Record fall in sales in March

Emily Nicol
Chris Scicluna

At the national level, policymakers in the major economies continue to bolster their economic support measures. In the US, last night the House of Representatives passed a new $484bn package, including extra funds for hospitals and replenishment of the Paycheck Protection Programme for small businesses. In the UK, the Chancellor has reportedly agreed to offer 100% guarantees on loans to small businesses. And in China today, the PBoC reduced its interest rate on its targeted medium-term lending facility, with the 1Y funding rate reduced by 20bps to 2.95%.

Nevertheless, there seems little cause for cheer today. Reports of disappointing results in covid-19 trials for the antiviral drug remdesivir, seemingly accidentally published by the WHO, already weighed on US stocks yesterday, with the S&P 500 already having given up its earlier gains to end the day unchanged. Bad news on the rate of new coronavirus infections and deaths in Germany added to unease just days after the government relaxed restrictions on small shop opening. And while Chancellor Merkel had committed yesterday to boost her government’s contribution to the EU budget for the coming seven-year period, yesterday afternoon's failure of EU leaders to agree any detail whatsoever on the planned Recovery Fund – with the European Commission simply tasked with going away to do more work – was discouraging too.

Meanwhile, the economic dataflow remains alarming. After yesterday’s extreme series lows in the flash April PMIs, the German ifo indices, just released 15 minutes ago, similarly fell to the worst levels since reunification. And this morning’s announcement of a collapse in Japanese department store sales and a record drop in UK retail sales last month too highlighted the toll being taken by the coronavirus on spending across the major economies whether or not lockdowns are strictly enforced.

So, it’s no surprise that equity markets appear to be ending the week with a whimper. Most major Asian stock markets fell back, albeit relatively modestly (e.g. Japan’s Topix closed down 0.3%). But European indices have opened more than 1% lower, and S&P futures are down too. And with the exception of euro area periphery bonds, which are reversing some of yesterday’s gains, major government bonds are stronger this morning. Yields on 10Y USTs are back below 0.60%, with those on 10Y Bunds down about 4bps to -0.47%. And following reports that the BoJ will next week discuss whether to follow the Fed and make a commitment to buy a potentially unlimited amount of JGBs if necessary, and Japan’s latest inflation

With concerns about the coronavirus crisis having intensified and some stores having reduced opening hours or closed towards the end of the month, and the number of overseas visitors having fallen off a cliff, spending at Japan’s department stores collapsed in March. Indeed, the decline of 33.4%Y/Y was by far the steepest since the series began in the early 1980s and more than 12ppts sharper than the previous worst decline, which was due to the 1997 consumption tax hike. And the weakness was widespread, with sales of household goods down 28%Y/Y, clothing down 40%Y/Y, and restaurants down a 48%Y/Y. So, when the more comprehensive retail sales figures are published next Thursday, we would expect them to signal a marked contraction in spending in March and over the first quarter as a whole too.

The latest CPI figures out of Japan overnight offered no major surprises. In particular, headline inflation moved sideways in March at 0.4%Y/Y (just 0.1%Y/Y when excluding the effects of October’s consumption tax hike and associated government education measures). But when excluding a modest upward impulse from fresh food prices, the BoJ’s forecast measure of core inflation fell 0.2ppt to 0.4%Y/Y (0.1%Y/Y on an adjusted basis, which was the softest reading since the start of 2017), on the back of steeper pace of decline in energy prices. When excluding both energy and fresh food prices, the BoJ’s preferred new core measure was unchanged at 0.6%Y/Y (0.5%Y/Y adjusted). But while the internationally comparable measure of core inflation (excluding food and energy) edged slightly higher, at 0.3%Y/Y (0.2% adjusted) it still remained the lowest of the major economies.

Looking ahead, Japan’s inflation seems bound to slip back into negative territory over coming months. Certainly, the extension of free education to High Schools and lower electricity prices from this month will be an additional downside pressure. The slump in the oil price will also inevitably provide a further near-term drag, as will lower mobile phone charges (already down 4.3%Y/Y last month). Moreover, given the weakness in demand, we think any upside pressure on domestic costs from Covid-19 associated supply constraints will be more than offset by downwards pressure on wages and lower margins. Indeed, with surveys pointing to weakening labour market conditions, services inflation will likely fall back into negative territory. So, our colleagues in Tokyo currently expect the BoJ’s forecast measure of core inflation to fall back into negative territory in April and follow a gradual downward trend through to the end of the year at least.

As such, the BoJ’s updated economic assessment in its quarterly Outlook Report due next week seems bound to be pretty gloomy. If it is able to publish new projections, a massive downwards revision to its GDP and inflation forecasts for the current fiscal year (0.9%Y/Y and 1.0%Y/Y respectively) would obviously be in order. And a downwards revision would be required to its inflation forecast (1.4%Y/Y) in FY21 too. Indeed, the prospect of the BoJ hitting its 2% inflation target over the forecast horizon is minimal. So, expect Kuroda to downplay further the importance of that goal.

Against this backdrop, according to the Nikkei newspaper, the Policy Board will at its one-day policy-setting meeting on Monday discuss whether to make a ‘whatever-it-takes’ commitment to purchase, if necessary, a potentially unlimited amount of JGBs. While its current policy framework already gives it scope to make unlimited purchase operations to support its yield curve control objectives, such a commitment would allow it to drop its long-held, but repeatedly undershot, targeted annual increase in its JGB holding of ¥80trn, while affording significant flexibility if and when the government further revises up its JGB issuance plans. To support private financing conditions, it will also reportedly discuss whether to double its purchases of corporate debt – at its March meeting, the BoJ temporarily increased its upper limits for purchases of commercial paper and corporate bonds by ¥1trn apiece to ¥3.2trn and ¥4.2trn through to the end of September..

The UK data focus at the end of the week has been the consumer, with updates on retail sales and household confidence. The March retail sales data came in broadly in line with expectations, recording a steep drop in spending on non-essentials and fuel. Total sales fell 5.1%M/M, the most since the series began in 1988, to be down 5.9%Y/Y. The sharp fall partly reflected lower spending at petrol stations, down 18.8%M/M as the movement of people slowed and eventually the lockdown kicked in towards the end of the month. However, even excluding auto fuel, retail sales dropped a record 3.6%M/M and 4.1%Y/Y.

Within the detail, clothes stores were most severely hit, with sales down almost 35%M/M. Spending at household goods stores fell a steep 8.0%M/M. At the other end of the spectrum, food sales saw the strongest growth, up 10.4%M/M as households prepared for working from home and lockdown. And non-store retailing jumped 5.9%M/M so that online sales accounted for a record share of more than 22% of total spending. Given the weakness at the end of the quarter, total sales fell 1.6%3M/3M, illustrating the strong likelihood of a significant negative print to Q1 GDP when the respective data are published next month.

The GfK consumer confidence survey unsurprisingly showed that sentiment remains extremely weak. However, having plunged in March to the lowest level since February 2009, the survey’s headline index failed to deteriorate further this month, remaining unchanged at -34, 5pts above the series low. Perhaps reflecting the significant government support to household incomes announced at the back end of last month, not least the Job Retention Programme that offers furloughed workers up to 80% of their previous incomes, the survey detail suggested that consumers felt a touch more upbeat about the prospects for their personal finances, with the respective index up 3pts. However, remaining extremely downbeat about the overall economic outlook, households were also a touch more inclined to save, with no improvement in the respective indicator of willingness to make major new purchases.

Euro area:
Following yesterday’s extreme record lows on the April flash PMIs, the German ifo business survey also reported a deterioration in conditions. The headline business climate index fell 11.6pts to a new series low of 74.3, more than 5ts below the previous trough reached during the global financial crisis. This partly reflected a plunge in the assessments of current conditions across the manufacturing, services, trade and construction sectors alike, with the overall current index down more than 13pts to a new low of 79.5. But contrasting the vigorous rebound seen in the ZEW expectations index earlier this week, the ifo expectations index also fell more than 10pts, to a new low of 69.4, almost 10pts below the trough during the global financial crisis.

Durable goods orders data for March are expected to report a marked double-digit decline on the month as closures of businesses and heightened economic uncertainty hit demand. The revised University of Michigan consumer sentiment survey for April might also reveal downwards revisions from the more-than nine-year low registered in the preliminary release.


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