Asia Pacific policy action as COVID-19 concerns continue

Emily Nicol
Chris Scicluna

After a softer end to last week on Wall St (the S&P500 closed down 3.4% but that still left it up more than 10% on the week), most Asian bourses similarly slipped back today at the start of a week that will bring further evidence that the global economy is currently undergoing a record peace-time contraction.

For example, as Donald Trump conceded that the US won’t be back to business as usual by Easter, concerns about an imminent Tokyo lockdown rose amid the steady rise in Covid19 cases, and Japan’s government prepared to ban the entry of foreign nationals who have recently visited the China, Korea, the US and much of Europe, the Topix fell more than 3% in the morning session.

But while oil prices took another step down (Brent crude is now below $23.5bbl), further action by policymakers in the Asia Pacific – in particular a 20bps cut by the PBoC on its reverse repo operations – gave support during the afternoon session. And with the BoJ signaling a willingness to be flexible in interpreting banks’ capital and liquidity coverage ratios when determining their access to its current account and lending facilities, the Topix eventually closed down just 1.6% on the day, China’s CSI300 closed down 1.0% and the dollar modestly rose. Elsewhere, Aussie stocks were the standout, rallying 7% on the day after the government announced extra fiscal stimulus. But US equity futures are currently trending lower while European stocks have opened weaker too.

In bond markets, having made significant gains at the end of last week (10Y yields had fallen almost 20bps on Friday to 0.67%), USTs were little changed in Asian time. And ahead of a Reuters report Japan’s government will boost issuance by some ¥16trn (3% of GDP) to fund its forthcoming stimulus package – an increase that would rival the amount of additional bonds sold in 2009 and take net JGB issuance in FY20 to ¥48.6trn – JGBs showed a mixture of gains and losses across the curve. But with signs that Germany and its allies remain determined to resist the issuance of a common euro area ‘coronabond’, core euro area govvies are firmer this morning (10Y Bund yields now below -0.50%) while BTPs are weaker (10Y yields up 6bps to 1.38%) . And with the UK government having suggested over the weekend that its lockdown measures might have to remain in place for six months, Gilts have rallied, with 10Y yields down a further 6bps to below 0.30%.

It’s set to be a busy week for Japanese economic data, with most notably the BoJ’s quarterly Tankan set to be released on Wednesday. The March monthly Reuters Tankan saw the headline manufacturing DI drop 15pts to -20, the lowest since December 2009, leaving the quarterly average at -10 in Q1, the weakest for seven years. The decline in the non-manufacturing index was striking too, down 15pts to -10, the first negative since the 2011 quake and leaving the quarterly average at +6, the lowest since Abe took over as Prime Minister. Nevertheless, since that survey was released a fortnight ago, we would expect the BoJ Tankan to be significantly weaker. The profits and sales growth forecast will no doubt be slashed, while firms’ capex plans will be scaled back too. Meanwhile, ahead of the Tankan, tomorrow will bring the usual month-end monthly releases, including February industrial production, retail sales and labour market figures. These seem bound to show signs of weakening as the impact of the coronavirus started to take effect, not least through reduced visitor numbers and supply-chains constraints related to China’s shutdown. Indeed, retail sales are expected to drop about 1½%M/M, the most since October, while IP is currently expected to be flat on the month and thus down almost 5%Y/Y.

Euro area:
Sentiment surveys will continue to dominate the euro area data flow this week, kicking off today with the Commission’s Economic Sentiment Index (ESI). This often provides the most accurate guide to euro area economic activity. However, as with Friday’s INSEE and ISTAT surveys, the information reflected in the Commission survey will to some extent be out of date given the continued escalation of the Covid-19 outbreak over the past week or so. Nevertheless, while the flash consumer confidence indicator in March remained significantly higher than level seen during the euro crisis, the monthly drop was still the largest since the series began since 1990. And we expect this index to have been revised lower. Moreover, in line with the marked deterioration in the flash PMIs, business confidence (particularly services) looks set to have fallen at a record rate too – indeed, the headline ESI is forecast to decline more than 10pts to its lowest since the euro crisis. The final manufacturing and services PMIs (Wednesday and Friday respectively) also seem likely to be revised down from the already very weak flash estimates, which saw the manufacturing output PMI drop 9pts to 39.5 and the services PMI slump more than 24pts to 28.4, leaving the composite at a record low of 31.4.

Friday will also bring euro area retail sales figures for February, while Wednesday will bring euro area unemployment figures for the same month, both of which might well show some initial signs of weakening. German and Spanish labour market figures for March (Tuesday and Thursday respectively) will likely be more closely watched, although the former should provide support from the government’s short-term working subsidies (Kurzarbeitergeld). Finally, the euro area’s flash CPI estimate for March (tomorrow) seems bound to show a notable drop in headline inflation on the back of the weaker oil price, with an anticipated decline of ½ppt to 0.7%Y/Y matching the three-year low hit in October. Core inflation, however, is expected to move sideways at 1.2%Y/Y.

In the US, after last week’s shocking weekly initial jobless claims figures (3.283mn, totaling roughly 2% of the labour force), all eyes in the coming week will be on the various labour market releases, including Friday’s non-farm payrolls report. Expectations are for a marked decline this month for the first time since 2010, although the extent of the drop will be tempered by the reference period, which is the week containing the 12 March. So, the April payroll data to be released in early May will provide a clearer indication of the impact of Covid-19 on the labour market and Thursday’s weekly jobless claims figures should again be watched particularly closely for a more up-to-date view of events.

This week will also bring several US sentiment surveys of note, including the Conference Board’s consumer confidence indices (tomorrow), and manufacturing and non-manufacturing ISM indicators (Wednesday and Friday respectively). The final manufacturing and services PMIs are also due the same days. The past week’s flash estimates showed a marked decline in the headline services PMI by more than 10pts to 39.1, while the manufacturing output PMI fell 3pts to 47.6. And with the coronavirus crisis having intensified over the past week, we would expect these declines to be even steeper in the final release. Other releases due from the US include February pending home sales figures (Monday), construction spending data and vehicle sales numbers (Tuesday), trade and factory orders data (Thursday).

While PM Johnson is ill with Covid-19, the UK dataflow this will provide further insight into the initial economic impact of the pandemic on household and business sentiment. First up will be the Gfk consumer confidence survey tomorrow, which is expected to show a notable deterioration in sentiment even before tighter restrictions to activity came into place and lockdown was enforced a week ago. The following day will bring the final manufacturing PMI for March. While the preliminary release reported only a modest drop in the headline rate (3.7pt to 48) last month, this partly reflected the counter-intuitive boost from the survey’s lengthening supplier delivery time component. And the output component might well be revised down from the flash estimate of 44.3, almost 8pt below the February level and a seven-year low. In the same vein, we would expect the final services PMI (due Friday) to show a more marked worsening than the record drop (17pts, to a series low of 35.7) in the headline measure initially reported. Ahead of these, BoE lending figures for February are due today, while the final release of Q4 GDP (current estimate of zero growth on the quarter) will be published tomorrow.

In Australia, as the number of coronavirus cases rose above 4000 and the Government enforced stricter social distancing rules over the weekend, the Australian government today unveiled a number of additional support measures including most notably a job protection scheme, where A$130bn will be made available to make JobKeeper subsidy payments to businesses significantly impacted by the coronavirus. The payment of A$1500 per eligible employee every two weeks will last for up to six months and will be equivalent to around 70% of the national median wage. Coming on the back of the A$17.6bn economic stimulus package announced earlier this month, today’s announcement brings Government spending measures at around 7% of GDP.

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