Daily Commentary BY THE CURVE TEAM –

Lockdowns Tightened

19th of July, 2021

The delta strain continues to trouble Australia, as state governments aims to bring cases back down.

NSW banned non-essential retail and construction over the weekend, in an attempt to restrict the movement of people, which by extension will limit the spread of the virus. Victoria today will decide whether to re-open its economy after recording 16 community transmission cases over the last 24 hours.

NSW and Victoria are the largest states in terms of economic activity in Australia. Therefore, the current lockdowns will weigh heavily on economic activity for Q3, which began in July.

This has the potential to delay RBA tightening if lockdowns continue to be prolonged. Federal government’s response will be critical in evaluating the economic effect of the lockdowns.

Since covid began, the federal government have shown a strong willingness to support the economy through payments to businesses and workers. This should mean economic activity is able to quickly rebound once covid is contained. Should the government change tact, the economy may have harder times to come.

Globally, the delta strain is also spreading at a rapid pace, even in countries such as the UK and US where vaccination rates are high. This could delay expectations of international borders opening and change the perspective of vaccine efficacy. Both of these could increase volatility and uncertainty in markets, including fixed income.

This week, the RBA minutes from their July board meeting are released tomorrow. This will explain the decision to slightly reduce the rate of QE and not extend the yield curve target to the November 2024 bond.

There are also preliminary retail sales data for June released on Wednesday and weekly payrolls on Thursday.

Josh Stewart

Associate - Money Markets