With encouraging news arriving this week on the development and likelihood of Covid-19 vaccines becoming available, markets took this as a green light to rotate from defensive positioning into the more cyclical areas that would benefit from a broader reopening of economies worldwide. However, according to the reports, the widespread availability of any potential vaccines is still not a likely scenario until well into 2021. And in the meantime virus cases are rising sharply in the US, while much of Europe and the UK have already returned to stricter restrictions after an earlier acceleration of infections. This tension between the hope of vaccines enabling broader and sustainable reopenings down the track against the near-term damage the virus is inflicting is what markets and policymakers have been contemplating this week. Markets have taken the optimistic view by looking past the immediate risks, but policymakers from the world's major central banks have been much more cautious in their assessments. At this week's ECB Forum on Central Banking, the key message from the heads of the European Central Bank, Federal Reserve and Bank of England in a panel discussion was that the re-escalation of the virus posed a major risk to the path of the economic recovery and that the prospect of vaccines would not diminish the need for more policy support.
Just last week, the BoE announced further monetary easing and the Fed expressed a willingness to add more accommodation to assist the recovery in the US, while the ECB's Governing Council at their most recent meeting made their intent clear by declaring it will "recalibrate its instruments" to updated economic forecasts in December. As ECB President Christine Lagarde highlighted in a speech at this week's Forum, the key for policymakers is building a bridge to the time when vaccines are available and this clearly involves an enhanced response by the central bank, which was likely to be focused on adjustments to its Pandemic Emergency Purchase Programme and TLTROs (term funding for the banking sector). On this week's data from Europe, the second estimate of GDP for the September quarter saw only minor revisions with the reopening effort leading to a 12.6% rebound from Q2's immense 11.8% contraction, albeit with GDP still heavily below its pre-pandemic level by 4.4%. Considering the reintroduction of containment measures, a more timely assessment of the situation came from the industrial production update, which after surging in the immediate period since the reopening has now stalled. A 0.4% fall in September came after modest growth in August (0.6%), while output still remains around 5.9% below its pre-pandemic level. In the UK, after contracting at its fastest pace on record in Q2 (-19.8%q/q), economic activity posted its fastest pace of expansion in a single quarter as the reopening saw GDP rebound by 15.5% in Q3. But that still left GDP around 10% below its pre-pandemic level. Meanwhile, the monthly estimates showed a loss of momentum in the pace of activity as the quarter progressed, with GDP slowing to a 1.1%m/m rise in September; this after increases of 2.2% in August and 6.3% in July.
In the US, concerns are rising over the escalation in virus cases but so far there has been a patchwork response from the states around the reinstatement of restrictions. The most notable response has come in the city of Chicago (population òf around 8.8 million) where the authorities will implement a stay-at-home advisory from Monday (16/11), signaling the effective return to shutdown. In spite of the virus situation, there may be some resistance to a similar approach in other jurisdictions in the US as earlier fiscal measures that supported incomes have now lapsed and attempts by Congress to agree to a new package have been falling short. The effects of this latest resurgence in the virus are yet to show in the data in a material fashion, but the concerns are clearly there with Fed Chair Jerome Powell noting a moderation in the pace of the economic recovery at last week's FOMC meeting. In a light week for data in the US, inflation came in softer than expected in October with headline CPI slowing to 1.2% annual pace from 1.4%, while core CPI (excludes volatile food and energy prices) eased from 1.7% to 1.6% in annual terms. The other development of note offshore this week came across the Tasman where the Reserve Bank of New Zealand provided more support to the economic recovery through the announcement of its Funding for Lending Programme that will commence in December providing cheap liquidity to the banking sector.
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Turning to Australia, the latest consumer and business survey were this week's focus. Consumer sentiment according to the Westpac-Melbourne Institute Index advanced by a further 2.6% in November to extend its recent stellar run after gains of 18.0% in September and 11.9% in October. Remarkably, this has driven the index to a reading of 107.7 to be at its highest level in 7 years (see chart of the week, below). Westpac's Chief Economist Bill Evans attributed the latest result to the widespread easing of restrictions in Victoria, while last week's decision by the RBA to ease monetary policy further and its pledge to keep rates on hold for an extended period was also a factor. The effect of the reopening in Victoria was a significant contributor to an 8.4% lift in expectations for economic conditions over the next 12 months, with the sub-index now standing 12.4% higher than the level that prevailed a year ago. While expectations for the 5-year outlook were relatively flat in November (0.5%) they are sharply elevated over the year (22.4%), continuing to suggest that consumers see better times ahead once the effects of the pandemic dissipate. The report's other key aspect was the continuation of optimism towards the housing market; the 'time to buy a dwelling' index up another 8% in the month to a 7-year high, while house price expectations lifted by 12%, albeit to a level that has not yet returned to where it was pre-pandemic.
Chart of the week
