Week ahead – China to reveal virus damage on GDP as markets cling onto optimism

As much of the world is stuck in a lockdown, one country where life has started to return to normal will shed some light on the toll of the virus outbreak on its economy as China reports GDP growth estimates. The data could either spread misery or provide a glimmer of hope to those countries still heavily stricken by the coronavirus. US indicators will also be scrutinized as March numbers for retail sales and industrial production are released. But aside from these highlights, market sentiment will continue to be driven by virus headlines, with investors hoping to see signs that the spread is at least slowing in big economies such as the United States.

 

China’s economy contracted in Q1, but by how much?

Having been the first country to suffer an outbreak of COVID-19, which peaked in China in mid-February, there can be no doubt that the shock on Gross Domestic Product (GDP) during the first three months of the year was massive. The economy probably shrunk for the first time since the 1970s, ending decades of uninterrupted growth. The question is, how severe was the damage of having some of the world’s largest factories shut for weeks and to what extent had businesses resumed their operations by the end of March.

All this is expected to be revealed on Friday when China publishes its Q1 GDP growth estimate as well as industrial output and retail sales numbers for March. A dire set of figures could spark some panic selling on fears that the economic slump in Europe and America will be even greater. Forecasts are for GDP to have declined by 10% over the quarter and 6% annually. If the contraction proves to be milder than anticipated, however, this may not necessarily be met with a positive response in the markets as many traders would question the validity of the official data.

Another reason why not so cataclysmic numbers may be brushed off is the fact that any recovery in China will likely be constrained by economic activity falling off a cliff in its major trading partners just as the situation at home is improving. The risk of an out of sync recovery is expected to be underscored by the March trade data due on Tuesday, with exports forecast to have plunged by 14% year-on-year.

 

Aussie’s rebound could run into trouble

The Australian dollar has been on a roll this past week but disappointing figures out of China could be the perfect excuse for the bulls to pause and take some profit. Traders will also be keeping an eye on domestic data, which will include the NAB business conditions gauge on Tuesday, Westpac’s consumer sentiment survey on Wednesday and the March employment report on Thursday.

Australia’s jobless rate is expected to have jumped from 5.1% to 5.5% in March. An even larger increase would not bode well for the aussie’s impressive bounce back, which has surpassed the 61.8% Fibonacci retracement of the March downfall, and would spur expectations of the Reserve Bank of Australia ramping up its bond purchases in the coming weeks.

In the bigger picture, though, the aussie’s near 15% surge from March’s 17-year low may not seem overdone when considering that Australia has not been hit quite as hard as most other Western nations by the pandemic and also stands to gain from China’s gradual lifting of restrictions, which should help drive up Chinese imports of Australian goods.

 

US data to nosedive in March

It will be a fairly packed week for US releases over the next seven days but unfortunately, the economic landscape can only turn uglier from the incoming data. Manufacturing surveys are due from the New York and Philly Feds on Wednesday and Thursday, respectively, with both readings forecast to take a tumble in April. Housing data (building permits and housing starts) will be in focus too on Thursday, along with the latest initial jobless claims. But the main attention will likely fall on Wednesday’s retail sales and industrial production figures.

American shoppers had turned cautious in February, even before the disease had taken hold in the United States. Retail sales were down 0.5% over the month and the decline is expected to have accelerated to 7% in March. That may not seem incredibly dramatic given that most consumers were advised to stay at home, as panic-buying frenzy in supermarkets will likely hide the even gloomier reality in other sectors of the retail industry.

Similarly, industrial output is also seen slipping sharply, with forecasts of a 4.2% month-on-month drop.

But despite the predicted awful numbers, the US dollar could stay supported if risk sentiment was to take a turn for the worse. In fact, rising optimism is the greenback’s biggest threat at the moment. Some indications that the virus infection curve is flattening in Europe and an abundance of central bank liquidity globally have led stocks to rally this week. The Federal Reserve just fired another bullet on Thursday, announcing that it will inject a further $2.3 trillion into the economy.

If the market tone continues to improve, the dollar’s pullback will probably deepen.

 

Bank of Canada to pause after emergency cuts

Elsewhere, it will be relatively quiet, with both the euro and the pound inclined to take their cues from dollar sentiment. A policy meeting by the Bank of Canada is not anticipated to generate much reaction for the Canadian dollar either. The BoC not only cut rates three times in March, slashing its overnight rate by a total of 150 basis points, but launched its first ever quantitative easing programme (QE), so policymakers have now exhausted their main options. Still, with the Canadian dollar not getting much of a boost from the latest jump in oil prices, leaving it exposed to virus and domestic news, any hint by the BoC of further unconventional measures to come could weigh on the loonie.

Also worth watching next week are the Spring Meetings of the International Monetary Fund (IMF) and the World Bank at the end of the week where they will be under pressure to produce a plan to help heavily indebted countries get through the virus crisis. Any pledge of extra funds by the international lending bodies would not only ease the burden of the pandemic on poorer nations but support the strengthening positive risk mood as well.