In the US, the Federal Reserve expanded its Municipal Liquidity Facility by $500bn to include purchases of short-term debt issued by smaller counties and cities, while it also broadened access to its Main Street Lending Program to facilitate loans to small and medium-sized businesses at 4-year maturities ranging in size from $500,000 to $25 million via commercial banks on favourable terms where repayments are deferred until year 2. The latter is a move by the central bank to address concerns associated with the US Treasury's Paycheck Protection Program, mainly that small and medium-sized businesses were missing out on gaining access to emergency loans to large institutions. At this week's meeting, the policy-setting FOMC made no change to its existing stance on rates (0-0.25%) and as highlighted by Committee Chair Jerome Powell during the post-meeting video conference nor will it be doing so any time soon. Instead, the focus was around what have been the more contentious aspects of its recent announcements to undertake a broad-based expansion of bond purchases, including into the high-yield market to support firms that have suffered credit rating downgrades to non-investment grade as a result of the pandemic. However, Chair Powell was clear that these steps were necessary to "foster smooth market functioning" to ensure that liquidity strains that emerged in the markets as fears over the pandemic intensified would not impair the ability of businesses and households to access credit and, in turn, do further damage to the economy. While market functioning has improved over recent weeks, Chair Powell indicated that more support could be warranted and that the Fed would act "forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery".
As liquidity and sentiment in markets has taken off, conditions in the real economy have collapsed. Nowhere is this more evident than in the labour market as initial jobless claims increased by another 3.8 million in the week to April 25, with a sobering total of around 30 million filings coming through over the past 6 weeks. In what is a sign of worse to come, the US economy rolled over in the March quarter as activity contracted at an annualised pace of 4.8% (-1.2%q/q) from 2.1% annualised in the previous quarter. The narrative is best conveyed by our chart of the week below, with consumer spending — the growth engine through much of the expansion of the past decade — collapsing in response to shutdowns, falling sentiment and rising unemployment. This will only worsen in the June quarter when these headwinds intensified.
Chart of the week
Also focusing on expanding asset purchases is the Bank of Japan (BoJ) with the Policy Board at this week's meeting removing its previously self-imposed upper annual limit of ¥80tn of Japanese Government bond purchases and pledged to substantially lift the amount of corporate debt it buys through to September 2020 from ¥7.5tn to ¥20tn. The additional support came as the Bank attempts to increase liquidity to keep government and corporate borrowing costs low amid a worsening economic outlook. While spread of COVID-19 has been less severe in Japan than in the US or Europe, the BoJ's latest outlook report showed that GDP was expected to contract by -3.0 to -5.0% in 2020 with private consumption and the export sector likely to see the worst of it.
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Switching to events on the domestic front, the highlight of the week was the March quarter's inflation report. On a headline basis, the Consumer Price Index surprised to the upside of consensus coming in at 0.3% in the quarter as the annual pace firmed from 1.8% to a 5½-year high of 2.2% (see more here). Driving the result was a strong rise in vegetable prices following on from drought and disruptions to supply chains caused by the summer bushfires. Also evident were notable rises in prices of household non-durables and personal care products, categories which include many of the items that came in short supply at the supermarkets as consumers stockpiled ahead of the escalation in COVID-19 restrictions. Abstracting for these more volatile price changes, trimmed mean inflation (RBA's preferred measure) also advanced past expectations rising by 0.5% quarter on quarter lifting the annual pace from 1.6% to 1.8% — its highest since Q4 2015. The improvement in the inflationary pulse will be short-lived ahead of what will be a deflationary hit in the June quarter in line with fuel prices falling to their lowest levels in nearly two decades, while governments have since announced a range of cost saving measures such as free child care services to provide financial support to households through the COVID-19 shock. Lastly, CoreLogic's Home Value Index showed that growth in property prices slowed to 0.2% across the capital cities in April — the lowest monthly rise since last July — on much weaker volumes with the residential property market effectively shuttered due to social distancing measures mandated by the Federal government that prohibit open house inspections and auctions. 
