With the Pacific G10 Macro Rates Team
Global Macro Overview
Risk assets again performed strongly last week. The S&P500 increased by over 3%, matched by the European and global equity markets, while WTI oil was 5% higher. There are a lot of reasons in the short-term for the optimism that financial markets have been pricing recently. Economies are gradually coming back to life across the globe and unprecedented fiscal and monetary stimulus in most developed nations are still in place.
A European recovery fund proposed last week can be the first step towards a more integrated European Union and should significantly help periphery countries to fund their deficits. Data, although of questionable quality, has started to stabilise and show signs of improvement from a very low base. However, there are a number of things that could go wrong over the coming months. Big questions remain around the speed of the recovery, consumer behaviour post lockdown and the future of fiscal policy, as the majority of current support programmes are due to expire by autumn.
China-US relationships have been heating up over the last couple of weeks and could easily hurt global sentiment again, as it did last summer. The proposed European recovery programme grabbed a lot of headlines but details are not so dramatic. Although it is a significant step towards closer fiscal union, the overall fiscal boost that it could generate doesn’t compare well internationally. The value of true grants (excluding loans masked as grants) in the programme is just over EUR 400bn and over ¾ of the amount is going to be split over 4 years, which is less than 1% of GDP per year.
The day of reckoning may come in the future, but for now, risk assets continue to rally.
US: Regional PMI data for May created a mixed picture last week. Dallas, Richmond and Kansas indices showed significant improvements ahead of expectations, while Chicago PMI extended the drop to 32.3 from 35.4 (40 exp.). Consumer confidence improved slightly in May to 86.6 (87exp., 85.7 prev.) boosted by the expectations component. Initial jobless claims registered another 2 million increase, however after removing seasonality adjustments the data is actually showing unemployment numbers going lower recently.
Canada: No major economic data.
Eurozone: Q1 GDP in Germany was left unrevised as expected with -2.2% QoQ contraction. IFO Business Climate improvement slightly outpaced the expectations with May number coming at 79.5 (78.5 exp., 74.2 prev.). Q1 GDP in France was revised higher with -5.3% QoQ contraction vs. the expectations for an unchanged -5.8% print. Q1 GDP in Italy was revised lower to -5.4% QoQ vs. the expectations for an unchanged -4.8% decline. Manufacturing Confidence for May disappointed expectations coming in at 71.2 (80 exp.) while Consumer Confidence was slightly better at 94.3 (89 exp.).
Sweden: Q1 GDP was better than expected coming in +0.1% QoQ vs. -0.3% expectations. Survey data for May showed that Consumer and Manufacturing confidence remained close to all-time lows.
Norway: May unemployment numbers were better than expected, improving to 6.4% vs. the expectations of 6.8% after the spike to 9.5% in April.
No major economic data.
No major economic data. Prime Minister Johnson announced the next steps in easing the lockdown, allowing outdoor markets to be open from the 1st of June and non-essential retail due to re-open on the 15th of June. Chancellor Sunak pre-announced a new stimulus programme that will be designed to help the economy to recover after lockdown is lifted and current schemes are unwound.
Australia: No major economic data. The RBA has stated that extra rounds of QE or introduction of Negative Rates is unlikely as economic contraction seems to not be as bad as they feared.
New Zealand: ANZ Business Confidence for May was revised slightly higher to -41.8 from -45.6, while Consumer Confidence showed significant improvement in May +14.8% MoM, albeit from all-time low levels reached in April.
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