Chart of the week
In the Reserve Bank of Australia's minutes from the June Board meeting, their outlook for the domestic economy could be considered to have improved at the margin and they could envisage a scenario in which the downturn was "shallower than earlier expected". This is on the basis of positive news on the health front, with the infection rate having slowed materially and with restrictions having been eased sooner than anticipated, as well as on the activity front in which the Bank's liaison had been reporting signs of improvement in household spending in May coming out of the shutdown. However, the prevailing view of the Board remained that the outlook was "highly uncertain and the pandemic was likely to have long-lasting effects on the economy". On policy, the Board continued to assess that its package of measures to support the economy was working effectively as it was keeping the 3-year government bond yield anchored around its 0.25% target and market functioning in the Australian bond markets had improved, while it did not appear to be perturbed by the recent appreciation in the Australian dollar. Should signs of fragility emerge, these minutes reiterated that the RBA stands ready to "scale up" its bond purchases and that it was prepared to maintain its accommodative stance in place for "as long as is required".
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Switching to events abroad, while a host of risks came across the markets' radar from rising COVID-19 cases and the potential for second waves in China and the US in particular and flaring geopolitical tensions, sentiment remained upbeat as more central bank support was forthcoming and on positive data in the early stages of the re-opening of economies. In the US, the Federal Reserve this week announced it would start purchasing individual corporate bonds under its $750bn Secondary Market Corporate Credit Facility. This announcement had already been in the pipeline and is aimed at ensuring the credit markets remain wide open for corporate issuers in need of liquidity amid the turbulence from the pandemic and, in particular, for those corporates that have suffered recent ratings downgrades. The Fed's Main Street Lending Program also opened this week to facilitate loans through banks for small and medium-sized enterprises ranging between $0.25m and $300m. At his testimony to the Congress this week, Fed Chair Jerome Powell noted that the central bank was taking "broad and forceful actions" to ensure that businesses, households and municipal governments have access to an ample supply of credit, market functioning is maintained and financial conditions remain accommodative. On the outlook, Chair Powell noted that the Fed was seeing some signs that economic activity was on the path of stabilising and that fiscal support was boosting household incomes and spending. In line with this view, retail sales snapped back to life in May soaring by a record 17.7% after plunging by 14.7% in the April shutdown.
In Europe, a videoconference of EU leaders was unable to make any progress on the path forward regarding the plan recently put forward to the membership by Germany's Chancellor Merkel and France's President Macron for debt mutualisation. This proposal would involve a collective bond issuance of €750bn allowing fiscal transfer to the nations hit hardest by the pandemic. Around two-thirds of this would be via grants and one-third in loans and this remains the major point of contention, particularly with the so-called 'Frugal Four' fiscally conservative countries of the Netherlands, Denmark, Sweden and Austria. EU leaders agreed to meet for further talks in mid-July as European Central Bank (ECB) President Christine Lagarde warned that in the absence of "decisive and effective action" market sentiment for the prospects of recovery was at risk of turning negative. Underpinning this optimism has been the support of the ECB who announced this week the take-up of its TLTRO-III program, which incentivises banks to take on their liquidity and lend it out, came in at a record €1.31tn. In the UK, the Bank of England provided more support by announcing that it would expand its QE purchases of government bonds by £100bn, lifting the target to £745bn by around the end of the year, though it should be noted that this actually implies a slowdown in the current pace of purchases by around 40%. Lastly in Asia, the Bank of Japan left its policy settings unchanged this week, though it announced the ceiling on its special lending program to provide emergency loans to corporate borrowers hit by the pandemic would be raised from 75bn Yen to at least 110bn Yen. Governor Kuroda also said the Bank's support would continue to remain in place well into the future noting that it was "a long way from a situation where interest rates can go up".