Eurogroup flunks it

Emily Nicol
Chris Scicluna

After Wall Street yesterday gave up its early gains (the S&P500 closed down 0.2%), US futures subsequently gained support from reports that the White House is preparing for a phased exit from the US lockdown measures. But European stock markets have opened lower after the Eurogroup failed to reach agreement throughout the night on a new package of support to facilitate funding of member states’ policies to address the Covid-19 crisis, and the Bank of France suggested that French GDP had already declined at a post-war record rate in Q1, with further extreme contraction obviously now underway in Q2 too (see below).

Asian stock markets, however, posted a mixture of gains and losses. Indeed, despite a terrible local economy watchers survey, Japan’s Topix closed up 1.6% today, perhaps benefiting again from Abe’s bumper fiscal package announced yesterday, even though the headline figure of ¥108.2trn exaggerates the direct boost to come from the government, which will require ¥18.2trn of new JGB issuance and will not suffice to prevent an extremely sharp (further) contraction in economic activity this quarter. But despite signs that the pandemic is under much greater control in China and Hong Kong, the main stock indices there posted declines ahead of a report in the SCMP a little while ago that the SAR government is putting together a new HK$100bn support package including wage subsidies for affected firms.

In bond markets, USTs and JGBs were little changed (10Y yields respectively close to 0.71% and zero percent). But the Eurogroup’s failure to reach a deal has inevitably hit BTPs this morning (10Y yields were up about 10bps to 1.71% before easing back somewhat) although the increase in Greek sovereign yields has been tempered by yesterday evening’s announcement by the ECB that it will allow such bonds to be used as collateral in its liquidity operations. Core euro area govvies, meanwhile, are firmer (10Y Bund yields down about 3bps to -0.35%). So too are Gilts, as Boris Johnson was supposedly stable after a second night hospitalised in intensive care.

Euro area:
While finance ministers worked through the night, they failed to make a breakthrough in the Eurogroup discussions on new pandemic crisis support. The original three-pronged proposal to make €500bn more readily available via a combination of the ESM and new funds established by the Commission and EIB was judged inadequate for Italy. While France, Germany and Spain had seemingly reconciled their differences with a compromise suggestion that might have referred to possible further ‘innovative financial instruments’, Italy reportedly insisted on keeping coronabonds on the table as a means for financing recovery, and also rejected conditionality on Covid-related ESM loans. Perhaps unsurprisingly, the Dutch failed to consent to any of that let alone the Franco-German compromise. The finance ministers will resume discussions tomorrow.

Thankfully, the ECB continues to support euro area bond markets via its unrestrained PEPP purchases and enhanced APP purchases too. And the detail on its proposals to relax its collateral rules, published yesterday evening, should have provided additional support for markets this morning given the range of measures aimed at promoting an increase in bank lending to firms and households. Among other things, the ECB decided to accept government- and public sector-guaranteed loans to firms, self-employed individuals and households in its frameworks, along with loans of lower credit quality and foreign-currency loans. It also reduced haircuts applied to assets provided as collateral, and downplayed the role of external credit ratings in the process. And, most eye-catching for the headline writers, it also decided to accept Greek government bonds as collateral in its liquidity operations for the first time since that country’s crisis. Nevertheless, given the Eurogroup’s failure to reach an agreement, Greek government bonds, like BTPs, have so far made losses this morning.

In terms of economic conditions, meanwhile, the Bank of France signalled that France has already likely suffered its biggest post-war contraction in Q1, estimating that GDP dropped about 6%Q/Q, roughly four times the biggest quarterly decline during the global financial crisis and beating the previous record drop of 5.3%Q/Q during the social unrest in Q268. That reflected an estimated fall in economic activity of 32% in the final two weeks of March. And with the Bank of France estimating that, for every two weeks the country is locked down annual GDP will shrink by a further 1.5%, and the current lockdown likely to be extended beyond the current end-date of 15 April, Q2 seems bound for a double-digit percentage plunge in French economic output.

The Bank of France’s latest business sentiment survey, conducted between 27 March and 3 April, gave a little further colour, e.g. reporting a marked decline in industrial production across all sectors in March. The relevant survey index registered a monthly change of -107, by far the weakest reading on record – to put it in context the largest decline during the global financial crisis was -25. And with order books at their thinnest since 2009, the overall headline sentiment indicator plunged 43pts in March to a record-low 51. Services activity was unsurprisingly severely impacted – the monthly change of 114 in March compared with a decline of just 12 during the height of the global financial crisis – with staff levels falling sharply and firms anticipating a further deterioration this month too. Overall, the headline sentiment indicator for the sector fell 21pts to 73, also a series low.

As the number of coronavirus cases in Japan jumped above 4000, today’s main economic release – the March economy watchers survey – illustrated the significant deterioration in business conditions over the past month. Indeed, as economy watchers considered the situation to be extremely severe due to the impact of the coronavirus, the survey’s headline current conditions diffusion index fell sharply for the second successive month (-13.2pts) to 14.2 – with a reading below 50 representing ‘worsening’ conditions – its lowest since the series began in 2001 and a decline of almost 28pts since the start of the year.

Unsurprisingly the deterioration was widespread, with the household-related demand DI falling to a record-low 12.6 due in part to a plunge in demand for services – the relevant index plunged to just 7.4, a drop of almost 35pts since the start of the year. The retail, housing and (perhaps surprisingly) food-related indices also fell to series lows. Corporate-related demand was also much weaker, with the associated DI down almost 11pts to 19.2, close to the lows seen during the height of the global financial crisis. And the employment-related DI also slumped to its weakest (13.6) for more than eleven years. Overall, a particularly gloomy assessment of current conditions, which seems bound to worsen further this month.

Elsewhere, for what they are worth given that the economic situation has severely worsened since February, the latest machinery orders data for that month (also published today) came in stronger than expected. Contrasting with an anticipated decline, private sector core orders rose for the second successive month and by 2.3%M/M. This principally reflected a jump in orders placed by non-manufacturers (5.0%M/M), while orders placed by manufacturers fell (-1.7%M/M) for the first month in three. This notwithstanding, orders were still trending lower on a three-month basis (-3.7%3M/3M) in February. And orders are likely to have plunged in March and beyond, implying a significant contraction in private sector capex over coming quarters.

Unsurprisingly, Covid-19 has given a massive hit to the labour market. So, after some signs of improvement at the start of the year, today’s REC/KPMG survey on UK jobs reported the sharpest decline in permanent and temporary placements in March since February 2009 as firms cancelled plans to take on new staff. In terms of the specific survey indices, which might be interpreted like PMIs with 50 representing no change, the relevant index for permanent jobs fell a whopping 21.2pts to 31.7, while the temporary billings indicator was down 14pts to 35.6. Perhaps inevitably, catering was the hardest hit sector – the relevant DI fell 28.8pts to just 22.1 – while IT, secretarial, blue collar and executive positions also declined sharply. Indeed, the only reported subsector to see jobs growth was healthcare, a trend that seems bound to be maintained over coming months too. Certainly, job vacancies fell for the first time since the global financial crisis. And against this backdrop, as workers across the economy were being furloughed under the government’s wage subsidy scheme, starting salaries were reportedly the weakest since mid-2016.

Today will bring the Fed minutes from the unscheduled 3 March and 15 March policy meetings, when the FOMC first reduced the Fed Funds Rate target range by 50bps and then cut it by a further 100bps to 0.00-0.25% and relaunched QE. That move, of course, was followed on 23 March by the announcement of potentially unlimited purchases of Treasury securities and agency MBS and a new facility to buy corporate bonds. Data-wise, the latest weekly mortgage applications figures will see a notable drop.

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