Drivers for the Week Ahead

  • The dollar is consolidating recent gains; reports suggest the White House and House Democrats are nearing a deal on another aid package
  • Weekly jobless claims Thursday are expected at 4.5 mln vs. 5.245 mln last week; regional Fed manufacturing surveys for March will continue to roll out this week
  • EU leaders will also hold a video conference Thursday to discuss its coronavirus response; preliminary April eurozone PMI readings will be reported Thursday
  • The EU and UK will start the second round of Brexit talks Monday; UK reports important data this week
  • Japan has a busy data week; RBA minutes will be reported Tuesday

The virus news stream remains mixed.  Italy reported the fewest new cases in a week, while New York state may have seen its peak too.  However infections in Singapore are rising and will likely raise fears of a second wave in countries that are just recovering from the first one.

The dollar is consolidating recent gains.  DXY was unable to make a clean break above 100 last week.  After that, the April 6 high near 100.931 is the next hurdle.  The euro remains heavy and is still on track to test the April 6 low around $1.0770.  Elsewhere, sterling is also trading heavy after being unable to make a clean break above the $1.25 area.  Lastly, USD/JPY remains in very narrow ranges just below the 108 area.  We remain constructive on the dollar, as poor economic data globally and lower oil prices are likely to weigh on market sentiment this week.

 

AMERICAS

Reports suggest the White House and House Democrats are nearing a deal on another aid package.  The Paycheck Protection Program is nearly out of funds already and so talks are focused on topping it off with another $300 bln.  Furthermore, reports of not-so-small businesses tapping into the program have led policymakers to focus more on making sure that the new funds are funneled to truly small businesses.  Reports also suggest that Democratic demands for $100 bln for hospital funding and $25 bln for virus testing will be largely be met.

Weekly jobless claims Thursday are expected at 4.5 mln vs. 5.245 mln last week.  If so, this would mean  that nearly 27 mln have become jobless over the last five weeks, which is close to 18% of the labor force.  Unemployment was 3.5% in February, just before the crisis.  If we add these together, the US is likely already over 20% unemployment after barely over a month.  May is unlikely to bring any relief.  Note that this week’s claims data is for the BLS survey week that includes the 12th of each month.

It’s worth taking another look at the state-by-state jobless trends.  According to the Bureau of Labor, the highest insured unemployment rates in the week ending March 28 were in Rhode Island (11.9%), Pennsylvania (9.8%), Nevada (9.6%), Washington (9.3%), Connecticut (8.9%), Massachusetts (8.7%), Minnesota (8.7%), Michigan (8.5%), Ohio (8.4%), and Georgia (8.2%).  Data continue to show that some of the key swing states are getting hit very hard.  Pennsylvania and Michigan are must wins for Trump and here they are amongst the highest unemployment rates.

The Chicago Fed National Activity Index for March will be reported Monday.  It is expected at -3.0 vs. +0.16 in February.  If so, the 3-month average would fall to -1.06 from -0.21 and would be well below the -0.7 recession threshold.  There is little doubt that April and beyond will show even more significant weakness.  While this is usually a reliable indicator of US recession risk, this current downturn was so sudden and steep that CFNAI has lost any relevance here.

The regional Fed manufacturing surveys for March will continue to roll out this week.  Kansas City Fed survey will be reported Thursday and is expected at -34 vs. -17 in March.  Last week, the Empire survey came in at -78.2 vs. -35.0 expected and -21.5 in March, while the Philly Fed survey came in at -56.6 vs. -32.0 expected and -12.7 in March.  Markit also reports preliminary April US PMI readings Thursday.  Manufacturing PMI is expected at 38.0 vs. 48.5 in March, while services PMI is expected at 31.3 vs. 39.8 in March.

Other minor US data will be reported this week.  March existing homes sales (-8.2% m/m expected) are out Tuesday, followed by new home sales (-15.8% m/m expected) Thursday.  Durable goods orders will be reported Friday and are expected to plunge -12.0% m/m.  Final April Michigan consumer sentiment will also be reported Friday and is expected to fall to 68.0 from 71.0 preliminary.

Canada reports some key data this week.  February wholesale trade sales (-0.4% m/m expected) will be reported Monday, followed by retail sales (0.3% m/m expected) Tuesday.  Wednesday brings March CPI data, with headline inflation expected to plunge a full percentage point to 1.2% y/y.  Common core is expected to remain steady at 1.8% y/y.  Last week, the Bank of Canada kept rates at the 0.25% lower bound but expanded its asset purchases to include provincial and corporate debt.  Next policy meeting is June 3, and further tweaks to its QE program may be seen then.

 

EUROPE/MIDDLE EAST/AFRICA

EU leaders will also hold a video conference Thursday to discuss its coronavirus response.  The last one yielded some options on funding various rescue packages but ultimately fell short of any progress towards so-called coronabonds.  Italian Prime Minister Conte renewed his calls for joint debt issuance, and warned of contagion effects if such action is not taken.  However, this remains a no-no for the northern European countries and so markets should be prepared for disappointment in this regard.

Preliminary April eurozone PMI readings will be reported Thursday.  Manufacturing PMI is expected at 38.0 vs. 44.5  in March, services PMI is expected at 23.0 vs. 26.4 in March, and the composite is expected at 25.5 vs. 29.7 in March.  Looking at the country breakdown, Germany and France are both expected see similar dynamics, with their composite readings seen dropping to 28.8 and 25.3, respectively.

The EU and UK will start the second round of Brexit talks Monday.  Last week, the UK stuck with its hardline stance and insisted it would reject any EU request to extend the transition deadline beyond December 31.  While this may just be posturing, we don’t think markets need yet one more thing to worry about this year.

UK reports important data this week.  March jobless claims and February employment data will be reported Tuesday, with labor market data expected to remain fairly solid.  March CPI will be reported Wednesday, with headline expected to drop a couple ticks to 1.5% and CPIH expected to drop a tick to 1.6% y/y.  March retail sales will be reported Thursday, with headline expected to drop -4.7% m/m.

Preliminary April UK PMI readings will also be reported Thursday.  Manufacturing PMI is expected at 42.0 vs. 47.8  in March, services PMI is expected at 28.5 vs. 34.5 in March, and the composite is expected at 31.0 vs. 36.0 in March.  CBI industrial trends for April will also be reported Thursday, with all readings plunging further from March.

 

ASIA

Japan has a busy data week.  March trade data will be reported Monday, with exports expected to contract -9.4% y/y and imports by -8.7% y/y.  March supermarket sales will be reported Tuesday.  Preliminary April Japan PMI readings will also be reported Thursday.   March national CPI and department store sales will be reported Friday.  Both headline and ex-fresh food inflation are expected at 0.4% y/y.

RBA minutes will be reported Tuesday.  At that April 7 meeting, the bank kept rates steady but signaled that it might curtail its asset purchases if conditions improve.  However, this really means nothing under a policy of yield curve control, which the bank said would remain in place for some time.  Governor Lowe will also speak Tuesday.  Preliminary April Australia PMI readings will be reported Thursday.  Elsewhere, New Zealand reports Q1 CP data Monday.