For households, the measure is a once-off payment of A$750 going to those already receiving income support (impact in Q2 $4.76bn). The measures for businesses include initiatives targeted at small and medium-sized enterprises to provide cash flow assistance and encourage investment. The cash flow assistance component is effectively a partial refund on tax withheld (of between $2,000-$25,000) available to businesses that employ staff and have a turnover of less than $50m (Q2 impact $5.9bn); additionally, wage subsidies are available for businesses that employ apprentices and trainees. On investment, the threshold for instant asset write-offs has been lifted (from $30,000 to $150,000) with access significantly expanded, and there will also be a 15-month period of accelerated depreciation deductions. The intent is clearly aimed at supporting the domestic economy through what will be a very challenging June quarter, noting also this comes on top of a $2.4bn package for the healthcare sector to combat the coronavirus announced last week as well as $2.0bn in bushfire recovery assistance. Also of note this week was a speech from Reserve Bank of Australia Deputy Governor Guy Debelle, who during the Q&A session said any move towards quantitative easing would involve forward guidance and set an objective for the government bond yield rather than adhering to a specific quantity of purchases.
The data flow this week underlined the challenges that are ahead, with the Westpac-Melbourne Institute of Consumer Sentiment sliding by 3.8% in March to a 5-year low of 91.9 (see chart of the week, below). The concerns for consumers are around the outlook for economic conditions for the next 12 months (-12.8%mth) and as a result, the Unemployment Expectations Index rose to a 4-year high, while spending intentions regarding 'time to purchase a major household item' rolled over to a 4-year low. Overall, households' assessment of family finances for the next 12 months weakened by 1.7% in March to be down by 4.0% through the year. Turning to the housing market, after a rapid acceleration in house price expectations over the past year (66%), Westpac's Chief Economist Bill Evans reported that the 6.6% fall in that index in March to 141.7 was in line with some slowing in momentum in the market even though the consensus view among consumers was still for prices to rise. This week, January's housing finance update confirmed a stronger-than-expected 4.6% rise in commitments in the month, with annual growth running at its fastest pace in more than 6 years at 23.3%, though the coronavirus outbreak clearly threatens to disrupt activity in the housing market (see here).
Chart of the week
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Moving offshore, it was a week of extreme volatility in markets and pessimism over the outlook as the World Health Organisation declared the coronavirus outbreak as a pandemic and the breakdown in negotiations around production cuts between OPEC and OPEC+ nations resulted in a plunge in global oil prices, prompted by Saudi Arabia's move to slash its prices and pledge to lift supply. In the US, an address to the nation by President Trump left markets unnerved as details of previously touted fiscal stimulus measures were lacking and a 30-day suspension on travel from Europe was implemented, not before significant confusion ensued as to whether the ban extended to all goods and trade. Later in the week, the New York Federal Reserve sought to ease the sense of fear and panic in markets through a $500bn liquidity injection (through 3-month repurchase operations) on Thursday followed by a further $1tn on Friday ($500bn on 3-month repo and $500bn on 1-month repo). It also announced that it would expand the scope of its asset purchases (running at $6obn/mth) beyond treasury bills. The market volatility and precarious outlook for the US economy caused by the coronavirus saw pricing shift aggressively over the week to have a 100 basis point cut to the fed funds rate nearly fully discounted that would take it to 0-0.25%. By week's end, President Trump had declared the coronavirus outbreak a national emergency, a move which will ensure up to $50bn in funding is released to assist efforts to combat the coronavirus outbreak.
In Europe, the European Central Bank's policy meeting saw the Governing Council leaving rates on hold — markets had anticipated a cut of 10 basis points — instead opting to boost quantitative easing by €120 billion through to the end of the year (net purchases have been running at €20mn/mth), providing additonal liquidity to the financial system and making more favourable its TLTRO III operations (funding available to the banking sector transmitted to the real economy through lending to small and medium-sized enterprises) for the period between June 2020 and June 2021 such that it will have a dual interest rate ranging from -0.25% to -0.75% (effectively incentivising banks to lend) and raising the amount that banks are able to "borrow" through this channel. Unfortunately for the Bank, the messaging of these measures became somewhat lost in the post-meeting press conference, most notably by the comment from President Christine Lagarde that "we are not here to close (bond) spreads, there are other tools and other actors to deal with these issues". That comment was later effectively retracted by President Lagarde in a separate CNBC interview, saying that the Bank was "fully committed to avoid any fragmentation in a difficult moment for the euro area". At a time of a severe economic shock, widening bond spreads, particularly for Italy, would impair the transmission of the ECB's monetary policy stance to support that economy. With those concerns ameliorated, the situation on the continent took another significant step forward on Friday with the European Commission setting in motion "full flexibility" for member states from EU budgetary rules so that necessary fiscal action to contain the coronavirus outbreak and support their economies can be taken. Importantly, Germany (the largest economy in the bloc) on Friday abandoned its conservative fiscal stance, pledging to go all-out with stimulus measures to support impacted businesses.
Over in the UK, a coordinated approach from fiscal and monetary authorities was unveiled this week. On the monetary side, the Bank of England announced a range of measures including an inter-meeting rate cut of 50 basis points lowering the Bank Rate to 0.25%, introducing a new funding scheme that will incentivise banks to provide lending to small and medium-sized enterprises and also removed the countercyclical buffer rate imposed on banks for at least the next 12 months that will enable an estimated £190bn in lending to flow into the real economy. On the fiscal side, the UK Government's Budget 2020 contained a combined £30bn of initiatives to support public services, individuals and businesses impacted by the coronavirus. Lastly, overnight on Friday, the Bank of Canada delivered an inter-meeting rate cut of 50 basis points taking its benchmark interest rate to 0.75% with the announcement coming in conjunction with other measures from regulators to support liquidity and lending to businesses.
In Europe, the European Central Bank's policy meeting saw the Governing Council leaving rates on hold — markets had anticipated a cut of 10 basis points — instead opting to boost quantitative easing by €120 billion through to the end of the year (net purchases have been running at €20mn/mth), providing additonal liquidity to the financial system and making more favourable its TLTRO III operations (funding available to the banking sector transmitted to the real economy through lending to small and medium-sized enterprises) for the period between June 2020 and June 2021 such that it will have a dual interest rate ranging from -0.25% to -0.75% (effectively incentivising banks to lend) and raising the amount that banks are able to "borrow" through this channel. Unfortunately for the Bank, the messaging of these measures became somewhat lost in the post-meeting press conference, most notably by the comment from President Christine Lagarde that "we are not here to close (bond) spreads, there are other tools and other actors to deal with these issues". That comment was later effectively retracted by President Lagarde in a separate CNBC interview, saying that the Bank was "fully committed to avoid any fragmentation in a difficult moment for the euro area". At a time of a severe economic shock, widening bond spreads, particularly for Italy, would impair the transmission of the ECB's monetary policy stance to support that economy. With those concerns ameliorated, the situation on the continent took another significant step forward on Friday with the European Commission setting in motion "full flexibility" for member states from EU budgetary rules so that necessary fiscal action to contain the coronavirus outbreak and support their economies can be taken. Importantly, Germany (the largest economy in the bloc) on Friday abandoned its conservative fiscal stance, pledging to go all-out with stimulus measures to support impacted businesses.
Over in the UK, a coordinated approach from fiscal and monetary authorities was unveiled this week. On the monetary side, the Bank of England announced a range of measures including an inter-meeting rate cut of 50 basis points lowering the Bank Rate to 0.25%, introducing a new funding scheme that will incentivise banks to provide lending to small and medium-sized enterprises and also removed the countercyclical buffer rate imposed on banks for at least the next 12 months that will enable an estimated £190bn in lending to flow into the real economy. On the fiscal side, the UK Government's Budget 2020 contained a combined £30bn of initiatives to support public services, individuals and businesses impacted by the coronavirus. Lastly, overnight on Friday, the Bank of Canada delivered an inter-meeting rate cut of 50 basis points taking its benchmark interest rate to 0.75% with the announcement coming in conjunction with other measures from regulators to support liquidity and lending to businesses.
