The focus domestically this week was on the Reserve Bank of Australia for its latest policy meeting and updated economic forecasts. As had been widely expected, the meeting decision statement from Governor Philip Lowe delivered a significant easing in the Board's monetary policy stance with the targets on the cash rate and 3-year bond yield, and the rate on the Term Funding Facility, lowered by 15 basis points from 0.25% to 0.1%, though of greater importance was the announcement of a separate quantitive easing (QE) program of Commonwealth and state government bond purchases with a target envelope of $100bn over the next 6 months (see here). Governor Lowe said the announcements were made to "support job creation and the recovery of the Australian economy from the pandemic".
That recovery was described by the RBA in its quarterly Statement on Monetary Policy (SoMP) as one that is likely to be "bumpy and uneven, and highly sensitive to further virus outbreaks". Under the Bank's baseline outlook, in which there are no significant virus-related setbacks, the contraction in domestic economic activity is now expected to be smaller at -4% Y/Y to Q4 2020 compared to -6.0% in the August SoMP. The recovery in 2021 leads to a stronger growth profile through the first half at 6%Y/Y to Q2 (from 4%Y/Y) with household consumption rebounding sharply and the drag from residential construction dissipating, before the pace eases back to an unchanged 5%Y/Y to Q4, which only then sees GDP being restored back to its pre-pandemic level. Meanwhile, the forecast for GDP growth of 4% in 2022 was retained. A more constructive view now attends the labour market outlook — the unemployment rate is now forecast to peak at a lower level of 8% by the end of the year compared to 10% previously — but progress from there is slow taking until the end of 2022 to retrace to 6%. As such, with "significant spare capacity" persisting, underlying inflation is held to a low and steady trajectory improving from 1% by the end of 2020 to 1.5% by Q4 2022. Given this outlook, the possibility of further stimulus over the next couple of years will never be too far away. The SoMP confirmed that should that be needed, the Board's marginal tool will be QE, where it could potentially adjust the size, timing and pace of purchases for example. The Board reiterated its resistance to lowering rates any further, judging that it "continues to view a negative policy rate as extraordinarily unlikely".
Domestic data releases were mostly constructive across the week. Nowhere was this more evident than in the housing market which is gaining momentum on the back of the reopening and stimulus measures, though working in the other direction is the headwind to demand from low population growth in response to the international border closure. Building approvals advanced by much more than expected with a 15.4% rise in September as house approvals elevated by 11.1% in response to the tailwind from the HomeBuilder scheme (see here). Meanwhile, borrower-accepted housing finance commitments continue to surge in the post-reopening period with a 5.9% lift in September taking the cumulative increase in the value of lending approvals to 38% since May (see chat, below). Activity from owner-occupiers (41%), and in particular first home buyers (43%) with the support of low rates and state government incentives, has been very strong over the period (see here). If sustained, this is likely to see house prices pushing up and there was an early sign this was already taking place as CoreLogic's home value index of capital city property prices showed its first month-on-month rise (0.2%) since April. Meanwhile, retail sales slowed for a second straight month with a 1.1% decline in September, though the level of turnover remains elevated over the year (5.6%) and on its pre-pandemic baseline (5.0%) from February (see here). Importantly for GDP growth prospects, retail volumes rebounded strongly in the September quarter with a 6.5% rise coming through to more than reverse the shutdown-driven 3.5% contraction in Q2. Weighing on what should be a return to GDP growth in Q3 will be a sizeable pullback from net exports, though September's trade data came against the recent run of play as a lift in exports (3.9%m/m) combined with an unwind in imports (-5.9%m/m) to drive the trade surplus up to $5.6bn (see here).
Chart of the week
Looking offshore where the US election was the focus for markets to the virtual exclusion of all other developments. With a tighter race in the count ensuing than had been indicated by the polls and prospects for the consensus view in the markets for a 'blue wave' scenario (Biden Presidency and Democrat-controlled Congress) looking less likely some clear themes emerged; a much flatter US yield curve, strongly bid equity markets and US dollar weakness. With prospects for a large fiscal stimulus package seemingly reduced on the basis of likely gridlock in Congress, the general sentiment was that the US economic recovery might now be less robust than could have been the case, leaving it to the Federal Reserve to again increase its policy response to the pandemic. While it left its existing settings unchanged at this week's meeting, the decision statement from the Federal Reserve's FOMC reiterated its preparedness to provide that additional support "if risks emerge that could impede the attainment of the Committee's goals". In the post-meeting press conference, FOMC Chair Jerome Powell highlighted that after a strong rebound in economic activity in Q3 there were signs emerging that the momentum was moderating and the outlook remained uncertain; this as virus cases in the US lifted to a daily high for the pandemic at 121.9k on Thursday according to John Hopkins University data. Consistent with signs of moderation, the key ISM services survey eased to a reading of 56.6 in October (vs 57.4 expected) from 57.8, pointing to a slower pace of expansion in the sector. However, it should be noted the manufacturing sector vastly outperformed with a lift to 59.3 in October (consensus was 55.8) from 55.4 led by an acceleration in the new orders component.
Currently, the Fed's asset purchases are calibrated to expand by at least $120bn/mth ($80bn Treasuries/$40bn of Mortgage-Backed Securities), though Chair Powell said this configuration would come under consideration as the FOMC contemplates how it can best support the economy through its ongoing recovery. In a positive development, the latest update on the US labour market came in on the upside of expectations as employment on nonfarm payrolls advanced by 638k in October against 600k expected. More importantly, the unemployment rate was lowered by 1ppt to 6.9% (vs 7.6% expected), a result strengthened by the fact that it came alongside a lift in labour force participation to 61.7% from 61.4%. Whether the recovery in the US labour market can be sustained against the virus headwinds through the winter is up for debate, though if the progress falters expect the Fed to be inclined to increase stimulus.
Moving over to the UK where, with the second wave shutdown taking effect this week, there were significant policy announcements coming from both the monetary and fiscal authorities in a ramp-up of support to the economy. Firstly, the Bank of England's Monetary Policy Committee announced an increase in its QE purchases of an additional £150bn of UK Government bonds, taking the total target to £895bn (which includes £20bn of corporate bonds). The meeting minutes outlined that this decision to increase QE was taken so the impact of the shutdown "was not amplified by a tightening in monetary conditions that could slow the return of inflation to the target". As it stands currently, total BoE asset purchases are at £717bn having been accelerated by £272bn since the emergence of the pandemic.
Meanwhile, the BoE's latest Monetary Policy Report highlighted the considerable degree of uncertainty weighing on the economic outlook due to the resurgence of the virus overlayed with the complexities of the UK's withdrawal from the EU. In terms of the outlook, in response to the return to shutdown, the expected contraction in GDP in 2020 has deepened to -11% from -9.5% previous, while the 2021 rebound was downgraded to 7.25% from 9.0%. Overall, under the BoE's baseline scenario, the recovery will take until early 2022 for GDP to be restored to its pre-pandemic level. Meanwhile, the UK Government announced an extension of its wage subsidy scheme as well as boosting support for self-employed workers through the northern winter to the end of March 2021. At this stage, the shutdown in England is slated to run until early December.
There has also been a broad-based return to shutdowns in Europe after a second wave surge of infections and the impact of this has already been seen in the data. Activity in the euro area economy stalled in October at a reading of 50.0 according to the IHS Markit Composite PMI, though this conceals a services sector that was contracting at a sharp pace (46.9) as restrictions were tightened. Providing some offset was the region's export sector, reflected by an elevation in manufacturing activity (54.8) to its fastest pace in 27 months. The implications for the economic outlook were highlighted in the European Commission's Autumn forecasts, with GDP growth to contract by 7.8% in 2020, and although this was less pessimistic than earlier expected (-8.7%), the pace of rebound in 2021 is now anticipated to be noticeably slower at 4.2% from 6.2% previously.
