macro, politics, markets, ambivalence
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 gross flows data shows that the NSW lockdowns in July were damaging. The longer the lockdown, the greater the damage … so the worst is yet to come.
The minutes to the RBA’s August meeting confirm that the Board did discuss reversing July’s decision to taper bond purchases
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.
The economy was already shedding jobs in early July. The outlook is for more weakness.
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.
The AFR’s John Kehoe reports that the RBA would not have tapered on 6 July if they’d foreseen the lockdowns. I think the RBA will reverse that decision on 3 August. It would be good strategy to remind the market that YCC’s not dead, it’s just frozen.
COVID lockdowns have over-taken the RBA’s recent upgrade of the current assessment from ‘recovery’ to ‘expansion’. A contraction in Q3 would extend the life of QE and boost the peak-size of the RBA’s balance sheet.
ricardian ambivalence 