- April U.S. ISM manufacturing index will plunge to near-record lows
- Rise in Fed’s balance sheet slows significantly
- ECB leaves its pandemic QE program size unchanged
April U.S. ISM manufacturing index will plunge to near-record lows — The consensus is for today’s April ISM manufacturing index to plunge by -13.1 points to 36.0, adding to March’s -1.0 point decline to 49.1.
Today’s expected report of 36.0 would be an 11-year low, stopping just 1.5 points above the Great Recession’s 40-year low of 34.5 (which was posted in Dec 2008). The record low for the ISM manufacturing index of 29.4 was posted during the recession in 1980, with data for the index dating back to 1949.
Markit has already reported that its U.S. manufacturing PMI in early April plunged by -11.6 points to 36.9. The consensus is for today’s final-April report from Markit to be revised lower by -0.2 points, leaving the index down by -11.8 points from March at 36.7.
Today’s ISM manufacturing index for April could prove to be the low for this cycle since some states are planning to start reopening their economies in May on a limited basis. Manufacturing sentiment therefore has some room to improve in May.
The U.S. manufacturing sector was already in a recession in late 2019 and early 2020, due to the trade war, when the pandemic emerged in February. The ISM manufacturing index was in contractionary territory in the high 40’s from August through December 2019. The ISM poked slightly above 50 in January and February 2020, but then started falling again in February as the pandemic arrived. U.S. manufacturing production on a year-on-year basis has fallen every month since last July, and in March fell sharply by -6.6% y/y.
The behavior of China’s PMI indexes provides some leading information for the U.S. since China is about two months ahead of the U.S. on pandemic timing. China’s national PMI index was at 50.0 in January, plunged to 35.7 in February, and then rebounded higher to 52.0 in March. China’s April manufacturing PMI earlier this week fell by -1.2 points to 50.8, but remained above the 50.0 mark.
The sharp upward rebound in China’s ISM index above 50 in March and April mainly occurred because sentiment improved relative to the low levels in February, not because things returned to normal. China’s manufacturing sector remains highly vulnerable, not so much because of the pandemic (unless there is a relapse), but because the rest of the world’s economy has collapsed and has stopped buying products from China. The negative external effect was seen in the news earlier this week that China’s manufacturing PMI export orders sub-index fell by -12.9 to 33.5 in April, falling back towards the record low of 28.7 posted in February. Chinese manufacturing executives are currently very pessimistic about the prospects for export orders.
The U.S. ISM manufacturing index is not likely to climb back above 50 for a number of months. While China’s ISM index snapped back above 50 after just a single month, the U.S. manufacturing sector was in a recession going into the pandemic. Moreover, the U.S. economy is likely to take significantly longer than China’s to recover because China cracked down on the pandemic much harder than the U.S.
Rise in Fed’s balance sheet slows significantly — The Fed reported late Thursday that its balance sheet in the week ended Wednesday rose by +$83 billion, which is substantially less than the rises of $200-500 billion seen in the previous six weeks. The Fed is slowing its asset purchases as it gets the financial system under control.
The Fed has so far succeeded in its primary goal of preventing the global financial system from going into a systemic meltdown. The Fed has also significantly softened the economic impact of the pandemic, although there is no way for the Fed to completely stop what will be the worst economic collapse since the Great Depression. No amount of money from the Fed will get people out of lockdown and back to their jobs. Rather, the pace of the pandemic is controlling the back-to-work schedule.
The Fed’s balance sheet in the week ended Wednesday rose to a new record high of $6.7 trillion and has now risen by a total of +$2.5 trillion (60%) in just the last nine weeks (i.e., since the end of February). The FOMC at its meeting earlier this week did not place any parameters on its QE buying. That means that the Fed plans to keep buying securities at whatever pace it feels is necessary to maintain financial system stability and provide monetary stimulus to the economy. The market is expecting the Fed to leave its funds rate target unchanged at 0.00%/0.25% at least into early 2023.
ECB leaves its pandemic QE program size unchanged — The ECB at its policy meeting yesterday left its Pandemic Emergency Purchase Program (PEPP) QE size unchanged at 750 billion euros, which was a little disappointing relative to some forecasts for a hike of 250-500 billion euros. However, the ECB still has time to raise the size of the program since it won’t hit the limit of that program until later this year. The ECB since the end of February has boosted its balance sheet by 655 billion euros (+14%) to a record 5.35 trillion euros. Some of those securities purchases were under the ECB’s main Asset Purchase Program (APP).
The Eurozone economy in Q1 was hit much harder than the U.S. economy. Yesterday’s Eurozone Q1 GDP report fell by -3.8% q/q, which was much worse than the U.S. Q1 GDP decline of -1.2% q/q. ECB President Lagarde warned that the Eurozone’s GDP could plunge as much as -15% q/q on a worst case basis in Q2, whereas the consensus is for a -7.5% q/q decline in U.S. Q2 GDP.
