Market news 23 June 2020

Bank of England stay on script; Fed commences buying corporate bonds in secondary

• The Bank of England left markets slightly underwhelmed after giving no clear signal of further easing policy at their June Monetary Policy Committee meeting. The MPC committed to expand their balance sheet by an additional £100bn, as was generally expected. At the time of meeting, the BoE had bought £168bn of the £200bn announced on 19th March. With the addition of the new asset purchases announced, the total committed by the end of the year is £132bn, which would slow the weekly pace of purchases to £4.5bn per week (from £13.5bn per week)
• The Fed commenced buying individual USD corporate bonds under the auspices of the Secondary Market Corporate Credit Facility (SMCCF). They had already been buying corporate bond ETFs since May 12th (meaning they actually own quite a lot of financial paper even though they have ruled out buying individual bonds of financial issuers for now)

Encouraging hard data from May...

• UK retail sales jumped 12% in May, well ahead of consensus (6.3%), despite some shops remaining shut throughout the month. Whilst unemployment remains low, this sharp recovery makes the BoE 'illustrative scenario' of a 25% fall in GDP in Q2 look rather pessimistic
• Concerns remain over the labour market recovery though. Whilst unemployment remained unchanged at 3.9% in April (consensus: 4.7%), hours worked and new vacancies fell sharply, and total pay growth was negative in real terms. According to the ONS, estimates from PAYE RTI indicate that the number of payroll employees fell by 612,000 between March and May (-2.1%)
• US retail sales beat expectations last month, +17.7% over the month (consensus: +8.2%), as 2.5m Americans returned to work in May. Retail sales are now down just -6.1% from a year earlier. Clothing, electronics, sporting goods and home furniture and motor vehicle sales surged after sharp declines in April. Whilst the easing of lockdown measures has allowed many to return to work, spending has been buoyed by federal support in the form of direct cheques into US citizens' bank accounts and the Paycheck Protection Program which aims to keep as many employees as possible on the payroll
• US weekly unemployment claims edged lower to 1.51m last week (revised 1.57m previous week), as many states continue to phase out COVID-19 related shutdowns and the $3trn fiscal stimulus continues to provide some cushioning for employers. More than 45m Americans have filed for unemployment since the beginning of the pandemic, but May saw increase in hiring even in some of the worst-hit sectors such as hospitality and retail
• In China, industrial production rose to +4.4% YoY in May (April: 3.9%), boosted by stronger export demand for medical goods and auto sales. Fixed Asset Investment narrowed the YoY YTD decline to -6.3% (Jan to Apr: -10.3%), led by a strong rebound in infrastructure capex, although manufacturing capex remains subdued

Sentiment surveys bouncing in June

• The Philadelphia Fed manufacturing index increased 70.6 points to +27.5 in June (prior -43.1), indicating expansionary estimates. The biggest move in expectations came in shipments (+55.6 points to 25.3), new orders (+42.4 points to 16.7) and employment (+11 points to -4.3). The New York Empire Manufacturing Index also increased +48.3 points in June to -0.1, well ahead of consensus (-29.8). Shipments, new orders and employment all rebounded over the month, +42.3 points, +41.8 points and +2.6 points respectively, although new orders and employment still both signal slight contraction
• The German Zew expectations  index gained 12.4 points in June to 63.4 (consensus: 56.0), recovering from depressed levels of -49.5 in March. The eurozone assessment of business expectations recovered from 46.0 to 58.6 over the month, with the UK lagging the monthly increases (+7.1 points in June)

Markets continue to rally

• It continues to be characterised as a “liquidity-driven market” – equities rallied, credit spreads grinding tighter and the US dollar weakening, yet no accompanying weakness in haven assets like gold and government bonds
• The comment in the Bank of England meeting that asset purchases would be complete 'around the turn of the year' was unwelcome, causing a sharp spike in gilt yields immediately after the meeting but the sell-off rapidly petered out