Equities had the worst week since the 2008-2009 financial crisis and fell into a more than 10% correction at the fastest rate in a long time. Most shares were sold indiscriminately on COVID-19 spread fears. During the week, the virus was seen to spread to many more countries (now 49) with exponential growth in cases outside of China, as the number of new cases in China started to reduce. Announcements by various authorities did not help market sentiment: northern Italy is in lockdown, Japan and Hong Kong closed schools and the northern Japanese island of Hokkaido declared a state of emergency. As the market was not in a position to assess the damage to economic and profit numbers, the selling was relentless.
Over the weekend, the Chinese PMIs were announced, which show the lowest levels ever, with services being hit much more than manufacturing. This is the path that may be followed by surveys in other parts of the world, too.
At the end of the week, global equities had fallen by double digits in most places, with Europe and the US and Asia better. Government bond yields fell again by more than 30 basis points (bps) for US treasuries and 13 for UK gilts. Gold, which had been the shining star year to date, suffered a large fall on Friday and finished the week down 3.5% on profit-taking. Oil prices fell sharply and Brent oil touched US$50 / barrel. Sterling was quite weak, as the battle of words between the UK government and the EU intensified. The Japanese yen was the strongest currency and the US dollar eased after a strong rise in early February.
The week ahead
Wednesday: China Caixin Service PMI sentiment survey (February)
Our thoughts: as the Chinese government transitions the economy away from a manufacturing-led growth model towards a service-led one, the service sector has grown in significance and now accounts for more than half of the Chinese economy. Confidence amongst service sector firms will therefore provide a vital gauge into the impact that the coronavirus crisis has had on economic activity. With cities on lockdown – employees banned from the workplace or advised to work from home and restaurants, shopping malls and cinemas all closed – it looks a near-certainty that service sector sentiment will plunge this week. The more challenging question is what implication this will have. An exceptionally weak reading raises fears that the coronavirus impact on the economy is worse than initially thought, but, at the same time adds more pressure on the Chinese government to introduce further policy stimulus, most likely through the fiscal channel – which over the medium term should be positive for growth.
Wednesday: UK Markit/CIPS Services PMI (February)
Our thoughts: with each week that passes there appears to be more evidence of a Boris bounce taking hold. The housing market, including sentiment surveys, mortgage approvals and house prices have all shown a pick-up in activity since the general election. The jobs market remains remarkably robust, with the number of people in work continuing to rise and the unemployment rate at its lowest level since 1975. After a weak end to 2019, there have also been signs of a rebound in consumer spending from January’s retail sales figures. This week sees the release of the service sector sentiment survey, an important indicator considering the service sector accounts for around 70% of the UK economy. Confidence amongst service sector firms has been increasing since the general election, consistent with the improvement in UK economic data. A further rise will strengthen expectations of a rebound in growth over the coming months.
Friday: US Non-Farm Payrolls (February)
Our thoughts: the US employment report for January was testament to the resilience and strength of the economy, with virtually all indicators showing an improvement at the start of the year. The economy added more jobs than expected in January (225,000 vs 158,000 expected) and average hourly wages also came in higher than anticipated, up 3.1% for the year. Even the slight rise in the unemployment rate (up to 3.6% from 3.5%) was a positive as it was the result of more people entering the workforce, with the employment-to-population ratio rising to 61.2%, the highest rate since 2008. Without doubt January’s employment report was a solid set of figures. Investors are expecting this positive trend to continue in February with the US expected to add 190,000 jobs over the month. The coronavirus could apply some downward pressure to the employment numbers, however, this is unlikely given the closed nature of the US economy – exports account for around 10% of the economy, which is low compared to developed market peers like Germany, which is closer to 40%. With the US Federal Reserve unlikely to raise interest rates in the near term, another strong employment report would suggest that households are in a relatively healthy state and consumption will keep the economy ticking along at a steady rate.
The numbers for the week
The US Federal Reserve (Fed) is now expected by the markets to cut interest rates three times this year, including one cut later this month and another by June. A few Fed members have made comments on the virus situation, including St Louis Fed President James Bullard saying that he would back interest rate reductions if COVID-19 develops into a global pandemic. On the other hand, Fed number two, Richard Clarida stated that it was “too soon to even speculate”, a comment also made by Chicago Fed President Charles Evans. Lastly, Chair Jay Powell pledged to support the US economy during this virus crisis, although he fell short of specific commitments.
In the UK, the Bank of England is also expected to cut rates, with one cut priced in by May. The large spending package expected for the UK is weighing on interest rates, just as rates are collapsing all over the world due to the virus, which is why a smaller number of cuts is estimated for the UK than for the US.
No sign of panic in any of the economic numbers. Housing market on a tear
Housing: the Case-Shiller home price index accelerated again, from 3.46% to 3.75% (and 2.85% vs 2.54% for the core 20-city index). This is corroborated by a stronger FHFA house price index at 0.6% vs 0.3% and a stronger house price purchase index at 1.3% quarter-on-quarter vs 1.2% (all of these are December numbers, though). This coincides with better housing starts and building permits, as ultra-low mortgage rates kick in and trigger a wave of refinancings. MBA mortgage applications were up 1.5% for the week. New home sales rose 7.9% in January (above estimates), vs 2.3% previously (revised upwards). Pending home sales up 5.2% vs 3% expected.
Major surveys: the Conference Board Consumer Confidence index for February was surprisingly volatile, with the present situation down sharply from 173.9 (revised down from 175.3) to 165.1, but the expectations up from 101.4 to 107.8. The University of Michigan sentiment index was almost unchanged, from 100.9 to 101.0, with current conditions slightly better than expectations.
Regional surveys: the Dallas Fed manufacturing activity index rose from -0.2 to 1.2. The MNI Chicago PMI rebounded sharply from 42.9 to 49.0. The Kansas City Fed index was up from -1 to +5.
Growth: GDP growth was confirmed at 2.1%, personal consumption was lower at 1.7% and the price index also lower at 1.3%. Durable goods orders fell 0.2% in January, better than estimates with ex transportation orders up 0.9% and capital goods orders also strong. Personal income in January rose 0.6%, from 0.1% previously, and above estimates. Personal spending was more subdued, up 0.2%.
Jobs and trade: jobless claims were up a little at 219K vs 211K with continuing claims a little lower at 1724K vs 1733K. The advance goods trade balance narrowed somewhat from US$68.7bn to US$65.5bn in January.
Inflation: the PCE deflator (personal consumption expenditures) was up from 1.5% to 1.7%, but below estimates. The PCE core deflator (the Fed’s inflation gauge) rose from 1.5% to 1.6%, still a long way from the 2% target. Separately, the University of Michigan inflation expectations have slightly softened from 2.5% to 2.3% for 1 year and remained at 2.3% for 5-10-year inflation.
Housing prices looking better
The CBI retailing reported sales survey rose from 0 to 1 with the total distribution reported sales down from 11 to 7. The BRC shop price index fell from -0.3% to -0.6% year-on-year.
GfK consumer confidence was up from -9 to -7. The Lloyds business barometer was unchanged at 23 (sample of 300 companies with turnover above £1m in industrial sector, consumer services, business & public sector). The Nationwide House price index up 2.3% year-on-year from 1.9%, the highest for 1 ½ years.
Mostly unchanged data
Unchanged data in Germany and France: GDP, private consumption, government spending, capital investments, business confidence, manufacturing confidence. In France, consumer confidence for February was unchanged at 104. In other countries consumer confidence was also holding up.
Eurozone M3 money supply rose from 4.9% to 5.2%. Eurozone economic confidence was higher at 103.5 vs 102.6, industrial confidence at -6.1 vs -7.0, services confidence at 11.2 vs. 11.0 and consumer confidence unchanged at -6.6. French consumer spending fell -0.9% year-on-year from +2.1% previously.
The German EU harmonised CPI (consumer price index) rose from 1.6% to 1.7% in February. In Italy, the CPI fell from 0.4% to 0.3%. In France, it fell a little from 1.7% to 1.6%.
Chinese PMI shock. Japan still depressed
China: the official February manufacturing PMI slumped from 50.0 to 35.7 but the services PMI collapsed from 54.1 to 29.6. The unofficial Caixin manufacturing PMI was more subdued at 40.3 vs 51.1.
Japan leading index was unchanged at 91.6 and the coincident index fell from 94.7 to 94.1. The Jibun Bank Japan manufacturing PMI for February was almost unchanged at 47.8, a surprisingly high number given the circumstances. January retail sales were down 0.4% year-on-year vs -2.6% previously. The jobless rate rose to 2.4% from 2.2%. Industrial production down 2.5% vs -3.1%. Housing starts fell 10.1% year-on-year in January and construction orders fell 17.0%. Vehicles sales year-on-year fell 10.7% in February, in line with previous data.
Oil prices fell in sympathy with stock prices last week, with the global Brent gauge falling to US$50/bbl. The movement in inventories had little impact on crude prices. Gold suffered a major fall at the end of the week, probably as many investors had to sell to meet margin calls on equities.