Weekly Market Recap

Everyone loves vanilla QE

19/10/2020

Week in review

Australian consumer confidence rises to 105.0 for October
Australian unemployment rate increases to 6.9% for September
U.S. CPI inflation 1.4% y/y for September

Week ahead

China 3Q20 real GDP
RBA policy meeting minutes
Eurozone PMI manufacturing index

Thought of the week

The RBA has set the scene for a rate cut in November. It’s debatable whether a 15 basis point rate cut from 0.25% to 0.10% will have a meaningful impact on the economy, it will be symbolic more than anything. What could be more meaningful is if the RBA expands its bond purchase program. Under yield curve control the RBA targets a yield of 0.25% on the 3-year government bond yield, purchasing bonds to ensure the yield remains at or below this level. Historically, RBA has been such that forays into the bond market have been limited in achieving this. The RBA has also purchased bonds further along the yield curve to remove any perceived dislocations. However, an extended scheme may look more like vanilla QE where the RBA targets a value of bonds it will purchase over time and at a longer maturity. Specifically, Governor Lowe referenced 10-year bonds yields being higher in Australia then elsewhere giving a strong hint at where the purchases may be targeted. This may not come in November, but it is coming.

Australian – U.S. government bond spread
Difference between Australian and U.S. 10 year bond yields

Source: Tullett Prebon, FactSet, J.P. Morgan Asset Management, all returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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