They’re Trying

The Kiwis have doubled QE
The Brits saw collapsed GDP
The Fed keeps on buying
More bonds as they’re trying
To preempt a debt jubilee

The RBNZ was the leading economic story overnight as at their meeting, though they left interest rates unchanged at 0.25%, they virtually doubled the amount of QE purchases they will be executing, taking it up to NZ$60 billion. Not only that, they promised to consider even lower interest rates if deemed necessary. Of course, with rates already near zero, that means we could be looking at the next nation to head through the interest rate looking glass. It should be no surprise that NZD fell on the release, and it is currently lower by 0.9%, the worst performing currency of the day.

Meanwhile, the UK released a raft of data early this morning, all of which was unequivocally awful. Before I highlight the numbers, remember that the UK was already suffering from its Brexit hangover, so looking at slow 2020 growth in any case. GDP data showed that the economy shrank 5.8% in March and 2.0% in Q1 overall. The frightening thing is that the UK didn’t really implement any lockdown measures until the last week of March. This bodes particularly ill for the April and Q2 data. IP fell 4.2% and Consumption fell 1.7%. Thus, what we know is that the UK economy is quite weak.

There is, however, a different way to view the data. Virtually every release was “better” than the median forecast. One of the truly consistent features of analysts’ forecasts about any economy is that they are far more volatile than the actual outcome. The pattern is generally one where analysts understate a large move because their models are not well equipped for exogenous events. Then, once an event occurs, those models extrapolate out at the initial rate of change, which typically overstates the negative news. For example, if you recall, the early prognostications for the US employment data in March called for a loss of 100K jobs, which ultimately printed at -713K. By last week’s release of the April data, the analyst community had gone completely the other way, anticipating more than 22M job losses, with the -20.5M number seeming better by comparison. So, we are now firmly in the overshooting phase of economic forecasts. The thing about the current situation though, is that there is so much uncertainty over the next steps by governments, that current forecasts still have enormous error bars. In other words, they are unlikely to be even remotely accurate on a consistent basis, regardless of who is forecasting. Keep that in mind when looking at the data.

In fact, the one truism is that on an absolute basis, the economic situation is currently horrendous. A payroll report of -20.5M instead of -22.0M is not a triumph of policymaking, it is a humanitarian disaster. And it is this consideration, that regardless of data outcomes vs. forecasts, the data is awful, that informs the view that equity markets are unrealistically priced. Thus, the battle continues between those who look at the economy and see significant concerns and those who look at the central bank support and see blue skies ahead. This author is in the former camp but would certainly love to be wrong. Regardless, please remember that data that beats a terrible forecast by being a little less terrible is not the solution to the current crisis. I fear it will be many months before we see actual positive data.

Turning to this morning’s session, the modest risk aversion seen in equity (DAX -1.5%, CAC -1.7%) and bond (Treasuries -1bp, Bunds -2bps) markets is less clear in the FX world. In fact, other than the NZD, the rest of the G10 is firmer this morning led by NOK (+0.7%) on the strength of the continuing rebound in the oil market. Saudi Arabia’s announcement that they will unilaterally cut output by a further 1 million bpd starting in June has helped support crude. In addition, another thesis is making the rounds, that mass transit will have lost its appeal for many people in the wake of Covid-19, thus those folks will be returning to their private vehicles and using more gasoline, not less. This should also bode well for the Big 3 auto manufacturers and their supply chains if it does describe the post-covid reality. It should be no surprise that in the G10, the second-best performer is CAD (+0.4%) nor that in the EMG bloc, it is MXN (+1.0%) and RUB (+0.5%) atop the leaderboard.

Other than the oil linked currencies, though, there has been very little movement overall, with more gainers than losers, but most movement less than 0.25%. the one exception to this is HUF, which has fallen 0.5%, after news that President Orban is changing the tax rules regarding city governments (which coincidentally are controlled by his opponents) and pushing tax revenues to the county level (which happen to be controlled by his own party). This nakedly political maneuvering is not seen as a positive for the forint. But other than that, there is little else to tell.

On the data front, this morning brings PPI data (exp -0.4%, 0.8% ex food & energy) but given we already saw CPI yesterday, and more importantly, inflation issues are not even on the Fed’s agenda right now, this is likely irrelevant. Of more importance will be the 9:00 comments from Chairman Powell as market participants will want to hear about his views on the economy and of likely future activity. Will there be more focused forward guidance? Are negative rates possible? What other assets might they consider buying? While all of these are critical questions, it does seem unlikely he will go there today. Instead, I would look for platitudes about the Fed doing everything they can, and that they have plenty of capacity, and willpower, to do more.

And that’s really it for what is starting as a quiet day. The dollar is under modest pressure but remains much closer to recent highs than recent lows. As long as investors continue to accept that the Fed and its central bank brethren are on top of the situation, I imagine that we can see further gains in equity markets and further weakness in the dollar. I just don’t think it can go on that much longer.

Good luck and stay safe
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