US Macro: A crucial week for restart impact – A number of US states began easing lockdown measures in late April/early May, and with federal guidelines advising each major reopening step to allow three weeks to judge the impact on virus spread, this week will be a crucial test for those states and for the reopening prognosis more broadly.

In a worrying development, Texas – one of the flagship reopeners – reported its biggest daily increase yet in new cases of covid-19 on Saturday of 1,801, following a steady rise in recent weeks. The state government attributes this rise to a significant ramp up in testing in recent weeks, and the positive rate on tests has indeed fallen significantly, from a 13% peak in April to around 5% currently.

Meanwhile, the estimate of the current replication rate (or Rt) – which takes account of increases in testing – was stable at 0.87 as of 16 May, with a 90% confidence interval of 0.69-1.04. Should the crucial R estimate rise above 1 over the coming weeks – indicating renewed exponential growth in cases – this would likely put a halt to further reopening of the economy.

What Texas has reopened, and the impact on activity so far – On 1 May, Texas reopened all shops, cinemas, museums and libraries (capped at 25% capacity); on 8 May hair salons reopened; today, non-essential manufacturing and offices are allowed to reopen at 25% capacity.

What has been the impact of the reopening been so far? Google mobility data suggests a steady increase in visits to retail & recreation establishments, with visits as of 9 May around 23% below normal levels – an improvement from the 40%+ reduction in mid-April. Meanwhile, OpenTable data shows seated diners now at 25% of 2019 levels, with a gradual increase since 1 May.

States representing around half of the US population are following a similar path to Texas, taking significant steps towards reopening such as allowing restaurant dine-ins (albeit at much reduced capacity). The other half – mostly Democratic coastal states that have been hard-hit by the virus, such as California and New York – are taking a much more cautious approach, moving from very strict hard lockdowns to something closer to what had prevailed in the Netherlands until recently.

On average, however, the reopening is moving roughly in line with the base case, which importantly does not assume any renewed spike in virus cases that requires a re-imposition of restrictions. Given that it is still very early days in the reopening, that risk remains significant. More broadly, we continue to expect the reopening process to be a gradual one.

ECB View: We think additional stimulus will be larger – We have made changes to our base case for the ECB. We previously expected the PEPP to be stepped by EUR 500bn by June, taking the total programme size to EUR 1.25 trillion. We now expect a larger step up of EUR 750bn doubling the total size to EUR 1.5 trillion.

There are three drivers behind this change. We have further downgraded our economic growth forecasts for the eurozone economy. This also triggered revisions to our inflation projections. We expect core inflation to slide over the coming quarters to end next year at levels that are not far from zero. Against this background, the risks of a sustained period of modest deflation are now significant. Finally, we have also raised our estimate for the additional corona-shock related government funding needs for this year of around EUR 1050bn compared to EUR 850bn previously.

This reflects some additional discretionary fiscal stimulus, but mostly additional projected deterioration in the public finances due to our weaker growth forecasts. We think the ECB will need to mop up a lot of this additional supply to prevent a tightening of financial conditions. Given this, we also think that public sector purchases will have a very heavy weight in the programme. For the PEPP and additional APP envelope, we assume a distribution of 79% to public sector assets, 16.4% to corporates and 4.6% to covered bonds.