Throwing in the towel
By Justin Pyvis – Delivered on 03 Nov 2021

Good morning! NSW Premier Dominic Perrottet announced that restrictions will be eased ahead of schedulefor the fully vaccinated, while the unvaxxed will now have to wait until NSW reaches 95% fully vaccinated (possibly around 15 December). Perrottet said that he hopes the change "will incentivise" people to go an get the jab, with their freedoms delayed so that the state can "open up safely".

93.6% of people aged 16+ in NSW have had a first dose (92.9% aged 12+), so Perrottet is no doubt hoping that a good ol' dose of envy – being forced to watch their fellow New South Welshmen enjoy a mostly pre-pandemic lifestyle from this Monday – will convince the remaining 1.4% to go and get the jab.

Fully vaccinated population (aged 12+)


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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 gained 0.37% overnight, hitting yet another record high as the Federal Open Market Committee starts its two-day meeting to discuss potentially tapering its asset purchases. Tesla fell -3.0% after Elon Musk tweeted (what else) that "I'd like to emphasize that no contract [with Hertz] has been signed yet". Last week Tesla shot up after announcing Hertz had agreed to purchase 100,000 Tesla electric vehicles in 2022.

Locally, the ASX200 finished down -0.63% with large losses in materials (-2.1%) following further large declines in iron ore prices, after Mysteel revealed that Chinese daily crude steel output in the final third of October dropped 2% from the prior ten days to the lowest since March 2020.

A notable mover was IAG, which plunged -7.0% after revealing it had underestimated the number of claims related to extreme weather, forcing it to cut its profit guidance.


Feelin' good: Australian consumers are confident, with the ANZ-Roy Morgan weekly survey rising 1.6 points to 108.4 on the weekend, its highest for nearly four months. However, people's inflation expectations – which dropped 0.1 percentage points to 4.9% – remain elevated at close to their recent seven-year high.

Regulating crypto: A report signed by US Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and SEC Chair Gary Gensler said "stablecoins could support faster, more efficient, and more inclusive payments options... If well-designed and appropriately regulated". It argued that "The rapid growth of stablecoins increases the urgency of this work. Failure to act risks growth of payment stablecoins without adequate protection for users, the financial system, and the broader economy."

Hey, big spender: According to the independent Parliamentary Budget Office (PBO), "at least $A38 billion [of the $A72 billion in JobKeeper spending examined by the PBO] went to companies where turnover did not fall below thresholds during the quarter for which they claimed support". At least $A19 billion of that went to companies that saw an increase in quarterly turnover.

Running hot: Inflation in South Korea hit 3.2% in October, the fastest rate of growth since January 2012 and well above the central bank's target of 2%. It was the seventh consecutive monthly overshoot, with the government cutting fuel taxes for the next six months to ease the pressure on its citizens (although core inflation, which strips out energy and food, still rose 2.4%).

Throwing in the towel

The Reserve Bank of Australia (RBA) officially threw in the towel yesterday, announcing that it would "discontinue the target of 10 basis points for the April 2024 Australian Government bond".

Stepping back: Rising inflation led markets to challenge the RBA's commitment to suppressing the April 2024 bond yield at 0.1%, a target it has been forced to defend several times at a cost of nearly $A20 billion since the pandemic struck.

Speaking after the statement, Governor Lowe said if the RBA tried to defend it further "we would have ended up holding all the freely tradable bonds in the bond line... [diminishing] the usefulness of the target". Regular readers will note that we predicted as much two weeks ago, warning that to defend its target "the RBA may have to nationalise that part of the market by buying the entire $A32.9 billion worth of April 2024 bonds".

In announcing its belated abandonment of the target, the RBA conceded that it had made "earlier-than-expected progress towards the inflation target". That the RBA was surprised by rising inflation shouldn't come as a shock – in terms of forecasting, it doesn't have the best track record:

Why this matters: Get ready for higher mortgage rates. While the RBA expects to keep the cash rate at 0.1% for "some time" – the "not before 2024" scenario was also ditched – that mostly affects just one component of bank funding (domestic deposits), and there's a good chance that it's wrong about that as well.

But even if it holds to its new guidance that "a lift in the cash rate could be appropriate in 2023", banks also need to tap domestic and global wholesale markets to fund their lending activities (especially fixed-term mortgages), where rates will likely increase as inflation expectations pick up and other central banks begin to step back from their yield suppression antics.

Looking forward: The RBA hasn't touched the "emergency low" cash rate for a full year despite rising inflation and the imminent end of the pandemic, at least in terms of lockdowns and other major restrictions on activity.

The bond market called the RBA's bluff on the April 2024 bond and even if the bank remains stubbornly dovish compared to its global peers, there's a good chance markets do the same with the Aussie dollar and other rates along the curve should economic reality start to contradict its public pronouncements.

The Wrap Up
    👏Doing their part! Global leaders are gathering in Glasgow for the Cop26 climate talks, with the preferred method of transport being private jet – around 400 to be precise.
    🎤US podcaster Joe Rogan reacted to a satirical advert from Gruen, taking the bait by lashing out at Australia as supposedly having "the absolute dumbest propaganda".
    🏖️Thailand now permits fully vaccinated travellers from one of 63 approved "low risk" countries and territories, including Australia, to avoid quarantine on arrival.
    🏇Verry Elleegant won the Melbourne Cup, overtaking hot favourite Incentivise on the final straight.
    🗾Japan's government is reportedly considering relaxing its border restrictions, dropping quarantine from 10 days to 3 for those in Japan travelling for business.
    😴Sleepy Joe? US President Joe Biden was videoed... resting his eyes during a speech at the Cop26 climate conference in Glasgow, before he was rudely interrupted by an aide.
    👊The happiest place on earth! China's government locked 34,000 visitors into the Shanghai Disneyland over a suspected COVID-19 leak, testing every person and ordering them to isolate before departing.
    🍚China's government told people to hoard food ahead of winter in case of poor weather and COVID-19 lockdowns, which immediately triggered "crazy panic buying in the supermarket".
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