ECONOMETER

Markets have been willing to look past weak economic data despite the spate of dire economic releases recently, even as economic forecasts have been not been revised as aggressively lower as they should have been.  Reality may come back to bite. It is one thing to look past the data, but a reality check may lie beyond.

Economic forecasts continue to come in below expectations in the US; the Citi US Economic Surprise Index (a measure of data releases relative to consensus expectations) fell to a record low last week.  Among the key releases last week was US weekly jobless claims, which revealed another 5.245 million Americans filing first time claims for unemployment insurance. The total has now reached over 22 million, highlighting that the US jobless rate could reach above 15%.

Weak data has had little bearing on equity markets, which continue to rally on signs of virus curve flattening, expectations of economic re-opening, stimulus measures and vaccine hopes.  For instance the S&P 500 is now almost 30% above the lows set on March 23 having rallied strongly over recent weeks. This week attention will turn to Q1 corporate earnings though the signals will be more difficult to discern as increasingly companies are withdrawing forward guidance and ranges for earnings expectations look very wide.  Against this background earnings outliers are likely to provoke a bigger response.  Key earnings this week include IBM, P&G, Netflix, Snapp, ATT, Delta, and Intel.

Sentiment will also be directed by moves to open up economies.  However, this is likely to be a very drawn out process, suggesting scope for disappointment. For example, in Harbin, China, a new cluster has recently forced the authorities to reverse opening up measures. In the US there has been growing demonstrations against lockdown measures. Some states are about to ease restrictions, but they only account for a small proportion of GDP.  While there is a growing push to open up economies to avoid further economic pain, to do so prematurely, would threaten to inflict a new wave of infections.

Meanwhile oil is continuing to garner plenty of attention and unlike stocks, maybe more reflective of the economic pain ahead, with prices continuing to slide, and near term prices for West Texas Intermediate (WTI) trading at major discounts to later contracts. Fears that storage facilities in the US will run out of capacity are keeping the pressure on near term prices despite the OPEC+ deal to cut 9.7mn barrels a day of output.  Demand fears are adding to the downdraft on prices, with China’s Q1 GDP data, which revealed that growth fell by 6.8% y/y, highlighting the intensifying demand pressures on crude.