Daily Brief

A wall of money

QE Infinity

Aiming to prevent an economic depression, the US Federal Reserve came out on Monday with unlimited QE. Australia’s Parliament approved a bill that will provide $84 billion of support for workers, students and businesses. EU finance ministers agreed to ditch restrictions on national borrowing and spending.

Of all of those, the most striking was the Fed’s pledge to soak up a wide range of securities in order to calm markets, support businesses and keep credit flowing. A decade ago the Fed’s early rounds of quantitative easing purchases were limited to US Treasury instruments. The criteria broadened in subsequent rounds of QE. The Fed’s latest “whatever it takes” programme opens the floodgates to all manner of instruments and sets no limit on what it will spend.

In contrast to the Fed’s absolute commitment, Congress is dragging its heels on a $2 trillion stimulus bill. Roughly, the Republicans want to bail out the corporations while the Democrats prefer to support people and local authorities. The failure of the bill to pass yesterday contributed to another losing day for equities and a below-par day for the dollar.


Germany blinks

The “prudent” northern EU countries have long insisted on balanced budgets and Italy’s recent requests for help were rebuffed. Now, perhaps in reaction to the provision of aid by Russia, it looks as though Germany is at last ready to help.

The idea is to give Italy an “enhanced credit line” from the European Stability Mechanism. There is nothing yet resembling a pan-Euroland stimulus package for the EU as a whole: the plan appears to be to leave the European Central Bank on point for as long as it can handle the pressure.

That is not the situation in Australia. The government’s second coronavirus stimulus package brings the total commitment to $189 billion, almost 10% of Australia’s gross domestic product. Meanwhile in Britain, the Prime Minister ordered people to “stay at home” and the US President warned that he is inclined to ignore the advice of experts and reopen the economy, whatever the consequences for health. The Aussie strengthened by six cents and the US dollar by four fifths of a cent. Sterling was the weakest among the majors.


Lower PMIs

Australia’s provisional manufacturing purchasing managers’ index was a surprisingly buoyant 50.1. Services came in at a more comprehendible 39.8, putting the composite measure at 40.7. Australian manufacturing is likely to be the strongest among today’s provisional readings.

Early numbers from Europe put French manufacturing and services at 42.9 and 29.0 with the equivalent German figures at 45.7 and 34.5. The UK numbers are pencilled in at a feasible 45 for manufacturing and an extremely optimistic 45 for services. The effects of the economic shutdown have been more immediate in the services sector than in manufacturing.

Other agenda items today include the minutes of the Bank of England’s Financial Policy Committee, the CBI’s Industrial Trends Survey, the Richmond Fed’s manufacturing index, US new home sales and, tonight, the NZ balance of trade. The Reserve Bank of New Zealand is not expected to make any further rate cuts at its regular policy meeting.

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