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Back in March, when the Fed unleashed Unlimited QE with the added kicker of buying corporate bonds as central banks around the globe activated the monetary firehose of helicopter money, Albert Edwards finally admitted that the deflationary “Ice Age”, a term he coined back in the 1990s, was coming to an end. Three months later, the SocGen analyst is now convinced: “We are transitioning from The Ice Age to The Great Melt” he writes, as “massive monetary stimulus is  combining with frenzied fiscal pump-priming in an attempt to paper over the current slump.”

Looking back to the start of his working career in financial markets in 1982, Edwards writes that inflation and bond yields in developed economies have enjoyed a one-way disinflationary slide, although as he notes “It has not been all plain sailing” and points out that his “Ice Age thesis explained how a tipping point would be reached where western financial markets would mirror what we saw in Japan during the 1990s and beyond.”

Said tipping point would arrive as “a gravitational pull towards outright deflation (exacerbated by policy mistakes) would cause a re-rating of stability in absolute and relative terms compared to cyclicality.” To be sure, the last few years of the Ice Age served not only bond investors but also equity investors well, “as bond proxies within the equity market have massively re-rated relative to cyclicals.”

However, all that is coming to an end as Edwards now believes that the world is finally in the transition phase as The Ice Age begins to thaw. The reason: “this economic bust is so serious and so deflationary that policymakers felt they had no choice but to cross the policy Rubicon.” Looking ahead to what he called the “The Great Melt”, Edwards posits – correctly – that there will never be any serious attempt to reverse policy stimulus. “Indeed we will see more and more stimulus until the deflationary ice melts.”

But there is one final, interim step before The Great Melt gains proper real economy and inflationary traction: According to the SocGen analyst “first we need to fully embrace The Great Melt-Down – the final stage of the Ice Age.” And although even Edwards has thrown in the deflationary towel and is now a believer that inflation will be properly re-ignited in the next economic cycle, “the markets remain focused on what lies ahead and not on the deflationary crevasse that has just opened up beneath them.”

Case in point, yesterday’s May US CPI data saw an unprecedented three consecutive mom declines in core CPI, Edwards notes, adding that “previously even a single sighting of a 0.1% mom decline in core CPI was as rare as hen’s teeth. Before this year there were only three mom declines since inflation peaked in 1982! US core CPI has now slumped into deflation and the markets will find this a most difficult crevasse to bridge.”

Referring to the chart below, Edwards writes that in May, US core CPI (ie ex food and energy) continued its unprecedented slide with the yoy inflation rate slowing to 1.2%, half the rate seen as recently as February. But excluding imputed Owner Equivalent Rent (OER is not included in the eurozone measure)  this comparable measure is rising only 0.4% yoy and falling sharply on a 6m basis.

Indicatively, if one uses the Eurozone’s definition of core CPI for the US, one would get the following dramatic slide into outright deflation (of course, try explaining that to all those millions of people who can’t afford rent at any cost).

Indeed, it appears that sticky rent prices via OER inflation (which tends to mirror actual rent inflation) have held up core CPI. The rapidity of the slump in the core inflation ex OER is shocking and we have discussed the likely temporary nature of high OER/rent inflation on core CPI previously. 

Yet despite the quasi-deflationary data reported by the CPI, inflation expectations remain anchored, and in fact the Fed’s latest survey of consumer expectations showed that people believe inflation is set to rise (see below).

As Edwards notes, “it is curious that investors have not absorbed the current deflationary reality”, suggesting that the next leg of US “Japanification” may be a shift in long-term price outlooks (unless of course most Americans remain focused on the abovementioned rents and food prices which remain rather sticky).

In any case, the slump in inflation feeds into the core of Edwards’ Ice Age thesis and concerns equities too. Indeed, nominal GDP growth is set to slow further (blue line in chart below) dragging down analyst forecasts of long-term eps growth, which are already weighed down by the ongoing profits collapse, and forcing the Fed’s hand further.

Finally, and most ominously, the slump in core CPI is bringing the Japanification of US nominal growth to an economy already saddled with record debt, which in turn will lead to a reset in price levels as investors realize companies are unable to “grow” into their record high valuations.

For those wondering what this means for stocks, Edwards saves the best for last: “As this will trigger a further decline in L/T eps, nose-bleed expensive PEG ratios will likely be fatally undermined. Before markets can properly embrace The Great Melt, they first need to comprehend the new normal: deflation has arrived.”

Producer Prices rebounded MoM in May with headline Final Demand PPI rising 0.4% (against +0.1% exp) but it left PPI YoY still down 0.8%…

Source: Bloomberg

Some serious dispersion in the various sector’s price swings…

This rebound was driven by a record surge in food prices…

Source: Bloomberg

Two-thirds of the May increase in the index for final demand goods is attributable to a 40.4-percent jump in meat prices.

Source: Bloomberg

The indexes for gasoline, processed young chickens, light motor trucks, liquefied petroleum gas, and carbon steel scrap also moved higher.

Source: Bloomberg

Conversely, prices for chicken eggs fell 41.2 percent. The indexes for diesel fuel and for plastic resins and materials also decreased.

What will Jay Powell do now that average joe’s cost of living is soaring?

Despite last week’s hope-restoring nonfarm payrolls “recovery”, in the last week 1.542 million more Americans filed for unemployment benefits for the first time (slightly better than the 1.55mm expected).

Source: Bloomberg

That brings the twelve-week total to 44.21 million, dramatically more than at any period in American history. However, as the chart above shows, the second derivative has turned the corner (even though the 1.54 million rise this last week is still higher than any other week in history outside of the pandemic)

Continuing Claims did drop very modestly but hardly a signal that “re-opening” is occurring! And definitely not agreeing with payrolls data…

Source: Bloomberg

The claims by state, show an outlier improvement in Florida, where nearly there was a decline of 100K claims, with Texas and Georgia also on the mend, while California, Massachusetts and New York saw the biggest increases in the past week.

And as we noted previously, what is most disturbing is that in the last twelve weeks, twice as many Americans have filed for unemployment than jobs gained during the last decade since the end of the Great Recession… (22.13 million gained in a decade, 44.21 million lost in 12 weeks)

Worse still, the final numbers will likely be worsened due to the bailout itself: as a reminder, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, could contribute to new records being reached in coming weeks as it increases eligibility for jobless claims to self-employed and gig workers, extends the maximum number of weeks that one can receive benefits, and provides an additional $600 per week until July 31.

A recent WSJ article noted that this has created incentives for some businesses to temporarily furlough their employees, knowing that they will be covered financially as the economy is shutdown. Meanwhile, those making below $50k will generally be made whole and possibly be better off on unemployment benefits.

Additionally, families receiving food stamps can typically get a maximum benefit of $768, but through the increase in emergency benefits, the average five-person household can get an additional $240 monthly for buying food.

But, hey, there’s good news… stocks are near record highs and Treasury Secretary Steven Mnuchin said he anticipates most of the economy will restart by the end of August.

The big question is – what happens when the $600 CARES Act bonuses stop flowing?

Finally, it is notable, we have lost 392 jobs for every confirmed US death from COVID-19 (112,914).

Was it worth it?

 

Soybean futures were flat on Thursday morning amid oversupplied conditions globally, though the market was at a two month high from China increasing agriculture shipments. Prices remain near correction territory, down 9% since President Trump signed an agreement between the US and China to increase purchases of American products, dubbed the phase one trade deal.

Tracking bulk carriers of soybean shipments, Reuters’ Karen Braun discovers a “rush hour traffic of soybeans from South America to Asia continues.”

Braun said, “Official export data suggests Brazil shipped close to 31 mmt in April-May. That includes 22.2 mmt to China, some 66% more than the same period a year ago.” 

She also shows a progression map of soybean shipments post the signing of the phase one trade deal through June 10. What it suggests is that China dramatically increased soybean shipments from South America while altogether ditching US markets.

“Here’s a little 2020 progression. January 30 ➡️ Feb 26 ➡️ March 23 ➡️ April 14. Exports of soybeans from Brazil had a slower start to 2020 than 2019, but through the first five months, they have shipped 37% more than in Jan-May 2019. Jan-May shipments to China are also up 37%,” Braun said. 

January 30 soybean shipments 

February 26 soybean shipments

March 23 soybean shipments

April 14 soybean shipments 

May 11 soybean shipments

June 10 soybean shipments

At the moment, very few to no bulk carriers are carrying soybeans across the Pacific Ocean from US West Coast to Asia/China (a decline in shipments has been seen over the last several years since President Trump waged a war on trade against China — Beijing simply went elsewhere to shop). 

To be fair, China did make several purchases of soybeans from the US, as of recent. Reuters said last Tuesday that Chinese state-owned Sinograin bought at least 120,000 tons of soybeans for shipment in December. 

To sum up, China, and the rest of Asia, are sourcing soybeans from South America, not the US, leaving American farmers devastated as an economic depression unfolds. 

President Trump recently said he was “very torn” about whether to end the phase one deal — as tensions between the US and China continue to soar — it appears China refuses to buy from the US. 

What’s evident is that China has predictably fallen way short of its commitments of the trade deal as it now blames virus pandemic for reduced purchases. 

Authored by Bill Blain via The Morning Porridge,

“It is the system that deserves to be blamed. What those who wish to perpetuate the system deserve is another question.”

The Fed did exactly what was expected – nay, demanded! Asset purchase volumes will be maintained while rates will remain near zero for the next 2 years. Hallelujah! The market shrugged aside indications a second virus wave is hitting across parts of the US and Europe… 

If Fed-Head Jay Powell has said anything else, there would have been a hissy-fit mini-taper-tantrum. The dominant force on markets will remain central banks juicing markets – and all the entails in terms of distortion. The immediate lesson for investors is – keep buying! The Fed and the other CBs have got your back. They can’t afford for markets to stumble.

Problem is… little the Fed said is likely to change the reality of the coming recession. The downturn might not be as deep or as bad as we originally feared, but whatever nonsense some analysts are spouting in terms of hopes for a V-Shape recovery… recession is coming. It might be less damaging, and less long-lived than we fear… But.. 

There is a new and growing dimension to this crisis…

The Black Lives Matter demonstrations around the globe highlight the threat of social unrest, and political dislocation. When the virus kicked in, I commented a few times how lockdown frustrations and hot summer nights could be a recipe for riots. But, what’s happened is much more fundamental – and should be a critical concern for investors in terms of how it changes the political narrative.  

Unrest is a political issue – and politics have a seriously underestimated ability to roil markets. 

The shocking judicial murder of George Floyd and the resurgent Black Lives Matter campaign have launched something very significant in terms of political dislocation. I don’t for a microsecond buy into any of the nonsense “antifa” conspiracy fake-news, but from the massive global reaction its clear something has been stirred – and markets should be factoring in rising political risks as a result.

Forget all the news-noise in recent days about thuggery, police brutality, frankly ridiculous white middle-class virtue signalling, and chucking statues in harbours. While the violence and looting was probably driven by opportunism and boredom, the underlying grievances are about fundamental human emotions.  The real issues are much bigger.  Perceptions of rising inequality are rising – in terms of opportunities, rights and of income. Inequality has  been magnified over the last 12 years – as a consequence of the last market crash – and societies are likely to become even more unequal as this recession plays out.  

This growing sense of injustice and unfairness will hit across economies. As the virus bites harder in less developed economies, the pressure and unrest is likely to escalate. As the global economy deteriorates, unemployment rises and inequalities widen, the pressure on governments will mount. Economies in crisis and rising unrest are going to prove a fertile ground for political agitation and populism. 

The authorities should be increasingly nervous. Persuading electorates that stable markets are indicative of stable economies won’t hold up for long if the picture becomes bleaker. I suspect the veil is falling – the increasingly obvious inconsistencies that underly markets and the economy could break down.. deepening the swiftly developing sense of injustice and inequality we’ve seen in the recent demonstrations. 

The unrest is rising at a very vulnerable time in the virus cycle, and will further deepen political dislocation.  The narrative has changed from unity and “governments know best”, to a new blame game phase. It doesn’t help build confidence when a discredited epidemiologist is given face time by the government-hating BBC to declare 20,000 UK deaths could have been avoided if we’d locked down a week earlier. 

Around the globe, governments are struggling to address the critical fiscal challenges thrown up by the virus. As the coming recession mounts, the pressure will increase. Here’s how its likely to play out:

• We know global supply chains are stretched and difficult to repair. Every shuttered factory and furloughed job has potential downstream consequences – much like the proverbial butterfly’s wing flap in Surrey causes a typhoon in Hong Kong. It’s a very connected global economy – and will take time to adapt and settle. 

• Corporates are planning defensively, cutting costs and jobs. If 5% of jobs are cut, that’s a massive global economic demand shock. Factories are being shut because of slumping demand – not the virus.

• For all the government largesse, state bailouts and furlough schemes – they can’t last forever.  I understand there was a massive rush y’day to get UK workers registered on the furlough scheme before the 1st phase of the scheme closed yesterday.

• The virus remains a threat – while there has not been a second Tsunami of cases, waves are occurring in places like Texas, Arizona, Florida and across Europe. Lest we forget – if you catch the virus and get it bad, you could be looking at long-term recovery after weeks of hospital.

• Meanwhile, we have stock markets at or close to record levels, and record PE ratios ahead of massive drops that will be released through the Q2 earning seasons. We are seeing a massive debt binge by sovereigns, corporates and individuals who seem to think ultra-low rates means debt doesn’t matter – it still has to be repaid.. (Unless… where is that teach-yourself MMT Book of Magic…?)

Its already happening. We’re seeing recently reopened factories being closed again – sometimes due to a lack of parts from broken supply chains, but in the case of Caterpillar yesterday on a lack of demand for its products. Around the world, companies are looking to shed costs and surplus employees as they scale back businesses to weather the recession. 

All the above point to an increasing number of fracture lines and points of tension emerging in the global economy. But it’s not money or markets that actually matter. Economies comprise individuals interreacting between themselves. As the economy cracks – unskilled workers suffer most, and unrest will rise. 

Job cuts are hitting hardest across the least skilled classes. Its shop, factory-floor and serving staff that are joining the job lines. Knowledge based workers are having a much easier – even satisfying – crisis in lockdown. 

Through the last 10-years of debt-fuelled corporate stock buybacks we’ve seen massive income shifts towards the rich. Shocking corporate bonuses, and the failure of trickle-down, offends many – not just on the left. Unskilled workers are priced out of good neighbourhoods. Social deprivation, drugs, crime – all hit hardest on the less privileged parts of society. Educational opportunities are limited. 

And how do politicians react? Badly. Our current leadership crop are dominated by dither and bluster. Stories are allowed to take root and spread like pernicious weeds.

For instance, when a prominent politician claims BAME health-workers have been sacrificed to Coronavirus, and were bullied into treating patients with insufficient PPE, she is playing to an audience where the story has resonance. 

It’s true – nearly every single doctor in the UK who has died from coronavirus has been of Black or Asian ancestry. But have you ever tried to bully a doctor? You won’t get far. Its also true BAME staff are massively overrepresented on the NHS, and they will have run a greater risk of exposure. They’ve clearly suffered more – but I’m pretty damn sure no one ever planned for it to be that way. (I am frankly furious a politician would demean the NHS BAME doctors, nurses, cleaners and other staff who’ve died as result of the coronavirus by calling their deaths racism – they were skilled and highly regarded heroes doing jobs they chose to do. Government will find out why the virus has hit BAME citizens so hard – and will address it.) 

The riots demonstrate that tensions are high and rising. As the recession bites, there is a risk of further division and populism creating political instability and populism. While the riots are largely a US issue thus far, I’m actually even more worried about the political risks elsewhere; in South America, North Africa, Asia and even Europe. 

According to analysts, it was one of the most dovish Fed statements in history. It was also not enough to offset the Fed’s gloomy and uncertain outlook which sees unchanged rates until 2022 and an economy that fails to recover its 2019 highs for at least three years. As a result global stocks dropped the most in five weeks and US equity futures tumbled on Thursday not only on the Fed’s sobering outlook but also on rising signs that a second wave of the pandemic has arrived; bonds rallied on bets yet more stimulus would be needed to ensure recovery and the dollar ominously rebounded indicating that financial conditions are about to get tighter again.

The MSCI All-world index slid 0.75% in its largest daily loss in five weeks, while E-Mini futures for the S&P 500 fell 2% to extend the previous session’s pullback on Wall Street, sliding as lows as 3,100 a day after Powell suggested the pandemic could inflict long-lasting damage on the economy. Futures legged lower after the WSJ reproted that the EU is reportedly mulling formal antitrust charges against Amazon in the next week or two over treatment of third-party sellers, according to WSJ citing sources.

Market sentiment also took a hit as new coronavirus infections in the United States showed a slight increase after five weeks of declines, topping 2 million, but only part of which was attributed to more testing; this has led to fears of a second wave in Texas and Florida. Consider the following headlines from Bloomberg:

• Texas reported their highest 1 day new coronavirus cases total since the pandemic emerged
• A month after reopening, Florida reported the most new cases of any seven day period-to-date
• California’s hospitalizations are at their highest since May 13th, having risen in nine of the past 10 days
• Arizona’s daily tally of new cases has abruptly spiked in the last two weeks, hitting an all-time high of 1,187 on June 2

Eric Toner, a senior scholar at the Johns Hopkins Center for Health Security said that “There is a new wave coming in parts of the country. It’s small and it’s distant so far, but its coming.”

“This is the first time we’ve had a little bit of negative newsflow recently” on developments in the coronavirus, Dean Turner, economist at UBS Global Wealth Management, told Bloomberg TV. “Put that in the context of how far markets have come in the last few weeks, it’s not at all surprising that we get a little bit of profit-taking at this stage.”

U.S. virus cases now top 2 million, with fears of a second wave in Texas and Florida. Treasury Secretary Steve Mnuchin said the U.S. “definitely”needs more fiscal stimulus, supporting prospects for another round this summer. European policy makers meet Thursday on whether to boost aid.

Europe’s main bourses all opened with a heavy thud, with the Stoxx Europe 600 Index sinking, as sectors that were bought up in the recent rally such as banks and travel leading declines.  London’s FTSE, Frankfurt’s DAX and Paris’s CAC40 were all down more than 2.5% in what for coronavirus-sensitive sectors such as carmakers and travel and tourism was a fourth straight day of drops.

Asian stocks saw a 10-day winning streak come to an abrupt finish, the drop led by finance and energy stocks in Japan and Australia. Trading volume for MSCI Asia Pacific Index members was 12% above the monthly average for this time of the day. The Topix declined 2.2%, with DLE and Relia falling the most. The Shanghai Composite Index retreated 0.8%, with Beijing Urban-Rural Commercial Group and Shanghai Fenghwa Group posting the biggest slides.

In a reality check to the stock market’s recent euphoria, the Fed predicted the U.S. economy would shrink 6.5% in 2020 and unemployment would still be at 9.3% at year’s end.

Shortly after the latest inflation data showed core U.S. consumer prices fell for a third straight month in May, the longest stretch of declines on record, Fed Chair Jerome Powell said he was “not even thinking about thinking about raising rates”. Instead, he emphasized recovery would be a long road and that policy would have to be proactive with rates near zero out to 2022.

“While Powell did not commit to any new action at this time, his focus on downside risk and uncertainty reinforces the message that they will take further action, probably by September,” JPMorgan economists said. “Outcome or calendar-based guidance looks likely and Powell left the door open for moving to some form of interest rate caps.” Powell also confirmed the Fed was studying yield curve control, although he did not hint that a launch was imminent.

YCC is probably further away today after yields on 10-year Treasuries fall 9 basis points on Wednesday, the biggest daily drop in almost two months. Treasuries extended their rally, with the biggest advance in the long end of the curve, in the wake of the Fed’s signal that it would keep rates near zero for years to come and continue its bond buying at least at current levels. 10Y yields were down at 0.70% on Thursday, a sharp rally from last week’s peak of 0.96%. German Bund yields – the benchmark for Europe – duly followed. Their 10-year levels fell to an eight-day low in early trade at -0.37%, falling 4 basis points on the day.

In FX, the risk of more Fed easing initially had the U.S. dollar under pressure, seeing it touch a three-month low against a basket of currencies at 95.714. But it then staged a rebound back towards 96.500 as risk appetite waned and stocks came off.  The Bloomberg Dollar Spot Index bounced back above 1200 and the greenback advanced against most Group-of-10 peers amid a flight to safety. Commodity currencies, led by the Australian dollar and the Norwegian krone, were the biggest losers after renewed concern about the global economy and rising U.S. coronavirus cases sparked a selloff in risk assets; oil prices slumped. The yen advanced to a 4-week high versus the dollar and the Swiss franc rose to its strongest level since mid-March amid haven demand, while the pound was hurt by the risk-off tone. Sweden’s krona pared some losses after inflation came in higher than forecast.

Crude oil declined while gold faded some of Wednesday’s gain amid the rise in the dollar. WTI and Brent front month future conformed to the overall risk aversion post-Powell with added weight from a resurgence in cases State-side and ongoing questions regarding the enforcement of OPEC compliance among laggard producers. Fresh news-flow has been light for the complex this morning with price action more-so a continuation of downside from the US and APAC sessions. WTI Jul briefly breached USD 38/bbl to the downside (vs. high 39.09) multiple times but USD 37.90/bbl held as a support throughout the session thus far.

Looking at the day ahead now, data highlights include initial jobless claims from the US, along with May’s PPI reading. There’ll also be a video conference of the Eurogroup taking place. Adobe and Lululemon are among companies reporting earnings

Market Snapshot

• S&P 500 futures down 1.6% to 3,134.25
• STOXX Europe 600 down 2.4% to 359.47
• MXAP down 1.8% to 159.38
• MXAPJ down 1.7% to 512.93
• Nikkei down 2.8% to 22,472.91
• Topix down 2.2% to 1,588.92
• Hang Seng Index down 2.3% to 24,480.15
• Shanghai Composite down 0.8% to 2,920.90
• Sensex down 1.4% to 33,774.99
• Australia S&P/ASX 200 down 3.1% to 5,960.64
• Kospi down 0.9% to 2,176.78
• German 10Y yield fell 4.8 bps to -0.379%
• Euro up 0.09% to $1.1384
• Italian 10Y yield rose 5.0 bps to 1.422%
• Spanish 10Y yield fell 2.8 bps to 0.649%
• Brent futures down 3.1% to $40.43/bbl
• Gold spot down 0.2% to $1,734.61
• U.S. Dollar Index up 0.2% to 96.11

Top Overnight News

• A second wave of cases in America is raising alarms after new infections pushed the overall count past 2 million
• U.K. Prime Minister Boris Johnson is battling to contain a public split with his top scientific advisers after they warned the government must learn from a catalog of failures it made during the coronavirus crisis
• Governor Haruhiko Kuroda says Thursday the Bank of Japan will take all necessary measures to protect jobs, businesses and people’s livelihoods amid the pandemic
• European Central Bank Chief Economist Philip Lane says the PEPP expansion last week is aimed at helping a recovery and countering a “substantial negative shock to the inflation trajectory”

Asian equity markets ended the session lower as the region took its cue from the underwhelming performance on Wall St where the spotlight was on the FOMC which maintained rates as expected and projected no change in rates through to 2022, while members forecast a 6.5% contraction in the economy this year and Fed Chair Powell also struck a cautious tone during the press conference. This resulted to a choppy reaction in US stocks and most major indices finished negative with energy and financials resuming their underperformance, although tech continued to buck the trend to lift the Nasdaq to its first ever close above the 10k landmark. ASX 200 (-3.1%) and Nikkei 225 (-2.8%) were lower as Australia’s financials and energy sectors mirrored the hefty losses seen in their counterparts stateside, while sentiment in Japan was pressured by a firmer currency and further deterioration of large business surveys in which the BSI Large Manufacturing Index slumped to -52.3 from -17.2. Hang Seng (-2.3%) and Shanghai Comp. (-0.8%) were mixed following another drab PBoC liquidity effort and with participants mulling mixed Chinese financing data, with focus also on IPO developments after NetEase shares surged around 10% at the open on its Hong Kong debut. 10yr JGBs edged higher and broke above the 152.00 level amid gains in T-notes and weakness in stocks, while the results of the enhanced liquidity auction in the long- to super-long end were mixed but attracted a slightly higher b/c.

Top Asian News

• Booming Online Businesses Are Next Target in Philippine Tax Hunt
• SoftBank’s China Chip Venture Rejects Accusations Against CEO
• Even With $500 Billion Warchest, RBI Won’t Let Rupee Climb
• JD Is Said to Raise $3.9 Billion in Year’s Second-Largest Listing

European equities continue to bleed as the session is underway [Euro Stoxx 50 -2.2%], following a similarly downbeat APAC handover as sentiment takes a hit post-Fed with investors weighing the prospect of resurging COVID-19 cases in the US – with Texas seeing the highest one-day total since the pandemic began, Florida cases rising above key recent averages and California hospitalisations at the highest since early May. Add to that the background tensions brewing between US and China, geopolitical tensions in the Korean peninsula, Brexit risk and disagreement over EU member states over the Recovery Fund proposals. Major European bourses trade with losses deeper than 2% at the time of writing, with Netherland’s AEX (-1.5%) faring somewhat better as Unilever (+2.3%) cushioned the index as the group is to combine its Anglo-Dutch arms to streamline M&As. UK’s FTSE 100 (-2.3%) fails to glean much support from the stock as exporters bear the brunt of a firmer Sterling. Sectors all reside in the red with defensives outpacing cyclicals – Energy, Financials and Consumer Discretionary lag. The detailed breakdown paints a similar anti-cyclical picture with Travel & Leisure taking a hit on the prospect of a second wave. In terms of individual movers, Lufthansa (-6.5%) pared back a bulk of opening losses after plunging 12% at the open after stating they have a surplus of 26k employees and said job cuts would be “significantly more” than the 10k figure previously estimate. Meanwhile, PSA (-6.3%) and Fiat Chrysler (-5.6%) are subdued amid reports the merger is facing a full-scale antitrust probe as they have failed to provide the necessary concessions to EU Officials regarding the van units which they have reportedly been reluctant to sell, according to sources.

Top European News

• Generali Is Said to Explore Options for Swiss Insurance Unit
• Europeans Are Hoarding Billions and Have Few Plans to Spend Them
• Unilever to Combine British, Dutch Arms in U.K. in Reversal
• Biting Passenger Gets EU Airlines Off Hook for Flight Delays

In FX, the DXY has been choppy in wake of the FOMC, but ultimately still more inclined to extend its losing streak within a 96.503-95.946 range as the Greenback underperforms G10 counterparts with a greater weighting in the basket. For the record, no new policy changes emerged from the Fed, but maintaining accommodation via QE was reaffirmed and the new dot plots signalled no change in rates until the end of 2022, albeit not indicating any chance of NIRP either. However, beyond a nod to last Friday’s gravity-defying headline payrolls count the FOMC’s prognosis of the economic situation and tone of Chair Powell’s presser was largely downbeat. Hence, no real respite for the Buck aside from recovery gains vs high beta and more risk sensitive rivals, especially as doubts about reopening from COVID-19 have been subsequently compounded by reports of 2nd waves of the pandemic in several US states that have lifted restrictions.

• CHF/JPY/EUR – All extending advances against the Dollar, with the Franc now on the cusp of 0.9400 and testing 1.0700 vs the Euro even though Eur/Usd is rebounding towards Wednesday’s 1.1400+ spike highs. Meanwhile, the Yen continues to grind higher and has now soaked up offers ahead of 107.00 to expose another prior peak at 106.74 that was last seen on May 13 and constituted a higher low for the headline pair.
• GBP/SEK/CAD/NZD/AUD/NOK – The Pound remains top heavy around 1.2750 in Cable terms and above 0.8900 on the Eur/Gbp cross due to rising Brexit no deal probability and coronavirus contagion, but the Swedish Krona has gleaned some protection from broad risk aversion following firmer than forecast inflation data rather than Riksbank remarks, as Jansson contends that the near term contraction in GDP may be a bit worse than envisaged in April’s projections. Indeed, Eur/Sek is holding below 10.5000 whereas Eur/Nok has rebounded much further from recent lows to 10.7000+ at one stage amidst a deeper retreat in crude prices that is also weighing on the Loonie, with Usd/Cad firmly above 1.3400 again between 1.3398-1.3498 parameters. Similar story down under where the Kiwi and Aussie have recoiled from best levels to trade sub-0.6500 and close to 0.6900 vs their US peer, albeit with Aud/Usd holding just above stops said to be sitting in wait at 0.6898, while Nzd/Usd is now eyeing US weekly claims and PPI before Westpac’s Q2 NZ consumer survey, May manufacturing PMI and FPI for further direction.

• EM – Risk-off positioning undermining most regional currencies, but the Yuan and Lira weathering outflows better than others after another dip in the PBoC Usd/Cny fix and Usd/Try is capped by chart resistance circa 6.7900-50.

In commodities, WTI and Brent front month future conform to the overall risk aversion post-Powell with added weight from a resurgence in cases State-side and ongoing questions regarding the enforcement of OPEC compliance among laggard producers. Fresh news-flow has been light for the complex this morning with price action more-so a continuation of downside from the US and APAC sessions. WTI Jul briefly breached USD 38/bbl to the downside (vs. high 39.09) multiple times but USD 37.90/bbl held as a support throughout the session thus far. Meanwhile, Brent Aug trickles lower in tandem as it hovers around USD 40.50/bbl having found a mild base at USD 40.10/bbl and having waned off highs a touch above USD 41.00/bbl. Spot gold sees muted price action relative to the melt-down in stocks and bounce in bonds – with the yellow metal stable north of USD 1725/oz (USD 1727-40/oz intraday range) as it juggles USD action with the risk aversion in the market. Copper meanwhile retraces some of recent supply-led gains, with the risk-off tone also possibly providing the red metal with downside impetus as prices retreat from the USD 2.7/lb mark and closer to USD 2.65/lb.

US Event Calendar

• 8:30am: PPI Final Demand YoY, est. -1.2%, prior -1.2%; MoM, est. 0.1%, prior -1.3%
• 8:30am: PPI Ex Food and Energy YoY, est. 0.4%, prior 0.6%; MoM, est. -0.1%, prior -0.3%;
• 8:30am: Initial Jobless Claims, est. 1.55m, prior 1.88m; Continuing Claims, est. 20m, prior 21.5m
• 9:45am: Bloomberg Consumer Comfort, prior 37

DB’s Jim Reid concludes the overnight wrap

The Fed reiterated that it expects to maintain the near-zero fed funds rate until it is confident the economy is on track to achieve the central bank’s dual mandate. The quarterly dot plot, which was not published back in March due to the high level of uncertainty in forecasting, showed rates near-zero through 2022. It was a strong signal with only two dots above zero in 2022. Powell reinforced this message with the line that they are not even “thinking about thinking about raising rates.”

Along that timeline, the central bank does not expect GDP to return to pre-recession levels until at least 2022. On QE, the Fed said that it would continue its purchases “at least at its current pace,” which amounts to $80bn Treasuries and $40bn MBS per month. This was perhaps the most dovish development as it puts a floor on how much the Fed could buy, while leaving them able to surprise to the upside.

During the press conference Powell tried to downplay last week’s jobs report surprise and manage overall expectations of the considerable risks ahead for the US economy. He said that the Fed, “will continue to use our emergency powers forcefully, proactively and aggressively until the economy is solidly on the path to recovery”. He also stressed the need for fiscal support to stimulate the economy, considering the Fed only has the power to lend. Powell called the outlook extraordinarily uncertain, but that a full recovery is unlikely before people feel safe to resume normal activities. Is that just a step away from saying before a vaccine or herd-immunity is present? In the prepared remarks Powell touched on yield curve control, saying it remains an open question. DB think they’ll announce it in September where it’ll be focused on the 3 year part of the curve. Powell also touched on the topic of asset price inflation saying that “we’re not focused on moving asset prices in a particular direction at all, it’s just we want markets to be working and partly as a result of what we’ve done, they are working.” He also alluded to the fact that the Fed was unlikely to hold back just because of high asset prices as the damage to “normal people” would be greater. So a pretty explicit message. See our economists’ piece on the meeting here.

Going into the FOMC, the equity market looked somewhat like it did on Tuesday with the S&P 500 down slightly due to cyclicals lagging and technology stocks outperforming. The market rallied around 0.7% on the press release and through the early moments of the press conference before moving between gains and losses throughout the final 2 hours of trading as Powell spoke. The S&P 500 finally closed down -0.53%. Information Technology (+1.69%) was the only sector higher in the US, as the NASDAQ rose +0.67% to another record high. With the Fed dot plot showing rates low through 2022, US Bank stocks were the worst performing industry, down -5.75% – nearly 2.5% of that move came after the Fed announcement. In other assets, the US dollar fell to a 3-month low dropping -0.29% on the day. Gold rallied +1.06% with yields likely to remain low, and to that effect 10yr Treasuries fell -9.1bps to 0.735%.

Asian markets have also weakened this morning, with notable losses for the Nikkei (-2.05%) and ASX (-3.14%) in particular, while the Hang Seng and Kospi are down -1.04% and -1.41% respectively. Bourses in China are bucking the trend, trading close to flat. Yields on 10y Treasuries are down another -1.6bps and futures on the S&P 500 are trading down -0.88%. Elsewhere, WTI oil prices are trading down -3.11% to $38.38 after a buildup in US crude stockpiles.

Seemingly also not helping sentiment this morning is news that Texas reported 2,504 new coronavirus cases yesterday, the highest one-day total since the pandemic emerged. The latest numbers also show a pickup in cases in Florida and California. Eric Toner, a senior scholar at the Johns Hopkins Center for Health Security said that “There is a new wave coming in parts of the country. It’s small and it’s distant so far, but its coming.” A reminder that the current case and fatality Covid tables are in the pdf every day in the EMR.

As we navigate through the economic impact of the virus, yesterday we also published our latest weekly PowerPoint-based Exit Strategy Policy Tracker to help compare the current state of play towards reopening major economies. You can find the latest edition here.

The virus continued to cast a shadow on the data yesterday as May’s US CPI reading underperformed expectations. In terms of the month-on-month measure, both the CPI and core CPI readings came in at -0.1% (vs. 0.0% expected for both). That left the main CPI reading at just +0.1% year-on-year, which is its lowest annual rate since September 2015, while the core CPI print of +1.2% was its lowest since March 2011.

Meanwhile in Europe yesterday, financial markets struggled ahead of the Fed’s decision, as European equities fell for a 3rd day in a row. The STOXX 600 ended the session down -0.38%, while the DAX (-0.70%) and the CAC 40 (-0.82%) saw even larger falls. Against this backdrop, there was also a further divergence in sovereign bond spreads between the core and periphery. In fact, the spread of Spanish and Portuguese yields over 10yr bunds now stand above their levels before the ECB’s announcement of an extra €600bn in asset purchases last week, widening by a further +6.3bps and +7.0bps respectively. And the Italian spread also widened by +7.3bps in what was its 3rd consecutive move higher.

This repricing of peripheral risk came against the backdrop of a number of ECB headlines yesterday. Isabel Schnabel of the executive board said that the ECB didn’t “necessarily have to extend our toolbox already right now, but according to how the crisis develops there may be a time when this becomes necessary”. However, the Estonian central bank governor, Madis Muller, said that if growth recovered as expected in the second half and the inflation outlook didn’t worsen, “then I think an additional increase in the asset-purchase program isn’t needed”. Yesterday marked the first time in over two weeks that market expectations of Euro Area inflation fell, with five-year forward five-year inflation swaps snapping a run of 11 successive increases to fall by -1.6bps to 1.08%.

Staying with Europe, and yesterday saw a number of Brexit headlines, as the EU’s chief negotiator, Michel Barnier, said that there needed to be “clear and concrete signals” that the UK would compromise in order to reach a trade deal. It came as the Guardian reported that the European Parliament could veto such a deal if there weren’t “robust” safeguards, according to a draft resolution. That would include a level playing field, which has proven one of the biggest sticking points in the talks, but was described in the resolution as a “necessary condition for the European parliament to give its consent to a trade agreement with the UK”. Thus far the negotiations haven’t made much headway at all, so all eyes will be on a meeting expected later this month between Prime Minister Johnson and Commission President von der Leyen to see whether they will be able to break the deadlock. Remember that if a free-trade agreement can’t be reached, then we arrive at another Brexit cliff-edge at the end of the year (apologies if you’re experiencing déjà vu now…), since the end of the transition period sees the UK automatically leave the EU’s single market and customs union.

Aside from the US CPI reading there wasn’t a great deal of other data yesterday. However, we did get French industrial production for April, which fell by a further -20.1%, following a -16.2% decline in March.

To the day ahead now, and data highlights include Italian industrial production for April, weekly initial jobless claims from the US, along with May’s PPI reading for the US. This afternoon, there’ll also be a video conference of the Eurogroup taking place.