ECB View: Executive Board signals it could act again soon – Two members of the ECB’s Executive Board stressed that the central bank was ready to ease monetary policy further. President Lagarde asserted that the Governing Council ‘is fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed. It will explore all options and all contingencies to support the economy through this shock’. Meanwhile, Executive Board member Isabel Schnabel made clear that the ECB ‘stands ready to adjust all of its instruments, as appropriate’. This reflected the need to ‘ensure that inflation moves towards its aim in a sustained manner’. Indeed, she noted that ‘uncertainty looms large and downside risks to the medium-term inflation outlook have increased’. In addition, the readiness to act reflected the need ‘to avoid fragmentation that may hamper the smooth transmission of our monetary policy’. ‘Fragmentation’ is ECB-speak for rising country spreads and it is no surprise that this verbal intervention comes in the face of the sharp rise in Italian government bond spreads over recent days. Furthermore, Ms. Schnabel said that the PEPP was partly designed by the need to reverse the tightening of financial conditions to bring them back to levels that were consistent with achieving the ECB’s inflation aim over the medium term. However, she admitted that despite some success ‘financial conditions today remain tighter than they were in mid-February’. Finally, the Executive Board member suggested that further easing would take the form of asset purchases rather than deposit rate cuts. Referring to the ECB’s policy choices last month, she explained that ‘a further cut in our main policy rate – the deposit facility rate – would have been unlikely to support sentiment and market functioning at a time when banks’ profitability was already expected to come under additional pressure due to the crisis’. We continue to expect the ECB to increase the size of its PEPP by EUR 500bn later this month. (Nick Kounis)
US Macro: Fiscal measures could be having some effect on the labour market – Jobless claims rose a further 5.2mn last week, a notable decline from the 6.6mn rise the week earlier, but still an extraordinary number for a series that ranged between 150-700k in the past. Interestingly, however, continuing claims from two weeks ago, rose by 4.5mn – far less than gross new claims suggest, to a total of 12mn. This suggests that some workers who had filed for unemployment benefits might already be returning to payroll, perhaps due to the roll-out of the government’s Paycheck Protection Program. Indeed, as we noted last week, the overwhelming majority of job losses in the March non-farm payrolls report were registered as furloughs – or temporary layoffs – meaning that, with government support and provided lockdowns do not last too long, employees could return to their old jobs relatively quickly.
Seasonal adjustment is also exaggerating the picture – Something else we have noticed in the data is that the non-seasonally adjusted jobless claims have been significantly lower than the adjusted claims. In normal times, seasonal adjustment helps to cut through the noise in data by correcting for seasonal patterns. For instance, jobless claims tend to spike in December and January each year, and fall in the summer months (see Figure 1). However, in these exceptional times – with volumes ten times the usual amounts – seasonal adjustment is actually having a significant distorting effect. Over the past month, we calculate seasonal adjustment has added a total 1.9mn extra claimants to the statistics (Figure 2). While certainly very weak, the labour market looks to be not in quite as bad a shape as the headlines suggest. (Bill Diviney)