China factory activity unexpectedly expands, but economy cannot shake off virus shock

BEIJING (Reuters) – Factory activity in China unexpectedly expanded in March from a collapse the month before, but analysts caution that a durable near-term recovery is far from assured as the global coronavirus crisis knocks foreign demand and threatens a steep economic slump.

China’s official Purchasing Managers’ Index (PMI) rose to 52 in March from a plunge to a record low of 35.7 in February, the National Bureau of Statistics (NBS) said on Tuesday, above the 50-point mark that separates monthly growth from contraction.

Analysts polled by Reuters had expected the March PMI to come in at 45.0.

The NBS attributed the surprise rebound in PMI to its record low base in February and cautioned that the readings do not signal a stabilization in economic activity.

That view was echoed by many analysts, who warn of a further period of struggle for China’s businesses and the broader economy due to the rapid spread of the virus across the world, the unprecedented lockdowns in several countries and the almost near certainty of a global recession.

“This does not mean that output is now back to its pre-virus trend. Instead, it simply suggests that economic activity improved modestly relative to February’s dismal showing, but remains well below pre-virus levels,” said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note to clients.

The pandemic’s sweeping impact on production was underlined in two of Asia’s main export engines, Japan and South Korea. In Japan, industrial out rose at a slower pace in February and factories expect a plunge this month, while production in South Korea contracted the most in 11 years.

Economists are already forecasting a steep contraction in China’s first quarter gross domestic product, with some expecting a year-year slump of 9% or more – the first such contraction in three decades.

Nie Wen, economist at Shanghai-based Hwabao Trust, said given weak export orders, rising stockpile and soft prices, the underlying issue facing Chinese manufacturers has shifted to a lack of market demand, from production shutdowns forced by Chinese authorities.

The survey’s sub-index of manufacturing production picked up to 54.1 in March from February’s 27.8, but new export orders received by Chinese manufacturers were still mired in contraction, after ticking up to 46.4 from 28.7 in February.

Manufacturers are still facing big operational pressures, the survey showed, with over half of the respondents reporting a lack of market demand and 42% reporting financing issues, both up from the previous month.

“The biggest problem facing China’s economy in the second quarter is the slumping foreign demand,” said Nie, adding that authorities may roll out more policies on top of the billions of dollars pumped into the financial system since February to boost domestic consumption and tide over the shrinking overseas demand.

Markets reacted positively to the PMI survey, with Asian stock rising as investors seemed relieved by the rare good news as the pandemic showed few signs of abating.

China’s yuan, however, barely budged, reflecting analysts’ views that a sustainable bounce in manufacturing looked some way off despite a slowdown in China’s coronavirus infections from its peak in February.

GRIM OUTLOOK

Beijing, at great costs to the economy, had imposed draconian quarantine rules and travel restrictions to curb the pandemic that has killed more than 3,000 in the country.

While life for millions of people has started to slowly return to normal, the pace of business resumptions has been constrained by China’s efforts to guard against a second wave of infections from abroad.

The coronavirus, which originated late last year in China, has wreaked havoc along global supply chains and severely hurt foreign demand amid tight lockdowns in Europe, the United States and a number of other key economies where daily life has ground to a halt.

Already, Chinese exporters are seeing overseas orders being scrapped as the worldwide spike in coronavirus infections and deaths has forced many of the nation’s trading partners to slow or suspend production. Globally the outbreak has claimed the lives of over 37,000 people with more than 770,000 infections.

China should not set an economic growth target this year given the heightened uncertainty and avoid having to resort to “flood-like stimulus” to meet the goal, a central bank adviser said.

The service sector, which accounts for 60% of China’s GDP, also saw an expansion in activity, with the official non-manufacturing PMI rising to 52.3 from 29.6 in February, a separate NBS survey showed.

Analysts warn the outbreak could have a lingering impact despite the government loosening restrictions in recent weeks, as many people remain worried about the possibility of new infections or fretting about job security and potential cuts to wages as the economy struggles.

China’s urban jobless rate hit 6.2% in February, up one percentage point from the end of 2019, with analysts estimating about 5 million jobs lost in January-February period.

“The situation remains volatile as the trajectory of the COVID-19 virus outbreak in several key economies is still unpredictable,” ANZ analysts said in a note.

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US Senate unanimously passes TRILLION dollar coronavirus package

The bill passed by a vote of 96 to 0, showing unanimous bipartisan support for the bill.

The vote ends days of deadlock and debate over provisions for American people and businesses

It’s now sent to the House Of Representatives for the next stage of debate.

The emergency legislation is the largest economic relief bill in US history.

The package is expected to provide one-time direct payments to Americans of $1,200 per adult making up to $75,000 a year.

The payments extend to $2,400 to a married couple making up to $150,000, with $500 payments per child. 

The benefit is reduced by $5 for each $100 the taxpayer makes, assisting poorer workers.

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The legislation is the product of crisis compromise between a bitterly divided political system in America.

House Speaker Nancy Pelosi has said that the House of Representatives vote will be “a good debate on the floor.”

Speaking to CNN’s Wolf Blitzer on Wednesday about fears the bill doesn’t go far enough, she said: What is important is for us to recognize the good that is in the bill, appreciate it for what it does. Don’t judge it for what it doesn’t because we have more bills to come,

“At the start of all this we had two bills, which were about emergencies … and the emergency isn’t over, but the focus was on those two bills. Now we’re mitigating for the damage of it all to the health and to the livelihood of the American people,

She added: “That is in this bill. And then we will go forward for recovery. Emergency, mitigation, recovery.

”And again all along the way still addressing the emergency and mitigation needs by focusing on how we build the economy in a positive way as we meet the health needs of the American people.”

She has said she’s “very pleased (…) congressional Democrats were able to turn upside down the bill that was presented at the beginning of the weekend.

“It was a trickle-down, corporate bill. It is now a bubble-up, workers bill and we’re very proud of that.”

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The package is intended as relief for an economy falling fast into recession.

This comes along with America facing a devastating toll from an infection that’s killed nearly 20,000 people worldwide.

Treasury Secretary Steven Mnuchin is reticent to allow the unprecedented aid to continue for too long, as the bill costs half the annual federal budget.

He said: “We’ve anticipated three months. Hopefully, we won’t need this for three months.”

The US currently has 64’180 cases of Coronavirus based on available testing.

As of Thursday, 897 have died after contracting the virus.

New York remains the most afflicted state, with its dense population leading to over 30’000 cases.

Michigan, California and Washington are all around the 2’500 mark, as the pandemic rages across the US.

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U.S. core capital goods orders point to worsening business investment downturn

WASHINGTON (Reuters) – New orders for key U.S.-made capital goods fell sharply in February as demand for machinery and other products slumped, suggesting a deepening contraction in business investment that analysts said signaled the economy was already in recession.

The coronavirus pandemic has further darkened the outlook for business investment as measures to contain the highly contagious virus have brought the country to a sudden stop. The Federal Reserve has taken extraordinary steps to soften the hit on the economy. U.S. senators were set to vote on Wednesday on a record $2 trillion fiscal stimulus package.

“Business investment is the key swing factor in every recession, and right now the pendulum is swinging the wrong way with declining orders likely to drag the economy over the cliff and down into recession in March,” said Chris Rupkey, chief economist at MUFG in New York.

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.8% in February after rising by a slightly downwardly revised 1.0% in January, the Commerce Department said on Wednesday.

These so-called core capital goods orders were previously reported to have increased 1.1% in January.

Economists polled by Reuters had forecast core capital goods orders would drop 0.4% in February. There were decreases in orders for machinery, primary metals and computers and electronics products last month. But demand for electrical equipment, appliances and components increased 1.3% last month.

Shipments of core capital goods fell 0.7% last month. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. They increased 1.1% in January.

Business investment has contracted for three straight quarters, the longest such stretch since 2009. Economists have blamed the business investment rot on the Trump administration’s 20-month-old trade war with China. The weakness in business investment comes at a time when corporate profits are weakening.

“Given that profits are likely now declining, financial market conditions have tightened and the economy is contracting, business investment will take it on the chin,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Business investment in equipment will drop sharply in the second quarter.”

Stocks on Wall Street were trading mostly higher, with investors comforted by the huge stimulus package. The dollar .DXY fell against a basket of currencies. U.S. Treasury prices were mostly trading higher.

ABRUPT HALT

The coronavirus, which causes a respiratory illness called COVID-19, has brought the economy to a abrupt halt, with governors in at least 18 states, accounting for nearly half the country’s population, ordering residents to stay mostly indoors.

“Non-essential” businesses have also been ordered closed, leading to massive unemployment and a rush to apply for jobless benefits. A survey by data firm IHS Markit on Tuesday showed its gauge of U.S. business activity dropped to a record low in March. Some analysts say the economy slipped into recession in March.

Recessions in the United States are called by the National Bureau of Economic Research. The NBER’s business cycle dating committee does not define a recession as two consecutive quarters of decline in real gross domestic product, as is the rule of thumb in many countries.

Instead, it looks for a drop in economic activity, spread across the economy and lasting more than a few months. Measures taken by the U.S. central bank to stem the slide include slashing interest rates to zero, promising bottomless dollar funding and implementing an array of programs to help keep companies afloat.

Business investment is taking a hit from a collapse in crude prices, thanks to the coronavirus and an oil price war between Russia and Saudi Arabia. A survey from the Dallas Fed on Wednesday showed a significant decline in activity in the oil and gas sector in the first quarter.

The survey’s measure of capital expenditures among exploration and production firms dropped to a reading of -49.0 in the first quarter from 9.1 in the October-December period. Its measure of the expected level of capital expenditures next year plummeted to -61.9 from 0.9 in the fourth quarter, as firms also cut expectations for capital spending in 2021.

“Prior to the global COVID-19 outbreak, the combination of muted global growth, persistent trade policy uncertainty and tariffs, the strong dollar and weak corporate profitability made for a very challenging backdrop for U.S. businesses,” said Lydia Boussour, a senior U.S. economist at Oxford Economics in New York. “We now believe the additional headwind posed by the coronavirus will lead to one of the largest pullbacks in capital spending in history.”

Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, accelerated 1.2% last month after gaining 0.1% in January. They were boosted by a 4.6% rebound in orders for transportation equipment, which followed a 0.9% decline in January.

Orders for civilian aircraft slipped 0.3% last month after soaring 356.7% in January. Motor vehicles and parts orders accelerated 1.8% in February after falling 0.5%.

But orders for transportation equipment are set to weaken. Boeing (BA.N) has temporarily closed some its plants in Washington state, one of the states hardest hit by the coronavirus, and auto makers have shuttered factories to protect their workers from COVID-19.

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