Key insights from the week that was.
Starting in Australia, the Westpac-MI consumer sentiment survey fell to a 5-year low in March of 91.9, 3.8% lower than a month ago and 7.0% below this time last year. Unsurprisingly, the economic outlook, next 12 months sub-component was hardest hit, declining 12.8% in the month to be 18.8% lower than a year ago. The longer-term economic view was comparatively resilient however, only falling 4.4% over the past year and being broadly in line with its long-run average. Family finances ‘versus a year ago’ and ‘for the next 12 months’ are also only down 2.0%yr and 4.0%yr, but this is from already weak levels – these sub-components are now a little more than 7ppts and 9ppts below long-run average levels.
The consequence of this weak view of family finances as well as growing concerns over unemployment is that households are becoming increasingly unwilling to spend. Highlighting this, ‘time to buy a major household item’ fell 4.3% to a five-year low in March.
Even though the Federal Government has this week announced a large stimulus package and the RBA stands ready to ease further, consumers’ willingness to spend is unlikely to change materially. Indeed, we continue to see an Australian technical recession in the first half of 2020 even after incorporating the benefit of the Government’s stimulus package.
In part, this is because, through this week, the ASX 200 fell 15% excluding our market’s response to the S&P500’s 9.5% Thursday sell-off (currently around –5%), creating yet another shock to wealth and crystallising downside risks for spending. But it also must be emphasised that weak income prospects; high household debt and rising uncertainty over job prospects are against the consumer and our economy more broadly.
Turning to the business sector, the NAB business survey weakened further in February. Business conditions fell 2pts to 0, its weakest outcome since 2014. Business confidence also moved lower in the month to –4, its weakest reading since 2013 but nowhere near the GFC low of –30. Of the components of conditions, profitability was hardest hit in the month, slumping 6pts also to a low back to 2013; forward orders meanwhile fell 3pts. Trading conditions and employment were broadly unchanged in the month. However, given the global escalation of COVID-19 since February, conditions, its components and confidence will all remain highly susceptible to the downside in March and beyond. In such an environment, it is difficult to see the Government’s stimulus measures adding materially to business investment, though their support will alleviate some of the cost of the crisis.
The ECB March meeting provided the other major shock to confidence globally this week. The package of alternative measures was significant and arguably in excess of market expectations. But the absence of a deposit rate cut, the very clear and mounting downside risks to their growth forecasts, the complexity of the package and the way it was promoted by the ECB created concern rather than confidence.
It is fair to say that the package of measures is “comprehensive” and also flexible. The €120bn in extra asset purchases can be used anytime between now and year’s end. Hence, coming months could see asset purchases by the ECB materially higher than the current €20bn a month. A new wave of TLTRO’s and the release of banks’ capital and liquidity buffers will help the region’s banks to continue lending and will also limit risks around funding costs. However, the above initiatives are only really helpful for activity if confidence is sustained. To date, this certainly has not been achieved.
As highlighted in our March Market Outlook, we hold significant concerns over the state of Europe. A recession is now seemingly inevitable there, and the path to recovery highly uncertain. This has led us to forecast year-average growth of just 0.2% for 2020, with downside risks. To avoid these hazards, there is need for clear communication and material additional support from the ECB as well as large-scale fiscal stimulus across the continent. The Bank of England fared better this week than the ECB as it announced extensive stimulus for the economy, but our view for UK 2020 growth has still been revised down materially, with uncertainties around global growth and the Brexit process rife.
The US’ FOMC continues to respond aggressively to this crisis, this week backing up the 50bp federal funds rate cut delivered at its unscheduled 3 March meeting by providing sizeable liquidity to US financial markets through a much-expanded REPO facility – with funds made available overnight and out to 3 months. Still, US equities have collapsed and all financial markets are showing signs of significant stress. With the US having limited fiscal options, expectations for further monetary easing at next week’s scheduled March meeting are high. By mid-year, it now seems inevitable that the US federal funds rate will be back at the lower bound and QE will have been restarted. From that point on, containment of the virus and the response of each economy to stimulus provided will increasingly dictate FX market outcomes. This is another topic discussed in detail in this edition of Market Outlook.
