- Global PMI reports illustrate desperate low in business confidence
- Fed’s balance sheet hits 30% of U.S. GDP
- Oil prices extend sharp recovery but fundamental outlook remains bearish
Global PMI reports illustrate desperate low in business confidence — Yesterday’s global PMI reports hit record lows that underscored the pessimism among businesses worldwide as the lockdowns continue in many countries.
The global April PMI reports released on Thursday all fell to record lows. The Markit U.S. manufacturing PMI fell -11.6 to 36.9, the Markit Eurozone manufacturing PMI index fell -10.9 to 33.6, the Markit UK manufacturing PMI fell -14.9 to 32.9, and the Jibun Bank Japan manufacturing PMI fell -1.1 to 43.7.
The April service-sector PMIs were in even worse shape since there are more business shutdowns in the service sector than in the manufacturing sector in many regions. The Markit U.S. services PMI plunged by -12.8 to 27.0, the Markit Eurozone services PMI fell by -14.7 to 11.7, and the Markit UK services PMI plunged by -22.2 points to 12.3.
China is running ahead of the world on pandemic timing since China’s economy is already back to about 95% of capacity after having been partially closed from late January into March in some areas. China’s national PMIs in February bottomed out at 35.7 for the manufacturing PMI and 29.6 for the services PMI. China’s PMIs then rebounded sharply higher in April as China reopened its economy. China’s manufacturing PMI in April rose to 52.0, while the non-manufacturing PMI rose to 52.3, indicating a sharp month-to-month improvement but certainly not a return to any normal expansion.
The sharp recovery in China’s PMIs in April was initially an encouraging sign. However, China’s PMIs are likely to fall back in May since Chinese businesses were hit by a second whammy by the sharp slump in orders from the rest of the world as it went into lockdown. The PMIs in the U.S. and European will remain weak at least through spring since many lockdowns will last into May and even June.
Fed’s balance sheet hits 30% of U.S. GDP — The Fed late yesterday reported that its balance sheet in the week ended Wednesday rose by another $205 billion to a new record high of $6.37 trillion, which is equivalent to 30% of U.S. GDP. However, the weekly +$205 billion rise was the smallest since mid-March since the Fed has been scaling back its purchases of Treasury and MBS securities as the markets settle down. The Fed’s balance sheet during the pandemic has soared by $2.4 trillion (+58%) since late February, far exceeding the QE3 size of $1.7 trillion that took two years to complete in 2012-14.
Fed officials this week are in their usual quiet period ahead of the FOMC meeting next Tue/Wed (April 28-29). The FOMC at that meeting could make some minor adjustments to its various lending programs and could also more closely define its QE program.
Oil prices extend sharp recovery but fundamental outlook remains bearish — June WTI crude oil prices since the meltdown early this week have recovered sharply with gains of +19.10% on Wednesday and +19.74% on Thursday, leaving the contract closing at $16.50 per barrel on Thursday. The June contract has recovered from Tuesday’s contract low of $6.50 per barrel.
Bullish factors driving the 2-day rally include (1) U.S./Iran tensions after the U.S. and Iran exchanged threats regarding their vessels in the Persian Gulf, (2) the end of selling tied to the May WTI futures roll after the May contract expired on Tuesday, and (3) the approaching May 1 implementation date for the April 20 OPEC+ agreement, which obligates members to each cut production by 23% for a grand total of -9.7 million bpd (about -10% of global production).
Crude oil prices have also seen support from forecasts and news of production cuts. OPEC members, Kuwait and Algeria, on Thursday announced that they would start their respective production cuts immediately rather than waiting until next Friday’s (May 1) implementation date.
IHS Markit on Wednesday said that the recent plunge in crude oil prices has put 1.75 million bpd of U.S. shale oil production at immediate risk of being shut down. Evercore ISI estimates that 5 million bpd, or around 40% of U.S. crude production, could be temporarily shut down by the end of June.
U.S. oil production has already fallen sharply by 900,000 bpd (-6.9%) to a 9-month low of 12.2 mln bpd from mid-March’s record high of 13.1 million bpd. U.S. oil production will continue to fall sharply considering that the number of active U.S. oil wells has plunged by more than one-third in the past two months. Specifically, the number of active U.S. oil wells as of last Friday fell to a 3-1/2 year low of 438 rigs, down by -240 rigs (-35%) just since the end of February.
Still, the overall fundamental picture for crude oil remains overwhelmingly bearish since producers are not cutting production fast enough to prevent global oil storage facilities from filling up soon. Royal Vopak NV, the world’s biggest independent storage company, said on Tuesday that its three main crude storage hubs in Singapore, Rotterdam, and Fujairah are nearly filled to capacity.
U.S. oil inventories have quickly risen to 79.4% of total U.S. capacity from only 68% of capacity at the end of February, according to EIA data. Oil inventories at the Cushing hub in Oklahoma, where WTI crude oil futures are priced, have quickly risen to 78.6% of the facility’s total capacity of 76 mln bbls from only 49% of capacity at the end of February.
