ECB ignores German judges’ demands

Emily Nicol
Chris Scicluna

While US stocks late in the day gave up much of their earlier rise as Fed Vice Chair Clarida flagged the need for caution with respect to the economic outlook and ongoing policy support (the S&P500 closed up 0.9%), by and large most Asian stock markets have made further gains today. For example, despite initially opening lower after the five-day holiday amid ongoing concerns surrounding potential renewed trade conflicts, China’s CSI300 closed up 0.6% a short while ago. And elsewhere, the Hang Seng is up more than 1% while the KOSPI closed up more than 1.7%. In contrast, despite confirmation of a surge in Aussie retail sales in March (see more details below), the ASX 200 bucked the Asian Pacific trend, to close down 0.4%. Meanwhile, US futures are currently trading slightly higher but European stocks are flat to weaker.

In government bond markets, UST yields have risen further this morning, with 10Y yields up to 0.68% for the first time in three weeks. Aussie bonds took their cue from yesterday’s shift in Treasuries to similarly make losses overnight. And despite a record drop in German factory orders (see below), euro area govvies have opened slightly lower, with BTPs the exception after the ECB’s Governing Council appeared yesterday to pour cold water on the German Constitutional Court’s earlier controversial ruling (more on this below too).

The dataflow over the remainder of the day seems bound to further illustrate the extremely weak current economic conjuncture. Certainly, euro area retail sales figures for March will show a record fall, while the ADP employment report is expected to show a massive drop of more than 20mn over the past month.

Euro area:
After yesterday’s ruling by the German Constitutional Court demanded that the ECB justify its public sector bond purchases, and also flagged the importance of the issuer limits and capital key in constraining the programme, the subsequent statement issued by the Governing Council yesterday evening made clear that it has no intention of bending to the whims of any bunch of national judges, whichever member state they might represent.

Indeed, the statement ignored completely the Court’s call for the ECB to produce new “proportionality analysis” explaining the case for the QE programme. Instead, the Governing Council simply restated that it remains fully committed to doing everything necessary within its mandate to meet its inflation aim and support the transmission of its monetary policy to all jurisdictions of the euro area. And making it clear whose tune it dances to, it also noted that the EU’s Court of Justice had already ruled in December 2018 that the ECB is acting within its price stability mandate – a ruling that the German Court had yesterday dismissed as “not comprehensible”. So, while Bundesbank President Weidmann will need to respond to the indulgences of the German Court in due course, it’s clear that ECB President Lagarde has no intention whatsoever of doing so. Indeed, if she did, the ECB’s independence would be compromised.

German new factory orders – figures released a short while ago – plunged a record 15.6%M/M (and 16.0%Y/Y) in March. And it made little difference where the orders came from. Domestic orders dropped 14.8%M/M while foreign orders fell by 16.1%M/M. New orders from elsewhere in the euro area were particularly weak, falling 17.9%M/M. But new orders from elsewhere still fell a record 15.0%M/M. By type of good, new orders of consumer items fell a decidedly modest 1.3%M/M. In contrast, orders of intermediate goods dropped 7.5%M/M. So, capital goods (including cars) bore the brunt of it, plunging 22.6%M/M. With Germany’s manufacturing new orders PMI having dropped a record 19pts to a series low of just 21.0 last month, expect April’s orders numbers to be weaker still, pointing to a very subdued outlook for production – particularly of capital goods and cars – even as Germany’s lockdown continues to be relaxed.

After last week’s flash estimate of Q1 GDP saw output in the euro area contract by a record 3.8%Q/Q, retail sales figures for March, due this morning, will shed more light on consumption at the end of the first quarter. With most countries having entered into lockdown over the course of that month, sales are expected to have fallen at a record double-digit monthly pace, to leave them 5% lower compared to a year earlier. We will also shortly see the final release of the service sector PMIs and composite indices for April. The flash euro area services PMI fell to just 11.7 in April. And after Monday’s release of the final manufacturing PMIs saw the output index downwardly revised, the euro area composite measure might well also come even weaker than the record low of 13.5 initially estimated. And the Italian indices might well chalk up further record lows for any country. Certainly, they will rival the extraordinarily weak readings from this morning's Spanish PMIs, with the headline services index down almost 16pts to just 7.1, to leave the composite PMI at 9.2. Finally, supply-wise, Germany will sell €4bn of 5Y bonds.

Like the flash release, today’s Aussie retail sales figures reported a surge in spending at the end of the first quarter as households rushed to bulk buy certain household and food items amid heightened coronavirus concerns. In particular, the total value of retail sales jumped 8½%M/M in March, the most since the series began in 1990, as sales at food stores rose a record 24.1%M/M. Indeed, special analysis by the ABS showed that the retail turnover for non-perishable goods increased by a whopping 39%M/M – with canned soup seeing by far the most significant increase of 180% – while products such as cleaning goods, medicinal items and toilet paper were up more than 30%M/M (with the latter up around 115%M/M) and perishable goods increased by more than 21%M/M.

But the negative impact of Covid-19 on certain other categories of spending was also evident in today’s figures, with significant drops in sales at cafes, restaurants and takeaway food services (-22.9%M/M), clothing retailers (-22.6%M/M) and department stores (-8.9%M/M). Admittedly, the surge in overall sales in March left them up more than 2½%Q/Q in Q1, the strongest quarterly reading since 2003. But this partly reflected higher prices. Indeed, when adjusting for price effects, retail sales volumes were up a more modest 0.7%Q/Q in Q1, the firmest growth since Q218 but nevertheless unlikely to offset weakness elsewhere in the economy.

Ahead of tomorrow’s BoE MPC decision and Monetary Policy Report, this morning will bring just the construction PMI for April. This is expected to align with the downbeat messages from the latest manufacturing and services sector surveys and point to ongoing sharp contraction in activity. In the markets, the DMO will sell 2023 and 2054 Gilts.

In the US, the focus today will turn to the first of the week’s labour market data. The ADP measure of private sector non-farm employment is expected to drop sharply in April, by more than 20mn, an outturn likely to be mirrored in Friday’s more comprehensive labour market report.


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