Central banks in overdrive

Emily Nicol
Chris Scicluna

Overview:
Central banks have been at it again, announcing further unconventional measures in an attempt to catch up with the intensifying market panic and dysfunction. In particular:

  • Shortly before Tokyo market opening last night, after an emergency teleconference the ECB announced a new €750bn asset purchase programme, the Pandemic Emergency Purchase Programme (PEPP), to provide both a significant increase in the volume of purchases and greater flexibility to try to give support to specific parts of the market, not least BTPs, GGBs and CP (see details below).
  • In an unscheduled operation, the BoJ subsequently offered to buy ¥1trn of JGBs across four maturity ranges, with a further ¥300bn bought shortly after, representing a big increase in size of its operations of this nature (see more below). It also offered an extra ¥2trn in a special liquidity operation, and bought a record daily amount of ETFs too (¥201.6bn, up roughly two-thirds from yesterday).
  • As expected, the RBA cut its cash rate by 25bps to a record low of 0.25%, its effective floor. And it also announced a form of yield curve control, targeting a yield of 0.25% on 3Y Australian government bonds – judged the most relevant maturity for impacting broader financial conditions – via secondary market purchases of ACGBs and semi-government securities across the curve. Taking a leaf out of the book of the BoE, the RBA also established a term funding facility offering 3Y loans at 0.25% to financial institutions to support the flow of credit to SMEs. And in his press conference, Governor Lowe insisted that no further policy option was off the table for the RBA, whether in terms of monetary policy or indeed forex market intervention.
  • At the same time (11.30 EST), after the Treasury had earlier in the day proposed to temporarily guarantee US money market funds, the Fed further expanded its range of credit-easing measures by establishing a new facility focussed on the sector. In particular, under the new Money Market Mutual Fund Liquidity Facility (MMLF), the Boston Fed will lend to eligible financial institutions secured by assets purchased by the financial institution from money market mutual funds. The MMLF is based on the similar facility (the AMLF) operating from 2008-2010, but will be able to buy a broader range of assets. The Treasury will provide $10bn of credit protection to support it.

The market response in Asian time, however, was discouraging, with US stock futures down again. And most regional stock indices fell again too, with Korea’s KOSPI down a whopping 8.4% even as the government offered a package of loan guarantees to SMEs and the self-employed. The principal exception in the region was Japan, where the TOPIX and JPX400 (but not the Nikkei 225) closed up on the day to reflect the impact of the BoJ’s newly enhanced ETF purchase target.

In bond markets, the picture was mixed. Yields on JGBs continued to edge higher at the longer end (10Y yields up a couple of bps to 0.065%). And while yields on ACGBs dropped up to the 5Y zone on the RBA’s yield curve control announcement (3Y yields down 17bps to 0.29%, still 4bps above the target), longer-dated yields saw an extraordinary spike. Indeed, 10Y yields briefly leapt 100bps close to 2.50%, before falling swiftly back to end the day 23bps higher at 1.41%. (The AUD also plunged through its 2008 low, briefly moving to within a whisker of $0.55 before recovering somewhat).

USTs initially lost ground too, but subsequently reversed in European time, as markets had the opportunity to respond to the ECB announcement. And crucially, the impact on euro govvies has been just what was intended with yields lower across the curve and BTPs and rallying hard. So, for example, while yields on 10Y Bunds are about 8bps lower close to -0.32%, yields on 10Y BTPs are down almost 80bps near 1.65% and those on 10Y GGBs are down about 170bps to below 2.00%. So, for the time being, pressure for emergency ESM lending packages has abated, while euro area corporate credit spreads are sharply lower too. And euro area equities are up too (Milan currently up more than 4%).

Data highlights:
Data-wise, today’s new releases from the major economies are giving an early indication of the initial hit to economic activity from then coronavirus. Indeed, a special one-off preliminary release of Germany’s ifo business climate survey for March, just published within the past half hour, unsurprisingly reported a marked deterioration in conditions and expectations too. In particular, the headline index dropped more than 8pts, the most on record, to 87.7, the lowest level since August 2009. The current conditions index fell more than 5pts, also surpassing the largest drop during the global financial crisis and euro crisis, to 93.8, the lowest since April 2013. And as a guide to the economic shock to come, the survey’s expectations index dropped by more than 11pts, clearly the most on the series, to just 82, the lowest since January 2009 when global economic activity was last falling off a cliff.

The latest Japanese visitor number released earlier today were also certainly dire (down almost 60%Y/Y, see below along with a discussion of the latest Japanese inflation numbers). And in the US, following the very weak Empire Manufacturing release earlier in the week, today’s Philly Fed business survey seems set to report a plunge in the outlook component following the sharp jump in February. The weekly initial jobless claims figures will also be closely watched for any initial signs of weakening the labour market.

ECB PEPP:
To recap, the details of the ECB’s new Pandemic Emergency Purchase Programme (PEPP) are as follows:

  • New asset purchases amounting to €750bn to be conducted until the end of the year. Added to the €120bn of purchases committed under the existing Asset Purchase Programme, under the new plans the ECB will now purchase on average almost €100bn per month until the end of 2020.
  •  All asset classes eligible under the existing asset purchase programme (APP) will be included, i.e. public sector bonds, corporate and covered bonds, and asset-backed securities.
  •  In terms of the public sector purchases, the capital key will nominally still be the benchmark for allocation across jurisdictions. Crucially, however, the purchases will be conducted “in a flexible manner” to allow “fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.” As such, the capital key is no longer a binding constraint to prevent the ECB from increasing purchases of BTPs (or any other member state’s bonds).
  • The ECB also committed to revising any of its self-imposed limits on the public sector bond purchases (i.e. the 33% issue and issuer limits) if they would prevent the ECB from buying assets to the extent necessary to achieve its mandate.
  • In addition, for the first time, Greek government bonds will be incorporated in the ECB’s asset purchases in the PEPP.
  • In terms of the corporate bond purchases, the ECB took a lead from the Fed and BoE and will now, for the first time, include non-financial commercial paper, an important source of funding for many companies. The collateral framework will also be adjusted to incorporate claims related to the financing of the corporate sector.

Overall, therefore, the announcement of the PEPP brings the response of the ECB closer in line with that of the Fed in terms of its magnitude and scope. And coupled with the recent increase in fiscal commitments over the past couple of days, the euro area macro policy response is starting to look rather more fit for purpose. But only time will tell whether it is commensurate to the task in hand.

Indeed, as the full magnitude of the shock underway will only be evident over time, a lot more support from the ECB and governments might yet be required. The increased purchase volumes and greater flexibility within the PEPP has, however, already relieved the pressure on Italian and Greek bonds caused by the harmful comments on Thursday from Lagarde, and yesterday from the Austrian Governor Holzmann. But the other euro area authorities will keep a close eye on developments, and are likely to stand ready to offer an ESM bailout (precautionary or not) for the two most heavily indebted southern member states if that should provide necessary.

Japan:
As well as buying a record daily amount of ETFs today (¥201.6bn, up roughly two-thirds from yesterday), and offering up to ¥2trn in a special fund-supplying operation against pooled collateral (although take-up was relatively modest at ¥150bn), the BoJ also stepped up its presence in the JGB market ahead of tomorrow’s public holiday. In particular, with 10Y yields having risen to their highest levels since December 2018, the Bank offered an additional unscheduled JGB purchase operation at the 5-10Y maturity, taking the total amount purchased at that zone today to ¥700.5bn, more than double that bought at any such operation since September and ¥150bn higher than the most previously purchased in a daily operation in 2014. And, overall, the BoJ today bought ¥1.3trn of JGBs across the curve to the 25Y maturity. It also again saw significant take up under its Securities Lending Facility to ¥352bn.

Turning to the data, today’s overseas visitor numbers for February were inevitably dire, further highlighting the significant negative impact of the coronavirus on Japan’s important tourism sector. Indeed, total tourist arrivals to Japan fell a whopping 58%Y/Y to just 1.1mn in February, the lowest number for six years, and the steepest year-on-year drop since the 2011-quake. Unsurprisingly given the travel restrictions in place since the end of January, the most striking decline was seen in visitors from China, down 88%Y/Y (to an admittedly still relatively high 87.2k). But visitors from South Korea were also down 80%Y/Y (to 144k), from Taiwan down 45%Y/Y (to 220k) and Hong Kong down 36%Y/Y (116k). And with these countries accounting for 40% of total spending by overseas visitors, and further travel restrictions having subsequently come into effect, Japan’s services exports seem bound to have a notable drag on GDP growth in Q1.

Against this backdrop, today’s national CPI release perhaps unsurprisingly showed some signs that weaker overseas demand was already causing price distortions. For example, February saw the largest annual decline in hotel charges since late 2011, related to a more than 9½%Y/Y drop in charges for package tours - a trend that seems likely to continue for some time to come too. Energy inflation also fell back (down 1ppt to -0.2%Y/Y), while the cost of mobile phone handsets also fell.

Overall, this all left headline CPI down a steeper-than-expected 0.3ppt to 0.4%Y/Y (just 0.1%Y/Y when adjusting for the consumption tax hike and associated government initiatives). The BoJ’s forecast measure of core CPI (excluding fresh foods) fell 0.2ppt to 0.6%Y/Y (just 0.3%Y/Y on an adjusted basis). And not least given the further marked adjustment in the oil price (down almost 50% since the end of February in yen terms), headline and the BoJ’s forecast core inflation will fall further in March. April will also see the government extend free education to High Schools, while Rakuten will start to offer a mobile price plan at less than half the price of its main rivals. So against the backdrop of significantly weaker demand for the foreseeable future, we expect to see headline and core inflation to fall back into negative territory over coming months and struggle for upwards traction thereafter.

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