No surprises from the RBA

Chris Scicluna
Emily Nicol

Asian equities once again largely overlooked ongoing unrest across the US, posting gains across the major indices. Despite a lack of domestic news, Japan’s Topix led the way rising more than 1% on the day, while the increase in Chinese stocks was more modest following the jump at the start of the week. European equities are also higher on opening this morning, with attention today focussed on whether German officials from the ruling coalition will agree on the details of a second stimulus package to support the recovery.

Meanwhile, in government bond markets, European govvies have started the day stronger, reversing some of the losses recorded yesterday, with Spanish 10Y bonds currently outperforming as the latest labour market figures from that country suggested that the number of people in employment had fallen by 1mn since February (see more details below). In contrast, Aussie government bonds made modest losses after the RBA left policy unchanged, but noted in its statement that the economic downturn might not prove to be quite as severe an initially expected.

Looking ahead, today’s data calendar will bring the latest UK lending figures, as well as US vehicle sales data, both of which will undoubtedly have been impacted significantly by the current crisis.

There were no surprises whatsoever from the conclusion of the latest RBA policy meeting, where the key policy parameters – in terms of both the cash rate and 3Y yield target – were kept unchanged at 0.25%. And with government bond markets having been operating smoothly, and 3Y yields anchored at the target, thanks to the credibility of the Bank’s policy framework the RBA was able to confirm that it had purchased government bonds on only one occasion since the previous Board meeting.

In terms of the economic outlook, Governor Lowe was somewhat more optimistic, indicating that the downturn might be less than severe than previously expected, not least given that lockdown restrictions had been relaxed at a timelier pace than initially anticipated. This notwithstanding, Lowe also reiterated that the economy was currently undergoing the deepest economic contraction since the 1930s. So, with GDP set to remain below the pre-Covid-19 level for a considerable time to come, unemployment set to jump, and inflation to remain well below target for the foreseeable future too, it was not surprising to see the RBA note that monetary and fiscal support would be required for some time. Indeed, Lowe restated that the Board would not increase the cash rate until there were signs that progress towards full employment was being made, as well as confidence that inflation will be sustainably within the 2–3% target band.

Turning to the data, ahead of tomorrow’s release of Q1 GDP data, today brought net exports and inventories figures for the first quarter. The impact of Covid-19 was clearly evident, with a decline in both import and export volumes in Q1 – for example, goods imports were negatively impacted by supply chain disruption with China, while travel restrictions caused a significant decline in both services imports and exports. On balance, however, today’s release implies that net trade provided a positive contribution to Q1 GDP growth of around ½ppt. In a separate release, ABS data suggested that government expenditure was also stronger in Q1, with the rise of 1.8%Q/Q set to add a further 0.3ppt to GDP growth. So, while inventories came in weaker in Q1, as did private sector capex numbers last week, on balance today’s data suggest that, when GDP figures are published tomorrow, the outturn might be slightly better than the BBG consensus forecast decline of 0.4%Q/Q. This notwithstanding, GDP is still bound to have contracted in Q1 for the first quarter in nine years and will undoubtedly fall significantly further in Q2.

Euro area:
We have already seen the only scheduled data release of note from the largest four member states, with Spanish labour market figures for May. Spain has been one of the hardest hit countries by the Covid outbreak, with an associated strict lockdown measures and significant impact on the all-important tourism sector causing an unsurprisingly large negative impact on employment. But today’s figures showed a much smaller than expected increase in the number of people registered as jobless in May, up just 26.6k (on a non-seasonally adjusted basis) after rising 282K in April. This notwithstanding, this still marked the worse outturn for the month of May since 2008. Moreover, they don’t include the nearly 3mn workers who have been temporarily laid off. So, the number of people in employment was therefore down a further 71k last month to 18.4mn (seasonally adjusted), down by more than 1mn from the peak in February and the lowest since August 2017.

Today will bring arguably the week’s most noteworthy data release, with lending figures from the Bank of England expected to show a further surge in bank loans to business in April to meet emergency liquidity needs. But against the backdrop of heightened economic and job uncertainty, they will also likely reveal a continued reduction in net borrowing by consumers in April as households refrained from spending during the lockdown.

In the US, today will bring the latest vehicle sales figures. As more states loosen quarantine restrictions, a potential partial rebound in auto sales is expected in May. However, in the long term, lost wage income will limit the recovery in domestic demand over coming months.

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