The week was marked by global markets selling off as COVID-19 continued to spread. This brought Central Banks out in an attempt to appease, however the markets saw the commentaries as being more a knee-jerk panic than proactive policy impetus to boost economic activity. Australia led the way, easing 25bp to 0.50% and then 12hrs later the US Fed followed, easing 50bp to 1-1.25% range, in what appeared to be a global Central banks concerted move. Central Bank comments of note were:

• The RBA noted that Tuesday’s cut supports “the economy as it responds to the global coronavirus outbreak”. The RBA noted that the “coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending. As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected.” 
• US Fed defined their out of cycle move as an “Emergency easing” noting “The coronavirus poses evolving risks to economic activity,” and “In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point.”
• G7 Finance Ministers and Central Bank Governors announced in a joint statement that they will use  “all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks” and that “G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase”.

In tandem with their Central Banks, governments made promises to support the easings with fiscal policy stimulus packages. These are promised to be announced imminently. 

From an Australian perspective, the mooted fiscal stimulus package (anticipated to be announced the week of 9 March) will be orientated towards supply side; targeting jobs, small business cash flows and capital investment. It is reported some of this package is to be funded via tax deductions from new business initiatives and investment, suggesting delays will occur as businesses determine initiatives. It is not expected to target demand, via one-off cash handouts to the general population to spend, as we saw with the GFC response in 2008. It is intended to try to avert Australia’s first recession in 29yrs since the recession we had to have in 1990/91. Economists are speculating the economic package will be circa $4bn, but I wonder if this will really be enough and what its impact will really have if the roll out is gradual.

The issue I see by targeting the supply side of the economy, will be the time the allocated funds will take to get into the business network and flow through the economy… as we have seen with the governments bushfire response policies, bureaucracy (forms filling, submission and actioning) and state and federal government interdepartmental interaction has not been smooth sailing, meaning monies targeting communities in need have seen elongated delays. Will this economic response be any different?

In the meantime, the economy continues to travel sideways. This week’s December quarter GDP reported 0.5% growth with an annualised growth rate of 2.2%. This however did not have the full impact of the bushfires, floods or coronavirus spread, which will impact 1H20. 

Australia eases Monetary Policy 25bp…is it panicking?

This week’s 25bp rate cut to 0.50% was met with a very speedy response by the major banks, passing on the move and cutting their mortgage rates effective essentially immediately:

But of course you will only benefit IF you have a mortgage. You certainly won’t benefit if you are a retiree or living off your savings, where essentially you will have just taken another pay cut when you can least afford it. Bank deposit rates will likely fall with the cut in mortgage rates, however bank margins will contract, thus impacting their share prices and your superannuation balances. With this in mind, I question what benefit the Australian rate cut will have to promote the consumer to spend, although it will depend upon what form and how much of a fiscal stimulus package Canberra announces in the next few days. 

Did the RBA go early?

Overall I feel the RBA has gone early, especially given the US Fed meets on 17-18 March and perhaps has signalled how worried they really are of a slowing economy. It also appears that the RBA and the Federal Government are co-ordinating, so we now await what stimulus packages Canberra will bring to the public. They will need to encourage the economy to spend and not save or repay debt…noting credit cards are not subject to cuts in monetary policy.

The RBA concluded their statement of easing today with “The Board is prepared to ease monetary policy further to support the Australian economy”. The next step after this is another rate cut to 0.25% and then QE…a very negative signal to capital markets. View the RBA media release on the easing in rates by 25bp to 0.50%.

The US Fed and the RBA responses by easing rates was, in part, to reduce the negative sentiment of coronavirus induced supply chain disruption that was spilling over onto equity markets. The reduction in rates hasn’t had the desired impact, but rather has prompted questions over the Central Banks and whether they are perhaps panicking.

Australian bond curve moved down in yield, reflecting a flight to safety from equities and risk assets into bonds and cash. At COB 5 March 2020, with the AUD bouncing to US$0.6620 was, the curve was:

Just saying:

Clearly a pandemic emergency, where COVID-19 can pass human to human (as is now the case) will bring on population isolation and thus impact supply chains (we are now seeing this in building products and certain consumer goods), but are the Central Banks now worried about the flow on impact of access to capital? Emergency easing’s in Monetary Policy are normally targeted at managing systemic risks…they don’t promote the easier flow of health services.

What does this mean for Australian Property? 

• Near term residential prices will continue to appreciate, making affordability harder to 1st home buyers. Remember only 1/3rd of Australians have a mortgage with 1/3rd owners and the balance renters. As such interest rate cuts will only have a limited impact on this aspect of the population
• Investors will not necessarily buy residential given the still tight credit market for this segment. 
• Households with mortgages will likely retain previous repayment schedules rather than spend the repayments savings. The CBA was quoted in January that “most borrowers keep their repayments unchanged when interest rates are cut. They take the benefit via a faster reduction in their housing debt.” CBA data highlights 61% of their mortgage borrowers are paying ahead of schedule and 46% are paying more than 5% above what’s required. The RBA has hinted at this over time and it is perhaps one of the reasons as to why rates are having less impact over the last year.
• If repayments are effectively saved, by paying off more, then retail sales will not be boosted. As we have seen in 2019 with 3 easings to 0.75%, retail sales were benign and indeed fell to 2.7% (Dec 2019) vs the 5yr average of 3.1%. Neighbourhood centres with high exposure to non-discretionary and day-to-day living will continue to be sought after relative to sub-regional centres. Regionals will somewhat retain their value due to scarcity, densification and centralisation, however it won’t be plain sailing, especially for those Malls that have a high exposure to tourism and high-end spend. We saw Vicinity downgrade 2020 earnings guidance due to this negative impact.
• Industrial could flounder if the Australian economy does slow meaningfully, given its leverage to GDP growth. Industrial prices are the strongest they have ever been on the back of population growth and on-line consumerism. These asset prices could be tested going forward if a global slowdown is elongated or Australia heads into its first recession in 29yrs.
• Office will likely remain our preferred asset class given its supply constraints especially in Sydney and Melbourne. Spec dev is yet to take off, as developers remain disciplined. Foreign capital will continue to come into Australia supported by a lower AUD and relatively higher yield. This will see further capital growth and hence cap rate compression, however travel restrictions could limit the velocity of turnover.

Outside the square

The spread of the coronavirus has brought a very Australian response…a run on toilet paper!!! I can’t quite fathom the link between a respiratory disease and the need for elongated stays in the dunny, but there you have it. There was an incident on Wednesday at Woolworths, Westfield Parramatta where an altercation developed in the toilet paper isle resulting in a knife being pulled. A Woolworths staff member was quoted as saying “people were losing their s***t”...perhaps that’s why everyone is hording “Loo tickets”, to quote Kenny.

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