Money Matters 16th June 2020

This week’s title is paraphrasing Jerome Powell, the Chair of the Federal Reserve (Fed), who painted a sobering picture of the US’s economic prospects on Wednesday. According to the Fed’s latest economic forecast, real GDP could contract by as much as 6.5% this year followed by a recovery in 2021, when economic growth could reach 5%. In practice this means that the US’ GDP would not return to the pre-pandemic level before 2022 at the earliest – provided the Fed’s underlying assumptions are realistic. Mr Powell sent a very powerful message by stating that the FOMC unanimously sees the current Fed funds rate range of 0-0.25% stable by the end of 2021 (‘We’re not even thinking about thinking about raising rates’), whilst monthly asset purchases will continue as long as needed to ensure the orderly functioning of financial markets and to minimise the long-lasting negative impact of the coronavirus. In response to the Fed Chair’s remarks, President Trump tweeted that the Fed ‘is wrong so often.’ In the POTUS’ view the third quarter will be ‘very good’ and the fourth quarter will be ‘great.’ Although the President himself was openly displeased with the Fed, his administration’s economic advisor, Lawrence Kudlow, struck a more constructive tone, when he stated that it would be difficult for the Fed to offer a more accommodative policy stance.
This week, retail sales and industrial production data will be released in the US, which should provide some insights how economic activity in the world’s largest economy evolved in May. Elsewhere, the Bank of Japan and the Bank of England are scheduled to decide on interest rates and asset purchases, whilst the Fed Chair will deliver his semi-annual monetary policy report to Congress.
S&P 3,041 -4.48%, 10yr Treasury 0.70% +24.25bps, HY Credit Index 509.35 +76.75bps, Vix 36.09 11.57 Vol
Investor sentiment significantly deteriorated during the week and weighed on the major indices in the US as a result of the gloomy economic outlook presented by the Federal Reserve. As a result, the S&P 500 declined 4.8%, whilst the small cap-biased Russell 2000 index fell 7.9% by the end of Friday. In contrast, the tech-heavy Nasdaq behaved more defensively, as the index decreased 2.3%. Although the dollar consistently weakened against both developed and emerging market currencies until Wednesday, the trend reversed post the FOMC meeting on Wednesday, which led to a stronger DXY index by the end of Friday. In this environment, the short-end of the Treasury curve remained stable (the 2-year yield was 0.18%), whilst the belly and the back-end of the curve significantly declined (the 5-year fell 14bp to 0.31%, whilst the 10-year declined 19bp to 0.66% until the end of Friday).
Eurostoxx 3,153 -7.27%, German Bund -0.44% -1.60bps, Xover Credit Index 397.92 57.54, USDEUR .89 +0.49%
Investor sentiment and asset price movements in Europe resembled their American counterparts during the week. Most major stock indices declined by the end of Friday with the German DAX index delivering one of the weakest weekly returns (-7.5% in USD). The risk-averse investor sentiment drove German Bund yields lower, whilst the curve flattened (the 2-year yield fell 7bp to -0.67%, whilst the 10-year declined 16bp to -0.44%). In contrast, risk premia on periphery bonds (such as the Italian or the Spanish) widened during the week. 
HSCEI 9,832 -2.30%, Nikkei 22,305 -0.40%, 10yr JGB 0.01% -0.40bps, USDJPY 107.50 -2.05%
The risk-averse investor sentiment spilt over from the US to Asia after the FOMC meeting, although the impact on the regional stock indices was limited. Despite the reduced appetite for risk, frontier market indices (such as the Bangladeshi or Pakistani ones) managed to squeeze out positive returns by the end of Friday.
Inflation in China was slower than expected, as both consumer price inflation meaningfully slowed (2.4% YoY in May), and producer price deflation further deepened (-3.7% YoY in May). The slowdown in consumer price inflation was predominantly driven by easing food price inflation. Meanwhile, deepening producer price deflation was a function of commodity price fluctuations as well as a reflection of weaker external demand. Meanwhile, broad M2 money supply rose 11.1% YoY in May, indicating that the concerted efforts of the central bank and the government to boost credit flow to the economy has been exerting their favourable effect, which in turn will contribute to the further strengthening of the domestic economic activity.
Bangladesh’s exports amounted to USD 1.5bn in May, which means a sharp decline of 61.6% YoY, following a contraction of 82.9% YoY in April. The unprecedented weakness in foreign trade is primarily a result of deteriorating external demand.
Imran Khan, the Prime Minister of Pakistan signed the Budget bill for FY2020-21 after the cabinet’s approval. The bill foresees the budget deficit at 9.1% of GDP in FY2020 (ending in June 2020) and at 7% of GDP in FY2021 (ending in June 2021). Despite the (expected) low growth environment and the absence of new tax levies, the government expects total revenues to significantly grow, by 1.6ppt to 15.9% of GDP, whilst expenditures are not expected to meaningfully decline in FY2021.
Latin American stock markets took a nosedive as a result of the FOMC meeting on Wednesday.  Therefore, regional indices finished the week in the red. The Peruvian (-3.2% in USD) and the Brazilian (-3.8% in USD) stock indices were the least affected by the shift in risk appetite relative to their regional peers.
Industrial production in Mexico fell 29.3% YoY in April, due to a broad-based weakness in activities brought about by the Covid-related lockdown. Construction and manufacturing activities were impacted to the greatest extent in April.
As a consequence of the nationwide lockdown in Colombia, most business operations had to shut down for the entire month in April to contain the spread of the coronavirus. Therefore, retail sales volume in Colombia declined 42.9% YoY in April (following a 4.8% YoY contraction in March). Retail sales activity excluding fuel and car sales, showed a less negative pattern as the narrower indicator fell 10.7% YoY. Meanwhile, industrial production deteriorated 35.8% YoY in April. The weakness within industrial segments were uneven, since most food-related industrial activities expanded. In contrast, vehicle production declined 99.8% YoY.
The central bank of Peru left the key policy rate stable at 0.25%. The Monetary Policy Council’s official statement highlighted the weakness in domestic demand and concluded that inflation could be stuck at the lower end or below the central bank’s target range (1-3%) for a prolonged period of time without the maintenance of an accommodative monetary policy stance.
By the end of Friday, the South African TOP40 index declined 3.3% in USD as the index was significantly influenced by the change in global investor sentiment post the FOMC meeting on Wednesday. In contrast, the Kenyan (+3.4% in USD) and Egyptian (+1.9% in USD) indices gained by the end of Friday.
South Africa’s manufacturing output fell 5.4% YoY in March, after contracting by 2.3% in February. March was the tenth month in a row, when manufacturing activity shrank, even before the full impact of the lockdown.
Nigeria’s merchandise trade deficit amounted to USD 358mn in 1Q20. Although the trade deficit narrowed compared with the previous quarter, it is still in sharp contrast with a sizeable trade surplus in 1Q19. The foreign trade activity in 1Q20 significantly declined since the government restricted vessels not carrying essentials from docking at Nigeria seaports to limit the spread of the coronavirus. Furthermore, collapsing crude oil prices also contributed to the foreign trade gap via a drop in the value of exports.
Consumer price inflation in Egypt remained benign in May, as the headline CPI inflation slowed to 4.7% YoY (from 5.9% YoY in April). The core inflation gauge (which strips out the impact of volatile components, such as energy prices) followed a similar pattern, as the indicator eased to 1.5% YoY in May (from 2.5% YoY in April). The deceleration in both indices was primarily due to a decline in food prices. The May readings were well below the central bank’s 9% inflation target.
This week’s global market outlook is powered by Alquity


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