Macro (Re)view (3/7) | A quarter like no other

The June quarter of 2020 came to a close during the week and the single word that best describes it is unprecedented. Unprecedented not just from a health perspective as government-mandated shutdowns were implemented worldwide in the fight against the COVID-19 pandemic but also from an economic perspective as countries were driven deep into recession prompting monetary and fiscal policymakers to go all-in to stem the damage. The markets were focused on the other side of the crisis taking the view that containment measures would prove successful allowing economies to reopen and come back sharply when they did helped by the unprecedented level of policy support in the system. That is a thesis still to be fully tested, especially amid a resurgence in virus cases in the US, though for the equity markets at least, it seemed to be a case of so far so good as the benchmark S&P500 index surged to its best quarter since 1998 rising by 20%, European markets advanced in the order of 10-20% and Australia's ASX200 was up 16%.

In Australia this week, there was some negative news on the pandemic with the state government in Victoria reinstating some shutdown orders across 10 postcodes in the northern districts of Melbourne, though in the other states restrictions continued to be eased. The most positive sign on the reopening of the domestic economy came from a record rise of 16.9% on retail sales in May as the nation came out of the shutdown (see chart of the week below). While this needs to be taken in the context of coming after the record 17.7% fall in April when the retail sector was effectively closed, turnover in May increased to $28.97bn to be 4.4% above its pre-pandemic level (see here). Indeed, turnover in most categories advanced above the levels from February, though it is understandably still well down in cafes and restaurants with social distancing restrictions still in place. Overall, the details of the report were consistent with the strong improvements recorded in consumer sentiment data in May and the improved picture on household finances in the ABS's latest survey (see here) bolstered by the support provided to incomes from the government's fiscal measures. Australia's trade surplus widened a little further to a very elevated $8.0bn in May (see here). The pandemic has significantly disrupted trade flows, but so far the impact continues to be more significant on imports than exports. Imports fell 6.1% in the month and were contracting at their fastest annual pace on record (-22.8%) reflecting the impacts from the overseas travel ban and very weak domestic demand conditions. The export side also contracted in May (-4.3%), though it will receive support from resources and inbound tourism from overseas students that still remain in Australia even with the international borders closed.

Chart of the week

The issue of the international borders will become of increasing importance to policymakers as strong net overseas migration has been a key source of population growth and this has in turn helped to underpin Australian economic activity. In the absence of the level of population growth the nation has become accustomed to (around 1.5%), the residential construction sector will continue to face considerable headwinds. To highlight this point, the ABS reported that building approvals fell by 16.4% in May to a 7-year low of around 12,700, though the lags between submission and approval meant that the impact from COVID-19 is yet to be reflected (see here). Meanwhile, national property prices according to CoreLogic followed up May's 0.4% fall with a 0.8% decline in June, though considering the level of disruption to activity in the sector and the severity of the broader economic shock, these declines have been modest. The other main development this week came via a speech by the RBA's Deputy Governor Guy Debelle on the Bank's policy settings. Dr Debelle outlined that the RBA's actions to lower the cash rate to its effective lower bound, introduce yield curve control on 3-year Commmenalth bonds and improve liquidity conditions were seen to be reflected in the reduction in borrowing costs for businesses and households since late March. Greater use of the RBA's Term Funding Facility was expected in the months ahead as banks' wholesale funding matures.  

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Moving offshore, the US economy continues to face hurdles in the recovery with new daily virus cases rising at a record pace north of 50,000 per day towards by the back end of the week driven by a surge in cases from the southern states of Florida, Texas, California and Arizona. As a result, the reopening process has stalled in these states with a range of containment measures being reinstated. These developments took some of the gloss away from a very strong employment report for June in which non-farm payrolls lifted by a record 4.8 million, coming in well ahead of the 3.2 million increase expected. Including May's 2.7 million increase, non-farm payrolls have risen by 7.5 million over the past two months, though that still means there are around 14.7 million fewer Americans in work than before the pandemic hit. Much of the employment gains between May and June reflects workers that had been placed on temporary layoffs being taken back by the employers as the economy started to reopen, but clearly the rise in new virus cases threatens to put this progress at risk. The unemployment rate now stands at 11.1% coming down from 13.3% in May, while the broader unemployment rate remains much more elevated at 18.0% from 21.2% in the month prior. What the payrolls report underscored was that there is still a long way to go in the recovery in the US and the focus is now around how the fiscal response will evolve with the $600 a week enhancement to unemployment benefits due to expire at the end of the month. Over at the Federal Reserve, the minutes from the FOMC's meeting highlighted an important discussion around consideration of potential options for future policy changes. The Committee appeared to be unconvinced by yield curve control, though it did consider the RBA's approach to be a reasonable model it could potentially follow where it is used as a communication tool reinforce forward guidance on the path of interest rates. For the time being, increased asset purchases and the introduction of a form of outcome-based forward guidance shape as the more likely path for the FOMC.

In Europe this week, the IHS Markit PMIs confirmed a notable slowing in the deterioration of conditions in the continent in the month of June as the euro area economy begun to emerge from its shutdown. The composite reading advanced to 48.5 from 31.9 in the month prior (readings < 50 signal contraction), with the services sector showing more improvement (48.3 from 30.5) than manufacturing (47.4 from 39.4). In April, the composite reading had slumped to just 13.6 so the hope is that the sequential improvement can translate into economic growth beginning to expand in the September quarter. In other data releases, June's flash estimate on euro area core CPI slowed by 0.1ppt to 0.8% to its weakest pace in a year, while the unemployment rate ticked up from 7.3% to 7.4% in May concealing a larger rise of 0.3ppt for the segment of workers aged under 25 to 16.0%. Lastly, in the UK the Bank of England's Chief Economist outlined in a speech this week that in his assessment the early indications pointed towards a v-shaped economic recovery and that his decision to vote against the action recently taken by the Monetary Policy Committee to expand its asset purchases by £100bn had been influenced by high-frequency data that had suggested the risks to the outlook had moderated but were still "skewed to the downside".