The wind-down towards the end of the quarter and a limited data flow meant that narratives were driven by the price action this week where it was the ongoing rotation into cyclicals in the US that stood out while the recent rise in long-end bond yields took a pause. In the US, testimony from Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen, as well as public appearances from several Fed officials, garnered most of the headlines. Once again, it was the message of patience emphasised by Chair Powell with accommodative policy to be maintained as economic conditions rebound until the recovery from the pandemic crisis is assured. Secretary Yellen told lawmakers that while the crisis remains deep at this stage, the recent $1.9tn stimulus package enacted by the Biden Administration provided her with optimism that a return to full employment might be possible next year. Best summarising the reaction function of the Fed was the speech this week from Governor Brainard ("Remaining Patient as the Outlook Brightens") that implied maintaining "resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance". With a labour market that currently counts around 9.5 million fewer Americans in work than before the onset of the pandemic, an outcome-based rather than preemptive approach to policy points to the continuation of current settings for some time. Inflation also remains soft, slowing to a 1.4% annual pace in February on the core PCE reading from 1.5%, though base effects will see the rate accelerate over the next couple of months, likely to well above the Fed's 2% target. However, Chair Powell reiterated that any rise in inflation is not expected to be "neither particularly large nor persistent" and will be tolerated. Meanwhile, after slowing sharply in February, both personal spending (-0.6%Y/Y) and income growth (4.3%Y/Y) are expected to accelerate from next month in response to US households taking receipt of their $1,400 stimulus cheques and a wider reopening effort.
Over in Europe, concerns over a third wave of virus cases amid frustrations in the vaccine rollout has led to tensions rising in the continent. A statement from EU leaders after talks on the matter outlined that ramping up the production of supplies and accelerating the speed of the rollout was "essential and urgent to overcome the crisis". For the time being, explicit export restrictions on domestically-produced doses of the vaccine, including to the UK, were resisted, though EU leaders did support implementing proposals for tougher rules should they be deemed necessary. Tensions have also been rising in response to containment measures, with German Chancellor Merkel announcing a 5-day circuit-breaker shutdown over the Easter period only to then reverse the decision 24 hours later after criticism over the government's handling of the pandemic intensified. But recent extensions of shutdowns are likely to curtail what were signs of improvement in economic conditions in March's preliminary PMI readings. The Eurozone composite PMI advanced above the 50 line separating expansion from contraction for the first time since September in rising from 48.8 to 52.5 (vs 49.1 expected). A slight earlier easing of restrictions resulted in the rate of contraction in the services sector slowing (48.8 from 45.7) to its least severe in 7 months, though this progress is now at risk of unwinding. This in stark contrast to the manufacturing sector where activity has surged to a record high (62.4 from 57.9) with output ramping up in response to backlogs in order books, including strong growth in export orders as global demand for goods remains elevated. Reflecting the sum of these developments, the euro has broken below 1.18 against the US dollar for the first time since November; the weakness in the single currency will undoubtedly be welcomed at the ECB. Meanwhile, the ECB's PEPP purchases lifted to €21.1bn (net), stepping up to their highest weekly pace in more the three months following the Governing Council's guidance from its meeting earlier in the month to conduct these purchases at "a significantly higher pace than during the first months of this year".
In Australia, with employment having been restored to its pre-pandemic level as of February (see here), more insights into the labour market recovery came to hand this week. Employment in household services was hit hardest by the onset of the pandemic and social distancing measures, but the reopening and easing of restrictions have enabled the sector to lead the way in the recovery, albeit with significant ground still to be made up. In particular, the hospitality, education, and arts and recreation industries recorded the heaviest job losses in the economy as the crisis took hold, with sharp rebounds then occurring following the reopening (see chart below). A strong 7% rise in job advertisements reported by the Federal Government this week for the month of February points to the recent strength in employment continuing, with the vacancies as a share of the labour force rising to their highest level since mid-2018 at 1.4%.
Chart of the week
While there remains a degree of uncertainty over the outlook for the labour market when fiscal support is withdrawn at the end of the month, there were some signs from the ABS's monthly Business Conditions and Sentiments survey suggesting that the transition will not be unduly disruptive to the momentum that has been established. The survey reported that a greatly reduced proportion of firms were now receiving the JobKeeper wage subsidy (29% compared to 73% in May last year), with only 9% of these businesses indicating that the end of the support will prompt a reduction in staffing levels. A much larger amount of the responding businesses (20%) planned on reducing staff hours instead. Remarks from Federal Treasury Secretary Kennedy to the Economics Legislation Committee this week outlined the Government's expectation is that the transitional effects from the end of the JobKeeper policy could result in around 100-150k job losses, though this would not necessarily lead to a commensurate rise in unemployment.
