SUMMARY
The Australian share market was up 2.29% for the month of June. Meanwhile, US stocks, on average were up 1.84%. Some marginal improvements to the US economy were noted in terms of unemployment, with statistical estimates beating economic analyst expectations for the second month in a row, however, well over 20 million people remain newly unemployed. Furthermore, China manufacturing, construction and raw materials purchases beat analyst expectations, which has had a positive impact on local markets and exports (with Iron Ore jumping over 10% for the month). Markets in general continue to be fuelled somewhat by the raft of fiscal and monetary policy measures made locally and in countries abroad. For example, a commitment to virtually limitless support from the US Fed has indeed propped up the markets for now, however, volatility remains around 30 after retreating from the recent June high around 40. Historically speaking, this is still very high and indicates significant risk and uncertainty remains in the equity markets and the economy.
ECONOMIC DRIVERS
In the US: Rates on hold, marginally better unemployment
- On the 11th of June the Fed elected to keep the funds rate on hold again at 0.25% where, as previously reported, they have been since mid-March, following the Federal Reserve decision (as recently as 11th of June) to not reduce rates further. Also as previously reported, the Fed indicated that it doesn’t expect to increase rates through 2022. To-date, negative rates have not been entertained as likely for the US, however, yield curve targeting has been discussed.
- The most recent unemployment report (2nd of July) beat the expectations slightly but is still high at 11.1% (not including the significant number of people considered to be permanently out of the workforce). This is a slight improvement over recent previous reports and marks the second month in a row that beat analyst expectations.
- Market volatility briefly peaked in June around 40, up from around 30 at the beginning of the month, following Trump rhetoric around China and a resurgence in Covid-19 cases in some US states. Volatility remains high at around 30 indicating uncertainty and risk remains in the markets.
- Further to the above, as previously reported: a staggering amount of support has been deployed by the Fed, which includes aggressive emergency cuts to rates in March as well as a slew of additional policy measures, with similar action being taken around the world in developed economies in response to COVID-19. Following regulation changes the Fed has also launched Money Market Mutual Fund Liquidity Facility (MMLF) and MLF, The Pay check Protection Program Lending Facility (PPPLF), the Commercial Paper Funding Facility (CPFF), the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), the latter of which is a major step toward avoiding a financial contagion that spreads to the corporate bond markets.
- Regarding recent fiscal measures: On the 5th of June several changes to the Paycheck Protection Program (PPP) Act came into law, which has had the effect of easing payroll demands and gives loan forgiveness further than previously set out in April. As previously reported “Phase 3.5” of COVID related fiscal stimulus was enacted on the 24th of April to direct 484B toward funding hospitals and Covid-19 testing. Also as previously reported: a “Phase One” 8.3B spending bill was passed on the 6th of March, which included funding for vaccine research, and assigned money to state and local governments. On the 13th of March, Trump declared a “state of emergency” to free up 50B in spending. On the 18th of March “Phase Two” took the form of a stimulus bill that included free virus testing, expanded unemployment benefits and healthcare funding. “Phase Three” also known as the “CARES Act” was passed on the 25th of March, which include 2 trillion in spending and included 300B in direct payments to earners under 75K p.a., 500B in government lending to companies impacted by the crisis, 367B in small business loans, 250B in unemployment insurance, 220B in tax cuts as well as a smaller amounts to support state governments and healthcare.
In China: Slight improvements in economic data
- The economic data for June was generally as expected to slightly better than expected with regard to inflation (2.5%) and PMI (50.9). With PMI above 50 and non-manufacturing PMI at 54.4, China currently has relatively positive outlook with regard to slow recovery. Spending on infrastructure, manufacturing, construction and raw materials is showing signs of recovery also.
- As previously reported: In May, China announced fiscal stimulus, which was significant at US $500B (3.6T Yuan), but still less than many other countries hit by COVID. Furthermore, the issue of 1T Yuan worth of special treasury bonds was announced (a measure not seen since 2007). The special bond quote for infrastructure was also increased from 1.6T to 3.75T yuan.
- According to the IMF, further to the above, around US 360B in fiscal support measures have been announced in China which is to include social security tax relief, increased unemployment payments, production of medical equipment and to increase spending related to controlling COVID-19.
- As previously reported, the Peoples Bank of China (PBOC) reduced bank reserve requirement further following its action in March (freeing 79B). Also, to-date, as reported previously, the PBOC deployed 174B in reverse repo operations on February 3 (i.e. very short-term loans to banks so they remain stable and able to meet cash requirements. This was followed by an additional 71B on February 4. They also cut their medium term rates by 0.1% on the 16th of Feb.
In Australia: Rates on hold, further support for credit if necessary, another round of $750 payments
- On June 2nd and July 7th, the RBA kept rates on hold at 0.25% where they have been since the 19th of March following a series of cuts. As previously reported the RBA has scaled back bond purchases (to-date around 50B) but are still supporting credit markets and expended the eligible collateral to investment grade securities. Also as mentioned previously: the RBA cut rates twice in March, first on the 3rd of March by 25bps down to 0.5 percent (after having left rates unchanged at 0.75% at the previous meeting). The on the 19th of March the RBA cut by another 25bps to their current level at 0.25%. The RBA also committed to “market operations” i.e. the purchase of government bonds in the secondary market as well as additional repo operations.
- The treasurer Josh Frydenberg indicated an expectation of GDP to fall by 10% in the June quarter and an unemployment rate of 10%. As previously reported, to-date, the fiscal response from the government targeted businesses and the newly unemployed. There are three stimulus packages to-date as well as 11.8B total in state-level packages. The first, a 17.6B package (12th of March) that includes cash payments of $750 to welfare recipients as well as tax breaks for small businesses. The business incentives include cash payments of between 2,000 and 25,000 to support hiring staff and paying wages. Further to this, 2.4B will be spent on health needs, including coronavirus clinics and other related expense needs as well as 1B to support the tourism sector. The second package on the 22nd of March, was for 66B to include income support for workers (“jobseeker payments”) and small business loans. The third stimulus package on the 30th of March of 130B to include $1,500 fortnightly payments to employers to pass on to employees to keep them in work.
- Further to the above, an additional phase of cash payments to low income households was announced in early July, which will deliver $750 cash to around 5 million Australians, which will total around 3.8 billion.