Daily Commentary BY THE CURVE TEAM –

Risks for Recovery Coming to a Head

22nd of March, 2021

Although the outlook is increasingly optimistic, potential risks for the economy will materialise over the coming months.

Retail sales for February foreshadows the looming risks. They were down 1.1% in February but remain 8.7% higher than last year.

There is no obvious impetus for the decline in sales, but the lofty levels at the moment may be difficult to sustain. Services spending is more sustainable because you can repeatedly pay for a service whereas there are only so many goods you can justifying buying.

The expiry of JobKeeper also poses a risk. Since covid, income and savings levels have been propped up largely due to government income support measures, which has seen a surge in retail spending.

With no JobKeeper and lower unemployment benefits retail spending should normalise which will result in monthly falls. Over 100 000 people are still employed but working 0 hours, which is nearly double what the pre covid level was.

A surging job market could offset the impact but nonetheless the capacity to spend and employment will likely be impacted post March.

In the US, treasury yields were a focal point for investors yet again late in the week. The Supplementary Leverage Ratio (SLR), which imposes regulations on banks for how much capital they need to hold relative to their assets was the instigator.

As the Fed and government has injected enormous amounts of liquidity into the banking system, including the Fed’s current QE purchases worth $120 billion a month, bank’s asset levels have grown drastically and capital has struggled to keep up. As a result, the SLR was relaxed by allowing cash and reserves to be excluded.

At the end of March, the exception for cash and treasuries is set to expire. It has led to speculation that banks will look to sell treasuries to reduce their assets and that QE purchases could be reduced sooner than expected by the Fed to reduce the pressure on banks. Both factors would put upward pressure on treasury yields.

Josh Stewart

Associate - Money Markets