains around deflation, rather than inflation.
Over the longer term, the massive liquidity injection from the US Federal Reserve and impact of the COVID-19 crisis on supply chains and social distancing could put upward pressure on prices. In this context, inflation hedges such as gold, inflation-linked bonds or real assets such as infrastructure appear attractive.
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