Investors will continue to monitor the impact of COVID-19 on the global economy as there can be no hiding from the dreadful economic data that is now pouring in from all angles as we move further into the second quarter. The week ahead sees the release of key statistics: US retail sales, industrial output and inflation data; China’s trade statistics; UK and Germany’s first-quarter GDP figures; Europe’s industrial output numbers and Australia’s employment figures. New Zealand’s central bank will be deciding on monetary policy. Markets anticipate gloomy news.
Spotlight will shine on two US macroeconomic reports this week
An appearance by Fed Chair Powell will be closely watched and a pair of macroeconomic reports will stand out from the rest as the dent on April’s data will be highly visible in the raft of releases coming from the United States over the next few days. First up, the Consumer Price Index on Tuesday is expected to fall to a near 4-year low of 0.8% year-on-year in April. Producer prices will follow on Wednesday before attention turns to retail sales and industrial production figures on Friday.
Retail sales are forecast to set a new record, falling by a massive 10% in April. This is due to the escalation of stay-at-home measures and the temporary closure of many businesses due to the outbreak of COVID-19. Furthermore, the slump in industrial activity is also anticipated to have accelerated, with production shrinking by 11.6% m/m. However, the Empire State manufacturing survey is expected to print at a slightly higher -68.0 in May which might provide a glimmer of hope to stabilise the sector.
Europe’s macro reports will probably be of limited consequence to markets
Traders will focus upon industrial output readings from the UK and Eurozone on Wednesday, trade figures from the UK (Wednesday) and Eurozone (Friday), Eurozone Q1 employment (Friday), GDP figures from the UK (Wednesday) and Germany (Friday).
The UK will be publishing preliminary estimates of first-quarter GDP which is forecast to have contracted by 2% on a quarterly basis, with March output alone predicted to have plummeted by 7%. This is the highest drop since the last quarter of 2008, given that the Covid-19 pandemic forced the government to impose lockdown measures from mid-March. Other releases include business investment data, alongside foreign trade balance, industrial production and construction output for March.
The pound is likely to come under selling pressure if the GDP estimate disappoints as the Bank of England has hinted it remains open to more stimulus should it be needed.
Elsewhere in Europe, several countries, including Germany will publish flash readings of first-quarter GDP, while the Eurozone is set to provide a second estimate. The euro has been slipping amid growing concerns about the political will to safeguard the European economy. At the end of this past week, the EU Court of Justice took a poke at Germany’s constitutional court ruling that questioned the ECB’s quantitative easing program. It did so by declaring that the EU Court “alone” has the power to rule over matters such as the constitutionality of the purchase program.
Eurozone industrial production readings for March out on Wednesday will likely confirm the severity of the damage to the economy by the lockdowns, with output forecast to have declined by 10.5% m/m.
Asia Pacific: Some distraction from endless COVID-19 tracking this week
Firstly, trade tensions between the US and China are resurfacing and there may be further developments in the coming week. Trump is desperately looking to score points from his China-hating base ahead of the US election in November, while China is materially failing to live up to ‘phase 1’ purchase targets so far.
Secondly, the Reserve Bank of New Zealand (RBNZ) is expected to leave policy measures unchanged including the cash rate of 0.25%. The program’s response to the COVID-19 shock will be the focal point of Wednesday’s meeting. The odds are strong that the RBNZ will scale up its purchases as its heavy intervention in the bond markets to date suggest it may soon reach its initial target of NZ$30 billion New Zealand government bonds. What is less likely are negative interest rates as the bank has signalled that the official cash rate will be held at the current 0.25% at least until March 2021.
Finally, Australian employment data may spoil the Aussie’s current bullish shift. March’s job figures were surprisingly positive, but that is only because the labour survey was carried out before lockdowns were introduced. Retail sales for the month were unusually strong too. April’s job numbers are therefore expected to paint a more accurate picture of the situation and this may knock the aussie off its perch.
Lately, the Australian dollar has come back fighting and even managed to top the $0.65 level at one point during its rebound. With signs that China is continuing to see an increase in economic activity and the relaxation of lockdown in Australia, there is plenty to sustain the aussie’s gains.
