“Creation of A Recovery Fund…”

Creation of A Recovery Fund

In Europe, France and Germany called for the creation of a 500-billion-euro Recovery Fund able to offer grants to the countries and regions that are hardest hit by the coronavirus crisis.  The proposal is for the European Commission to borrow money on behalf of the whole EU for the recovery fund.  The proposed fund is mostly expected to benefit Italy and Spain whose economies have been hit by the coronavirus pandemic. The Franco-German Deal described by French president Emmanuel Macron as a major step forward, seeks to break the impasse over joint euro debt and act as a blueprint for a wider EU agreement.


On Tuesday a new post-Brexit tariff regime was announced to replace the European Union’s external tariff, keeping a 10 percent tariff on cars but cutting levies on tens of billions of dollars of supply chain imports.  In this regard, Britain is embarking on negotiating free trade agreements with countries around the world and aims to have deals in place covering 80 percent of British trade within three years.  According to the British government, the new regime known as UK Global Tariff (UKGT) would be simpler and cheaper than the EU’s Common External Tariff.  It will apply to countries with which it has an agreement and will remove tariffs below 2 percent.  The UKGT will be in pounds and will be legalised for later in the year and will come into force from January 2021.  Furthermore, the government said that under the new regime, tariffs would be eliminated on a wide range of products: 60 percent of trade will come into the UK tariff free on WTO terms or via existing preferential access.  Meanwhile tariffs on several products that support the UK industry will be maintained such as agriculture, automotive and fishing.

UK Jobless Claims Jump

The number of people claiming unemployment benefits in Britain increased in April to its highest level in nearly 24 years.  The impact of the coronavirus on jobs is likely to deepen in the coming months.  Those claiming rose by 856,500 which is the biggest month-on-month increase to 2.1 million, a 69 percent increase from March, data published on Tuesday showed.  It was the highest level since July 1996, when the British economy was still recovering from a deep recession caused by the failed bid to remain in the European Exchange rate Mechanism.  According to Finance minister Rishi Sunak there would be no immediate bounce back in the economy, even when the government’s coronavirus shutdown is lifted.

Inflation in the UK

Inflation in the UK dropped below 1 percent to its lowest in nearly four years fuelling speculation that the Bank of England (BOE) could cut interest rates below zero to bolster an economy impacted by the Coronavirus pandemic.  Inflation dropped to 0.8 percent in April to its lowest since August 2016.  Sterling dropped after the release of the data.  According to the BOE governor Andrew Bailey, the BOE is looking carefully at the experience of other central banks with negative interest rates, but for the time being it wants to see how the British economy will respond the rate cuts it has undertaken.


Policymakers in Japan are preparing for the worst nation post-war slump as the economy slipped into recession for the first time in 4 ½ years in the last quarter.  Monday’s first quarter GDP data underlined this as global lockdowns and supply chain disruptions effected the shipments of Japanese goods. In fact, exports dived 6 percent in the first quarter, the biggest decline since April-June 2011.  In the first quarter the world’s third largest economy contracted an annualised 3.4 percent, according to preliminary official gross domestic product (GDP).  This slump followed an even steeper 7.3 percent drop in October-December period.  The consecutive quarters of contraction meet the technical definition of recession.  The last time Japan suffered a recession was in the second half of 2015.  The gloom about the Japanese economy is expected to deepen over the coming months.  Private consumption, which accounts for more than half of Japan’s $5 trillion economy, slipped 0.7 percent in January-March, less than a market forecast for a 1.6 percent drop, as increased demand for daily necessities partially offset the impact on services spending.  Capital expenditure fell 0.5 percent in the first quarter after plummeting 4.8 percent in October-December last year, according to the GDP data.  The government has already announced a record $1.1 trillion stimulus package and the Bank of Japan expanded stimulus for the second straight month in April.  Meanwhile, Abe pledged a second supplementary budget later this month to further support the economy.

US Weekly Job Claims

Millions of Americans last week filed for unemployment benefits as backlogs continue to be cleared and disruptions from the pandemic continue.  Initial claims for state unemployment benefits totalled a seasonally adjusted 2.438 million for the week ended 16 May (data from previous week revised to 2.687 million) according to the Labour Department on Thursday.

FED Minutes

Federal Reserve policymakers are still working on a multi-trillion-dollar effort to support financial markets and an economy effected by the coronavirus pandemic.  There was a debate as how best to support the economy whose recovery they agree could be slower than initially thought.  Amongst the ideas discussed by the central bankers at their April meeting, according to the Minutes released on Wednesday, were more detailed guidance for the path of short-term interest rates, and the capping of long-term interest rates.  There was no discussion about negative interest rates.  This was a controversial approach to policy supported by US President Donald Trump and in use in Europe and Japan but is seen by US central bankers as risky and ineffective.  At their April meeting, policymakers re-upped a pledge to keep interest rates near zero until they are confident the US economy is on track to recovery.  The minutes further state that “While participants agreed that the current stance of monetary policy remained appropriate, they noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions”.

Britain Selling Debt With Yield Lower Than 0 percent

Britain has joined Japan, Germany and some other European Countries in selling debt yielding less than 0 percent.  Britain has for the first time sold a negative yield government bond meaning the government is being rewarded for borrowing after investors agreed to be repaid slightly less than they lent.  This reflects the possibility that the coronavirus pandemic will cause a severe global recession and bond-buying by central banks to lessen its impact.  Wednesday’s action saw 3.75 billion pounds of gilts maturing in July 2023 sold at an average yield of -.003 percent.  Investors will receive interest of 0.75 percent, but they paid above face value for the bond, so the cash return will be less than they have lent if they hold the debt to maturity.  In March the BOE cut interest rates to a record level of 0.1 percent and began buying 200 billion pounds of assets, mainly gilts, to help the economy and cap a spike in yields seen at the start of the pandemic.  Appetite for British debt has increased since the BOE started its purchases.


Oil price climbed more than $2 a barrel on Monday with the benchmark Brent hitting a one-month high and US crude topping $30 supported by optimism that economies are re-opening and the output cuts by major producers.  Brent crude was up 6.2 percent a barrel its highest level since mid-April.  US West Texas Intermediate was up $2.63 or almost 9 percent at $32.06 per barrel, its highest since mid-March.  As the June WTI contract expired on Tuesday, there was little indication of it repeating the historic plunge of below zero that happened last month on the eve of the May contract’s expiry.  Supporting oil prices are the cuts by the OPEC and its allies, including Russia, the group known as OPEC+.  Efforts to re-open the economy were also seen in the US auto industry where the US auto industry slowly returned on Monday, with some vehicle assembly plants reopening while suppliers geared up to support a sector that employs nearly 1 million people.  On Wednesday oil prices rallied after US crude inventories fell in the most recent week, however, increases were capped over worries of an economic fallout from the pandemic.  Brent crude settled up $1.10 or 3.2 percent at $35.75 per barrel while US crude futures ended up $1.53 or 4.8 percent at $33.49.

Market Wrap

US stock indexes jumped in early trade on Monday as encouraging data from a potential COVID-19 vaccine trial raised optimism.  Investors were also counting on more stimulus to rescue the economy.  The Dow Jones Industrial Average rose 1.58 percent reaching 24,059.98.  The S&P 500 opened higher by 2.4 percent reaching 2932.38 whilst the NASDAQ Composite gained 1.8 percent to 9177.15.  US Treasury yields advanced on Monday as investors were optimistic about a potential vaccine.  The 30-year yield climbed to an eight-week peak, the 10-year rose to two-week highs and the two-year advanced to a one-week peak.  The increase in long-dated yields steepened the yield curve to its widest spread in two months.  Since the start of the pandemic the curve has steepened as investors increased their holdings in short-term debt, having ruled out rate hikes in the immediate future.  Meanwhile on Tuesday Asian shares jumped and oil extended the gains over the optimism of the successful early-stage trial of a coronavirus vaccine.  Australia’s benchmark index and Hong Kong’s Hang Sang were the lead gainers up 2 percent respectively whilst China’s blue-chip index climbed 0.8 percent.  Japan’s Nikkei index added 2 percent to the highest since early March.  The gains followed the rally on Wall Street overnight after data from Moderna Inc’s vaccine, the first to be tested in the US, showed it produced protective antibodies in a small group of healthy volunteers.   The vaccine optimism sent treasury yields surging overnight as investors dumped bonds while gold came off its peak with spot prices were last up 0.4 percent $1739.22 an ounce.  China shares rose on Tuesday as they tracked the gains on the Wall Street.  News about the Recovery Fund sent Italian government bond yields to their lowest in more than a month.  European shares extended the gains amid fresh stimulus plans for the EU raised the hopes of a quicker economic recovery.  Wall Street main indexes surged and the NASDAQ hit its highest level in three months on Wednesday as investors hoped for a recovery from the slump amid signs of more stimulus for ailing sectors. The pan-European stocks .STOXXE gained 0.4 percent after the Proposal by France and Germany over the Recovery Fund. Italian government 10-year bond yields rose slightly on Thursday from the  near six-week low reached last week as investors waited for details about the proposed 500 billion euro EU recovery fund.  There is uncertainty as to whether the fund will be financed by grants or loans. The 10-year BTP yield climbed to 1.65 percent not far off from the low level reached on Tuesday.  Moreover, the premium that Italy pays over the benchmark German 10-year Bund yield climbed slightly to near 211 bps.  Spanish yields also followed suite as the 10-year bond yields climbed higher at 0.74 percent.  In core European markets, yields were falling mostly by 1 to 2 bps, with the safe-haven German 10-year government bond yields dropping 1.6 bps at -0.48%. Meanwhile investors were more risk averse as the World Health Organisation said there were 106,000 new cases of the new virus recorded worldwide in the last 24 hours- which is the highest in a single day.  Wednesday saw global coronavirus infections surpassing 5 million.  Latin America has overtaken the US and Europe in the past week. On Thursday, European shares dropped as investors breached for the latest batch of business activity data.

Currency Roundup

On Monday a jump in oil prices lifted commodity currencies such as the Norwegian crown and the Canadian dollar against the US Dollar as optimism about the economies reopening boosted risk appetite.  Against the dollar the Norway’s crown rose more than 1 percent to 10.0821 whilst the Canadian dollar rose 0.52 percent to 1.4036.  Against the yen the US currency fell about 0.25% to 107.30 per dollar after data showed Japan slipped into a recession for the first time since 2015.  Also, on Monday sterling hovered at a near two-month lows against the dollar and the euro as the deadlock in Brexit negotiations and the talk of negative interest rates from the Bank of England kept the currency pinned within tight ranges.  The pound has already dropped this month by 3.75 percent against the dollar.  The euro hovered near a two-week top at $1.0907 on Tuesday while the British pound was up 0.1 percent at $1.2201.  The risk sensitive Australian and New Zealand dollars were also slightly up.  The safe-haven yen eased on the greenback reaching 107.40 per dollar.  On Tuesday the dollar nursed losses against major currencies after encouraging results from the trial of a vaccine for COVID-19 that improved sentiment to lift investment in riskier assets.  The euro jumped against the Swiss franc and the dollar following the proposal by France and Germany for a 500-billion-euro recovery fund.  Sterling edged up against the dollar but dropped versus the euro on Wednesday as inflation in the UK dropped below 1 percent to its lowest in nearly four years. The dollar recovered some of the week’s losses on Thursday as investors were more cautious about trade while Sino-US tensions and weak economic indicators dampened the mood.  The euro gave back some of its gains and the British pound was under pressure amid soft inflation that stirred more talk of negative rates.  There were trade tensions between China and Australia over the latter’s role in the push for a global enquiry into the origins of the coronavirus pandemic.

Malta: Harmonised Index of Consumer Prices (HICP) for April 2020

In April 2020, the annual rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) was 1.1 per cent (1.2 per cent in March 2020).  The largest upward impact on annual inflation was measured in the Food and Non-Alcoholic Beverages Index, while the largest downward impact was recorded in the Education Index.


Antonella Mercieca

Client Relationship Manager


Reuters, https://nso.gov.mt


May 22nd, 2020

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