“European Central Bank Extends its Bond-buying Programme …”

European Central Bank Extends its Bond-buying Programme

In its latest effort to support the eurozone economy, the European Central Bank increased its bond-buying programme on Thursday.  It increased the size of its Pandemic Emergency Purchase Programme (PEPP) to EUR 1.35 trillion from EUR 750 billion and extended it till June 2021 at the earliest with a pledge to reinvest the proceeds until at least the end of 2022.  The ECB said, “in response to the pandemic-related downward revision to inflation over the projection horizon, the PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households.”  In May, eurozone businesses suffered a catastrophic contraction in activity and although there are signs that the worst is over, it could take months to return to a growth phase, showed a survey on Wednesday.  Thursday’s meeting leaves the ECB benchmark Deposit Facility Rate at -0.5 percent, that is banks are charged this annual rate for parking idle cash at the central bank.  Meanwhile, the rate on the ECB’s Main Refinancing Operations, which banks tap to obtain one-week credit from the central bank, was left at zero, while the rate on overnight liquidity was fixed at 0.25 percent. 

Global Economy

European manufacturers may be over the worst of the downturn arising from the pandemic.  Although factory activity has contracted sharply across Europe last month, purchasing managers said April lows had passed as governments on the continent began to ease the measures to contain the spread of the virus.  After crashing to its lowest reading in 22 years in April, IHS Markit’s Manufacturing Purchasing Managers’ Index (PMI) for the eurozone recovered last month rising to 39.4 from 33.4.  This is far off from the 50 threshold that separates growth from contraction.  Meanwhile, in Britain the growth was mainly attributed to healthcare and personal protection equipment although some firms reported some business inflows.  Japan’s factory activity shrank at the fastest pace since 2009 in May, according to a separate survey, while South Korean manufacturing dropped at its sharpest pace in more than a decade.  Taiwan’s manufacturing activity also fell in May.  Vietnam, Malaysia and the Philippines saw PMIs rebound from April, despite indices remaining below the 50-mark threshold. 


A fourth round of trade talks related to the European Union following Britain’s departure from the bloc commenced this week.  The UK has until 1 July to ask for an extension to the current transition period which is due to end in December.    Britain is expected to indicate flexibility over fisheries and trade rules if the European Union agrees to lessen its “maximalist” demands regarding regulatory alignment and fishing access, reported the Times newspaper on Tuesday.   Meanwhile, Britain has until 1st July to ask for an extension to the current transition period, which ends in December. 

Trump Postpones G7 Summit

President Trump said on Saturday that he would postpone a summit of the Group of Seven that he had hoped to hold next month until September or later.  Furthermore, he hopes to expand the list of invitees to include Australia, Russia, South Korea and India, as according to him, the G7, which groups the world’s most advanced economies, was a “very outdated group of countries” in its current state.   There was no immediate comment on the proposal and a German spokesman said it was “waiting for further information.”  It is still unclear if Trump’s desire to invite additional countries, was a permanent thing.  Trump has on several occasions suggested to add Russia, referring to the global strategic importance of Moscow.  Russia was expelled from the G8 in 2014 when Barack Obama was US president, after Moscow annexed the Crimea region from Ukraine.  Russia still holds the territory, and various G7 governments have turned down previous calls from Trump to re-admit Moscow. 

US Private Payroll

US private payrolls dropped less than expected in May, with employers laying off another 2.76 million workers.  The ADP National Employment Report on Wednesday showed a drop in private payrolls last month after a record 19.557 million plunge in April.  Although the worst of the job losses is probably behind as businesses reopen, economists are of the opinion that roughly one in four workers who were laid off during the lockdown period in mid-March to control the pandemic were unlikely to be rehired.  The ADP Report, which was developed jointly with Moody’s analytics, was published ahead of the government’s more comprehensive employment report for May which is scheduled to be released Friday. 

China’s Factory Activity

China’s Factory activity unexpectedly returned to growth in May albeit a marginal improvement as export orders continued to shrink, according to a private business survey on Monday.  The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 50.7 last month, from a contraction in April of 49.4.  The 50-mark separates growth from contraction on a monthly basis.  Although May’s reading was modest it was the highest since January.  It was driven by a sharp increase in output as companies got back to work and cleared outstanding orders.  Meanwhile, supply chains also steadied after massive disruptions early in the year. 


Oil prices were steady on Monday amid reports that OPEC and Russia were closer to a deal on extending oil cuts however they were held back due to renewed tensions between the US and China.  Benchmark Brent crude was up 0.3 percent at $37.94 a barrel while US crude dipped 0.3 percent at $35.39 a barrel.  OPEC and Russia part of a group known as OPEC+ are moving closer to a compromise on the duration for extending the oil output cuts and were discussing rolling out over the curbs for one to two months.  Oil prices rose on Tuesday to a near three-month highs on expectations that major producers would agree to extend output cuts.  Benchmark Brent crude rose 2.2 percent to $39.15 a barrel whilst US West Texas Intermediate climbed 2 percent to $36.14 a barrel.   Brent has doubled in the past six weeks helped by supply cuts by the OPEC+, however they are still low by 40 percent this year.  Under the original OPEC+ Plan the cuts were due to run up till June, cutting back to a reduction of 7.7 million bpd from July to December.  Contributing to the price caps were the trade tensions between China and the US over Beijing’s security legislation in Hong Kong.  Furthermore, manufacturing data on Monday show that the world’s factories are still struggling.  Oil topped $40 for the 1st time since March, on Wednesday, amid lower US inventories, expectations that OPEC+ will keep oil output cuts in place and signs that demand is picking up.  On Tuesday the American Petroleum Institute said that US crude inventories fell by 483,000 barrels.  Brent crude futures for August were up by 1.5 percent at $40 reaching a high of $40.53, the highest since 6th March, whilst US West Texas Intermediate crude for July gained 2.2 percent to $37.61. 

Currency Roundup

The pound rose to a three-week high against a weaker dollar on Monday as the UK relaxed its lockdown restrictions whilst the market’s net short position on sterling is the largest in more than five months.  The pound is being weighed down by a number of factors such as the high death rate in Britain, the lack of progress in Brexit negotiations, gloomy economic outlook and the consideration of the Bank of England for negative interest rates. The pound hit a three-week high of $1.2425 before easing at $1.2390.  The Euro briefly hit its strongest level since mid-March on Monday and trade sensitive currencies including the Australian dollar rallied as investors were happy with signs that some economies may be through the worst of the coronavirus downturn. Investors were relieved that US President Donald Trump did not impose new tariffs on China during a news conference on Friday.  On Monday the dollar pared losses after it was reported that China has told state-owned firms to halt purchases of soybeans and pork from the US, raising concerns that the trade deal between the US and China could be in jeopardy.  On Tuesday sterling climbed above the $1.25 to its highest in a month against the dollar, a sign that Britain might be willing to compromise on a few points in the new round of Brexit negotiations with the European Union.  The euro reached an 11-week high on Tuesday, while the dollar lost ground as investors maintained their hopes for a global economic recovery. On Thursday the euro held near multi-month highs against its peers on expectations the European Central Bank will expand its bond buying programme later in the day to support the European economy.  It stood at $1.1220 slightly down on the day after having risen to $1.1258 on Wednesday its highest levels since mid-March and the seven-straight session of gains.  Against the Japanese yen, the common currency rose to a 4 ½ high of 122.625 overnight.  The Euro has been supported by the hopes of the European-wide fiscal support measures. 

Market Update

Most of the euro zone bond yields dipped but Italian bonds rose on Tuesday as investors diverted their attention to the first release of data breaking down the ECB’s emergency purchases and the bank’s upcoming meeting.  The ECB has picked up all of Italy’s new debt in April and May, however merely managed to keep borrowing costs from rising.  Investors are focusing on the actions of the ECB to the gauge the direction of the Italian debt.  There were expectations, that the ECB will increase its 750 billion-euro bond-buying programme, the Pandemic Emerging Purchase Programme (PEPP) on Thursday, probably by around 500 billion euros. Italian yields posted their biggest monthly drop in four months in May, boosted by the likelihood the country will get grants from the EU to support its economy.   Wall Street’s main indexes were set to hit new three-month highs on Tuesday as optimism about business reopening overshadowed fears of more disruptions from protests in the country over the death of a black man while in police custody.  Improved economic data, trillions of dollars in stimulus and a restart of business has helped the S&P 500 climb about 38 percent from its March lows.   Yields on British government bonds hit their highest levels on Wednesday as investors around the world increased their bets on riskier assets hoping for more economic stimulus and further easing in coronavirus restrictions.  The 10-year gilt hit its highest on 20 May at 0.255 percent and was up about 2 basis points on the day.  Meanwhile, the yields on 20 and 30 year gilts hit their highest since 19 May.  Also, US Treasury yields rose on Wednesday while riskier assets gained after a report showed that US private payrolls dropped by much less than expected in May as businesses reopened amid the coronavirus pandemic.  The yield on the 10-year note was up 8.6 basis points at 0.7656 percent in afternoon trading which is the highest level since April.  Also, Germany’s benchmark 10-year Bund yield hit its highest level since mid-April as investors offloaded safe-haven assets on encouraging economic data from China and optimism from the easing of the lockdown.  Italy’s borrowing costs also climbed, hitting a one-week high, as the country received over 100 billion euros of demand for a new 10-year government bond sale.  As the European Central Bank increased its Pandemic Emergency Purchase Programme (PEPP) to 1.35 million euros, world markets were boosted. This was beyond what most analysts had predicted and prior to the announcement, European equities, oil and euro markets were lower.  The safe-haven German 10-year bond yields eased away from their highest since mid-April at 0.36 percent and the yield on the benchmark US Treasury 10-year also dropped down after an increase on Wednesday to 0.77 percent.  European shares resumed their rally on Friday as the stimulus from the European Central Bank boosted hopes of a faster economic recovery, leading the main benchmarks to their best week in two months.  

Malta:  Government Finance Data:  January to April 2020 (Highlights)

Between January and April 2020 recurrent revenue fell by EUR 220.1 million and totalled Eur 1,167.6 million representing a decline of 15.9 percent from the EUR 1,387.7 million reported by the end of April 2019. The decline was mainly attributed to a EUR 109 million drop in Income Tax, while other factors such as Value Added Tax, licences, Taxes and Fines, Customs and Excise Duties, Grants Social Security.   Meanwhile by the end of April 2020, total expenditure amounted to EUR 1,774.7 million, a 15.9 percent increase from the corresponding period in 2019.  The interest component of the public debt servicing costs totalled Eur 61.7 million, a EUR 4.4 million drop from the same period in 2019.   Government’s capital spending amounted to EUR 221.8 million by the end of April, an increase of EUR 77.4 million from 2019.  Meanwhile, the difference between total revenue and expenditure resulted in a deficit of EUR 607.1 million being reported in the Government’s Consolidated Fund by the end of April 2020.  This represented an increase in the deficit of EUR 463.2 million when compared to the deficit of EUR 144 million witnessed during the same period in 2019.  By the end of April 2020, Central Government debt amounted to EUR5,936.4 million, an increase of EUR 433.4 million rise from April 2019. 

Antonella Mercieca

Client Relationship Manager


Reuters, https://nso.gov.mt/


June 5th, 2020

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