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Of Doves And Depressions

"Whatever it takes."

Horrendous economic data and dovish central bankers.

That was the story on Wednesday, which makes it not much different from any other day.

New Zealand opened the door to negative rates and topped up QE, prompting money markets to price in a negative OCR in 2021. Bond purchases – unveiled in late March – were increased to NZ$60 billion from NZ$33 billion, and RBNZ said it’s open to employing additional easing tools if necessary. 

Orr quoted Draghi. “The Monetary Policy Committee remains prepared to do whatever it takes to ensure that we have significant monetary stimulus in the economy”, he said.

Although the bank’s fresh projections have rates unchanged (at 0.25%) for the remainder of the year, notes from the meeting betray a willingness to go negative. NIRP “will become an option in [the] future, although at present financial institutions are not yet operationally ready”, the bank said. RBNZ has asked financial institutions to prepare themselves by the end of the year.

The new economic projections see the economy contracting nearly 22% in Q2, while deflation is expected to take hold on falling fuel prices and a recessionary environment.

“Given the huge ramp up in asset purchases today and the fact that commercial banks are not yet ready to implement negative rates, we are pushing out our forecast for negative rates to November”, Capital Economics said, in a note. “We have pencilled in a 50bp cut in the OCR at the November meeting followed by two 25bp cuts in early 2021”.

The kiwi plunged on the news.

With the government expected to roll out new virus relief funded by bond issuance, this is an opportune time for RBNZ to absorb the supply. “The committee noted that the size of the LSAP program needed to be sufficiently large to keep interest rates lower across the yield curve”, the record of the meeting reads.

Orr didn’t rule out direct government financing. Although he said any decision to buy bonds directly from the government was “a long way away”, he indicated RBNZ would “keep an open mind”.

Meanwhile, the UK plunged into recession (we already know Q2 will be a disaster). GDP contracted 2% in Q1 and 5.8% in March, sequentially, while industrial production plummeted 4.2% in the month.

This is but a preview of the malaise. UK’s lockdown was in place all of last month, and won’t be totally lifted for quite a while. The economy will likely shrink more than 20% in Q2.

Let me emphasize: The Q1 numbers included just a week of lockdown protocol. Chancellor of the Exchequer Rishi Sunak didn’t mince words in an interview with Sky. “The first quarter was that bad based on just a few days of the impact of coronavirus in March, so yes it is now very likely that the UK is facing a significant recession”, Sunak remarked.

Last week, the BOE refrained from adding more QE but will almost surely move to top up the program again in relatively short order. The bank also warned that the economy will likely collapse by a third by June from the start of the year – that’s 30%. The bank sees a 14% contraction for the year.

“While there are wide bands of uncertainty around any estimates of activity at the present time, UK GDP is expected to be close to 30% lower in 2020 Q2 than it was at the end of 2019”, the bank said, in its updated assessment.

Two-year UK yields dropped to record lows on Wednesday, at -0.044%. MPC-dated Sonia rates are pricing in negative rates by 2021.

Finally, Eurozone industrial production tumbled 11.3% in March from February. YoY, output was down 12.9%.

Those figures were actually better than estimates. And now that you mention it, so were the UK numbers.

“In the scheme of things, the results were still pretty dour and using the ‘R’ word isn’t overstating the situation”, former trader Richard Breslow said. “Still, on a different day, different mood, we would have been reminded that the results were better than expectations. That may have to wait for tomorrow”.


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