A recent bias to shorter bonds means that the risk (DV01) extracted by the RBA’s buybacks has declined. Combined with the tapering of the amount, this lowers risk extracted by about 30% per week.
July retail sales report sets up Q3’21 as the worst ever quarter. It raises fresh questions about on the RBA’s Aug SOMP forecasts. And reminds us what is different about the Q3’21 lockdowns.
Q2 GDP is tracking 40bps below the RBA’s August SOMP forecast. Weekly payrolls suggest job losses in NSW are similar to the first COVID lockdowns.
The RBA can push back the constraints on their Bond Purchase Program by buying beyond May’32 and buying more Semis. Doing both would create scope to ease policy by accelerating QE, if that was required.
There are three main problems with RBA QE: The RBA owns too large a share of the lines it does buy. The tenor of the bonds they buy is shortening. And Semis want to issue longer than the RBA buys to fund infrastructure.
The difficulty controlling Delta/COVID means that we are being urged to “learn to live with the virus”. This is a big existential change from H1’21, and a reason to think that this recovery may be more subdued than the H2’20 bounce.
The lockdown situation is twice as bad as the RBA had in their August SOMP. Using Gov Lowe’s rule of thumb that consumption falls 15%, a Q3’21 GDP forecast of around -3% seems plausible (v. RBA -1% in the Q3 SOMP). The probability that the taper is dropped in Sep is rising.
The RBA has ‘looked through’ the delta-outbreak, and retained some of the upgrade that drove the July taper. A downgrade that drives easing is plausible, but it’ll take some time for the data to make the case
The RBA eschewed the signal-value of reversing the taper. My hunch is that they are worried about their market footprint and housing.
We can be pretty sure the RBA will downgrade and dump the taper. I think there’s a chance they say that YCC’s not dead, just frozen. Boosting QE to 6bn per week seems unlikely to me.
What can the RBA do? Faster QE will take RBA ownership of mid-curve ACGBs to 50%. They should consider buying Ultras and increasing the share of Semis. And rolling YCC to Nov’24.
RBA minutes confirm that the decision to taper to 4bn/wk was a close run thing & set up a reversal (due to COVID downgrades) in August.