Daily Commentary BY THE CURVE TEAM –

US Fed Active Again Overnight

16th of June, 2020

In a confirmation of measure already signalled to the market the Us Federal Reserve is now set to buy individual corporate bonds. The Secondary Market Corporate Credit Facility with a total capacity of $250b has a mandate to support secondary market activity and price in the so called ‘Fallen Angels’, companies downgraded by the rating agencies and now sit below the investments grade threshold.

Whilst the detail of the facility has been known since march and the Fed has already bought some $5b of these securities the announcement overnight was more of an increase in the activity rate. As was expected by the market there where movements in asset prices on the back on the announcement. US equities saw modest gains reversing the intraday losses to close up for the session. Similarly, US 10 years treasuries reversed yesterday’s falls in yield and are currently trading at 0.72%.

Whilst markets offshore are buoyant, our Prime Minister spoke yesterday at the Committee for Economic Development of Australia “State of the Nation 2020” conference. In what was a rather blunt assessment of the economy, Morrison conceded

“We cannot say to Australians that government or anyone else, ultimately, will be in a position to ensure that every job can be saved, and every business can be saved. That is unrealistic”

The PM also set a rather ambitious target for the medium term outlook:

“We need to lift our economic growth rate by more than 1 percentage point above trend to beat the expected pre-COVID-19 GDP by 2025, to catch back up to where we were before COVID hit.”

That implies a 3.75% growth rate over annual average growth rate over the next 4 years. In order for the nation to achieve such a goal we would undoubtably need to see significant structural reform in the nations economy with significant gains in productively and investment.

Looking ahead today the main item on the Economic calendar is the release of the RBA minutes at 11:30am. Whilst the release is unlikely to see any dramatic changes it should give insight into the RBA boards view of the economy as the lockdowns begin to be relaxed.

Matthew Dunshea

Client Relationship Manager