We’re All Doves Now (Central Bank Week In Review For 7/6-7/10)

The Reserve Bank of Australia kept rates at 25 basis points. Here is how it described the current economic situation in Australia (emphasis added):

The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s. Since March, an unprecedented 800,000 people have lost their jobs, with many others retaining their job only because of government and other support programs. Conditions have, however, stabilised recently and the downturn has been less severe than earlier expected. While total hours worked in Australia continued to decline in May, the decline was considerably smaller than in April and less than previously thought likely. There has also been a pick-up in retail spending in response to the decline in infections and the easing of restrictions in most of the country.

We’re seeing similar patterns across the developed world: 2Q20 will print the worst economic data on record, but the indicators show the beginning of a rebound.

However, some Australian cities are locking down cities again as infections rise (emphasis added):

On Tuesday, the authorities said that people in the 10 worst-affected postal codes would be confined to their homes, except for essential travel, for the next four weeks in an effort to stop the virus’s spread. International flights have been diverted from Melbourne, a city of almost five million people, and an inquiry has been opened into breaches in quarantine protocols.

This will also be a familiar pattern – one which we’re experiencing in the US: reopening causes an increase in infections, leading to at least a partial shutdown, slowing overall growth.

For a complete look at the Australian economy, see the Chart Pack issued by the RBA.

Mexico’s Central Bank released the minutes of its June 24th meeting. The Mexican economic data is stunningly negative (emphasis added):

  • Most members pointed out that the lockdown measures have affected aggregate demand. One member stated that, at the end of the first quarter, consumption and investment contracted 1.2 and 9.5%, respectively.
  • From the supply side, most members indicated that in April industrial production contracted 29.6% in annual terms, reflecting disruptions in global value chains and production shutdowns. Some members pointed out that manufacturing production and construction decreased 35 and 38% in annual terms, respectively, and highlighted the weakness of the services sector.
  • Another member pointed out that, if individuals that are “available” for work are considered as part of the economically active population, the “concealed” unemployment rate would be 25.4% of the labor force. He/she added that if underemployed workers are included as well, the rate for the indicator known as the labor gap would reach 50.6%.

The employment data is especially concerning; it shows the economic equivalent of a nuclear blast. Worst of all, Mexico is a key component in the global value chain; the country’s recovery is dependent on the recovery of global trade, which, according to the latest Markit Economic manufacturing PMI releases, won’t be happening anytime soon.

Several Fed presidents gave speeches, interviews, or presentations this week.

  • Atlanta Fed President Bostic gave an interview to the Financial Times, where he argued high-frequency indicators were leveling off, indicating slower growth in the next few months.
  • Fed presidents Barkin, Bostic, and Daly participated in a panel discussion earlier in the week (from the link; emphasis added):
    • San Francisco Federal Reserve President Mary Daly noted Tuesday that the coronavirus pandemic has decimated important parts of the economy such as travel, tourism, hotels, restaurants and retail. Those industries lost millions of jobs in the early stages of the pandemic and will have to reimagine how they do business in an era of social distancing in order to survive.
    • Asked if the Fed will have to do even more to help the economy, Barkin said: “Unemployment is 11%, so yes.”
    • Both Daly and Barkin also said states and local governments are sure to get hit hard in the coming months, adding to the economy’s woes. Tax revenues have tumbled even as financial demands on government increases.

There is a consensus among Fed officials that the economy is in precarious shape. Given recent increases in the number of infections, the pessimistic economic projections from the latest Fed meeting minutes seem a likely scenario (emphasis added):

The staff still observed that the uncertainty related to the economic effects of the coronavirus pandemic was extremely elevated and that the historical behavior of the U.S. economy in response to past economic shocks provided limited guidance for making judgments about how the economy might evolve in the future. In light of the significant uncertainty and downside risks associated with the pandemic, including how much the economy would weaken and how long it would take to recover, the staff judged that a more pessimistic projection was no less plausible than the baseline forecast. In this scenario, a second wave of the coronavirus outbreak, with another round of strict limitations on social interactions and business operations, was assumed to begin later this year, leading to a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year.

In other words, we’re all doves now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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