Fed provides a fillip

Emily Nicol
Chris Scicluna

While the US fiscal response to Covid-19 remains stuck in limbo, the Fed’s commitment to buy an unlimited amount of USTs and agency MBS, and provide new support to a wide range of other asset markets too, gave a significant boost to risk appetite in Asian markets. So, as the dollar slipped back against a range of currencies, Asian stocks rallied. And despite a predictably weak set of Japanese flash PMIs, with a particularly marked drop in the services indices (the first of the series of releases to come from the major economies today, see below), the Nikkei 225 was among the stronger performers rising 7.1% (the most since 2016), while the broader Topix closed up 3.2% (the most since 2018).

Japanese stocks were boosted not least by Softbank’s asset sale and buyback plans, while the country’s banks took a further $89bn in cheap dollar funding under the latest central bank swap operation, to take the total over the past week to above $150bn and beat the previous record during the Global Financial Crisis. The best showing among the main Asian stock indices, however, was the Kospi, up 8.6% as Korea’s government doubled its overall support for the economy and financial markets to about 100trn won.

US stock futures are also much stronger this morning. And European markets have opened firmly on the front foot too, with Germany’s DAX up about 6% and the Stoxx Europe 600 up a little more than half that, despite steep declines in the French flash PMIs, the first to come from the euro area. In bond markets, meanwhile, JGBs and ACGBs were firmer across the curve, the latter coinciding with an extremely dim Australian consumer confidence survey.

Meanwhile, UST yields rose in the improved risk environment but remained firmly within yesterday’s range (10Y yields up about 3bps to 0.82%). And yields on most euro govvies are also higher this morning although BTPs have made gains after the number of new Italian fatalities from Covid-19 fell for a second day, while the Italian government is reportedly considering new fiscal measures worth €18bn on top of the existing €25bn stimulus. Gilts are also higher ahead of today’s start of the BoE’s latest £200bn round of bond purchases, which the Bank intends to conduct “at a materially higher pace than in the past”.

The Japanese PMIs were inevitably extremely weak in March, confirming a significant negative economic impact from the coronavirus. This was particularly evident in the services survey where the tourism and hospitality subsectors have been disproportionately impacted by travel restrictions, event cancellations and closure of visitor attractions. Indeed, the headline services business activity index fell a whopping 14.1pts in March – the second-steepest drop on record (the largest being the 2011 quake) – to 32.7, the lowest since the series began in 2007. The near-8pt drop in the new orders component and 12½pt decline in the business expectations index – to its lowest since the height of the Global Financial Crisis – imply ongoing steep contraction ahead. As such, firms in the sector reportedly scaled back their workforces for the first time since 2016 and by the most since 2011.

The manufacturing PMI was also very weak this month, with the headline index down for the second successive month and by 3pts to 44.8, the lowest for almost eleven years. And this index masks to some extent the full extent of the deterioration in conditions, as the lengthening of suppliers’ delivery times – the 2.8pt drop to 42.9, the lowest reading since the 2011 quake – boosts the headline PMI. Indeed, the decline in the survey’s output and new orders component – down 5.3pts to 42.1 and 5.9pts to 37.5 – better illustrate the deep contraction underway in the manufacturing sector.

Overall, today’s surveys left the composite output PMI down more than 11pts in March to 35.8, only just above the 2011 trough. And with new orders declining at their fastest pace since 2011, today’s survey suggests that Japan’s economy will remain in deep recession over the coming quarter too. So, against the backdrop of weaker demand and the slump in the oil price, today’s survey also flagged a significant risk of a return to deflation – indeed, the output price PMI fell more than 4pts to 45.9.

Euro area:
While yesterday’s European Commission consumer confidence indicator reported the steepest monthly drop since the series began in the early 1990s, the level remained well above the lows seen during the euro crisis suggesting that household sentiment still has a lot further to fall. But with firms having been feeling the pinch for a little longer (not least given supply constraints), today’s flash PMIs are reporting a much more downbeat assessment of current and expected conditions. Indeed, like today’s Japanese survey, they are signalling a substantial worsening in services activity, with hospitality, recreation and aviation having been hit particularly hard, while the manufacturing PMIs are reflecting the ongoing hit from supply constraints and weaker external demand. Overall, these point to marked contraction at the end of the first quarter and well into Q2.

Certainly, the French PMIs revealed a dire performance among services, with the headline activity index down a whopping 23.5pts – by far the most on record – to 29.0, the lowest since the series began in 1998. New business in the sector was also significantly weaker, reflecting not least a plunge in services exports (the relevant index was down 16.7pts to 33.7).

French manufacturers also reported a notable deterioration in conditions in March, with the headline PMI down 6.9pts to 42.9, an 86-month low. Like in Japan, that headline manufacturing PMI was flattered by the increase in supplier delivery times, with the output component down almost 13½pts to 35.6, the lowest since February 2009. So, overall, the composite output PMI fell an extraordinary 21.8pts to 30.2, a record low, with the survey also suggesting the sharpest drop in new orders on record, in part reflecting a slump in overseas demand. As such, French firms cut their workforces for the first time in nearly 3½ years and by the most for almost seven years.

The German PMIs, just released, were also woeful. The headline services index fell a record 18pts to 34.5, the lowest since the series began in mid-1997. But there was also a notable drop in the manufacturing output PMI, down more than 5pts to 42.2, matching the low seen during the euro crisis and a level that was last lower during the Global Financial Crisis. Admittedly, the headline manufacturing index fell a more modest 2.3pt to 45.7, but this reflected a substantial lengthening of supplier delivery times (the relevant index was down 10½pts) as the initial impact of the coronavirus on availability of components continued to take its toll, which counter-intuitively boosted the headline index. Overall, the composite PMI fell 13½pts in March to 37.2, the lowest since the height of the GFC.

While the BoE kicks off its new asset purchase programme, the UK flash PMIs are similarly expected to report a marked deterioration in the headline services index to its weakest level since the Global Financial Crisis, with the manufacturing index bound to point to marked contraction. And this should mirror the findings of the CBI’s latest industrial trends survey, due later this morning, which will also point to a significant drop in new orders.

The most striking release out of Australia overnight was the ANZ Roy Morgan weekly consumer confidence indicator, which plummeted 27.8pts to 72.2, by far the lowest since the weekly series began in 2010. Indeed, this left the indicative reading for March so far at 94.4, a drop of 8pts from February and the lowest reading since the height of the Global Financial Crisis. And with the government having introduced some lockdown measures from the start of this week, we would anticipate a further notable decline over the remainder of the month too.

While the Aussie PMI series is not closely followed due to its short history, it too offered a downbeat assessment of conditions in the services sector, with the headline index down 9.2pts to 39.8, while new business and expectations for the year ahead dropped sharply not least reflecting reduced tourism associated with travel restrictions. Manufacturers were also more pessimistic, with the output index down 2.6pts to 46.7 and the new orders PMI down 0.6pt to 46.6, both signalling sharp contraction. And the survey also flagged increased supply constraints with a significant lengthening of suppliers’ delivery times - the relevant index declined more than 9pts to just 31.5.

In the US, today will also bring the flash Markit PMIs for March, along with the Richmond Fed manufacturing index. In February, the headline composite PMI fell to its lowest level since October 2013, while new orders were reportedly the weakest since the series began. And we expect these indices to have deteriorated notably further.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.