This week, Fed chair Jerome Powell dismissed the possibility of negative rates in the US saying ‘it isn’t something we’re looking at’. Bank of England has also dismissed it for now and the Bank of Japan (BoJ) sees no need to take interest rates deeper into negative. Focus for BoJ is to pump money into cash-strapped firms and keep financial markets stable. Flexibility within the QE programme will likely be the go-to for now. Negative rates are not at the bottom of the list everywhere, though. The Reserve Bank of New Zealand has said that n egative rates could become an option in the future. Apparently, banks have been asked to be ready for negative rates in 2021. The renewed focus on negative policy rates could spur further discussions in Scandies as well.
In China, we saw another stronger-than-expected reading in Total Social Finance in April. The boost to credit is coming from corporate bonds and bank loans, probably mostly coming from lending to state-owned companies and infrastructure credit as China is using the state sector as a cushion against the big drop in private demand. It suggests that China’s easing is maybe bigger than perceived and happening via the state sector. While not at the same scale as the 2008-09 stimulus, it looks like China is providing a decent support to its economy – and thus to the global economy.
It has been another eventful week on the oil markets with plenty of support for prices. The week started off with a surprise 1mb/d cut in production from Saudi Arabia. Other Middle Eastern production cuts followed. The International Energy Agency forecast lower global stockpiles in the second half of 2020, which gave another boost to oil prices. However, demand has weakened over increasing concerns of a possible second wave of COVID-19 infections with the emergence of new cases in South Korea and China .
In the euro area late last week the Euro group agreed on the terms of use of the Pandemic Crisis Support credit line of the ESM amounting to 2% of GDP of each member state. However, EU countries will probably be reluctant to make use of it, both due to the stigma and credit nature. Hence, the Commission proposal for the recovery fund – expected on 20 May – is still the more important element, in our view.
Over the coming two weeks some very interesting data are set to come out, particularly PMIs from the major economies. Euro area PMIs could show a bounce this time round with the end of lockdowns – just like in China – but probably more muted since France, Italy and Spain are only slowly getting back to speed. In the US, we expect PMIs to increase but remain below 50 (economic activity in May was worse than in April but the decline was smaller). PMIs must increase significantly above the 50 threshold before we can talk about a recovery. In the UK, we expect a PMI increase as well but still below 50.
In the US, focus will also be on policymakers. The House Democrats have proposed USD3,000bn more stimulus. So far, the proposal has got the cold shoulder from the Republicans but we think the 3m initial jobless claims last week support our view that the US needs more stimulus.
