OVERNIGHT NEWS
* ECB relaxes collateral rules, to accept junk debt for liquidity operations; EUR/USD offered, 10y BTP/Bund narrows to 242bp
* France April services PMI plummets to 10.4, mfg falls to 31.5; EU leaders to discuss €2trn recovery plan today as per draft plan
* Japan April services PMI plunged to 22.8 from 33.8, mfg PMI fell to 43.7; Australia services PMI drops to record low 19.6
* S. Korea prel 1Q GDP contracts 1.4% qoq; private consumption -6.4% qoq, govt consumption +0.9%, real exports -2.0%
* BRL slumps to a record low of 5.4573/USD, central bank signals further Selic rate cut likely before launch of QE programme
* Market Alert : “Oil: return to 1990s prices stymies reflation trade”
* Nikkei +1.5%, EUR 10y IRS +1.5bp to 0.02%, Brent crude +9.4% at $22.3/b, gold flat at $1,715/oz
April PMIs: more pain likely in UK composite after later lockdown
Risk sentiment paused overnight after Markit PMIs cratered across Europe: with some indices now in the low teens, it is a reminder of the unprecedented impact of coronavirus and corresponding restriction measures. EURUSD is testing the key 1.0770 level as a consequence while other assets trade flat. As Citi Economics notes in its flagship publication, we’re about to see the deepest global recession in living memory, but the question is will the recovery be V, U, W, reverse J? Data in the coming weeks will help to inform us. For the USD, we have initial jobless claims and flash Markit PMIs with clear downside risks for the latter.
It’s clear that more policy stimulus is necessary. The EU Council meets today on this matter in what is likely to be a long and exhaustive meeting. Focus is on a recovery fund and how to finance it – we expect positive soundbites that could support periphery spreads but ultimately no breakthrough. A lack of solidarity will not be received well by EUR assets. In the US, Phase 3.5 is likely to pass House today but don’t hold your breath for Phase 4. EM central banks are stepping up and we think more rate cuts could be coming: UAH and potentially CZK today, COP and BRL look primed for further rate cuts while HUF sees QE next month.
· COP: Central bank Governor Juan Jose Echavarria said yesterday that the benchmark rate will be cut “to where it’s needed.” He added: “We won’t hesitate to do what’s needed, always taking into account inflation, growth and the behavior of the financial system” and “Rate cuts of 50 basis points will possibly continue, but up to now we’ve concentrated on providing liquidity to the market so that the financial sector can operate.”
· Initial Jobless Claims. Citi Economics expect 4000k initial jobless claims filed in the week ending April 18 as the initial wave of job losses should begin to slow. Claims that have been backlogged due to capacity issues should continue to be processed, with initial claims dropping to more normal (but still elevated) levels. In the next few weeks, continuing claims will become more important as an indicator of how many people are still without work. More: US Economics Weekly – Great Disruption, Not Great Depression
· Flash Markit PMIs follow. Manufacturing is seen at 38.5 vs 48.5 prior, while services are seen at 32.5 vs 39.8 prior. European PMIs point to downside risks clearly. While we typically pay more attention to ISM data, this will no doubt be watched by the market and will echo collapses in regional sentiment indicators (e.g. empire manufacturing survey).
· We also have New Home Sales for March. The market expects data to print at 650k vs 765k prior posting -15%MoM growth (-4.4% prior). The Kansas City Fed Manf. Activity rounds off the day. The market currently has no forecasts. We expect this to show similar deterioration to the other regional activity indices.
CitiFX Technicals warn that EURUSD
GLOBAL
*U.S. stock-index futures are fluctuating amid mixed global markets as oil rebounds
*8:30am: U.S. Initial Jobless Claims, est. 4.5m, prior 5.25m
*8:30am: U.S. Continuing Claims, est. 16.7m, prior 12m
*Trump Signs Order Suspending Immigration to Curb Job Competition
*EU Eyes $2.2 Trillion Plan as ECB Accepts Some Junk-Rated Bonds
*Merkel Coalition Agrees on New $10.8 Billion Crisis Package
*U.K. Economy Shrinks Most on Record Amid Virus Lockdown
*South Korea’s Economy Shrinks Most Since 2008 Amid Pandemic
*Economic Confidence Collapses to a Record Low Across Europe
*The U.K. government is to survey 20,000 households in a bid to track the spread of the coronavirus in Britain
COLOMBIA
*Central Bank Chief Says Colombia to Cut Rates as Much as Needed
*“Rate cuts of 50 basis points will possibly continue, but up to now we’ve concentrated on providing liquidity to the market so that the financial sector can operate.”: Echavarria
*The central bank hasn’t updated its inflation forecast for year-end but says the board doesn’t expect inflation to be a concern
Global equity recovery follows earnings strength; US-Iran tensions buttress crude despite domestic inventory buildup; USTs mirror EGB, Gilt bear steepening moves; BTPs outperform; ECB updates collateral eligibility ahead of Thursday’s EU Council meeting; flash PMIs to come; US 10y at 0.619% (+5bp)
Latin America: We saw mixed performance across LatAm FX, as commodity currencies outperformed and BRL and MXN saw further declines against the USD. The real was the worst performing EM currency, depreciating by almost 1.5% by 2PM, before mildly trimming some of those losses on the back of additional BCB intervention ($500mm in FX swaps). Wednesday’s BRL underperformance was driven by some repricing lower in the curve on the back of more dovish comments from the BCB earlier in the week, particularly as local markets were closed Tuesday. The more dovish comments were released on April 20 and emphasized that monetary policy remains an effective tool to support the economy and that the economic activity outlook has significantly deteriorated since March. This led the curve to price in an additional 25bp of easing at the upcoming May meeting, to a total of 75bp. Rates rallied on the back of this news, particularly the front-end, with Jan 21 DIs closing almost 18bp lower, at around 2.65%.