ScoMo Tightens The Screws

In a press conference this morning, Prime Minister Scott Morrison upgraded the travel ban on Australians to level four for the entire world in the wake of the coronavirus outbreak. This is the first such ban in Australian history.

A human biosecurity emergency has been declared under the Biosecurity Act by the Governor-General.

“The travel advice to every Australian is do not travel abroad. Do not go overseas. That is very clear instruction,” he said. Domestic air travel though will not be cancelled as it is “low risk”.

Scott Morrison said the country will not go into lockdown during the COVID-19 pandemic, saying the situation will last at least six months.

Prime Minister Scott Morrison said non-essential indoor gatherings of persons more than 100 have been now banned.

The health advice is that schools should remain open, Morrison said.

However, to reduce the risk of transmission to aged care residents, visits will be limited to a short duration and will only allow a maximum of two visitors at one time per day.

He criticised (rightly) the panic buying chaos across the nation. ” Stop it. It is not sensible, it is not helpful and I have to say it is has been one of the most disappointing things I have seen in Australian behaviour in response to this crisis,” he said.

He flagged further economic measures will emerge soon with the government is considering further economic measures that will deal with the impact of the coronavirus on the Australian economy, particularly on small businesses and individuals.

Chief Medical Officer Brendan Murphy said there are about 450 cases of COVID-19 in Australia, with increasing numbers each day. There is only “limited community transmission”.

Australia has completed more than 80,000 tests, with additional supplies being secured.

“Further supplies are being secured and that includes having domestic solutions to the supply issues that relates to the supply issues that relates to the testing equipment.”

Westpac: Unemployment To 7%

Westpac just released a revised economic outlook.

Growth through 2020 is now estimated at 1.5% with minus 1% in the first half ( minus 0.7% and minus 0.3% respectively in the March and June quarters) and 2.5% in the second half. This is recession territory.

Just last week they had set the forecast peak in the unemployment rate at around 5.8%- 6%, up from the current level of 5.3%.

But now the unemployment rate is now forecast to reach 7% by October 2020 (up from the previous estimate of 5.8%-6.0%) due to the larger negative shocks to the labour intensive sectors such as recreation; tourism; education; renovations and additions; and dwelling construction. This lift in the unemployment rate is despite reducing the participation rate from 66.1% to 65.4% as a discouraged worker effect – that is, as workers respond to a deteriorating labour market the participation rate is likely to decline.

They add: please note that these forecasts are not based on Australia following a European style full lock down. Not surprisingly, the forecasts are subject to downward revision in the event of such an occurrence.

This is consistent with our modelling – mortgage stress will rise in the months ahead as unemployment rises.

Now the question becomes, to what extent with the banks forego mortgage repayments, and not foreclose, and to what extent will the Government supports households directly? The mortgage debt mountain could bite deep and early.

Its also worth noting that we are already seeing a rise in financial stress among those renting – here the protections currently are very limited, and will need to be increased.

Our own modelling is based on the assumption the crisis will run for at least 6 months. Overnight a UK report suggested 18 months is more likely, given the lead time to a vaccine.

UK Treasury and the Bank of England launch a Covid Corporate Financing Facility (CCFF)

UK Treasury and the Bank are coordinating closely in order to ensure that our initiatives are complementary and that they will, collectively, have maximum impact, consistent with the Bank and HM Treasury’s independent responsibilities.

Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for working capital from companies.

The CCFF will provide funding to businesses by purchasing commercial paper of up to one-year maturity, issued by firms making a material contribution to the UK economy.  It will help businesses across a range of sectors to pay wages and suppliers, even while experiencing severe disruption to cashflows.

The facility will offer financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock, and will be open to firms that can demonstrate they were in sound financial health prior to the shock.  The facility will look through temporary impacts on firms’ balance sheets and cash flows by basing eligibility on firms’ credit ratings prior to the Covid-19 shock. Businesses do not need to have previously issued commercial paper in order to participate.

The scheme will operate for at least 12 months and for as long as steps are needed to relieve cash flow pressures on firms that make a material contribution to the UK economy.  The Bank will publish further details of the operation of the CCFF in a Market Notice on Wednesday 18 March. The Bank will implement the facility on behalf of the Treasury and will put it into place as soon as possible.

By providing an alternative source of finance for a wide range of companies, the scheme will help to preserve the capacity of the banking system to lend to other companies, including small and medium-sized enterprises, which rely on banks.  Last week, the Bank of England boosted this capacity by:

  • launching a new Term Funding Scheme with additional incentives for lending to SMEs (TFSME).  This will, over the next 12 months, offer four-year funding to banks of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate.  Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs).
  • reducing the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect. This extended banks’ capacity to lend to businesses by up to £190bn.

Taken together the actions announced by HM Treasury and the Bank of England will help UK businesses and households to bridge a temporarily difficult period and thereby to mitigate any longer-lasting effects of Covid-19 on jobs, growth and the UK economy.

HM Treasury and the Bank will take all further necessary steps to support the UK economy and financial system, consistent with its statutory responsibilities.

DFA Updated Property And Finance Scenarios

We have updated our scenarios, driven from our core market models.

The drivers are rising unemployment, and business failure thanks to the impact of the virus. We discussed these scenarios in our live stream event last night. This is the full version with live chat. The show starts formally at 32 minutes.

We estimate that mortgage stress is set to rise significantly in the months ahead as household cash-flows are interrupted.

Alternatively we have also released a shorter edited version, without chat here:

Shock And Awe – The Property Imperative Daily 16 March 2020

Welcome to our latest post covering finance and property news with a distinctively Australian flavour. Given the current market gyrations, we are going to examine the latest critical data each day, because a week is a long time in politics but a lifetime on the markets at the moment…

March Live Q&A:

RBA Says “More On Thursday”

As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses. (Refer to earlier Council of Financial Regulators’ (CFR) press release.) Australia’s financial system is resilient and it is well placed to deal with the effects of the coronavirus. At the same time, trading liquidity has deteriorated in some markets.

In response, the Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system. The Bank will also be conducting one-month and three-month repo operations in its daily market operations until further notice to provide liquidity to Australian financial markets. In addition the Bank will conduct longer term repo operations of six-months maturity or longer at least weekly, as long as market conditions warrant. The Reserve Bank and the AOFM are in close liaison in monitoring market conditions and supporting continued functioning of the market.

The Bank will announce further policy measures to support the Australian economy on Thursday.

DFA is expecting a 0.25% rate cut, and formal QE to go alongside the repo operations already in train.

Fed’s Firepower Pulls Bond Rates Lower; For Now

Understand that the Fed’s actions (and other central banks actually) are NOT about supporting stock prices – as they are determined more by prospective future cash flows from business operations than anything else. There is a lot of rubbish in the media on this point.

But bond rates are another matter. Given the hike in bond rates we saw last week – which translates to higher interest bills, and funding issues, the T10 and 3 Month US rates dropped after the announcement. T10 was down 24%

The 3 month dropped 50%.

Question is, will this be enough – we think not. Watch for more action to try to control rates.

Aussie bonds also came down, with the 10 year down 13% and the 2 year down 20%.