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ECB on impact of Coronavirus
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Luis de Guindos, vice president of the European Central Bank, depicted the coronavirus as an additional ” layer of uncertainty to global and euro area growth prospects,” in his speech at the European Economics and Financial Centre on March 3.
What does Guindos mean?
- The virus can reduce foreign demand for Euro Area exports, given the quarantine measures in China, and the suspension of production lines associated, negatively impacted the global supply chain and production of intermediate goods.
- Travel bans and cities lockdown is also hindering the gowth in euro area services sector.
What has ECB done so far?
- There is a change of tone in the ECB’s stance.
- Previously, President Lagarde said the outbreak had not reached the point to become a long lasting that would impact supply and demand as well as inflation.
- Lagarde now says the “outbreak is a fast developing situation, which creates risks for the economic outlook and the functioning of financial markets,’ in a emergency statement published on Monday, adding that ECB “stand[s] ready to take appropriate and targeted measures” if the virus has implications for the economy, medium-term inflation and the transmission of our monetary policy.
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Japan’s Inflation Rate is still Far From BOJ’s 2 Percent Target
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Japan’s core inflation rate was on 0.7 percent in February, remaining distant from the Bank of Japan’s 2 percent target.
The core inflation rate, defined as the Consumer Price Index (CPI) with all item except fresh food, rose 0.7 percent from a year earlier and 0.1 percent from a month earlier in February. The annual rate falls short of the market expectation for a 0.8 percent gain, according to Reuters.
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| Trading Economics | The headline CPI rose 0.2 percent over a year, and remain unchanged compared to the previous month. Food price, which is excluded from the core CPI, recorded an -1.4 percent decrease over the year. Meanwhile, the fuel, light and water charges recorded a 5.3 percent increase.
Analysts expect the inflation rate experience further slowdown. As quoted in the Financial Times, Darren Aw at Capital Economics thinks that the capacity shortage, which supported the inflation for some time, is diminishing, and the inflation rate might turn negative in the middle of the year.
Takeshi Minami at Norinchukin Research Institute, as quoted by Reuters, said that as the global economy is weakening, it makes Japan harder to achieve the 2 percent inflation rate BOJ targeted.
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Americans have not been this optimistic about their financial situation — for the last 16 years
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According to the Gallup poll, 69% of American is financially optimistic, reaching the highest level for the last 16 years.
Financial Opitimism reflects the percentage of people responded saying that they expect to be financially better off “at this time next year”.
With 69% saying they expect to be better off, it is only two percentage points below the all-time high of 71%, recorded in March 1998.
The poll also asked how people think their finances have changednovee the past year. Fifty percent say they are better off today than they were a year ago. This is the first time since 2007 that at least 50% of the public has said they are financially better off than a year ago.
According to Gallup, in the 109 polls since 1976, only 11 times which at least half of those polled said they were financial improved during the prior year.
You can find the full release here.
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Germany’s GDP Data might have been Distorted by Questionable Data
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Per Bloomberg, Germany’s GDP data for 2018 might have been distorted by some questionable data provided by the pharmaceutical manufacturing industry.
As shown in the figure above, there was a sharp rise and fall in drugmaker production even as the industry’s orders and sales moved at more stable rates. The German statistics office is investigating if there are certain mistakes in the data.
The German statistics office said the questionable data might be influenced by data from “some” companies in the pharmaceutical industry that have a “high” market share.
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OECD governments borrowing expected to hit record $11tn
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Gross borrowing of OECD governments from the markets is set to surpass $11tn this year. This would be a new record, above the current record of $10.9 trillion set in 2010.
Gross borrowing includes not only new bonds issued on capital market, but also the existing debt that is being rolled over.
According to the OECD Sovereign Borrowing Outlook, outstanding government debt for the 34 members of the OECD doubled between 2007 and 2018, also the debt-to-GDP ratio rose from 49.5 % to 72.6% during the period.
New debt issuance of OECD governments rose to $1.9 trillion last year, up from $1.3 trillion in 2017, the lowest level since the financial crisis. The new issuance is projected to rise further to exceed $2 trillion this year, the OECD said.
Although the government borrowing is increasing, the report mentioned that over the past decade, the composition of government financing in the OECD area has tilted towards long-term fixed rate financing instruments.
The average-term-to-maturity of outstanding marketable debt has increased considerably and reached almost 8 years in 2018, which implies a slower pass-through of changes in market interest rates to government interest costs. It has resulted in more resilient debt portfolios.
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You can find the OECD Report here.
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Derivatives’s Credit Terms in Eurozone Tighten Further
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ECB has published the December 2018 SESFOD (survey on credit terms and conditions in euro-denominated securities financing and OTC derivatives markets) results.
The latest SESFOD shows that the credit terms offered to counterparties for both securities financing and OTC derivative transactions is further tightened.
Deterioration in general market liquidity and functioning, competition from other institutions, and the availability of balance sheet capacity were the factors most frequently cited by respondents who reported a tightening in credit terms and conditions.
Other factors mentioned were a willingness to take risks and the change in internal treasury charges. Changes in central counterparties’ (CCPs) practices, including margining and haircuts, contributed to a further tightening of conditions for both securities financing and OTC derivative markets, according to 12% of respondents.
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How will the shutdown impact GDP growth?
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The effect is shown differently on nominal and real GDP. According to this Wells Fargo’s report, as Real GDP attempts to solely measure changes in output, the real labor costs, which are measured by hours worked, is what it reflects. Thus, when hours worked decline, so does output.
On the other hand, the nominal federal component of GDP is unchanged, as a result of accrued back-pay. This is reflected mechanically in the GDP accounts as a rise in the federal price deflator. This has happened before in the Q4-2013 shutdown, as shown by the red circle in the graph below.
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Japan exports (Dec 2018) recorded largest fall in two year
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According to preliminary data from Japan’s Finance Ministry, Japanese exports record a year-on-year drop of 3.8% in December 2018, the most substantial shrinkage since October 2016.
Exports to Asia countries dropped 6.9%, with those to China fell 7%. Meanwhile, exports to Hong Kong fell 17.3%.
– Per FT, the fall in exports to Asia is mostly “driven by falls in exports of chipmaking machinery and communications equipment in the wake of the US-China trade dispute”.
Full data here.
