PBC, ECB & Eurogroup support risk appetite

Chris Scicluna
Emily Nicol

It’s been a largely positive start to the week for global stocks, with most major Asian indices advancing along with US and European futures on continued hopes of a V-shaped economic recovery. So, for example, with no new domestic economic data to trouble minds, Japan’s Topix closed up 1.5%, with main bourses in Hong Kong and Taiwan similarly up more than 1%. However, while yesterday’s announcement from the PBoC in its monetary policy report that it will “work to offset the virus impact with more powerful policies” contributed to the positive mood elsewhere, China’s stocks underperformed, giving up their initial gains.

In the bond markets, having lost ground late Friday after the weak US labour market report (NFPs down 20.5mn), USTs are a touch firmer, with 10Y yields back below 0.70% despite plenty more issuance due over coming days (a 3Y auction comes later today with augmented 10Y and 30Y auctions coming tomorrow and Wednesday). With plenty of sovereign supply to come in Japan too, JGBs were weaker at 5-7Y and at the longer end, even as the BoJ raised its purchase amount of 3-5Y bonds.

In Europe, most govvies are also a touch weaker but BTPs are outperforming (10Y yields down about 6bps) after PM Conte suggested that he might accelerate Italy’s exit from lockdown, Moody’s decided not to change its sovereign rating on Friday, and the same day the eurogroup videoconference confirmed that the ESM’s new Pandemic Support facility will offer loans of up to 2% of national GDP of up to 10Y maturity with neither macro policy conditionality nor enhanced surveillance – i.e. perhaps as generous as might have been hoped. In an interview with La Repubblica published this morning, German ECB Executive Board member Schnabel also re-emphasised that the ECB is committed to countering fragmentation in spreads “with appropriate policy measures” including the PEPP. Meanwhile, Gilts have also opened lower after UK PM Johnson announced yesterday evening initial steps to ease England’s lockdown, encouraging those who cannot work at home (particularly in manufacturing and construction) to return to work.

In terms of economic news, highlights this week include webinars from Fed Chair Powell (Wednesday), ECB Chief Economist Lane (also Wednesday) and BoE Governor Bailey (Thursday), as well as first estimates of Q1 GDP from Germany (Friday) and the UK (Wednesday), and US and Chinese April retail sales and IP data (Friday).

After a quiet start to the week for Japanese releases, tomorrow will bring the BoJ consumption activity figures for March, which are expected to show a marked decline in expenditure that month. Last Friday’s household spending figures reported a 4%M/M drop in March to leave total expenditure down 6% compared with a year earlier. Perhaps unsurprisingly given heightened concerns about the coronavirus crisis that month and increased recommendations to limit non-essential activities, spending on recreation and clothing fell sharply (down 20%M/M and 17%M/M respectively). And over the third quarter as a whole, total spending was down more than 2%Q/Q following the more than 5%Q/Q contraction seen in Q4 and consistent with a second successive quarter of negative GDP growth in Q1.

Tomorrow will also bring the Cabinet Office’s latest composite business conditions indicators, which will similarly point to a further significant deterioration in March with declines to the weakest levels since at least the global financial crisis and levels consistent with a sizeable contraction in output in Q1 and Q2 too. Wednesday, meanwhile, will bring the latest bank lending figures for April, along with the Economy Watchers Survey for the same month. Friday will see the release of goods PPI data for April, which seem bound to further highlight the significant disinflationary price pressures emanating from lower energy and commodity prices.

Euro area:
One focus in the euro area this week will be the release on Friday of updated Q1 GDP figures, which will include the first estimate from Germany. We expect German GDP to have contracted by as much as 2%Q/Q, the steepest pace of decline since the global financial crisis, albeit the softest decline in Q1 of the major member states. Indeed, on aggregate, euro area figures are expected to confirm the record contraction of 3.8%Q/Q in Q1, leaving output down more than 3% compared with a year earlier. That day will also bring employment figures for Q1. It will be too early to see the full impact from the recent significant job losses seen since the escalation of the coronavirus crisis. In terms of monthly releases for March, euro area and Italian IP figures are due Wednesday and today respectively – which will report record declines – while euro area trade numbers are due Friday. Final inflation data for April from Germany and Spain are due on Thursday, with French and Italian figures due on Friday. Meanwhile, the Bank of France survey for the same month will be published tomorrow. Elsewhere, ECB Chief Economist Lane will participate in two online conferences on Wednesday. And another Eurogroup meeting will be held on Friday.

Following yesterday’s televised address from Prime Minister Johnson who announced only limited relaxation of England’s lockdown restrictions from this week, focus today will turn to the publication of the full official guidance setting out the detail. Meanwhile, the most noteworthy UK data to be released will come on Wednesday with the first estimate of Q1 GDP, as well as the monthly output and trade figures for March. These will inevitably be extremely weak. We expect GDP to have contracted by around 3%Q/Q, which would be the biggest quarterly decline in the post-war era. And the monthly figures will further illustrate the significant hit to activity in March, across the services, manufacturing and construction sectors alike, as the country entered lockdown. Trade figures will also flag the significant negative impact travel restrictions elsewhere will have had on services exports. Elsewhere, BoE Governor Bailey is scheduled to speak on a webinar discussion on Thursday.

Like in the euro area, the main events in the US this week will come on Friday, with retail sales and industrial production data for April set to show an even sharper pace of decline in activity as the country remained in lockdown. Indeed, both are forecast to have declined at double-digit monthly rates. That day will also bring the University of Michigan’s consumer sentiment and Empire Manufacturing surveys for May, which will no doubt suggest that conditions remain extremely weak, but no more so than in April. Ahead of this, the NFIB business optimism survey for April will come tomorrow, along with CPI figures for the same month. Not least given the sharp fall in the oil price, headline inflation is expected to have fallen by 1ppt to just ½%Y/Y. With underlying price pressures also weakening, core inflation is forecast to have eased to leave the annual rate at 1.7%Y/Y, which would be the lowest since November 2017. And the weekly jobless claims figures (Thursday) will again be daunting. There are plenty of Fed speakers in action this week too, with perhaps most notably Fed Chair Powell due to discuss current economic issues via a Peterson Institute webinar on Wednesday.

This week will bring several Aussie releases of note, including Thursday’s labour market report for April. Following last week’s weekly jobless claims figures showed that there had been a 7½% decrease in the number of jobs since mid-March, we will see a significant fall in employment last month, with expectations for a decline of 450k. As such, the unemployment rate is expected to jump from 5.2% previously to about 7.8%, the highest level since 1998. Ahead of this will bring the NAB business survey (tomorrow), which will likely report a record decline in sentiment in April. The Westpac consumer sentiment survey for May (due Wednesday) is expected to show little if any improvement.

Of most interest out of China this week will be Friday’s release of the monthly IP, retail sales and fixed investment figures for April. These are likely to confirm further improvements as the economy returned to some form of normality after restrictions were lifted. Tomorrow will also bring the latest inflation data for April, which are expected to show that the headline CPI rate eased to a six-month low on the back of weaker energy prices, while PPI figures will further highlight the disinflationary price pressures down the pipeline.

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