Over to fiscal policy

Emily Nicol
Chris Scicluna

Overview:
The overall mood in Asian Pacific markets was dire at the start of the week as the number of coronavirus cases and deaths around the world continued to spiral and US congress last night failed to agree its fiscal support package. Indeed, with the exception of Japan (where markets benefitted somewhat from Friday’s bounce in Asia despite PM Abe finally admitting that the Tokyo Olympics might well be delayed this summer), equities fell sharply across the board with China’s main CSI 300 down more than 2%, South Korea’s KOSPI down more than 5% and the Australian ASX 200 fell more than 5½% as the government ordered the closure of all pubs, restaurants and gyms. And while the Reserve Bank of New Zealand joined the unconventional monetary policy club unveiling overnight a Large Scale Asset Purchase programme (LSAP) and pledging to purchase up to $30bn of New Zealand government bonds across a range of maturities over the next twelve months, the New Zealand NZX 50 fell more than 7½%. Unsurprisingly, Kiwi bond yields fell sharply, particularly at the longer end of the curve, with 10Y yields down 50bps and 15Y yields down almost 70bps.

Of course, major central banks have been rolling out their crisis tool kits over the past few weeks. Today saw the BoJ allocate $34.85bn to banks as part of a new daily 7-day dollar swap facility. The BoJ also offered to purchase ¥9.5bn of JGBs as well as ¥2bn of corporate bonds, while the RBA offered to buy A$4bn of government bond in its first operation under its yield curve control framework.

Fiscal policy in focus:
The focus therefore now turns to the fiscal response. The failure of the US Congress to approve the near-$2trn fiscal support package yesterday was particularly disappointing and saw US equity futures tumble upon opening this morning. While the proposal to include a one-time cash payment to US households (worth $3k for a family of four) was well received, Democrats objected to the significant support offered to large businesses ($500bn), seeking restrictions on compensation and stock buybacks by assisted firms. And the offer of loans to small businesses for up to two weeks to help with cash flow was deemed insufficient. The proposal also included a fund to allow the Fed to leverage up to $4trn of liquidity to support the economy. Discussions on the package will continue today.

European equities also plummeted on open today, despite the more encouraging news that the German government stood ready to approve a sizable package today. Indeed, reports suggested a total support package worth over €1trn. A large share will include a bailout fund for struggling companies, with unlimited liquidity support. But it also includes a €156bn supplementary budget for this year (circa 4.7% of GDP), reportedly including €122.5bn of additional spending and €33.5bn of foregone tax revenues. This will require additional bond issuance of around €150bn and so German ministers will today seek the approval of the Bundestag to suspend the current debt brake, limiting new government borrowing to just 0.35% of GDP. This of course is good news for the ECB, which will provide plenty more Bunds for it to buy under its new PEPP facility.

Economic data:
Aside from news of the spread of the coronavirus crisis, its impact on financial conditions and the associated policy responses, this week’s data flow will also provide a clearer picture of the magnitude of the initial impact on economic activity and confidence. First up later today will bring the European Commission’s flash consumer confidence index. Of greater interest will be tomorrow’s flash March PMIs from the major economies, including Japan, euro area, Germany, France, UK and US. We expect this to be dire, pointing to marked contraction at the end of the first quarter and beyond. Indeed, they are likely to signal a substantial worsening in services activity, with hospitality, recreation and aviation having been hit particularly hard, while the manufacturing PMIs will reflect the hit from supply constraints. Also of note on Thursday will be the US weekly jobless claims figures – after last week’s number showed a jump of 70k (33%), this week’s release seems likely to report a record rise. We will also see plenty of March sentiment surveys from the US, euro area and UK (see attached calendars for details), while Japanese department store sales for February and Tokyo CPI inflation figures for March are due tomorrow and Friday respectively.

After the UK’s ‘unprecedented’ stimulus package announced at the end of last week (including an employment support programme), the DMO today is due to announce a comprehensive revision to the 2020-21 financing remit. The BoE will also meet for its scheduled monetary policy meeting this week, with the announcement on Thursday to include the minutes from last week’s emergency package. Given the extraordinarily fast pace of events, we do not rule out additional easing measures being unveiled on that occasion too. Given Bailey’s recent comments, however, we do not expect an imminent move to negative rates or, indeed, helicopter money.

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