Is Europe’s economy still in freefall?

Economists are expecting a further drop in business activity across Europe in April, after a record-breaking pace of decline in March. The purchasing managers’ index for the eurozone, a closely watched gauge of economic growth, crashed to an all-time low of 29.7 last month, far below the 50 mark that separates contraction from expansion. The UK equivalent fell to 36. 

April’s figures scheduled to be published on Thursday are forecast at 26 for the eurozone and 32 for the UK, signalling another sharp decline in activity. “Due to the time period when the surveys were conducted, it is possible that both may slip even further this month,” said Cathal Kennedy of RBC Capital Markets. “Some of the March survey responses would have been collected before the most stringent lockdown measures were introduced.”

Even the bleak PMI figures may be masking the true scale of the fall, according to Mr Kennedy. The surveys track the balance of companies experiencing a reduction in activity, but respondents do not record how much their business has shrunk.

A sharp pick-up similar to China’s figures last month would signal a stabilisation of activity at very low levels rather than a recovery, according to Nomura economist George Buckley.

“At some point these numbers are going to rebound sharply, although April is likely to be just as bad as March,” he said. “But even a figure of around 50 should not be taken as a sign we are out of the woods.” Tommy Stubbington

Will a deluge of Treasury supply mean higher rates?

On Monday, the US Treasury department will auction off more than $150bn of short-dated securities, which mature in one year or less. 

In recent weeks, it has flooded the market with these Treasury bills, as it has begun to finance the $2tn relief package agreed by US legislators late last month.

Analysts said the market has so far digested this glut of new supply with little trouble, given the insatiable appetite for haven assets during the economic uncertainty that has accompanied the coronavirus outbreak. 

Few anticipate a significant rise in rates in the long term, even as the department ramps up Treasury issuance to $3.5tn over the next two years, as forecast by strategists at TD Securities. Given that the Federal Reserve has agreed to buy an unlimited quantity of Treasuries to ensure the smooth functioning of the world’s largest debt market, the US central bank is expected to guzzle up most of the new supply. 

According to TD, the Fed will snap up $3tn in Treasuries by the end of next year, with $2.4tn purchased in 2020 and another $600bn by the time 2021 wraps up.

That means low borrowing costs are here to stay, according to Brian Levitt, global market strategist at Invesco — not least because economic activity is set to fall even further this year. 

“Interest rates will remain low, reflecting what will be a slow growth environment,” he said. “The Treasury will have no issue funding [the stimulus programme].” Colby Smith

How will China’s central bank address the coronavirus fallout?

After data on Friday showed China’s economy suffered its first contraction in four decades during the first quarter, with a 6.8 per cent slide from the same period last year, attention is turning to how Beijing hopes to undo the economic damage wrought by coronavirus. One answer arrives on Monday.

The Loan Prime Rate, China’s lending benchmark, introduced last year, is announced on the 20th of every month.

The one-year LPR is an average of lending rates that 18 commercial banks extend to their best customers, but its floor is set by the People’s Bank of China through its so-called medium-term lending facility rate, which it cut by 0.2 percentage points last week to 2.95 per cent.

Since its introduction, the LPR has followed the MLF rate lower every time the latter has been cut, making a similar fall in the former benchmark all but certain on Monday. But that still leaves the question of what comes next.

With Chinese banks’ profits under serious pressure as they carry out Beijing’s orders to lend to struggling companies and at lower rates, deposit rates are the logical next front in China’s fightback against the pandemic.

“For China, we still have a bit of policy room for rate cuts,” said Michelle Lam, greater China economist at Société Générale. The French bank noted ahead of the MLF rate cut last week that reductions to China’s benchmark deposit rate “seem inevitable, if not imminent, as banks need help to lower their funding costs”. Hudson Lockett

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