In other events domestically this week, the Reserve Bank of Australia remained firmly unchanged on its policy settings at the July meeting with Governor Philip Lowe noting in the decision statement that its "accommodative approach will be maintained as long as it is required" (see here). That line reinforces the Bank's forward guidance on rates that they will not be raised from their current targeted level of 0.25% until such time as material progress is achieved in lowering the unemployment rate and returning inflation towards the 2-3% target band. Yields on 3-year Commonwealth Government bonds continue to trade close to the RBA's 0.25% target and with the domestic bond markets now assessed as functioning more effectively, the RBA's bond purchases have not increased since early May, though it was reiterated by the governor that it would "scale-up" these purchases again if required. Contributing to the enhanced flow of liquidity in the markets has been the $15bn in drawings by banks from the RBA's Term Funding Facility. In combination with its cash rate and yield targets, Governor Lowe noted that these actions were "keeping funding costs low and supporting the supply of credit to households and businesses". The effect of this could be seen in the refinancing numbers within this week's housing finance update for May (see here). The number of external refinancing approvals granted by lenders to the owner-occupier segment surged to 21.7k totaling $10.1bn — both sitting at record highs — with borrowers taking advantage of the more favourable terms on offer in the market. However, this was against a record monthly fall in 'new' demand for housing finance that declined by 11.6% in May to $16.4bn, which reflects the scale of the disruption that the prohibition placed on open house inspections, public auctions and restrictions on mobility had on housing market activity during the shutdown. Lending commitments to owner-occupiers were down 10.2% month-on-month to $12.3bn (7.3%yr), while the investor segment recorded a sharper fall of 15.2% to $4.1bn to its lowest level in 17½ years.
Chart of the week
— — —
Turning to events offshore, markets remain focused on the reopening of the US economy with some officials from the Federal Reserve expressing caution over the sustainability of the rebound recently reported in the data flow as daily virus cases averaged north of 50k over the past week. The trend of late has been for the economic data points to come in strongly above consensus expectations, resulting in Citigroup's US Economic Surprise Index soaring to unprecedented highs. President of the Atlanta Fed Raphael Bostic outlined this week that he saw signs of a "levelling off" in some of the high-frequency indicators and that businesses and consumers in his district were reporting nervousness over the virus with the case numbers mounting. On similar lines, Cleveland Fed President Loretta Mester had also seen signs of activity stalling in her district and pushed back against the notion of a quick recovery, anticipating that a return to pre-pandemic levels of employment and activity was a long way off. Both Bostic and Mester said that additional fiscal support will be critical, while on the monetary side the Vice Chair of the Federal Reserve Richard Clarida outlined that there was more it could do in terms of expanding the balance sheet, which has declined by around $0.25tn over the past four weeks, and strengthening forward guidance. In support of the strength of the reopening was an upbeat read on activity from the ISM non-manufacturing survey that came in at 57.1 in June (reads > 50 signal expansion) — well ahead of consensus (50.2) and up sharply from the month prior (45.4). The standout features in the report were a record rise of 25 percentage points in the business activity sub-index to 66.0 and a 19.7 percentage point lift in new orders to 61.6, with both reads suggesting that order books were filling up and production was rising to meet pent-up demand that accumulated during the shutdown. However, it is worth highlighting that this contrasted with the IHS Markit services PMI that suggested conditions were still in decline in June at a reading of 47.9 but had improved from a depressed level in May (37.5).
Over in Europe this week, the finalised IHS Markit PMIs for June confirmed that while economic conditions remained very challenged, there had been a solid improvement over the month as the composite index lifted from 31.9 to 48.5 to add to the 19-point improvement recorded in May. Overall, this suggests that activity in the bloc returned with some vigour as Europe came out of the shutdown, though it was still declining by the end of Q2. Speaking to this theme was the stronger than expected and record rise of 17.8% on euro zone retail sales volumes in May with all sub-categories rebounding from heavy declines in the past couple of months. However, even after May's surge retail volumes are still down by some 7.4% on their pre-pandemic level in February. In the UK, the Chancellor of the Exchequer Rishi Sunak set out the government's latest plans to support the economy in the Summer Statement. Unveiled was a £30bn fiscal support package focused on taking up the running from its furlough (wage subsidy) scheme that is due to expire at the end of October. Under the package, firms will be incentivised to retain furloughed workers through one-off payments of £1,000 per employee provided they remain on the payroll through to the end of January 2021. Other initiatives announced included targeted value added tax relief for restaurants, hotels, and attractions for the next 6 months lowering the rate from 20% to 5%, the 'Kickstart scheme' that will provide incentives for firms to create jobs for workers aged 16-24 as well as offering grants for businesses taking on new apprentices and trainees, cuts to stamp duty through to the end of March 2021 and an innovative scheme that will provide subsidies for restaurants, cafes and pubs to discount the cost of eating out in the month of August.
