- Weekly global market focus
- Fed continues to taper its Treasury purchases
- Markets are relieved by lack of concrete Trump action on Hong Kong
- ISM manufacturing index expected to rebound a bit but remain in dismal shape
Weekly global market focus — The U.S. markets this week will focus on (1) US/Chinese trade tensions, which eased a bit after President Trump’s diluted salvo last Friday, (2) whether the street unrest in the U.S. continues and disrupts the economy, (3) the extent of the U.S. labor market debacle, which will be on display in this Friday’s May unemployment report (payrolls expected -8.0 million after April’s -20.5 million; unemployment rate expected +4.9 to 19.6%), (4) anticipation of next week’s FOMC meeting where the Fed will release updated economic forecasts, and (5) oil prices, which rallied to a 2-3/4 month high last Friday on the quick cuts in global oil production in May.
In Europe, the focus will be on Thursday’s ECB meeting where the ECB is expected to boost its pandemic QE program from 750 billion euros to 1.00-1.25 trillion euros. The markets will also be watching this week’s round of Brexit talks since virtually no progress has been made thus far. EU officials last week said they hoped that the UK has not already given up hope for reaching a trade deal that would avert a no-deal Brexit and WTO tariffs at year-end.
The Chinese markets today will react to President Trump’s announcement last Friday of the U.S. plan to withdraw Hong Kong’s favored trade status. The weekend Chinese PMI reports were mixed. Saturday’s May national PMI fell by -0.2 points to 50.6, weaker than expectations for a +0.3 point rise to 51.1. However, the May non-manufacturing PMI rose by +0.4 points to 53.6, slightly stronger than expectations of +0.3 to 53.5. Also, Sunday night’s (ET) May Caixin China manufacturing PMI rose by +1.3 to 50.7, stronger than expectations of +0.2 to 49.6.
Fed continues to taper its Treasury purchases — The Fed last Friday announced that it will reduce its daily Treasury purchases to $4.5 billion this week from $5 billion last week. The Treasury’s daily Treasury purchases reached a peak of $75 billion per day in the latter half of March, but the Fed has since been tapering those purchases.
The Fed has bought $1.5 trillion worth of Treasury securities in the last ten weeks to smooth the functioning of the Treasury market, inject liquidity into the financial system, and keep Treasury yields low. The Fed’s balance sheet has now risen by a total of +$2.9 trillion (+71%) since the end of February to a record high of $7.1 trillion, rising to 33% of GDP from 19% before the pandemic began.
Fed Chair Powell last Friday said that the Fed’s much-anticipated Main Street Lending program will be up and running within “days,” which perhaps means this week. That facility will deliver loans to medium-sized U.S. businesses that have been hard hit by the pandemic.
Fed officials this week will be in their quiet period ahead of next week’s FOMC meeting. The Fed is not expected to make any policy changes at next week’s meeting, but it is expected to release new economic forecasts. The Atlanta Fed’s GDPNow forecast for Q2 GDP was revised downward last Friday to -51.2% (q/q annualized) and -16.4% (q/q). That would be much worse than the current consensus of -34.2% (q/q annualized) and -9.9% (q/q).
Markets are relieved by lack of concrete Trump action on Hong Kong — The U.S. stock market rallied last Friday after President Trump delivered his press conference on China. Mr. Trump announced that the U.S. plans to withdraw Hong Kong’s special trade status, but he did not give a time frame or announce exactly what provisions will be retracted. The markets were relieved that the Trump administration did not levy sanctions on any particular Communist Party officials involved with the Hong Kong security law, although those sanctions might still be forthcoming. Mr. Trump did not mention the bill that received final passage by Congress last week that calls for him to impose sanctions on Chinese officials allegedly involved in the repression of China’s Muslim minority.
China this week may not feel compelled to retaliate since Mr. Trump last Friday did not implement any concrete measures against Hong Kong or China, and did not make it personal by sanctioning specific Chinese officials. The markets are worried that China might place companies such as Apple, Nike, Qualcomm and others on its “unreliable entities” list, which would imply investigations and disruptions to their sales in China.
The markets were also pleased that Mr. Trump issued no threat to cancel the US/China phase-one trade deal. China so far hasn’t come close to meeting its promises to buy U.S. products under that deal. However, Mr. Trump has so far cut China some slack on that issue due to the pandemic. Also, Mr. Trump may be wary of creating a major new bearish factor for the stock market ahead of November’s presidential election since the stock market is already dealing with the worst U.S. recession in post-war history.
The Chinese yuan last Friday rose by +0.13%, adding to Thursday’s +0.30% rise and recovering further from last Wednesday’s 9-month low. The upward rebound in the yuan late last week was a positive signal because it reduces the threat to the Chinese stock market from capital flight. The stronger yuan also reduces the risk of retaliation from President Trump.
ISM manufacturing index expected to rebound a bit but remain in dismal shape — The consensus is for today’s May ISM manufacturing index to rise by +2.2 points to 43.7, overcoming part of April’s -7.6 point drop to an 11-year low of 41.5. The ISM is actually in much weaker shape than its appears since it has been supported by supply chain distortions. In any case, the ISM index indicates widespread pessimism in the U.S. manufacturing sector, which was already in a recession going into the pandemic due to trade tensions, weak business investment, and weak overseas growth.
