“Believe you can and you’re halfway there” – Theodore Roosevelt
The RBA surprised the market following its meeting this week (Aug 3) when it decided not to reverse the taper its bond purchases, retaining weekly purchases at A$4bn from Sep to Nov, keeping its foot on the accelerator. The Bank did not provide any insight in there thinking regarding a timeline for when the lockdowns are to end. While it refrained from providing any forecasts for 2021, the RBA did lift its GDP (Gross Domestic Product) forecast for 2022 from 3.5% to 4% and pushed its unemployment forecast lower from 4.5% to 4.25%.
The labour market adjustment is expected to be primarily via lower hours worked, which is more than deceptive. As for policy the Bank believes conditions remain very accommodative, the TFF (Term Funding Facility) is providing substantial support, the AUD (Australian Dollars) is near the lowest levels this year and low bond yields are doing the work for the RBA. The wording around meeting the conditions to hike to be ‘not met before 2024‘ has remained unchanged. The call for more aggressive QE (Quantitative Easing) now only holds if the lockdown extends into Q4. At one point it looked like we were going to emerge from the current lockdown in NSW unscathed, but case numbers dictated otherwise, and the lockdown has now been extended another 4 weeks. That said, economists are still very upbeat about an imminent bounce back from the current situation.
It is no surprise given what is happening in the economy that growth numbers in the short-term are likely to be revised downwards and unemployment’s numbers are likely to rise – you only must walk around the streets to see the impact of this recent lockdown. It is now a race of COVID cases versus vaccination rates. Premier Gladys Berejiklian says Sydney can start to emerge from lockdown on August 28 if vaccination rates hit 50 per cent, signalling for the first time the proportion of people fully inoculated will determine how restrictions are eased not COVID case numbers.
As the chart below illustrates, Australia is well and truly behind our global counterparts in terms of the percentage of the population that is fully vaccinated. One must wonder why this is the case. One explanation could be that our mild experience with the first wave gave us a false sense of security and made us complacent to possible ongoing effects. In short there is plenty of work to do before Australia meets standards set around the world.
Apologies in advance for the focus on COVID, the public has been more than saturated by news and the media is having a field day with it, but it is an important driver of financial markets now.
As this delta-strain of COVID takes hold, any talk of rate hikes globally has been pushed further out, which is turn has seen longer dated (10 Year) bond yields drop once again towards 1% (Australian 10YR is 1.14%, US 1.19%). Only issue is this will further inflate risk asset prices which further supports a reallocation of assets towards less volatile and more certain assets.
Turning to the US, Q2 GDP surprised materially to the downside, printing at 6.5% annualised against the 8.5% consensus estimate. There was nothing in the detail to suggest that we should be concerned about the longevity of this recovery, however. Consumption growth was stronger than anticipated – circa 12% annualised – and, importantly, these gains were driven by a rotation to services spending as the economy re-opens. Equipment and intangibles investment also saw robust gains in the quarter, but this was offset by a reversal of Q1’s structures gain. A reversal in residential construction was also seen in Q2, at least in part because of supply-chain issues and labour shortages. The combined effect of supply-chain difficulties and strong end-demand also saw a large draw from inventories, taking more than a percentage point from annualised Q2 GDP growth.
This week we thought it may be interesting to look at the historical performance of financial markets during global pandemics.
There is quite a lot of valuable information regarding previous pandemics and encourage those who have interest to look at the attached link: