Amid a back-up in yields stateside and ongoing upside “surprises” in key data points both in the US and abroad, it might be tempting to suggest the world isn’t completely falling apart anymore.
If you’re inclined to say as much, hopefully you’re correct.
While it’s refreshing to see some optimism creeping back into the narrative (which is becoming incrementally better aligned with euphoric risk assets), it’s important to keep one foot in reality. In that regard, Wednesday served up a pair of reminders.
I won’t dwell too long on these points, but I did want to highlight them because one is a historic (and wholly dubious) milestone, and the other says something important about the trajectory of monetary policy in the face of headwinds that can still be described as gale force.
First, the UK economy contracted 20.4% in the second quarter. That was actually a bit better than estimates, but as you can imagine, it is easily the worst print in modern history.
Things have improved a bit recently, but there are pressing concerns about i) the expiration of a job retention scheme, and ii) the prospects for the services sector in the event the virus proves persistent.
“I’ve said before that hard times were ahead, and today’s figures confirm that hard times are here”, Rishi Sunak said Wednesday. “Hundreds of thousands of people have already lost their jobs, and sadly in the coming months many more will”, he added.
That would seem to make the case for extending programs aimed at keeping people on payroll, but I digress.
You should note that the UK’s contraction in the second quarter represents the single-worst performance of any major European economy and is twice as bad (give or take) as the contractions seen in the US and Germany.
Last week, the BOE released projections for inflation and growth that some analysts worried were too optimistic. Inflation, for example, is seen hitting the bank’s target within the forecast horizon, which suggests more stimulus may not be necessary.
The market generally expects the BOE to be forced into more QE. Andrew Bailey told reporters after the July meeting that negative rates “are part of our toolbox”, but said the bank doesn’t “plan to use them”.
That serves as a good segue into the second notable development I wanted to highlight Wednesday.
New Zealand — which launched QE in March — raised the stakes Wednesday, as RBNZ increased the size of LSAP to as much as NZ$100 billion. That’s a notable increase in the envelope (from NZ$60 billion).
The statement explicitly telegraphs scope for the rollout of additional accommodation. “Reflecting a possible need for further monetary stimulus, the Committee also agreed that a package of additional monetary instruments must remain in active preparation”, RBNZ said, adding that “The package of further instruments includes a negative OCR supported by funding retail banks directly at near-OCR [and] purchases of foreign assets”.
The statement also betrays palpable concerns about the currency’s impact on exports. “Commodity prices for New Zealand’s exports remain robust, but this has been partly offset by a rise in the New Zealand dollar exchange rate moderating the return to local export producers”, the bank said.
“RBNZ is still very dovish, expanding QE, and may yet opt for negative rates, albeit next year rather than imminently”, SocGen’s Kit Juckes remarked. “Referencing the currency’s strength seemed odd when it’s down on the year, but that adds to my belief that it is vulnerable in the short term”, he went on to say, adding that “we are short NZD/JPY and obviously would like both sides of the trade to work”.
The double-down from RBNZ came as Auckland was put back into lockdown after four new coronavirus cases were discovered. Prime Minister Jacinda Ardern is demonstrating a zero-tolerance policy for COVID-19. Prior to this week, New Zealand hadn’t had a locally-transmitted case in 102 days. An outbreak in the country’s largest city could jeopardize the recovery, necessitating still more easing from RBNZ.
All of the above serves to underscore a simple point: The world isn’t anywhere near out of the woods. After all, if you’re not safe in New Zealand, where are you safe?