Reaching the bottom

The number of new infections outside China continues to rise on the back of rising numbers in the US. The global number of infections has now passed one million. The worst-hit countries are seeing rays of light with the number of new Italian infections continuing to trend lower and new hospitalisations dropping sharply, while officials in Spain says the country is at a peak now. The number of new infections is still rising in the US, but the growth rate has flattened. New York, the epicentre of the US outbreak, has seen some stabilisation in new infections recently. India and Brazil have seen a worrying rise in infections recently. India's 1.3 billion people are now in lockdown, though, while Brazil's President has refused social distancing measures. We will keep an eye on those countries and we look for a peak soon in new infections in the US, but it will still feel painful for a while as deaths will continue to climb. 

This week we got some of the first signs of what a post-coronavirus rebound might look like. Both Chinese manufacturing PMIs jumped back slightly into expansionary territory at 50.1 and 52.0, respectively. That signals that the manufacturing sector has stopped deteriorating but is still running on significantly reduced capacity, indicating China is still at the bottom of what we expect to be a U-shaped recovery.

Outside China, bad news keeps pouring in. In the US, ISM manufacturing only declined slightly, but looking at the most important subcomponents, it paints a gloomy picture, just like the Markit PMI. New orders were down and employment indices were significantly down. Initial jobless claims came in at 6.6 million for last week so 10 million unemployed in just two weeks. In the coming weeks we will look out for more Fed action and potential discussions of a fourth rescue package. In Japan, the Business Tankan survey showed the worst reading in seven years. PM Abe is expected to be present a fiscal package with a size of 11% of GDP on Tuesday to cushion what looks like a perfect storm in Japan with consumers' negative reaction to October VAT-hike and cancelled Tokyo Olympics adding to the COVID-19 shock to the economy. Euro area HICP inflation declined to 0.7% in March weighed down heavily by sharply falling energy prices. Deflationary pressures seem relatively contained so far. However, most of the March data was likely collected before lockdowns took effect. We have taken a closer look at repercussions for the inflation outlook in Euro Area Research - Euro inflation in the corona maelstrom, 1 April. This week, the EU Commission unveiled a new unemployment reinsurance scheme dubbed ‘SURE'. Under the plan, Brussels is set to provide loans to countries that face a sudden and severe rise in spending on short-time working schemes. The initiative is part of a broader set of proposals to be discussed by the Eurogroup on Tuesday.

It has been a mixed week in financial markets with government bond yields slightly higher across the euro area as a surge in fiscal spending brings a lot of new issuance to the market. The USD strengthened as hopes of a quick recovery have dwindled and the oil price has surged. Weakening demand has weighed heavily on oil markets, but Chinese plans to start buying oil for state reserves, Trump's comment that OPEC would be willing to cut production significantly and a planned OPEC+ meeting next week have been supportive. If we move from a scenario where Saudi Arabia could potentially flood the market to one with an agreed cut in production, we might have seen the bottom in the oil price for now.

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