With the Pacific G10 Macro Rates Team
Global Macro Overview
Volatility continued declining across markets last week. Both Equity and Treasury markets in the US ended the week unchanged with tighter credit and FRA/OIS spreads. While yields on German Bunds and UK Gilts were lower on the week, supported by Central Bank purchases. Interest rates and FX volatility measures continued declining while VIX remained broadly unchanged as daily volatility of S&P 500 returns remains high.
There were few data announcements that were able to shock the financial markets. Data continued to deteriorate across the board, reflecting the enormous strain that the lockdown measures are putting on the global economy.
US: New all-time lows were made in the Dallas Fed and Richmond Fed Manufacturing Activity indices in April, while the Chicago PMI dropped to 35.4 and ISM Manufacturing Index printed at 41.5. Consumer confidence has declined substantially, driven by the assessments of the current situation, while expectations remain resilient for now.
The GDP report for Q1 2020 showed -4.8% annualised growth, in line with European countries that reported Q1 GDP last week. The Federal Reserve meeting was a non-event. Several market participants expected FOMC to increase interest rates that are paid on excess reserves and on reverse repo. Rates were left unchanged at 0% and 0.1% respectively.
Canada: GDP and some activity data that was released this week was for February and March and can be ignored. The Manufacturing PMI for April was the only relevant data and printed at a recessionary level of 33. The new governor of Bank of Canada was announced on Friday. Tiff Macklem who used to work with Mark Carney will be serving the next 7-year term. Financial markets did not react to the announcement, especially as the new governor indicated that he is in no rush to take interest rates into negative territory.
Inflation data for April was released last week. It showcased the struggle that statistical agencies are currently facing while trying to estimate price levels when economies are shut down. Inflation printed above expectations, partially because some components had to be estimated as no data was available for April. Unemployment in Germany increased to 5.8% in April after 373k jump in the number of claims. Q1 GDP numbers came out of France, Italy and Spain showing approx. 5% QoQ declines.
Scandinavia: Riksbank left interest rates unchanged at 0% and is likely to increase QE in the near future. Unemployment in Norway stayed at an all-time high level of 10%.
The Bank of Japan meeting did not produce any surprises. Interest rates were left unchanged and although QE limits were removed, the BoJ purchases of Government Bonds (JGBs) were running well under the previous target, so the announcement did not affect market pricing. Purchases of corporate bonds and equities were increased as well and should provide support to the asset prices.
A number of indicators dropped to the 2008 lows as CBI retail data came out for April.
Australia: Q1 CPI came in at 2.2% YoY and would have shaken the markets in a normal environment as expectations were for a 1.9% increase. CBA Manufacturing PMI dropped to 44 in April.
New Zealand: Business and Consumer Confidence indicators dropped to historical lows as Activity Outlook worsened to the new historical lows. Yields on NZGB were lower last week with 30bps rally in 10y bonds as Westpac changed its outlook predicting a -0.5% interest rate by the end of 2020.
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