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Cliff Notes: Extraordinary Policy Easing Justified Despite Strong Global Recovery

Key insights from the week that was.

For Australia, the past week had a strong focus on monetary policy as the RBA Board met; Governor Lowe spoke at the National Press Club then appeared before Parliament; and lastly, the February Statement on Monetary policy was released.

Tuesday’s RBA decision provided an extension of quantitative easing broadly in line with our expectation: a further $100bn of purchases to be delivered from mid-April at a pace of around $5bn per week. In his speech on Wednesday, Governor Lowe also made clear the RBA currently expect the cash rate will need to remain at 10bps until at least 2024. This warrants the 3-year bond target being kept at 10bps for now.

Like the RBA, Westpac believes this multi-faceted, extraordinary stimulus remains necessary. Indeed, we anticipate the current QE program will be followed by two further $50bn tranches through 2022, and that the 3-year bond yield will only slowly rise in 2022 to 0.30% by year end (3-year swap to 0.35%) as the RBA allow the market to begin to price in the probability of a cash rate increase in the following three years. Westpac Chief Economist Bill Evans contrasted the RBA outlook to our own following Governor Lowe’s speech, highlighting the significance of wages growth, consumer sentiment and the response of households to the end of key stimulus measures such as JobKeeper. Note this was recorded before the release of the February Statement on Monetary policy which offers full detail on the RBA’s forecasts as well as their assessment of key risks.

This week’s Australian data had a strong focus on housing. At the top of the week, CoreLogic reported a further 0.7% gain in capital city house prices, leaving the level of prices just 0.4% below pre-pandemic levels and 1.4% below the 2017 peak. Aside from weakness in inner-city units, recent gains have been broad-based. The growing strength of the upswing is emphasised by continued robust growth in turnover, up 38% since this time last year. The burgeoning strength of housing demand was also evinced this week by housing finance data for December, loan approvals jumping 8.6%, 31%yr. While gains over the past year have largely been driven by owner occupiers (39%yr), as the outlook improves and interest rates remain historically low, investors are increasingly coming back to the market (8.2%;10.9%yr). Clearly, it is not only the existing home market that will benefit from these trends. In December, dwelling approvals jumped 11% to be 23% higher over the year, outsized strength in detached homes across the nation clearly highlighting the success of the Government’s HomeBuilder grant scheme.

Today sees the release of our first Market Outlook for 2021. The analysis it contains highlights the strength of the rebound in both Australia, New Zealand and, in a league of their own, China. For each of these jurisdictions, swift action against the virus and in support of the labour market is producing a great return, with unemployment much lower at end-2020 than envisioned by policy makers during lockdown or the early stages of the recovery – New Zealand’s Q4 labour market data was released this week.

In China, the most recent official PMIs reported a deceleration in momentum at the beginning of the year. And through December and January authorities have adjusted policy settings on a number of fronts, limiting momentum in real estate in particular. Despite these developments, we remain fervent in our belief that China can sustain a strong rate of growth through 2021 and 2022, widening the gap between its economy and the west. As we have continued to emphasise the past few years, Chinese authorities’ pursuit of quality investment across the economy is intended to deliver robust gains for national income and household wealth, providing a strong foundation for consumption and residential construction over the long run. Both recent data and the policy initiatives announced point to such an eventuality.

If we switch to the US then, a significant improvement in economic prospects has been seen at the turn of the year as a result of a sharp reduction in new COVID-19 cases and a clearer path for sizeable stimulus. This has seen us revise up our US growth view for 2021 materially, with growth twice trend also anticipated in 2022. However, unless the US follows up the current stimulus package with a large infrastructure and investment plan, US growth is likely to slow abruptly beyond 2022. The growth pulse in China meanwhile should be sustained.

Europe and UK growth prospects are decidedly less certain, both in the near term and further out. Whereas China has already more than recouped its losses from the pandemic, and the US as well as Australia and New Zealand will do so in 2021, it is expected to take a number of years for Europe and the UK to regain the ground lost. To do so: both jurisdictions have to first put a halt to the current contraction, likely March 2021; then significant fiscal stimulus, in addition to an extension of current monetary accommodation, will be required to drive a strong, sustained rebound in activity.

Though the recovery in Europe and the UK will lag the US, we continue to anticipate gains for Euro and Sterling to end-2022 as a result of the global recovery in activity and sentiment. To investors, such an outturn will reduce the value of safe-havens such as the US dollar and Japan’s Yen. As per our revised Australian dollar view and our expectations for China’s Renminbi, the currencies of economies who fared best in the pandemic and have the greatest exposure to growth hence will see outsized gains into 2022 versus the US dollar trend.

Westpac Banking Corporation
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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