Macroeconomic picture - May 2020

• Fed: In order to stabilize financial conditions, the Fed moved rapidly into action, making full use of its conventional and unconventional tools:
  1) cutting rates by a cumulative 150bp and moving to ZIRP
  2) introducing supporting facilities for the CP market and primary dealers’ liquidity
  4) providing liquidity to the system through massive repos, and acting on banks reservesrequirements and capital buffers
  5) moving to open QE and to support corporates and ABS through dedicated facilities
  6) providing foreign central banks with both dollar swap lines and repos, and
  7) extending its support to fallen angels and municipalities
  Liquidity and coverage of extraordinary fiscal financing needs on the fiscal side are the Fed’s main objectives.
• ECB: The ECB acted in several steps and finally delivered a strong package
  - An overall amount of QE of EUR 1,050tn to be spent just over the next nine months (a triple-digit average monthly path).
  - Lifting of issuer and maturity limits on the public sector QE, increasing flexibility and QE firepower to better cover extra fiscal spending
• BoJ: The BoJ joined other central banks in easing, by expanding asset purchase amounts significantly, in order to alleviate financial stress. The BoJ can now purchase JGBs without limit. It also raised purchase constraint for corporate bonds and commercial papers from JPY 1tn to JPY 7.5tn each with a relaxation of the single-issuer share limits. Following this decisive move, we expect the central bank to remain on hold for a while and to refrain from policy rate cuts. A rate cut is seen running counter to the government’s epidemic control efforts.
• BoE: Like the Federal Reserve, the BoE decided to first deliver an emergency, intra-meeting 50bp rate cut, within a synchronized global easier policy scenario: the rate cut was combined with a later announcement of easier fiscal policy. Following the first decisions, the BoE also announced some days later the launch of a new GBP200bn QE targeting treasury bonds, and cut rates by further 15bp, therefore moving to ZIRP, too.

• China: The March data reports show that economic activity rebounded from the widespread suspension in February, with manufacturing production recovering at a faster pace than the services sector. We expect the economy to grow 2.3%-3.3% in 2020, as the policy stance has turned more accommodative. Credit growth is expected to firm up along with public spending, with a focus on boosting infrastructure builds. There is more room for monetary policy easing, although a deposit rate cut must wait until the CPI eases back more. The slump in global demand remains the major downside risk.
• India: The recovery in economic performance in Jan/Feb has been wiped out by the pandemic and subsequent lockdown. In March, economic data deteriorated sharply across the sectors(electricity generation, vehicle sales, freight traffic and exports). Thanks to substantial moderation in food prices, headline inflation finally dropped back below the target’s upper band (5.9% yoy vs. 6.0%) and is expected to fall further. The policy mix is still driven by the RBI, which recently introduced new liquidity measures. The fiscal strategy is not clear yet, though is very likely that the fiscal targets will be missed due to the ongoing recession.
• South Africa: The SARB cut rates by 100bp to 4.25% at a surprise committee meeting. This is the third drop since the start of the year, totalling 225bp. The SARB justified this decision with new forecasts of sharply deteriorated growth (6% recession in 2020) and lower inflation (3.6% in 2020) due to the pandemic. South Africa, which has also been under lockdown measures for a few weeks, is now facing a substantial domestic demand shock. Given that its room for manoeuvre is extremely limited on the fiscal level, the only tool to support activity remains monetary policy.
• Argentina: The government finally disclosed its debt restructuring proposal, but the offer has not been accepted by the bondholders. The old debt is to be replaced by new amortising bonds of five different maturities ranging between 2030 and 2047, with a grace period of three years and with significantly lower coupons. This implies an average haircut of 60-70% on coupons and 5% on the principal. Depending on the exit yield used and the bond, the offer translates into recovery values of 25-50% of principal. If a compromise is not reached with the bondholders in the next few weeks, Argentina could default on its debt at the end May following the 30-day grace period on NY law coupon payments due on 22 April.

Nota Bene: The uncertainty around our macroeconomic forecasts is very high, and it triggers frequent reassessments any time fresh high frequency data are available. Our forecasts at this point include a higher qualitative component, reducing the statistical accuracy and increasing the uncertainty through wider ranges around them.

The uncertainty around the macro forecasts is very high, and it triggers frequent reassessments any time fresh high frequency data are available. Our macroeconomic forecasts at this point include a higher qualitative component, reducing the statistical accuracy and increasing the uncertainty through wider ranges around them.

A global recession is our base case today

1. How deep?
—The deepness depends on the virus longevity in the countries affected and the consequent gradual to complete lockdown in most of them. Downturn is evident in domestic demand (across its components at different degree) and in trade dynamics. We assume the largest downturn in the lockdown quarter and a milder downturn to follow. We monitor outbreak developments and lockdown/resumption of the economic activity.

2. How long?
—The timeline depends on the deepness of the economic disruption together with the credit conditions and the rise of corporate default, magnifying the financial markets turbulence and therefore the impact on the economy.
—The timeline of the shock has extended, and overall a peak is expected by May to June 2020. The global economy was showing signs of growth stabilization during the 4Q2020.
—The timeline is also a function of the specific developments of the outbreak together with pre-existent fragilities.

3. The fiscal impact
—The impacts of micro and macro fiscal measures are not included in our forecasts but it’s fair to assume a normalization in the financial and liquidity conditions driven by Monetary Policy authorities

Financial targets
—Financial targets are reviewed on the same line and include policy actions implemented on a daily basis.