BoE expands QE envelope and cuts growth forecasts

Chris Scicluna
US election outcome still uncertain but Biden progresses towards magic 270
Notwithstanding this morning’s announcement from the BoE of a larger-than-expected increase in QE (see below), the principal focus for markets remains primarily on the US elections where counting continues and the outcome of the vote for the Presidency still uncalled by any of the major US networks. Over the past 12 hours Biden has made some progress in his bid for victory, with the key states of Wisconsin and Michigan called in his favour. So as things stand, with the outcome of 7 states still uncertain, Biden has won 253 Electorate College (EC) votes, while Trump has won 214 – both still short of the magic 270 votes needed to claim victory (while Arizona was called for Biden by one network yesterday, it has not been called more widely).
In the uncalled states, as expected, the ongoing counting of postal and absentee ballots has mostly moved results in Biden’s favour. As a result, Biden’s lead over Trump in the nationwide popular vote now exceeds 3.5m. Biden remains ahead in Arizona (11 EC votes) but now has a reduced lead of about 68,000 with still more than 400,000 votes uncounted. According to officials, counting in Arizona seems unlikely to be finished until at least Friday. In Nevada (6 EC votes), where Biden has a lead of less than 8,000 with about 260,000 votes outstanding, no further update is expected until 9am local time (noon ET). Should Biden win Arizona and Nevada, this would get him the 270 EC votes required to become President. Should Trump win at least one of those states, then Biden would need to win elsewhere.
In Pennsylvania (20 EC votes) Trump remains ahead, but his margin has narrowed sharply to less than 165,000 with about 750,000 votes still be counted – many in the Democrat stronghold of Philadelphia. The vote here is progressing but the final count will not be available until at least Friday. A win for Biden in Pennsylvania would gave him the Presidency regardless of the outcome elsewhere. Meanwhile, Trump’s advantage in Georgia (16 EC votes) has narrowed to less than 29,000 – less than a tenth of where it had been at midnight ET on election day – with about 95% of the vote counted. A further update is expected soon, with the plan that counting continues until completed. Trump’s lead in North Carolina (15 EC votes) has declined to 72,000 with 95% of the vote counted – a tougher count for Biden to overturn with the remaining vote. Alaska is yet to be called, but with 56% of votes counted Trump has a healthy lead that is unlikely to be overturned.
The Trump campaign has already indicated that it will seek a recount in Wisconsin (where Biden leads by just over 20,000 votes) while it has filed lawsuits to try to stop counting in Michigan and Pennsylvania (alleging a lack of transparency during the count). It has also filed a lawsuit to challenge voting in one county in Georgia, alleging that it may have received votes after the 7pm cut-off on Election Day (this has been denied by local officials). And there have been reports that the Trump campaign is considering law suits in Arizona and Nevada too. So while Biden may well be declared the winner over coming days, realistically there could still be a lot of water to flow under the bridge before the eventual winner will be known.
In the Senate race, as things stand both Democrats and the Republicans have won 48 seats each, with three outstanding races favouring Republicans at this stage and the fourth (in Georgia) to go to a run-off election. So, if Biden wins the Presidency, the Senate looks set to be a significant barrier to assertive government.
Markets calmer Thursday as investors await final count and Trump response
After rallying as much as 3½ during the morning, the S&P500 eventually closed with a 2.2% gain on Wednesday. The gains were paced by technology stocks, with the Nasdaq advancing 3.9%. The rally appeared to be underpinned by the collapse in bond yields – the 10Y yield falling to 0.76% – which, in turn, reflected the decreased likelihood of unfettered fiscal stimulus and an increased probability that the Fed will share a greater burden in supporting the economy. The check on Democrat power provided by a Republican Senate – including the power to reverse recent tax cuts and aggressively tighten regulation – was probably also a factor supporting equity markets too.
US equity futures have increased further since the close – S&P e-minis are presently up about 1% – and Treasury yields have drifted a few basis points lower. Meanwhile, on a day when John Hopkins University reported a record 9,763 daily deaths from Covid-19, Asia equity markets have seen significant gains, with major indices up 1½% in China and over 2½% in Hong Kong. In Japan the TOPIX increased 1.4% in Japan, helped at the margin by an upwardly-revised services PMI reading (see below). In FX markets the US dollar largely moved sideways. Following the BoE’s announcement, Gilts have unsurprisingly made gains, while sterling appreciated.
BoE expands Gilt purchases by £150bn as economic outlook deteriorates
A short time ago, the BoE announced an increase its Gilt purchase target by a larger-than-expected £150bn (versus the consensus forecast of an £100bn) to take the respective total to £875bn. The BoE left its £20bn total for purchases of private sector securities unchanged, and so the total amount of QE now stands at £895bn. Unlike last time, when Chief Economist Haldane voted against, the decision on the MPC to increase QE at this meeting was unanimous.
The MPC expects the extra Gilt purchases to be completed around the end of 2021. So, while the pace of purchases is expected to remain at around its current level initially, the MPC sees flexibility to slow the pace of purchases later in the year. At the same time, the BoE is ready to accelerate the pace over the near term if market conditions demand it – say, if the UK government fails to reach an agreement with the EU on a new FTA and market turbulence ensues.
Interestingly, the MPC’s statement and minutes made no explicit mention whatsoever of possible rate cuts, let alone a possible move to negative rates. The issue seemingly wasn't discussed at all, and the BoE’s revised forward guidance doesn't flag the possibility of such a move, bar stating that "If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit." Unsurprisingly, it also still doesn't intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.
Given the new English lockdown, which will start today, more stimulus was hardly a surprise. The BoE’s updated economic forecasts inevitably revised down significantly the near-term profile for GDP, which is now projected to be down about 11%Y/Y this quarter compared to the previous forecast of a drop of 5.4%Y/Y. Indeed, the profile for activity is now W-shaped, with a renewed drop in GDP – albeit of just 2%Q/Q in Q4 – expected to be followed by a return to growth from Q1 on. The near-term inflation profile has been nudged slightly higher. But due to persistent spare capacity, the forecast for two years’ time has been pushed down very slightly to 2.0%Y/Y – bang on target, suggesting little need to change policy for a while yet. Of course, the risks to the forecasts are skewed significantly to the downside given uncertainty surrounding the path of the pandemic (and the length of the current lockdown measures) and the outcome of the EU-UK negotiations.
Fed to leave policy steady, restate easing bias and need for fiscal support
Today sees this week’s second major event risk in the US, in the form of the FOMC’s post-meeting policy announcement. With the US economy continuing to rebound more quickly than had been expected from the severe slump in Q2, it seems unlikely that the meeting will result in any change in policy settings. However, given the growing risk that the recovery could lose momentum into year-end – thanks to increased worries about public health and now near-term political uncertainty too – as at the last meeting in September, Chair Powell is sure to leave all easing options on the table should additional monetary policy stimulus prove to be required over coming months. It is equally certain that Powell will use his post-meeting press conference to repeat his call for timely additional fiscal stimulus. And it is possible that the Committee and/or Powell will also provide a little more information on the FOMC’s intentions for its asset purchases.
US claims and euro retail sales due, after German factory orders disappoint
On the data front, following last week’s preliminary national accounts, the first estimates of US productivity and unit labour costs for Q3 will be released, while the weekly jobless claims report will be analysed closely as always. In the euro area, the September retail sales report is due. Given the weak spending data already released from Germany and France, euro area retail sales are likely to have dropped at least 1½%M/M, although that will still probably leave them up by more than 2½Y/Y and still above February’s pre-lockdown level. The October construction PMIs are also due, with continued weakness in the euro area expected.
German factory orders data for September were released a little while ago and came in softer than expected, with growth of just 0.5%M/M leaving them still down 1.9%Y/Y. August’s orders were, however, revised up (growth up a further 0.4ppt to 4.9%M/M). The downside surprise for September was the result of a drop in orders from the rest of the euro area. By sector, orders for capital and intermediate goods were firmer as autos (up 5.1%M/M), chemicals (3.3%M/M) and metals (9.1%M/M) all maintained improvement. But orders for consumer durables declined 5.1%M/M.
Japan’s services PMI revised up to 9-month high in October
Turning to the rest of the day’s economic news, Japan printed its final services PMI report for October – a day later than usual as a result of Tuesday’s holiday. However, the report proved worth the wait with the headline business activity index revised up 1.1pts to 47.7, marking the highest reading since January. Elsewhere in the survey, the new orders index was revised down 0.4pts to 47.9, but remains up 1.1pts from September and is still the best reading since July. And the business expectations index was revised up to 56.7 – a monthly gain of 3.4pts and the highest reading since January 2018. The output prices index was revised up 0.3pts to 49.2, albeit leaving it 0.1pts lower than in September.
With the manufacturing PMI having also been revised substantially higher earlier this week, the composite PMI output index was revised up 1.3pts to 48.0 – a 1.4pt gain for the month and the highest reading since January. This brings the scale of improvement in the PMI more into line with the marked improvement observed in the Economy Watchers Survey during October. It will be interesting to see whether this improvement is also reflected in the next Reuters Tankan, which is due for release on Monday.
Australian trade surplus widens as exports rebound, imports weaken
As suggested by the preliminary release of merchandise trade data, Australia’s trade surplus widened in September. However, that widening proved greater than anticipated – a surplus of A$5.6bn being more than twice as wide as last month. Overall exports increased 3.9%M/M – slightly more than expected – but were still down 19.7%Y/Y. Exports of goods increased 4.2%M/M, almost solely due to a rebound in receipts for non-monetary gold. Exports of services increased 2.3%M/M but, with the border closed to tourists, were still down more than 40%Y/Y. The largest surprise was a much greater than expected 5.9%M/M decline in imports, which are now down 22.3%Y/Y. The monthly decline was widespread across consumption, intermediate and capital goods, while imports of non-monetary gold also fell. Imports of consumption goods were little changed from a year earlier but imports of intermediate and capital goods recorded double-digit annual declines. And with Australians not travelling overseas, imports of services were down more than 58%Y/Y.
Notwithstanding today’s figures, exports fell 6.6%Q/Q in Q3 while imports increased 3.6%Q/Q. Given earlier-reported movements in trade prices this points to a modest decline in export volumes during the quarter and a strong rebound in import volumes. As a result, net exports will act as a drag on GDP growth during Q3 after contributing positively in Q2. However, given a strong rebound in domestic demand, GDP growth should rebound strongly in line with the RBA’s expectations.
Kiwi business confidence rises further in November
The preliminary results of the ANZ Business Outlook survey for November indicated that confidence has been stable in recent weeks, with the closely-followed own activity index declining a negligible 0.1pts to 4.6. While firms’ employment intentions firmed a little, capex intentions were a little softer this month. Meanwhile, firms’ year-ahead inflation expectations increased 0.17ppts to 1.55% – the highest reading since February but still well below the midpoint of the RBNZ’s inflation target.

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