RBA rate cut shows the way

Chris Scicluna
Emily Nicol

Yesterday’s vigorous rebound on Wall Street (the S&P500 closed up 4.6%) was followed by a statement from Christine Lagarde suggesting belatedly that the ECB is on the same page as the other major central banks, and, later in the day in the Asia-Pacific, a 25bp cut in the RBA’s cash rate to a new record low of 0.50%. Nevertheless, Asian investors were still rather circumspect today. Indeed, having opened higher, most of the region’s major stock indices subsequently fell back as the day went on. So, rather modest gains over the day as a whole were the norms (e.g. China’s CSI300 and Korea’s KOSPI closed up 0.6%). And as the yen appreciated back through ¥108, Japanese stocks closed lower (the TOPIX was down 1.4%) while the latest domestic survey pointed to an unsurprising deterioration of consumer confidence.

In the bond markets, following yesterday’s significant volatility, yields on USTs edged slightly lower in Asian time (e.g. 10Y yields drifted down a couple of bps to close to 1.14%, still more than 10bps above yesterday’s low). In contrast, yields on JGBs rose 1-3bps as the curve steepened. And having risen in response to the RBA’s statement, which left the door open to further easing but also made clear that the decision to cut rates was entirely driven by the coronavirus (see below), ACGBs ended the day little changed from yesterday’s close.

In the euro area, the major stock indices are currently up about 1.0% or more across the board, while core government bonds are a touch weaker and BTPs have made gains (10Y yields down more than 3bps to about 1.10%) in the aftermath of Christine Lagarde’s late-night statement. Coming a long time after the equivalent press releases either side of the weekend from the Fed, BoJ and BoE to highlight the reluctance of many Governing Council members to change policy (the statement was released at about 22.22 local time), the announcement nevertheless ticked many of the right boxes. In particular, Lagarde noted that the situation was “fast developing”. And by acknowledging risks for both “the economic outlook and the functioning of financial markets”, she implied that a range of different measures – rate cuts, asset purchases, or special liquidity operations – might eventually be required.

Indeed, noting that “the ECB is closely monitoring developments”, Lagarde signalled that a policy change could come as soon as next week’s scheduled policy meeting. But adding that the measures would be “targeted… and commensurate with the underlying risks”, there was perhaps a hint that the initial response might be aimed at addressing the recent tightening of financial conditions, e.g. via a new special liquidity scheme to support affected companies and/or an explicit increase in corporate bond purchases. On balance, not least given the reluctance of some Governing Council members to act, we still think that a rate cut might be more likely to come in April – when the economic impact might be expected to be clearer – than next week. However, today’s G7 teleconference of finance ministers and central bank governors might persuade Lagarde to encourage more assertive action from Frankfurt.

The RBA today arguably showed the way forward for the other major central banks as its scheduled policy-setting meeting delivered a 25bps cut to its cash rate, taking it to a record low 0.50%. Governor Lowe’s post-meeting statement – which was completely rewritten from that issued after last month’s meeting – was crystal clear that the move was a direct response to the coronavirus outbreak. Indeed, it noted that the epidemic had already taken a notable toll on Australia’s education and travel sectors, impacted undoubtedly by the drying up of Chinese visitors since the end of January. And, despite further signs of improvement in the housing market, ongoing uncertainty about the impact of the coronavirus was also expected to affect domestic spending more significantly. Accordingly, the RBA now expects GDP growth in Q1 to be “noticeably weaker than earlier expected”. And while it recognised the difficulty predicting “how large and long-lasting the effect will be”, the RBA acknowledged that the “coronavirus is expected to delay progress…towards full employment and the inflation target”. Therefore, the Board noted that it would continue to “assess the implications of the coronavirus for the economy”, and is “prepared to ease monetary policy further to support the Australian economy”. Futures markets are unsurprisingly pricing in the likelihood of another cut next quarter.

In Japan, February’s consumer confidence survey predictably showed renewed weakness in household sentiment, with the headline index declining 0.7pt to 38.4, a four-month low. While the deterioration last month was widespread, the drop in confidence about employment prospects was most striking, with the relevant index posting the largest monthly decline (2.4pts) for four years, falling to its lowest level since the start of Abenomics. Meanwhile, confidence about income growth fell for a second successive month to a four-month low, while households’ willingness to buy durable goods edged slightly lower too.

Today's survey was, however, conducted on 15 February, when the confirmed number of coronavirus cases in Japan was considerably lower. Indeed, since then the reported number of COVID-19 cases has increased more than five times in Japan, the government has imposed a month-long break for school children in March and recommended the cancelation of major cultural and sporting events, while major tourist attractions have closed for business through to the middle of the month. So, we would expect to see a more marked deterioration in consumer confidence in March and possibly beyond too.

Euro area:
In the euro area, today will bring the flash CPI estimate for February. Not least given the downwards shift in the oil price over the past month we expect headline inflation to have fallen back slightly, by 0.1ppt to 1.3%Y/Y. But Friday’s national data also suggest that core inflation might well have edged back up, probably to 1.2%Y/Y. Tuesday will also bring the euro area’s latest labour market figures, which are expected to show the unemployment rate unchanged at 7.4% in January, the joint-lowest reading since mid-2008 but still only 0.1ppt lower than in June. Elsewhere, ECB Vice-President De Guindos and Executive Board member Schnabel are due to speak at a joint ECB and European Commission conference on “The roles of equity markets and financial technology". And in the markets, Germany will sell 4Y and 10Y linkers.

Despite the generally positive headline message from yesterday's final UK manufacturing PMI, there were some initial signs of deterioration in the sector as the disruption caused by the coronavirus outbreak was already causing supply constraints. And while today’s equivalent construction sector PMI is unlikely to note an impact from the epidemic, the weather might well have hit activity last month. Overall, the headline index is likely to have remained in contractionary territory.

In the US, today will bring vehicle sales figures for February, while FOMC voting member Mester is due to speak in London. Meanwhile, politics-wise, ‘Super Tuesday’ will determine the results of the Democrat primaries in 14 states and about one third of delegates to the National Convention in July – it remains to be seen how much Joe Biden will benefit from the belated endorsements of former rivals Amy Klobuchar, Pete Buttigieg and Beto O'Rourke.


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