As to policy options, the deputy governor reiterated the earlier communication from the RBA that it could consider; 1) additional bond purchases, more targeted at the longer end of the curve, 2) intervene in the foreign exchange market, 3) further reduce rates to a still-positive nominal level, and 4) turn to negative rates. With the RBA assessing the Australian dollar as broadly in line with its fair value, the effectiveness of foreign exchange intervention was seen as unclear, while it remains much the same for negative rates. Whether the Board ultimately decides to move in October or not, if a further easing in the monetary policy stance is required a rate cut appears to be the most likely option and this would apply to the cash rate, 3-year Commonwealth bond yield target and Term Funding Facility (TFF) rate, which all currently stand at 0.25%. Under current arrangements, with banks' surplus exchange settlement balances held at the RBA earning 0.1%, there is potentially 15 basis points of scope available to cut rates and still remain positive. The other notable points from the speech were around the RBA's actions to enhance the supply of credit to the real economy and to lower borrowing costs. Here, the deputy governor outlined that the Bank's balance sheet had been expanded by $130bn since February to $300bn currently, which mostly reflects the impact of its bond purchases in support of its 3-year yield target and the take-up from the TFF. Initial allowance drawings under the TFF now stand at $78.7bn (see chart of the week, below), leaving another $5.3bn available to be taken up by the banking sector before the end of the month, with the access window for supplementary ($57bn) and additional allowances ($67.7bn currently) then opening up from October 1.
Chart of the week
On the fiscal front, Federal Treasurer Josh Frydenberg announced that the budget deficit for 2019/20 has been finalised at $85.3bn (4.3% of GDP) and in the July Economic and Fiscal update has been projected to widen to $184.5bn (9.7% of GDP) in 2020/21. Meanwhile, the Treasurer on Friday announced a proposal to roll back the nation's responsible lending laws in an effort to loosen credit standards and support credit flow to aid the economic recovery. Data domestically was light this week but was generally soft. August's preliminary estimate of retail sales declined by 4.2%, with the shutdown in Victoria (-12.6%) accentuating broader weakness across the rest of the nation (-1.5%). The high frequency employment data continued to point to a stabilisation in the recovery in the labour market as the payrolls index eased to 95.5 to be around its level from June. Some better news came from Australia's flash PMI for September that lifted from 49.4 to 50.5 (readings > 50 indicate expansion), indicating that the slowdown in economic activity in August that was driven by the reversal of Victoria's reopening was fading.
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To offshore developments where there was a decidedly risk-off tone in market sentiment over the past week. Among the concerns were perceptions that the timing of additional fiscal stimulus in the US would be delayed, rising virus cases in Europe and the UK leading to containment measures being reinstated, and signs that the initial rebound in activity from the reopening effort was beginning to stall. This was reflected in the week's price action as equity markets in Europe slumped, strength went into the US dollar and long-end Treasuries were bid.
An unnerving resurgence in the virus over recent weeks in Europe has clearly weighed on both economic activity and sentiment. The euro area flash PMI for September slowed to a 3-month low at 50.9 from 51.9 in August as the service sector fell back into contractionary territory (47.6 from 50.5) for the first time since shutdowns started to be wound back. In contrast, output in the manufacturing sector advanced to a 31-month high at a reading of 56.8 from 55.6 with the bright spot coming in Germany where output lifted at its strongest pace since early 2018. On the consumer, though sentiment improved marginally in rising by 0.9% in September, at a level of -13.9 it remains well below its long-run average (-11.1) and is vulnerable to rolling over if restrictions are progressively tightened over the northern hemisphere winter. Over in the UK, Prime Minister Boris Johnson this week announced a range of new pandemic measures that he indicated could remain in place for up to 6 months. With the Government's furlough scheme due to conclude at the end of October, Chancellor Rishi Sunak unveiled the slimmed-down job support scheme that will partially subsidise the wages of workers who have lost hours from November 1 onwards for a period of 6 months. With the threat of the virus re-emerging, conditions in the UK economy have started to start to lose momentum as September's flash PMI eased back to 55.7 from its 72-month high of 59.1 in August. This was driven mostly back a pullback in the services sector to 55.1 from 58.8, though the manufacturing sector also softened in the month to a reading of 54.3.
Dominating developments in the US have been the seemingly fading prospects for the next fiscal stimulus package to be passed before November's presidential election. However, Speaker of the House Nancy Pelosi and Treasury Secretary Steven Mnuchin to some extent pushed back against this narrative by expressing a willingness for both sides to come back to the negotiating table. There is much riding on more fiscal stimulus, not only from a markets perspective but also in keeping momentum in the economic recovery going, a point emphasised by Federal Reserve Chair Jerome Powell at this week's testimony before Senate Banking Committee. For now, the recovery remains robust with September's flash PMI coming in little changed at 54.4 from 54.6 in August, but as seen in Europe it is vulnerable to fraying if the path of the virus takes a turn for the worse. While the services sector saw activity slow slightly to a reading of 54.6 (from 55.0), manufacturing output advanced to a 20-month high at 53.5 driven by an increase in production and new orders. The key question now for markets now is whether the momentum in the recovery carries over into the December quarter with election, policy, and virus uncertainty in play.
