New state of emergency to be declared for Tokyo & Osaka

Chris Scicluna

Japanese stocks rebound even as new state of emergency to be declared for Tokyo and Osaka by the weekend
After two days of losses, Wall Street found its feet on Wednesday with a rally in materials and energy stocks leading the S&P500 to a 0.9% gain and so closing just 0.3% below last Friday’s record high. The rebound in risk sentiment had little impact on the Treasury market – the 10Y UST ended the day at 1.56% – but did remove the bid from the greenback. During a quiet day for economic data, of note was the Bank of Canada’s adoption of a more upbeat outlook, which has seen it decide to scale down its QE purchases and bring forward the forecast timing of its first rate hike to sometime in the second half of next year.

US equity futures are currently little changed after Asian trading, while the 10Y UST yield has nudged down around 2bps to close to 1.54%. Against that background, most equity markets in the Asia-Pacific region have moved higher today. And after leading Asia lower over the past two days amidst worsening virus news, today Japan has led the market higher. A short time ago the TOPIX closed with a gain of 1.8%, even as Tokyo’s governor confirmed that she had formally requested the central government to declare a new state of emergency. According to an Asahi newspaper report, following a meeting of its virus task force tomorrow, the government will decide on the which areas will be subject to a declaration, the nature of the new restrictions, and the expected time period that they will be in place (likely at least through the Golden Week holidays). It is worth noting that new coronavirus cases in Osaka rose to a record 1,242 yesterday while new cases in Tokyo rose to the most since January. So while PM Suga still seems determined to hold the Tokyo Olympics in July, today the JAMA cancelled this year’s Tokyo Motor Show, which had been pencilled in for October.

Of course, these numbers remain thankfully much lower than in many other countries, with India yesterday reporting a record 314,835 cases (which is highly likely to be an underestimate), causing Indian bourses to buck the mostly positive trend elsewhere. In mainland China markets edged lower but gains on average of around ½% were typical elsewhere. This included Hong Kong and Singapore, even amidst reports that a mooted travel bubble between the two financial hubs had been further postponed. Stocks also advanced in Australia, where the NAB’s quarterly business survey suggested that firms expect the economy to gather further momentum despite the phasing out of fiscal support measures. But with USTs having made gains, ACGB yields finished lower on the day.

ECB policy announcements to be uneventful despite underwhelming recent pace of asset purchases
Unlike last month, today’s ECB monetary policy announcements should be uneventful. The March decision to accelerate PEPP purchases within the existing €1.85trn envelope appears to have been the result of a compromise among members of differing views and will not be reopened for debate, with what happens from July on now the key focus of speculation. Reassuringly, however, while, so far, the ECB has not materially accelerated its net purchases (although admittedly it did increase its gross purchases notably last week as redemptions pick up), euro area bond yields have not surpassed their peaks for the year reached in late February. So, the Governing Council will have no additional cause for concern about financial conditions, even while lack of clarity about its precise reaction function persists.

Moreover, although the intensification of the pandemic and associated renewed lockdown measures raise concern about the near-term outlook, the ECB’s projections remain credible. The Governing Council will also take comfort from yesterday’s green light for the EU recovery funds from the German Federal Constitutional Court, and the recent acceleration in vaccine roll-out in the region. And it will also be encouraged by US fiscal policy, which ECB staff expect will add 0.3% to euro area GDP and 0.15% to euro area inflation over the projection horizon. Overall, therefore, expect no change to ECB policy or forward guidance today, with the pace of asset purchases to be reviewed by the Governing Council in June alongside updated macroeconomic projections.

Euro area consumer confidence and French and UK business surveys due
Data-wise, today will bring the flash Commission estimate of consumer confidence in the current month. Despite the intensification of the pandemic in many member states, we expect little change from last month’s reading, which at -10.8 was a thirteen-month high. In addition, the results of the INSEE French business survey for April, due imminently, will give an indication as to what to expect from Friday’s flash PMIs. While we expect the index of manufacturing sector confidence to have improved to a fourteen-month high close to the long-run average (100), service sector confidence – and the overall business confidence index – is likely to have weakened in light of the renewed lockdown measures. Today will also bring the UK CBI’s Industrial Trends Survey for April, which seems likely to signal a pickup in new orders and optimism, but also rising price pressures, in the sector at the start of Q2.

US data hiatus ends today while corporate reporting picks up pace
Following an unusually quiet start to the week, especially with the Fed also being in its blackout period, the data flow finally resumes today. Daiwa America Chief Economist Mike Moran expects a weather-assisted 4.5%M/M rebound in existing home sales in March, together with an 11th consecutive lift in the Conference Board’s leading index. Given developments other regional indicators, the Kansas City Fed’s manufacturing survey will likely be at least as upbeat as that see a month earlier while the latest reading on initial jobless claims will be of interest in light of last week’s decline to a post-pandemic low. Meanwhile a busy day for corporate earnings reports will bring news from the likes of Intel, Dow and AT&T.

Australia’s quarterly NAB business survey points to improved business conditions, expectations of further improvement and an economy back at pre-pandemic levels
The only economic report of note released in Australia today was the quarterly edition of the NAB business survey, which provides additional detail – including regarding firms’ near-term expectations – not found in the monthly survey. As indicated by the monthly survey, the current business conditions index increased a solid 6pts to 17 in Q1, marking the highest reading since Q218. Encouragingly, firms expect a further improvement in conditions over coming months with the 3-month ahead index increasing to 26 and the 12-month ahead index increasing to 31. Importantly, the survey also pointing to strengthening expectations for employment and capex – the 12-month ahead reading for the latter rising to the highest since 1994. Pleasingly, the rate of capacity utilisation rose 1.9ppts to 82.3% and so is now above pre-pandemic levels (indeed, also slightly above the long-run average), which bodes well for next month’s Q1 GDP report. Firms reported a 0.6%Q/Q lift in labour costs during Q1, which was the most since Q419, with a similar increase forecast to occur in Q2. Final product prices increased just 0.2%Q/Q in Q1, although a slightly firmer 0.4%Q/Q lift is anticipated in the current quarter.

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