Weekly Outlook: Apr. 27 — May 01: Fed, ECB and Riksbank Policy Decisions
This week appears busy in terms of economic data and releases. There are four central banks on the calendar, with the BoJ already deciding this morning. On Tuesday, it’s the turn of the Riksbank, on Wednesday we have the Fed, and on Thursday the ECB. With regards to the data, we get preliminary GDPs for Q1 from the US and the Eurozone, while from New Zealand and Australia, we have the quarter’s employment and CPI reports respectively.
Monday appears to be a relatively light day in terms of economic data and releases, as the calendar is almost empty.
The only important announcement is already made and this was the BoJ monetary policy decision. The Bank decided to expand its stimulus efforts to combat the economic fallout due to the coronavirus, for the second straight month. Officials decided to increase the maximum amount of corporate bonds and commercial papers they are pledged to by, to JPY 20 trillion from around JPY 7 trillion previously. The Bank also clarified its commitment to buy unlimited amounts of government bonds, by removing the guidance with regards to purchases at an annual pace of JPY 80 trillion.
On Tuesday, in the European session, the Riksbank takes its turn. On the 16th and 19th of March, the Riksbank decided to extend its bond purchases this year by up to SEK 300bn in order to mitigate the effects of the pandemic, while on March 26th, officials decided to initiate purchases of commercial paper issued by Swedish non-financial corporations. It appears that Swedish policymakers do not want to cut rates back into negative waters, and that’s why they are expanding their purchases.
Since then, inflation data showed that both the headline CPI and CPIF rates declined to +0.6% yoy from +1.0%, while the core CPIF one, which excludes energy, ticked down to +1.5% yoy from +1.6%. Given that the slide in the core CPIF rate was not so big as in the headline prints, we can confidently say that the headline declines were mostly due to the tumble in oil prices. This may allow officials to wait for a while more before deciding whether additional measures are needed, as they may prefer to wait and see whether the already adopted measures are having the desired effects.
Later in the day, we get the US Conference Board Consumer confidence index for April, which is expected to have declined to 88.0 from 120.0.
On Wednesday, the central bank torch will be past to the FOMC. This would be the first ordinary meeting since January, after which the Committee decided to proceed with a number of simulative measures, including cutting rates to the 0–0.25% range and unlimited amounts of QE purchases, to support the US economy from the coronavirus damages.
On March 26th, Fed Chair Powell highlighted that the Fed is not going to run out of ammunition in its attempt to stimulate the economy, but since then they announced programs considered as a “never seen before” intervention into the US economy. The Committee announced that it will purchase corporate bonds, backstop direct loans to companies and that it will initiate a program to provide credit to small and medium-sized businesses. They also announced that they will purchase unlimited amounts of Treasuries and agency mortgage-backed securities in order to allow proper functioning of the US debt market. With the Fed never been in favor of the “negative rates” regime, all these measures make us believe that, now, there is little easing ammunition in the chamber and thus, policymakers may prefer to stand pat for now and wait for a while to see whether the already adopted measures are having the desired effect on the economy.
As for Wednesday’s releases, during the Asian trading, Japanese markets will be closed due to the Showa Day, but we get important data from New Zealand and Australia.
Getting the ball rolling with New Zealand, we have the employment report for Q1 and the trade balance for March. The unemployment rate is forecast to have increased to 4.2% from 4.0%, while the net change in employment is expected to have accelerated to 0.3% qoq from +0.2%. No forecast is available with regards to the nation’s trade data.
On March 15th, the RBNZ proceeded with an emergency 75bps rate reduction, noting that the outlook has “deteriorated significantly”. Officials also added that the rate will stay at 0.25% at least for 12 months, meaning that there are no more cuts on the horizon. That said, they agreed that should further stimulus be required, a large-scale asset purchase program would be preferable. Having said that though, we don’t believe that a QE program will be introduced at the upcoming gathering. Inflation accelerated to +2.5% in Q1 from +1.9%, while a potential rise in the unemployment rate may be due to good reasons. After all, the new added jobs are expected to have accelerated something suggesting that the increase in the unemployment rate may be due to more unemployed people start actively looking for a job.
From Australia, we get the inflation numbers for Q1. The headline rate is expected to have risen from +1.8% yoy to +2.0%, which is the lower bound of the RBA’s target range. That said, the trimmed mean and weighted mean rates are expected to have remained decently lower. The trimmed mean one is forecast to have held steady at +1.6% yoy, while the weighted one is forecast to have increased to +1.5% yoy from 1.3%.
When they last met, Australian policymakers left monetary policy unchanged and offered some details with regards to their QE program. They noted that they will do what is necessary to achieve a 3-year yield target of 0.25%, with the target expected to remain in place until progress is being made towards the goals for full employment and inflation. However, they added that if conditions continue to improve, it is likely that smaller and less frequent purchases of government bonds will be required.
After saying that interest rates have reached their effective lower bound at the previous meeting, the aforementioned points suggest that there is very little chance of expanding their QE program. On the contrary, they could soon scale it back if the spreading of the coronavirus continues to level off. Thus, slightly better inflation numbers are unlikely to make them change their minds. We believe that in order for that to happen, the spreading of the pandemic may have to get out of control again. The Aussie could gain somewhat on the better data, but in the broader picture, it may be another victim of the changes in the overall investor morale.
During the European morning, Germany’s preliminary CPIs for April are coming out. Both the CPI and HICP rates are forecast to have slid notably, to +0.5% yoy and +0.6% yoy from +1.4% and +1.3% respectively. This would raise speculation that the headline rate for the Eurozone as a whole, due out on Thursday, may follow suit.
In the US, apart from the FOMC decision, we get the preliminary GDP print for Q1. Expectations are for a 4.0% qoq SAAR contraction, after a 2.1% qoq SAAR expansion in the last three months of 2019. A shrinking US economy would be a surprise to no one, given the fast spreading of the coronavirus in the US during the last month of the quarter. That said, it would be interesting to see how deep the wounds have been. According to the Atlanta GDPNow and the New York Nowcast models, the economy contracted only 0.3% and 0.4% respectively, something that shifts the risks of the official forecast to the upside.
On Thursday, we have another central bank deciding on monetary policy and this is the ECB. Last Thursday, preliminary data revealed that the Euro-area manufacturing PMI PMI fell to 33.6 from 44.5, hitting its lowest since February 2009, while the services index fell to 11.7, its lowest ever, dragging the composite PMI down to 13.5 from 29.7. Despite recent signs that the pandemic may be leveling off, these data suggest that Eurozone’s economic outlook continued to deteriorate at the beginning of the second quarter of the year and it remains to be seen whether this, combined with a potential slowdown in inflation, will prompt the ECB to expand even further its stimulus efforts. Just for the record, a couple of weeks ago, President Christine Lagarde said that she and her colleagues are committed to doing everything within their mandate to fight the crisis.
As for Thursday’s data, during the Asian session, we get Japan’s preliminary industrial production and retail sales, both for March. Industrial production is anticipated to have declined 5.2% mom after sliding 0.3% in February, while retail sales are forecast to have fallen 4.7% after rising 1.6%. China’s official PMIs for April are also coming out, but no forecast is currently available. Following the slowdown and the stabilization of the coronavirus in China since March, we wouldn’t be surprised if the PMIs reveal another month of expansion in both the manufacturing and services sectors.
During the European day, Eurozone’s preliminary CPIs for April, and the bloc’s 1 stestimate of Q1 GDP are due to be released, just a few hours before the ECB decision. Both the headline and core CPI rates are expected to have tumbled to +0.1% yoy and +0.7% yoy from +0.7% and +1.0% respectively, while the GDP data are anticipated to show that the Euro-area economy has shrank 3.2% qoq after expanding only 0.1% qoq in the last three months of 2019. The case for a notable slide in the Euro-area inflation is supported by the potential decline in Germany’s inflation on Wednesday, while, taking into account the fast spreading of the coronavirus, a contracting economy is nothing but a given for the financial community. Therefore, we believe that EUR-traders may focus more on the ECB’s response to the damages caused by the pandemic rather than the data itself.
From the US, we get personal income and spending data for March, alongside to core PCE index for the month, while from Canada, we get the monthly GDP rate for February. Both the US personal income and spending are expected to have declined 1.5% mom and -5.0% mom from +0.6% and +0.2% respectively, while no forecast is available for the core PCE rate. Canada’s GDP is anticipated to have grown +0.1% mom, the same pace as in February.
Finally, Friday is Labor Day in several nations under our radar. We only get data from Japan, the UK, and the US. During the Asian morning, the Tokyo CPIs are due to be released, with the core rate expected to have slid to +0.1% yoy from +0.4%. No forecast is available for the headline rate.
Later in the day, the final UK manufacturing PMI for March is expected to be revised down to 32.8 from 32.9, while in the US, the ISM manufacturing index for the month is forecast to have declined to 36.7 from 49.1. The final Markit manufacturing PMI is also coming out, but as it is always the case, it is expected to confirm its preliminary estimate of 36.9.
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Originally published at https://www.jfdbank.com on April 27, 2020.