Key insights from the week that was.
The past week has been another full of central back actions and pledges of support by government authorities.
The FOMC started the week off with a second unscheduled March meeting Sunday evening, resulting in a 100bp cut in the federal funds rate, to their lower bound of 0.125%, as well as the announcement of at least $700bn in asset purchases this year ($500bn in Treasuries and $200bn in mortgage backed securities). Market function was also in focus for the Committee throughout the week, with swap lines and numerous market liquidity facilities announced. Together with the rate decision and asset purchases, these facilities are intended to calm market nerves and, in time, restore the proper function of markets.
The dual focus towards easing financial conditions and restoring market function was also apparent in Europe as the ECB followed last week’s asset purchase increase and TLTRO announcement with another asset purchase program. Combined asset purchases by the ECB to year end are now pledged at over €1trn. Importantly they will include issuance from the entire region as well as corporate paper. This will help wind back market dislocations and reduce funding costs, most notably for those most affected by the crisis such as Italy. With interest rates constrained and markets hopefully stabilising, this will allow the Governments’ of the region to focus on preserving the health of their economies through the crisis and then on restoring momentum once the threat has past.
Albeit not in the same scale, both the Bank of England and Bank of Canada eased policy by cutting rates and, in the Bank of England’s case, by embarking on another round of quantitative easing – in addition to the bank funding package announced last week.
Australia’s RBA and New Zealand’s RBNZ also delivered support for financial markets and the economy this week. On Monday, the RBNZ cut their cash rate by 75bps to 0.25% and the RBA followed suit on Thursday, lowering their cash rate by 25bps to 0.25%.
More importantly for Australia, Thursday also saw the introduction of RBA asset purchases to lower the 3-year government yield to around 0.25%, in line with the cash rate. Effectively, this gives the market the signal that the RBA do not anticipate increasing the cash rate for at least three years.
As highlighted by Chief Economist Bill Evans, the RBA’s actions also extend to a term funding facility for the banking system and a complementary program run by the AOFM to aid small depository institutions and non-depository institutions as well. The RBNZ have since introduced a number of measures to support stressed financial market in New Zealand, though have refrained (for now) from quantitative easing.
The above measures are very necessary to support both market functioning and the economy. However, the risks to the global economy remain substantial and immanent. This week for Australia and New Zealand, we have revised down our growth forecasts materially. Australia is expected to see a 1ppt contraction in the first half and a lift in the unemployment rate to 7.0% by late 2020. New Zealand is meanwhile expected to see a 3ppt contraction in activity in the six months to June and a 1.5ppt rise in the unemployment rate. This assumes that the virus is brought under control by the middle of the year, allowing for a recovery in the second half and into 2021.
Risks continue to mount across the world both with respect to the scale of the virus’ impact and potentially its longevity. Highlighting the former for the US, initial jobless claims jumped higher in the week beginning 9 March. And analysis conducted by the New York Times points to an even larger jump in the current week, back towards the GFC peak. We have revised down our US growth view for 2020, and now anticipate a 0.5% contraction in year-average terms in 2020. Note though, if this rise in initial claims is sustained, an even weaker outcome is likely.
Europe is in a materially weaker state, with a 2.0% contraction now forecast for 2020. China has also been materially marked down to near 4.0% in year-average terms in 2020, although growth is set to quickly return now that new cases have effectively halted and stimulus is about to be introduced. Growth over the year to December in China is likely to be closer to 5.5%, a pace it will sustain or better through 2021. That leaves year-average growth for the world at 1.7% in 2020, to be followed by a moderate 3.3% gain in 2021. Risks will remain skewed to the downside as long as the virus is active.
