Upbeat Central Bank Comments Led by Federal Reserve Give Global Equities Additional Lift

Central bank activity dominated the news the past two days, starting with comments from a Fed official early Monday and ending with a major policy announcement that turned the stock market around later in the day.

Tuesday began with the Reserve Bank of Australia (RBA) releasing its latest Monetary Policy Meeting Minutes, followed by the Bank of Japan’s (BOJ) Monetary Policy Statement. Later in the U.S. session, traders will get the opportunity to react to the testimony of Federal Reserve Chairman Jerome Powell and a speech from heavyweight FOMC Member Richard Clarida.

U.S. Economy Will Start to Rebound in Second Half of 2020, Fed’s Kaplan Says

The U.S. economy will experience a “significant, historic” contraction in the second quarter before it starts to rebound, and unemployment will remain elevated at the end of 2020, Dallas Federal Reserve President Robert Kaplan said on Monday.

Kaplan said he projects that gross domestic product will drop by an annualized rate of 35% to 40% in the second quarter and that it should start to recover in the second half of the year, Reuters reported.

He said the economy may recover more quickly if consumers and businesses take precautions to limit the spread of the novel coronavirus.

Kaplan also said he expects inflation to remain muted over the next couple of years though some food prices are rising.

Fed Will Begin Purchasing Corporate Bonds on Tuesday

The U.S. Federal Reserve triggered a massive rebound in U.S. stock markets on Monday after announcing it will start purchasing corporate bonds on Tuesday through the secondary market corporate credit facility (SMCCF), one of several emergency facilities recently launched by the U.S. central bank to improve market functioning in the wake of the coronavirus pandemic.

According to Reuters, the Fed will use an indexing approach when making purchases, aiming to create a portfolio that is based on a broad, diversified market index of U.S. corporate bonds.

RBA:  Australia’s Economic Downturn Could Be Shallower than Earlier Expected

The Minutes of the June Reserve Bank of Australia (RBA) board meeting showed that while the Australian economy was going through the “biggest economic contraction since the 1930s”, the downturn would be “shallower than earlier expected”. Though, the outlook remained “highly uncertain” and the pandemic was “likely to have long-lasting effects” on the economy.

BOJ Holds Policy Steady but Increased Size of Lending Packages

The Bank of Japan (BOJ) kept its monetary settings steady as widely expected but increased the nominal size of its lending packages for cash-strapped firms to $1 trillion from about $700 billion announced last month.

Meanwhile BOJ Governor Haruhiko Kuroda reiterated, “We won’t hesitate to take additional easing steps as needed. That means we are ready to expand our lending facilities if necessary.”

“Given uncertainty on how the pandemic could affect our economy and markets, we may need to ponder new measures. We’ll respond flexibly.”

For a look at all of today’s economic events, check out our economic calendar.