Rabobank: China’s Stimulus Will Struggle In The Face Of What Is Needed To Contain The Spread Of The Virus

Submitted by Michael Every of Rabobank

There is a grim familiarity this morning in the news that the number of Chinese coronavirus cases has continued to rise. The number of cases in the country is now above 70,000 with the death toll standing at 1,770. Despite the headlines, the country’s stock market took encouragement from another round of stimulus. The PBoC cut interest rates for 1 year loans in an effort to support the baking sector while the Finance Minister promised that Beijing would roll out targeted tax and fee cuts.

The economic impact of the stimulus, however, will struggle in the face of the measures needed to contain the spread of the virus. According to Reuters, restrictions in the Hubei province were tightened further yesterday with most vehicles banned from the roads and companies ordered to stay shut until further notice. Headlines this morning also suggest that the Chinese government is considering delaying its high profile annual meeting of its full parliament in an effort to contain the virus. Around 3,000 members of the National People’s Congress have been expected to meet in Beijing from March 5 for around two weeks of meetings attended by President Xi and other top officials.

As the impact of the economic slowdown spreads out from China, both Singapore and Thailand cut their growth outlook. In Japan, criticism over PM Abe’s handling of the crisis resulted in a hit to his popularity in three separate opinion polls. It appears that the broad population may favour a blanket ban on arrivals from China rather than the softer policy currently adopted by the government. That said, the cost of the coronavirus on tourism in Japan is already marked. Japanese press report that regional economies have seen the number of visitors from China and Southeast Asia plummet. This is in line with UN estimates that Japan could lose USD1.29 bln in tourism revenue due to international flight restrictions related to the coronavirus outbreak. This won’t help fears that the country is in danger of falling into recession in the current quarter. Japanese GDP shrank at an annualised 6.3% q/q in the final three months of last year following the October increase in the sales tax. This was the biggest contraction in the economy since the last time the tax was hiked in Q2 2014. The market consensus had pointed to a fall of -3.8% q/q saar. Even though growth was also impacted by extreme weather conditions towards the end of last year, it appears that the government’s steps to limit the impact of the sales tax on certain parts of society may have fallen flat. Speculation that PM Abe may have to consider another round of spending, just two months or so after the last round of stimulus, will inevitably grow.

On Friday, reports circulated that the US government may already be considering further stimulus. One of the measures in a forthcoming package may be an incentive for US household to invest in stocks. Ahead of the November election President Trump is seeking to distinguish himself from Democrat rivals whom he has accused of following ‘socialist’ policies. Several market strategists,, however, are also stressing the risks that such a policy could stoke a stock market bubble.

Week ahead

The closure of US markets for President’s Day will ensure a slow start to the week. News of further stimulus from China has lent a little support to risk appetite this morning and helped currencies such as the AUD in addition to the CNY. Softer US economic data on Friday had encouraged profit-taking in US stock markets. However, buying on dips re-surfaced towards the close and Treasury yields moved lower. This week brings updates on US housing and PPI inflation data in addition to the latest PMI and Philly Fed surveys. In addition, Wednesday brings the release of the minutes of the January 28-29 FOMC meeting. Although this is unlikely to bring many fresh insights into the ‘steady as she goes’ policy, it could bring an update in the Fed’s current policy review. Various Fed officials will have the opportunity to air their views this week, including Kashkari, Mester, Kaplan, Brainard and Clarida. In addition, investors will be keeping one eye on a Las Vegas Democratic Primary debate. This could see Bloomberg taking to the stage for the first time in the season.

In Brussels the debate over the EU budget is expected to be difficult with richer countries such as Austria and the Netherlands expected to push back against proposed contributions. The forthcoming future relationship talks between the EU and the UK are also likely to remain in the headlines. Over the weekend France’s foreign minister Le Drian warned that the UK and the EU will ‘rip each other apart’ in the trade talks which are due to start next month. Meanwhile, the British Retail Consortium warned that UK consumers face higher costs and reduced availability on food imports from the EU mostly as a consequence of border friction next year. UK economic data due this week includes December labour figures and CPI inflation data, both of which could be key in assessing the actions of the BoE in the coming months. That said, the market has assessed that resignation of Javid as Chancellor last week has opened the door for Downing St to oversee an increase in fiscal spending in the budget, which could make further rate cuts less likely. While GBP/USD is holding above 1.300 on the back of this expectation, a rise in EU/UK political tensions could undermine the pound.

German data releases this week include the February ZEW survey and consumer confidence numbers, which may incorporate an initial reaction to coronavirus fears.

On February 21, Iran goes to the polls in an election which is expected to see hardliners tighten control after more pragmatic politicians were weakened by Washington’s decision to abandon the 2015 nuclear deal. A win for hardliners this week would increase their chances in the 2021 presidential contest.