This morning’s purchasing managers indices for the eurozone and UK were by far the worst on record, confirming an unprecedented economic slowdown across the region’s major economies.
The Eurozone composite PMI printed at 13.5, about half of the median forecast submitted to Bloomberg, while the UK figure was 12.9, similarly half of expectations. The manufacturing indices released this morning were all much better, at first glance, than both the composite and services indices, generally printing around the 30 level. However, this was once again a quirk of the way the manufacturing indices are constructed: increases in supplier lead times are included as a positive factor in the index.
Markit’s assessment was that the composite survey indices suggested GDP was falling at a quarterly rate of 7.5% in the Eurozone and 7% in the UK. However, this is based on a linear relationship between PMIs and growth. Goldman Sachs analysts argued a quadratic relationship – where losses to growth accelerate as the PMI falls from 50 towards 0 – is more appropriate, and based off this model estimated a 15% output decline in the UK. Just how bad the shock to growth will be remains uncertain; but this morning’s PMIs do make it clear that the recession will be of unprecedented depth and suddenness.
The FX reaction to this morning’s data has been muted, suggesting that an astonishingly bad second quarter is still priced into macro markets including currencies.
Markets remain focused on the shape of the recovery, and participants are perhaps encouraged by hopes of major economies beginning re-opening within the coming months, despite a lack of clear indication of the pace of re-opening. The dollar is mildly weaker compared to earlier in the day against several currencies, notably NZD, AUD, and NOK, while crude oil futures are higher after sabre rattling between Iran and the US overnight.
This afternoon’s data includes the already released weekly initial jobless claims number in the US, which was 4.427 million, broadly in line with expectations. Cumulative new jobless claims since March are now in excess of 26 million, easily erasing the entire expansion in total employment over the past decade. The sharpness of the job losses remains remarkable: in the past five weeks, more jobs have been lost than in any total recessionary period since the great depression in the US.
Looking ahead, the afternoon’s main events will be US flash PMIs at 14:45 BST, although given the muted reaction to the morning’s releases the bar seems to be set very high for a serious market reaction. The EU council will meet virtually to discuss – and potentially finalise – the economic response to COVID-19 today, possibly offering more impetus for volatility in the euro.
Rate of increase in jobless claims in US is falling, but the level is still staggering
Author: Ranko Berich, Head of Market Analysis.