The volatile risk sentiment last week changed to somewhat more consolidation this week. Incoming GDP figures from the euro area and the US naturally both pointed to a dismal first quarter, but we expect to see an even worse Q2 as many countries will remain in lockdown for large parts of it, only undertaking gradual opening of their economies in May. Notably hard hit countries such as Italy will open gradually starting on 4 May.
It was a busy central bank week with meetings at the Fed, ECB and Riksbank – we have updated our report on policy responses, see The Big Picture: Global fiscal and monetary responses to COVID-19 , 1 May. Fed chair Powell highlighted that the Fed is likely to do more, yet it is not quite clear what measure the Fed will deploy next as it has already deployed a host of measures. However, Powell did not hint at rate cuts, which are not preferred as they are at the ‘effective lower bound’, see Fed Monitor – Fed chair Powell hints more Fed support is coming , 29 April. The Riksbank left its monetary policy stance unchanged, stating that a rate cut in the current situation would have limited positive effect on the Swedish economy, as the demand slump is mainly caused by restrictions on movement. However, the Riksbank left the door open to lowering the policy rate or scaling up various balance sheet related measures at a later stage to support the recovery and/or prevent a too-marked decline in inflation expectations (see Riksbank Comment: ‘From the Riksbank – nothing’ , 28 April). The ECB decided to signal a readiness to act and hinted at more easing to come. At the meeting, the ECB decided to offer favourable liquidity until Q3 next year via new emergency liquidity facilities, but also make a pseudo rate cut in the June 2020 to June 2021 rate cut for banks, of a technical nature. Importantly, we still expect the market to trade off EONIA/deposit rate. We are revising our ECB purchase programme expectations now to a step up of its PEPP by another EUR250bn by Q1 next year and an extension of the APP scheme until September next year at the June meeting, see yesterday’s Flash ECB Research – No PEPP increase, no rate cut but then again .
Next week, the focus turns to the effects of the strategies for gradual opening of economies and controlling the spread of the virus. In the euro area specifically, we also focus on the EC’s spring forecast (Thu), which includes fiscal and debt projections for 2020 and 2021. The Italian projection in particular will gain attention, especially after Fitch made an off schedule rating announcement and downgraded Italy to BBB- (one notch downgrade) this week, citing the rising debt levels in Italy as the driver. Fitch has been the hardliner of the three major rating agencies, also downgrading the UK earlier this month.
In the US, the focus continues to be on the jobless claims on Thursday, but we also get the labour market report (Friday), although this will be less interesting in the coming period compared to the jobless claims. We are likely to see an employment drop of c.25m and an unemployment rate of 15-20%. In the UK, the BoE will likely face some pressure to scale up its QE, compared to other central banks. We expect a signal of readiness to act if needed.
In China, the PMIs this week were broadly in line with expectations. Following the plunge in Q1 GDP, we now look for economic growth to be 1.0% in 2020 (previously 5.2%) but to rebound to 9.0% in 2021 (previous 6.3%). Next week’s export figures could prove very interesting to see how hard China will be hit by the European and US economic slump, see From output to demand crisis, CNY stability set to continue , 30 April.
