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LGT Navigator: National People's Congress in Beijing overshadowed by tensions with the US

May 22, 2020

Continuing tensions between the US and China and a further increase in unemployment in the United States are causing nervousness on the stock markets. The National People's Congress in Beijing, which begins today, will be followed with great interest. Meanwhile, the latest minutes of the Federal Reserve's latest interest rate decision confirmed that the Fed expects considerable economic risks in the medium term due to the corona crisis. The latest economic data from the US confirm the negative impact of the pandemic on the economy.

National People's Congress in Beijing overshadowed by tensions with the USA
National People's Congress in Beijing overshadowed by tensions with the USA

US President Donald Trump intensified his rhetoric towards China and said that the People's Republic was pursuing a policy of disinformation and propaganda in the corona crisis. While the National People's Congress began today in Beijing – Prime Minister Li Keqiang's speech instead focused on employment and investment – the US Senate passed a bill that would exclude some Chinese companies from listing on US stock exchanges, which could lead to additional tension.

On Wall Street yesterday, renewed tension between the world's two largest economies, the US and China, pushed the indices into the red. After the Dow Jones Industrial had initially built on the previous day's gains and reached the level of end of April, the leading index closed with a daily loss of -0.41% at 24 474.12. The broad-based S&P 500 lost as much as -0.78% and the technology-heavy Nasdaq 100 ended the day down -1.13%.

The stock markets in Asia were also affected by the tensions between the US and China. This morning, the Tokyo stock exchange was down -0.75%, and in Hong Kong the Hang Seng index lost almost -5%.

Fed discusses “forward guidance” and interest rate control mechanism

The minutes of the last meeting of the Monetary Policy Council (FOMC) confirmed the assessment of the US Federal Reserve (Fed) that the corona crisis is weighing heavily on the economy, the labour market and price developments. The minutes also revealed that the Federal Reserve leadership had discussed so-called “forward guidance”, i.e. tying its monetary policy to economic developments or even a specific date. In addition, there was also talk of possibilities of steering capital market interest rates via yield curve control, as the Bank of Japan has been doing for some time. At the same time, the Fed reaffirmed its intention to keep its key rate at the current level close to zero until the economy has recovered from the crisis.

Unemployment in the USA continues to rise

Despite the easing of the economic “lockdown” that has begun in many US states, another 2.4 million workers lost their jobs in the week to May 16. Since the coronavirus pandemic reached the US, more than 38 million people have been laid off. The unemployment rate resulting from the data of the weekly registered initial applications for unemployment insurance would now be 17.2%. The official unemployment statistics recorded an unemployment rate of 14.7% in April. The May statistics will be published in early June.

US leading indicators not quite as bad as feared

According to the economic research institute The Conference Board, the composite index of leading economic indicators fell in April by -4.4% month-on-month, but less sharply than expected. Analysts had anticipated an average decline of -5.4% after the Leading Indicator had lost -7.4% in March. The composite index is composed of ten indicators, such as initial applications for unemployment benefits, new orders in industry, consumer confidence and building permits.

PMI for US private sector overcomes corona low

IHS Markit's Purchasing Managers Index (PMI) for the private sector – industry and service providers combined – improved slightly to 36.4 points in April from 27.0 points the previous month. The PMI for the industrial sector increased from 36.1 to 39.8 points and the PMI for the service sector rose from 26.7 to 36.9 points. As is well known, a value of below 50 signals a shrinking economy. According to IHS Markit Chief Economist Chris Williamson, the survey results showed that the economic slump peaked in April and, should a second wave of infection fail to materialize, the contraction should continue to ease in the coming months.

Philly-Fed raises hopes for stabilization in US industrial sector

The easing of measures to contain the Covid-19 pandemic appears to be at least stabilising the US industrial sector. The Philadelphia Fed's economic index, the so-called Philly Fed Index, recovered in May from -56.6 points to -43.1 points. The indicator has now been in negative territory for three months and in April reached its lowest level since July 1980.

Signs of stabilization in Europe

The purchasing managers' index for the eurozone economy as a whole published by the London market research institute IHS Markit rose to 30.5 points in May, indicating that the situation is stabilising after the corona-induced slump. Analysts had expected an average improvement to just 27.0 points. In April, the PMI had still reached 13.6 points, the lowest level since the survey began in 1998. On a positive note, both Germany and France saw a marked improvement in survey results in the service sector. Markit Chief Economist Chris Williamson commented that the survey results provide encouraging evidence that the trough is probably behind us.

Inflation (currently) not an issue

Against the backdrop of the Corona crisis, consumer price inflationary pressures in the euro zone and the UK again declined significantly in April. In the euro zone, the annual inflation rate fell from +0.7% in March to +0.3% last month. This was the lowest rate of inflation since August 2016. Energy prices fell in April by just under -10% year-on-year. On the other hand, however, food prices in the euro countries rose by +3.6% year-on-year during the corona phase. The EU Commission currently expects the inflation rate in the euro zone to average +0.5% this year and to rise again to +1.2% in 2021. A similar picture emerges in Great Britain. On the British Isles, the inflation rate for the year as a whole fell from +1.5% in March to +0.8% in April, which was also the lowest level since August 2016. According to Bank of England Vice President Ben Broadbend, inflation could even fall below zero by the end of 2020.



Economic Indicators May 26

MEZ Country Indicator Last
14:30 US Chicago Fed National Activity Index -2.48
15:00 US FHFA US House Price Index +0.33

Earnings Calendar May 22

Country Corporate Period
US Deere Q2



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