Markets
The ECB copied the Fed’s playbook today by reassuring markets that they will stick to a very accommodative monetary policy for as long as necessary to help tackling the coronavirus. Unlike the Fed, the European Central Bank did expand its policy package. They did so by making the terms of the previously announced TLTRO’s more attractive (cost could be as low as 50 bps below the deposit rate) and by announcing a new set of non-targeted pandemic emergency longer-term refinancing operations (PELTRO’s). Unlike TLTRO they don’t serve to keep credit to the business and households flowing. They will be conducted to support liquidity conditions in the EMU financial system and contribute to preserving the smooth functioning of money markets by providing an effective liquidity backstop. The interest rate will be set at 25 bps below the average of the MRO’s (0%) with maturities of 12-15 months. This measure will probably help bring short term Euribor rates back down. They had been rising since the start of the month, suggesting some financial institutions lacked eligible collateral to join the ECB’s operations. In this respect, the ECB froze ratings on assets on April 7, making them future-proof even in case of downgrades. Apart from those liquidity measures, the ECB strengthened forward guidance on asset purchases. They (PEPP) will now be conducted until the governing council judges that the coronavirus phase is over, but in any case until the end of the year. The former part of that guidance is new. Lagarde said that the ECB expects the economic hit to EMU growth to be between -5% and -12%. The recovery speed and scale remain highly uncertain. Peripheral bonds rallied after Lagarde’s announcement but reversed course after she started talking about the OMT programme. She downplayed the potential use of it. OMT is an unlimited bond buying programme related to a possible credit line granted via the European Stability Mechanism. The comments highlight the lack of coordination between monetary and fiscal policy (on which Europe is divided as well). 10-yr yield spread changes vs Germany currently widen slightly with Italy (+10 bps) underperforming. Moves on other markets are muted. The euro loses slightly ground with EUR/USD switching sides of the 1.0850 handle after failing to take out the recent days’ highs around 1.0890. German Bunds outperform US Treasuries. German yields lose 3.5 bps (2-yr) to 5.8 bps (5-yr). US yields decline by 1.2 bps (2-yr) to 3.1 bps (10-yr). From other markets, we retain that (EMU) stocks (-2%) today don’t profit from the oil rebound (Brent $25/b) or from the extended accommodative monetary policy stance.
News Headlines
EMU economic activity contracted 3.8% in the first quarter of 2020 due to shutdowns to contain the spreading of the corona virus. Activity was 3.3% lower compared to the same period last year. Several EMU countries also reported growth figures showing a similar or even bigger setback in activity. Activity declined by 5.8% Q/Q in France, 4.8% in Italy and by 5.2% in Spain. EMU April preliminary headline inflation declined less than expected to 0.4% Y/Y. Core inflation eased only marginally from 1.0% Y/Y tot 0.9% Y/Y.
FDA commissioner Stephen Hahn said that the agency is moving at a ‘lightning speed’ to assess the data Gilead Sciences Covid-19 drug Remdesivir drug. While not offering a timetable, Hahn said the FDA has several pathways to allow a medicine to the market. Anthony Fauci, director of the US National Institute of Allergy and Infectious Diseases also said that a decision on emergency authorization for remdesivir will take place ‘really quickly’.
Initial claims for US unemployment benefits were 3.8939K in the week that ended 25 April. The filings brought the number of people claiming unemployment benefits to about 30 million since March 21. US personal income declined 2.0% in March. As illustrated in yesterday’s GDP release this already translated into a big decline in private consumption. Personal spending in March declined 7.5% M/M. The sharp declines in activity didn’t result in steep price declines yet. The core PCE deflator eased only slightly in March from 1.8% to 1.7%. Looking forward, the Chicago PMI tumbled to 35.4 from 47.8.
