This week has been another positive one for markets despite persistent weakness in available data and caution from policy makers across the globe. The beginnings of an easing of COVID-19 restrictions in the US and Europe; hope over treatments; and a continued broad stabilisation in the global case count are all playing their part.

Domestically, the RBA remains resolute in their support for the Australian economy. At their May meeting, the board confirmed “it will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for three year AGS”. Further, that target for the three year AGS rate will remain in place until “progress is being made towards the goals for full employment and inflation”. As highlighted by Chief Economist Bill Evans, with a spot target of 4.5% for the unemployment rate and ‘comfortably within the 2–3% target band’ for inflation, the Board clearly has a long journey ahead. While the RBA has been able to reduce asset purchases of late as markets calmed, at their May meeting, the board emphasised their capacity to do more if necessary by adding corporate bonds to the list of eligible assets for repurchase agreements.

Following the May meeting, today the RBA released their full view on the implications of COVID-19 for our economy as well as the risks in the May Statement on Monetary Policy. Their baseline view is that GDP will contract by 6.0% in 2020 then rebound by the same percentage in 2021. The legacy of this crisis will be long lasting, with the unemployment rate still seen around 7.5% at end-2021 having peaked near 10% in mid-2020. Westpac’s own forecasts are broadly in line with those of the RBA. For a full review of our views and how they relate to the RBA’s expectations as well as key partial data out this week on retail sales and employment, see Chief Economist Bill Evan’s latest video update.

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Going offshore, while sentiment remains robust, evidence of the economic cost of COVID-19 continues to mount. The tension between sentiment and economic reality is at its extreme in the US where another 3 million workers filed for initial jobless claims last week. That takes the total number of claimants to some 33 million. While we expect the US unemployment rate to jump to around 17% at April (the April employment report is due tonight), the continued rapid increase in claims since the April survey period points to an even more concerning reality come May and June – an US unemployment rate in excess of 20%. The broader implications of this situation are discussed at length in our latest Market Outlook publication. In short, this dramatic surge in unemployment, which will only slowly unwind, is why we believe the US’ recovery will lag our own. There will be a consequence for the US dollar come 2021 of this economic reality, with a moderate downtrend seen from end-2020.

As is also detailed in Market Outlook, a stabilisation and nascent recovery in Europe on a similar trajectory to the US should see the Euro move higher in 2021 as risk aversion abates. Asia should prosper to a greater degree, having already shown a capacity to hold the virus at bay while getting its productive capacity back to work in recent months. China continues to lead Asia’s recovery by a considerable margin.

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