RBA surprises market with A$100bn extension of QE programme

Chris Scicluna

Equity markets rebound continues in Asia, Treasury yields steady but greenback firms
The US equity market made a positive start to the week yesterday with the S&P500 rising 1.6%, thus erasing most of Friday’s losses, and the Nasdaq going a step further with an even stronger 2.6% advance. Treasury yields tracked sideways – the 10Y yield oscillating around 1.08% – but the greenback firmed despite a slight decline in risk aversion (notably, the VIX remained just above 30 despite the rally on Wall Street). US equity futures have rallied a little further since the close, with White House Press Secretary Psaki emphasising that, while the Administration is hopeful of bipartisan support for its fiscal proposals, a reconciliation package remains a path to achieving the full stimulus that is sought by President Biden.

Against that background, and on a day with very few notable data releases or events, equity markets have enjoyed a very positive session in the Asia-Pacific region. In Japan, supported by the weakest $/¥ since mid-November (through ¥105 a little while ago), the TOPIX closed up 0.9%. Stocks traded positively even as local media reported that PM Suga would today announce a decision to extend a state of emergency until 7 March in 10 of the 11 prefectures currently under this order (confirmed late in the session by Economy Minister Nishimura, with Suga scheduled to make a televised address soon). In China, where repo rates continue to move lower after yesterday’s liquidity injection, the CSI300 increased 1.5%. And markets made solid gains in Hong Kong, South Korea and Taiwan too.

In Australia, the ASX200 also rallied a solid 1.5% as the RBA reinforced its commitment to ongoing policy accommodation by unexpectedly extending its QE programme more than two months in advance of when the prior programme was due to have run its course (more on the RBA below). After trading a couple of basis points higher prior to the announcement, the yield on the 10Y ACGB initially fell 6bps before quickly unwinding most of that move to close the day unchanged at 1.15%.

RBA leaves key rates steady as expected, but extends QE; more upbeat on labour market but inflation outlook still soft and forward guidance dovish
Following its first meeting this year, the RBA’s Board today elected to keep all of its interest rate settings unchanged – an outcome that was widely expected by the market. So, the Bank’s cash rate and 3-year bond yield targets remained at 0.1% and there was no change to any of the parameters governing the Term Funding Facility. However, the Bank did surprise the market by announcing its decision to extend its government bond purchase programme – currently only halfway through and not due to be completed until mid-April – by a further A$100bn. Purchases will continue at the current rate of A$5bn per week to a new cap of $A200bn. This announcement caused the yield on the 10Y ACGB to decline 5bps from its intraday high to close at 1.12%, unwinding yesterday’s sell-off.

The extension of the QE programme – which demonstrates the Bank’s commitment to maintaining highly accommodative monetary conditions – comes even as the RBA’s economic commentary turned somewhat more optimistic, at least regarding the labour market. In the press statement accompanying today’s decision, the outlook for the global economy was said to have improved over recent months due to the development of vaccines, with better prospects for a sustained recovery than a few months ago. Australia’s economic recovery was described as “well under way” and stronger than earlier expected. The Bank celebrated strong growth in employment and retail sales, a decline in the unemployment rate to 6.6% and the fact that many households and businesses that had deferred loan repayments have now recommenced repayments.

However, off that improved base, the Bank’s baseline forecast for calendar year GDP growth of 3½% this year and next is on average unchanged from the last forecast made in November. Most importantly, while pre-pandemic levels of activity are now expected to be recaptured around the middle of this year, the Bank expects slack to remain in the labour market for the foreseeable future. The Bank now forecasts that the unemployment rate will end this year and next at 6% and 5½% respectively – in both cases just ½ppt lower than forecast in November, despite the fact that the unemployment rate ended last year almost 1½ppt lower than the Bank had expected. Moreover, that has very little payoff in terms of raising the outlook for inflation. Annual underlying inflation is forecast to be 1¼% at the end of this year – just ¼ppt firmer than forecast previously – and an unchanged 1½% at the end of 2022, i.e. still a full-percentage point below the midpoint of the Bank’s 2-3% target range.

Given this outlook, the RBA’s dovish forward guidance was unchanged today. Specifically, the Board commits that it will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range – something that will require substantially higher wage growth than at present and so tight conditions in the labour market. Consistent with the Bank’s previous advice, the statement notes that the Board does not expect these conditions to be met until “2024 at the earliest”. That said, the Bank does acknowledge that there is scope for further upside surprises to the economic outlook, albeit reminding that disappointing news on the health front could instead delay the recovery and the expected progress on reducing unemployment.

Over the remainder of this week, the RBA has the opportunity to elaborate on its view of the economic outlook, starting tomorrow when Governor Lowe will give an address on “The Year Ahead” at a National Press Club of Australia conference. On Friday, Lowe will begin his semi-annual testimony to the House of Representatives Standing Committee on Economics, followed two hours later by the release of the latest Statement on Monetary Policy.

In other news, the ANZ-Roy Morgan consumer confidence index increased 0.8% to 112.1 in the latest week, marking the highest reading since November 2019. Respondents grew more optimistic about their financial outlook and more inclined to spend on major household items, even as optimism about the economic outlook declined a little. Meanwhile, based on tax data, the ABS estimated a 1.3% increase in both payroll jobs and wages in the fortnight to 16 January. However, as with the preceding fortnight’s large decline, this appears to be driven by the usual variability seen around the summer holiday period.

Euro area GDP to fall modestly in Q4, French inflation to leap in January
Today’s most notable new data will be euro area and Italian GDP figures for Q4. Following last week’s better-than-expected Q4 GDP results from Germany, France and Spain, we expect GDP for the euro area as a whole to have contracted by around 1.0%Q/Q in the final quarter of last year to be down 5.4%Y/Y. Much will depend on the Italian data, however, for which the consensus expectation is for a drop of about 2.0%Q/Q. Meanwhile, ahead of tomorrow’s flash estimate of euro area inflation in January, the equivalent French inflation data, due shortly, should also be watched closely. The French HICP rate is expected to rise 0.5ppt to 0.5%Y/Y – not as steep as the jumps seen in German and Spanish inflation last week, but marked nevertheless – reflecting the delayed start to the winter sales as well as a reweighting of the inflation basket, in particular lower weights on certain services adversely affected by the pandemic. That would leave the euro area figure on track to jump by a record monthly margin in January, to above ½% having been stuck at -0.3%Y/Y for the prior four months.

A quiet day ahead in the US with January auto sales the highlight
During an otherwise busy week for US data, today’s diary features only auto sales figures for January, which Daiwa America Chief Economist Mike Moran expects will point to sales running just a touch below the 16.3m pace set in December. That aside, speeches by the Dallas Fed’s Kaplan and the Cleveland Fed’s Mester will cover aspects of the economy.

Japan’s monetary base grows 18.9%Y/Y in December
The only economic data release in Japan today was the BoJ’s update on developments in the monetary base. Growth picked up to a strong 18.9%Y/Y in January from 18.3%Y/Y previously, with banks’ reserve balances at the BoJ up 24.3%Y/Y. That said, the pick-up in annual growth this month reflects base effects, with monthly growth having tailed off in recent months as financial conditions have eased and BoJ asset purchases slowed significantly from the pace around the middle part of last year.

Kiwi home prices continue to rise sharply in January
The Corelogic house price index increased a further 2.2%M/M in January to a new record high, lifting annual growth to a near 4-year high of 12.8%Y/Y from 11.1%Y/Y in December. Indeed, spurred by the RBNZ’s decision to pre-announce the re-imposition of LVR restrictions on 1 March, house prices have increased by over 7% in just the last three months. With the RBNZ washing its hands of responsibility for the strength in house prices, the Government will likely be forced to take further measures to try to boost the supply of housing when it considers new policies in this year’s Budget.

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