Drivers for the Week Ahead

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Win Thin
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• Risk sentiment is likely to remain under pressure this week as the impact of the coronavirus continues to spread; demand for dollars remains strong
• As of this writing, the Senate-led aid bill has stalled; the US economic outlook is getting more dire; Canada is experiencing similar headwinds
• This is a big data week for the UK; eurozone March flash PMIs will be reported Tuesday; oil prices continue to slide
• Japan has a heavy data week; RBNZ will start QE; China offers a potential bright spot amongst all the bad news

Risk sentiment is likely to remain under pressure this week as the impact of the coronavirus continues to spread. Germany and Italy have announced more severe restrictions on gatherings and travel. Reports that the Republican Senate-led aid bill has stalled due to Democratic resistance hasn’t helped matters, nor have increasingly dire estimates of the potential Q2 contraction for the US (see below).

Demand for dollars remains strong. Underlying risks remain elevated and so we expect the dollar to continue strengthening this week. DXY is on track to test the January 2017 high near 103.82. After that, we have to go back to 2002 to find the next target. The euro traded at a new low for this move near $1.0635 and the next target is the April 2017 low near $1.0570. Sterling remains heavy and a break below last week’s low near $1.1410 would signal greater losses ahead to levels not seen since early 1985.

AMERICAS

As of this writing, the Senate-led aid bill has stalled. The major sticking point for Democrats is a discretionary $500 bln chunk that they fear would be ear-marked for corporations instead of workers. Even some Republican Senators are not on board, as the 47-47 vote shows; 60 votes are needed for passage. House Speaker Pelosi said there was no deal and that the House would now craft its own package. The situation is fluid and an eleventh hour compromise is still possible.

A massive jump in initial jobless claims to 1.5 mln is expected from 281k last week. This would be an all-time high. During the financial crisis, claims moved from around 300k in September 2007 to a peak near 665k by March 2009, while the unemployment rate moved from 4.4% in May 2007 to a peak of 10% in October 2009. The economic outlook is still rapidly evolving but we are now looking for moves of much greater magnitude as the impact of the virus continues to spread in the US.

The second revision for Q4 GDP will be reported Thursday, with growth expected to remain steady at 2.1% SAAR. The Atlanta Fed’s GDPNow model estimates Q1 GDP growth at 3.1% SAAR vs. 2.7% previously, and will be updated Friday. Elsewhere, the NY Fed’s Nowcast model estimates Q1 GDP growth at 1.5% SAAR vs. 1.6% previously and Q2 growth at 0.1% vs. 1.1% previously. These readings will be updated Friday. The problem with these models is that they are in a sense real-time and not particularly forward looking. No one really believes that growth will be positive in Q2 and yet the New York Fed’s model paints a rosy picture.

It’s worth noting that one senior Fed official is more bearish than Wall Street. St. Louis Fed President Bullard warned that the US economy could contract -50% SAAR in Q2 and lead to an unemployment rate near 30%. This is by far the most bearish call we’ve seen, as the worst private sector call that’s out as of this writing is a -30% SAAR contraction with a resulting surge in unemployment to around 13%. Bullard called for aggressive fiscal stimulus and added that Q3 would most likely be a “transitional” quarter before “quite robust” growth is seen in Q4 and Q1 2021.

The Chicago Fed National Activity Index for February will be reported Monday. It is expected at -29 vs. -0.25 in January. If so, the 3-month average would fall to -0.35 from -0.09 and is the worst (high recession risk) since May. There is little doubt that March and beyond will show more significant weakness. The March 3-month average will move closer to the -0.7 recession threshold.

The regional Fed manufacturing surveys for March will continue to roll out this week. Richmond Fed reports Tuesday and is expected at -10 vs. -2 in February. This will be followed by Kansas City Thursday and is expected at -10 vs. 5 in February. Last week, Empire survey came in at -21.5 vs. 3.0 expected and 12.9 in February, while the Philly Fed survey came in at -12.7 vs. 8.0 expected and 36.7 in February.

Markit reports preliminary March US PMI readings Tuesday. Manufacturing PMI is expected at 44.0 vs. 50.7 in February, while services PMI is expected at 42.0 vs. 49.4 in February. US manufacturing sector had just begun to recover from the US-China trade war, but the outlook has gotten much bleaker.

There will be a lot of other US data this week. February new homes sales (-1.8% m/m expected) will be reported Tuesday, followed by durable goods orders (-1.0% m/m expected) Wednesday. Advance goods trade (-$63.8 bln expected), wholesale (-0.4% m/m expected)and retail inventories, and weekly jobless claims will be reported Thursday. Personal income and spending and final March University of Michigan sentiment (90.0 expected) will be reported Friday.

Canada is experiencing similar headwinds. Prime Minister Trudeau said half a million Canadians (2.5% of the workforce) applied for jobless claims last week. That likely breaks the all-time high of 499k from 1957 and is roughly equivalent to 5 mln jobless claims in the US. With the economy in freefall, more stimulus is likely. WIRP suggests 70% odds of a cut at the next BOC meeting April 15, but analysts see two cuts then that would take the policy rate down to 0.25%.

EUROPE/MIDDLE EAST/AFRICA

This is a big data week for the UK. It reports preliminary March PMI readings Tuesday. Manufacturing is expected at 45.0 vs. 51.7 in February, services is expected at 45.0 vs. 53.2 in February, and composite is expected at 45.1 vs. 53.0 in February. The only thing we can add is that risks are tilted to the downside. February CPI data will be reported Wednesday, with both headline and CPIH expected to fall a tick to 1.7% y/y. February retail sales will be reported Thursday, with headline expected to rise 0.2% m//m vs. 0.9% in January.

Bank of England meets Thursday but this has become a bit of a non-event after last week’s emergency moves. This is the first regularly scheduled meeting under new Governor Andrew Bailey, but he has already shown a willingness to act quickly and aggressively. The central bank also canceled its annual stress tests in order “to help lenders focus on meeting the needs of U.K. households and businesses via the continuing provision of credit.”

Eurozone reports preliminary March PMI readings Tuesday. Manufacturing is expected at 39.5 vs. 49.2 in February, services is expected at 39.8 vs. 52.6 in February, and composite is expected at 38.8 vs. 51.6 in February. Looking at the country breakdown, Germany composite is expected at 41.5 vs. 50.7 in February and France composite is expected at 38.1 vs. 52.0 in February. Here too, the only thing we can add is that risks are tilted to the downside.

Oil prices continue to slide as an OPEC-Russia truce seems increasingly unlikely. Hopes for some action by Texas producers have been met by criticism from US regulators and producers. Both Brent and WTI futures have fallen below their 2016 lows and are on track to test the 2001 lows near 16.65 and 16.70, respectively.

ASIA

Japan has a heavy data week. Preliminary March PMI readings will be reported Tuesday. February supermarket and department store sales will also be reported that day. Tokyo March CPI will be reported Friday, with both headline and ex-fresh food expected to slow a tick to 0.3% y/y and 0.4% y/y, respectively. With USD/JPY nearing the February high near 112.25, the pressure has eased somewhat for the BOJ to do something. WIRP suggests around 5% odds of a rate cut at the next meeting April 28.

RBNZ will start QE. The bank announced it will purchase up to NZD30 bln of government bonds in the secondary market over the next twelve months. It plans to buy NZD750 mln per week across a range of maturities via an auction process but will begin this week at NZD500 mln. RBNZ noted that financial conditions “have tightened unnecessarily” over the past week, reducing the effectiveness of the record-low policy rate of 0.25%.

China offers a potential bright spot amongst all the bad news. PBOC Deputy Governor Chen said China’s economy will quickly return to its potential growth rate, adding that there will be significant improvement in Q2. The official added that the PBOC will continue its targeted easing approach but announced no new measures. Some estimate that China’s factories are running at around 85% of normal now, which bodes well. It remains to be seen if Western nations will be able to emulate such a rebound given that China’s quarantine efforts were much more Draconian.