Abe’s package firming up

Emily Nicol
Chris Scicluna

Some better news over the weekend from the Covid-19 epicentres – with the fewest fatalities in Italy for more than a fortnight and a drop in deaths in New York for the first time – has provided a modest boost to risk appetite at the start of the week. Indeed, Japanese stocks rallied, with the Topix closing up 3.9% to be up 11% from its March trough even as the local media reported that PM Abe is set to declare a state of emergency as the number of Tokyo coronavirus cases surpassed 1000. Elsewhere, Hong Kong’s Hang Seng is currently up about 2% and stocks in most other regional markets (except China) posted solid gains. And European equities have started on the front foot too.

With reports that Russia and Saudi Arabia are close to reaching a deal on production cuts, oil prices have moved back close to Friday’s highs (Brent spot price up to about $33.5bbl). In the bond markets, up about 50% from the trough reached at the middle of last week). And so, while the BoJ provided support to JGBs as it maintained its purchases of 5-10Y bonds at the elevated level of ¥350bn, many major government bonds have lost ground (e.g. yields on 10Y USTs are up 6bps to 0.66%, while those on 10Y Gilts and Bunds are up around 3bps to 0.33% and -0.42%).

Looking ahead, the main economic events this week come tomorrow, with the Japanese Cabinet set to approve a near-record fiscal stimulus package as it declares a state of emergency, while the euro area finance ministers will hold their second Eurogroup videoconference in three weeks to try to agree specific recommendations on new common pandemic crisis support to facilitate funding of the exceptional fiscal measures being taken by member states on a sustainable basis.

High-frequency data are bound to remain appalling, with Germany’s statistical office Destatis scheduled to publish a special release on the effects of the Covid-19 outbreak later this morning, French agency INSEE will publish weekly labour market figures on Wednesday and the UK’s ONS to release its new weekly update on Thursday. Of course, all eyes that day will be on US weekly initial jobless claims figures, with another huge number expected after last week’s astronomical surge to 6.65mn.

Separately, having been taken into hospital over the weekend due to concerns over his persistent coronavirus symptoms, the health of UK PM Johnson will also be watched. Foreign Secretary (and leading Brexiter) Dominic Raab is formally Johnson’s so-called ‘designated survivor’.

With the number of Covid-19 cases in Japan continuing to jump over the weekend to above 3500, reports today suggested that PM Abe is on the verge of declaring a state of emergency – which would give local authorities the legal power to request the public to stay home and the closure of schools and businesses. As well as Tokyo, the declaration could first apply to neighbouring prefectures of Chiba, Saitama and Kanagawa, and also Osaka. The announcement could be aimed to coincide with the Cabinet approval of Japan’s latest fiscal stimulus package tomorrow. This will reportedly total ¥56trn, including some ¥40trn of new credit guarantees and new direct fiscal measures worth up to ¥20trn. Initial measures will include cash payments to lower-income households (¥300k), with an additional payout to households with children (¥10k per child) to compensate for loss of earnings; increased subsidies for virus-impacted firms, with more available to companies that maintain their workforce; a one-year tax payment holiday for virus-hit firms; a cut in the property tax to zero for some smaller firms; and a reserve fund for extra emergency spending if required. The impact on new JGB issuance is expected to be ¥16.9trn, similar to the April 2009 economic package, with the first supplementary auctions expected to be held in July.

Turning to the latest economic data, today’s consumer confidence survey flagged increasing concerns among households even before the recent spike in confirmed Covid-19 cases (the survey was conducted on 15 March). Indeed, the headline sentiment index fell 7.4pts in March – the largest drop since the monthly series began in 2004 – to 30.9, the lowest reading for eleven years. While the weakness was broad based, there was a double-digit decline in households’ confidence about employment prospects to 27.9, to the weakest since the 2011 quake. Unsurprisingly households assessed their overall livelihoods to be the worse since the height of the global financial crisis. And so, while households’ willingness to buy durable goods remained higher than the recent consumption tax hike-related trough, we would expect this to weaken considerably over coming months if and when Europe-style lockdowns occur, with overall confidence likely to fall well below the lows seen during the Lehman crisis.

Over the remainder of the week, tomorrow will bring the latest household spending and wage figures for February, followed by machine orders data for the same month on Wednesday. Of more interest that day will be the economy watchers survey for March, which seems bound to report a further notable deterioration in conditions over the past month.

Euro area:
Increased healthcare costs, support to household incomes and corporate liquidity, and marked declines in GDP, collectively mean that government debt as a share of GDP could rise in some euro area member states by 20 percentage points or more this year. And while borrowing over the near term will in part be absorbed by the ECB’s increased asset purchases under its PEPP programme, there are significant concerns over refinancing risks further ahead. Therefore, the main economic event in the euro this week will be the Eurogroup videoconference meeting tomorrow evening. There the finance ministers will, for the second time in three weeks, try to agree specific recommendations on new common pandemic crisis support to facilitate funding of the exceptional fiscal measures being taken by member states on a sustainable basis.

Following the previous videoconference, the Eurogroup’s chair Mario Centeno reported “broad support” among the finance ministers to make support available via the ESM Treaty, building on the framework of the existing Enhanced Conditions Credit Line (ECCL). The ESM currently has a lending capacity of just €410bn, and the proposal under discussion by the Eurogroup appeared to be based on making available about €240bn, with a limit of just 2% of GDP per member state. Ideally, funds amounting to far more than 2% of GDP would be made available, particularly to the most affected member states, Italy and Spain. And to be of benefit, the loans would need to have minimal conditionality attached, and be of long maturity. In addition, while proposals for issuance of new ‘coronabonds’ have been rejected in particular by Germany, the Netherlands and Austria, alternative suggestions for a further new one-off commonly-financed fund to provide support will also be considered. The European Commission has also proposed a separate €100bn SURE programme, with €25bn of guarantees from all EU member states, to help provide fund wage subsidies for furloughed workers. And the EIB has proposed its own €200bn credit support programme, similarly requiring €25bn of guarantees from member states.

Data-wise, the more up-to-date and high-frequency data will be most closely watched this week. Among these, the Sentix investor confidence survey of April, due this morning, will no doubt be characterised by extreme pessimism. Destatis will also publish a special Covid-19 release today. And weekly French labour market data, due on Wednesday will also likely grab headlines, particularly given the applications for temporary support by firms for 4 million workers under the national ‘partial unemployment’ scheme. That day will also bring the Bank of France’s latest business sentiment survey for March.

There are also several reports due on production and trade in February, whose relevance has been diminished by the marked intensification of the Covid-19 outbreak in March. Nevertheless, this morning’s German data suggested that the impact of Covid-19 hadn’t yet made a significant mark on new orders in the manufacturing sector in February. In particular, the partial figures released this morning (figures for Rheinland-Pfalz had to be estimated) suggested that new factory orders fell back only 1.4%M/M that month following the exceptionally strong (albeit slightly downwardly-revised) growth of 4.8%M/M in January. Excluding major orders, which can distort the series, new orders rose 1.1%M/M in February following growth of 2.2%M/M the previous month.

Within the detail, domestic orders rose 1.7%M/M in February and 2.0%M/M excluding major orders. And while foreign orders fell 3.6%M/M, a steeper decline was registered in new orders from elsewhere in the euro area (down 5.0%M/M) than in those from countries beyond the euro area (down 2.7%M/M). And excluding major orders, foreign orders were up 0.6%M/M, rising 2.8%M/M from within the euro area and falling a moderate 0.9%M/M from beyond the region.

In terms of type of good, orders of intermediate goods rose 0.9%M/M while those of consumer goods rose 1.7%M/M. But orders of capital goods (including autos) fell 3.4%M/M. Of course, while demand in most sectors in February was still satisfactory, it took a marked turn for the worse last month as the coronavirus hit hard. Indeed, on Friday we learned that German car sales and production plunged last month at the fastest rate since reunification. And new orders from the sector in March fell a steep 30%Y/Y, with domestic car orders dropping 22%Y/Y and those from abroad down 37%Y/Y. And with the manufacturing new orders PMI falling below 40 in March, factory orders seem bound to have plunged across a wide share of the spectrum of goods last month and total output will have plunged too.

Like in the euro area, the news flow in the UK will continue to be dominated by Covid-19, not least with PM Johnson hospitalised. This week’s data releases, meanwhile, are set to provide more insight into the initial economic impact. This morning’s special GfK consumer confidence release certainly flagged a significant (but not surprising) deterioration in conditions through the second half of March. In particular, the headline sentiment indicator fell 25pts between the first two week and second two weeks of the month – the largest drop since records began in 1974 – to -34, the weakest reading since the height of the global financial crisis. And there was a dramatic drop in the major purchase index by 50pts to -52pts, the lowest level since the series began in the mid-1990s, despite record grocery sales and surge in demand for home office equipment, freezers and televisions. And with the UK lockdown set to continue for some time, consumer sentiment seems bound to weaken further in April.

The latest car registrations figures for March, meanwhile, reported a further significant drop in March, with the 44.4%Y/Y drop the steepest since the late 1990s and well below the weakest reading during the global financial crisis. Given that March is usually a strong month for new registrations, and tighter Covid-19-related restrictions came into place in the UK towards the end of the month, the contraction last month was not as severe as the outturns from France, Italy and Spain, but we would expect something similar over coming months. The construction PMI for March also weakened. And Wednesday’s release of the REC/KMPG Jobs Report for March will no doubt signal a very weak outlook for recruitment prospects over the near term.

Likely of most interest, however, will be the ONS’ latest weekly release of coronavirus-related survey indicators on Thursday, which should reflect more fully the initial impact of the official lockdown. Of less relevance that day will be the monthly GDP, activity and trade figures for February. Nevertheless, these are likely to show only very modest growth before the coronavirus crisis escalated in Europe, with GDP set to have risen just 0.1%M/M following no growth in January. Thursday will also bring the latest RICS house price balance for March. In the markets, the DMO will sell short- and long-dated Gilts on Tuesday, and 5Y and 10Y Gilts on Wednesday, with the BoE set to buy £13.5bn of Gilts in the secondary market over the course of the week before Friday’s bank holiday.

In a quieter week for US economic data, Thursday’s release of weekly initial jobless claims figures will no doubt attract most attention. Last week’s numbers showed that the number more than doubled from the previous week to 6.65mn (roughly 4% of the labour force) and we would expect another huge number (the current median on the BBG survey is 5mn). Thursday will also bring the University of Michigan’s latest consumer confidence survey for April, which seems bound to fall significantly further in light of the escalation of the Covid-19 crisis in the country over recent weeks. That day will also bring PPI data for March, followed on Friday by CPI numbers for the same month. Given the sharp decline in the oil price, headline inflation is expected to have fallen 0.7ppt to 1.6%Y/Y, a thirteen-month low. In contrast, core inflation is anticipated to have moved sideways at 2.3%Y/Y.

Earlier in the week, Wednesday will bring Fed minutes from the 15 March policy meeting where the FOMC announced a comprehensive support package, including the cutting of the Fed Funds Rate target by 100bps to 0.00-0.25% and pledge to boost its bond holdings by at least $700bn (a move that was superseded by its subsequent announcement on 23 March of potentially unlimited purchases of Treasury securities and agency MBS and a new facility to buy corporate bonds). Meanwhile, February data releases including consumer credit figures (tomorrow) and wholesale trade numbers (Thursday). In the markets, while the Fed will continue with its asset purchase programme, the Treasury will sell 3Y notes tomorrow, 10Y notes on Wednesday and 30Y bonds on Thursday.

In Australia, tomorrow will bring the conclusion of the RBA’s latest monetary policy meeting. Last month, the RBA announced an emergency cut to the cash rate to 0.25% (the effective low) and introduced yield curve control, targeting 3Y bond yields at 0.25%. And so we would expect policy to be left unchanged on Tuesday. The statement will, however, no doubt flag the significant downside risks to the near-term outlook due to the coronavirus. The extent of these downside risks seem unlikely to be fully illustrated in this week’s economic releases, with tomorrow’s release of trade figures for February and job adverts figures for March. Nevertheless, both will likely be weaker.

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