Weekly Market Recap

It’s the least I could do

02/11/2020

Week in review

Australia CPI inflation 1.6% q/q
U.S. real GDP 33.1% q/q saar in 3Q
Australia private sector credit 0.1% m/m for September

Week ahead

RBA official cash rate
U.S. Presidential and Congressional elections
Australia retail sales

Thought of the week

The RBA will cut the cash rate to 0.10% this week. The associated rates on the yield curve control (YCC) policy target, the Term Funding Facility and interest paid on excess reserves will also come down. The rate cut is nearly fully priced by markets, but an extension to bond purchases and full QE is only partially accounted for. The market loves a big number and should the RBA announce a large package of bond purchases in the coming months the reaction is likely to be positive. However, if the RBA instead commits to a minimum monthly purchase level (e.g. $5bn per month) there may be some disappointment, even if the aggregate level of bonds purchases would be just as high. The RBA likes to maintain as much flexibility in its policies as possible. The chart below shows the pattern of purchases to implement YCC which were tapered rapidly. The RBA will do what it takes to achieve its objectives, but only the minimum. As soon as the balance sheet starts to expand, focus shifts to how big it will get and what happens when it stops.

It’s the least I could do
RBA bond purchases in 2020, AUD billions

Source: RBA, 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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