• Matthew Fotheringham

🌎 Tokyo 2021| How well is China really doing? | the US is running up a bill | 3 Things

Updated: Apr 3


April 3rd, 2020


Happy Friday!


The weekend fast approaches… or does it? if you’re still in your pyjamas with both TV and work laptop on, does it matter what day of the week it is?


Whether your weekends have merged into your weekdays or not, we hope you have a great one and we extend a virtual hug or elbow bump to you all.


Did you know?


As of April 2nd, 18 countries out of 193 (UN members) have not reported a COVID-19 case.


Can you name any of them? hats off if you can name more than 5!

(Answers below)

JPY


We have to wait another year for our competitive kayaking fix


As 2020 loomed, excitement rose at the prospect of spending the summer reveling in the weird and wonderful spectacle that is the Olympic Games. However, On March 24th, Prime Minister Shinzo Abe burst that balloon when announcing its postponement until summer 2021.


However, missing out on a summer worth of sport is likely to have a catastrophic effect on an already ravaged economy. Tourism in Japan is expected to be off by an estimated 40%, and Goldman Sachs estimates that as a result, they will lose 550 billion yen ($4.67B) in inbound and domestic consumption in 2020. This could be compounded if corporate sponsors seek reimbursement for their $3 billion investment.


Japan badly needed the Games. The market and government both were counting on the 2020

Olympics to help Japan's economy rebound after two large impacts:

  1. The consumption tax hike instituted late last year which has severely limited private consumption

  2. Typhoon Hagibis that hit last year and wreaked havoc on buildings and infrastructure.


These cumulative injuries have hugely impacted business indicators. Business sentiment among large manufacturers fell from 0 to -8 in the first quarter - the lowest reading in seven years. As can be seen in the chart below, this accelerates a downward trend that started more than two years ago. The services PMI fell to 32.7 in March from a revised 46.8 in February, marking the lowest reading since recent records began.


Japan PMI (source: Focus-Economics)

As in most OECD countries, the government is implementing cash payouts and zero-interest loans for vulnerable households and companies.

As a risk-off or safe-haven currency, JPY has not lost value like many other currencies. However, it has exhibited higher than usual volatility. Despite the market turmoil and Covid-19 Unemployment has remained at a stable 2.4% and retail actually beat expectations both MoM (0.6%) and YoY (1.7%) for February and manufacturing sentiment ticked higher but is still negative (see above). JPY is trading in a wide range right now. You will find resistance on the top side of 112 and support at 107.

CNY


China flattened the curve and is back to normal - or is it?



China may (or may not have) flattened the curve and gotten back to business. However, economic indicators tell a different story.


Industrial production plummeted 13.5% YoY in Jan/Feb, the sharpest contraction ever. On a month-on-month seasonally-adjusted basis, industrial production plunged 26.6% in February.


Iris Pang, Greater China economist at ING, comments that:


“As China’s coronavirus cases subside, the rest of the world has more confirmed cases, including China’s manufacturing partners in Europe, the rest of Asia and the US. This means supply chains are broken. Equally important, demand from these economies will shrink substantially when people avoid shopping and gathering at restaurants, just like the experience of China during the past two months. This is another severe hit for China's factories and exporters, as orders should pull back.”

China YoY Industrial Production ( source: Focus-Economics)


In response, The People’s Bank of China cut some key policy rates in mid-February, while it also reduced the reserve requirement ratio for selected banks on March 13th. With major Central Banks cutting rates around the world, China, fortunately, has room to do the same. The PBoC is expected to cut the 1yr benchmark deposit rate and 1yr MLF rate each by 25bp shortly.


On a positive note, VC activity has been picking up over the last few months.


The Yuan has continued a two-year-long depreciation, from about 6.2 to 7.10 to the Dollar, or about 16%. The floor for this pair comes in at 7.04 and the ceiling seems to be 7.12, not that matters much when you are a manipulator like China. Light data week next week for China only the CPI really worth watching out for and of course any unexpected PBoC announcements.



USD


It turns out money does grow on trees!



The $2.2Tr financial package signed into law last week was the third in a row, and Congress is already talking about a 4th.


Even before the bailouts, Trump’s tax cut packages of 2019 had generated a deficit of over $1Tr. Morgan Stanley estimates the 2020 deficit will reach $3.7Tr.

The “infrastructure” phase being discussed now by both Trump and Pelosi would inject an additional $2Tr into a new public works program. Adding an additional $2Tr totals over $5Tr. However, there are questions of whether this could be passed in an election year.

There’s a triple whammy here:


  1. Spending is increasing dramatically.

  2. Taxes are being cut.

  3. The economy is shrinking.


That means the deficit to GDP ratio will reach stratospheric heights not seen since WWII, possibly as high as 15% (they reached only 10% in the 2008/9 TARP bailout).


The only bright spot is that borrowing costs for the US are at historic lows. If the country wants to borrow, now’s the time.


The US is not alone in its stimulus efforts:



The US has just released the Non-farm Payroll report for March, indicating a loss of 701,000 jobs - the first time we are seeing a monthly loss in the US since 2010. Unemployment may have risen to 4.4%, but investors are still retreating to the safety of USD. EUR has performed particularly poorly against the USD with many questioning the actual Unity of the Union and the little support the stronger economies have shown to Italy and Spain. EUR/USD has slid nearly 4% this week from 1.1150 towards the magnetic level of 1.075 the next support level is at 1.0650.

US Dollar Index

In Other News



This Weeks Economic Data Calendar



Keep An Eye On Next Week



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Quiz of the week


Comoros; Kiribati; Lesotho; Marshall Islands; Micronesia; Nauru; North Korea; Palau; Samoa; Sao Tome and Principe; Solomon Islands; South Sudan; Tajikistan; Tonga; Turkmenistan; Tuvalu; Vanuatu, Yemen

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