Australian & New Zealand Weekly

Week beginning 1 December 2008

• The case for the RBA to cut by "only" 75bps.
• Australia: Q3 GDP - likely to show little to no growth.
• Australian data: Q3 activity data, Q3 current acc., Oct partials (retail, dwelling approvals & international trade).
• RBNZ, ECB & BoE all expected to cut rates.
• US data: payrolls, ISM's, Beige book, factory orders.
• Key economic & financial forecasts.

Australian Dollar: The Case for the RBA to Cut by "Only" 75bps

The Reserve Bank Board meets on December next week. The result of the meeting will be announced at 2:30pm on that afternoon.

Current market pricing is for the risk free rate to be 4.08% on December 2, almost 125bps below its current level. A 125bp rate cut would be larger than any move since the Bank started specifying an exact target cash rate on August 2, 1990 when it cut rates from 15% to 14%. That of course was in the depths of the 1990/1991 recession when the unemployment rate stood at 7% (having risen from 5.6% and on its way to 10.9% in December 1992).

Since that date there have been 11 moves (in either direction) of 100bps; three of 75bps; eleven of 50bps and twenty two of 25bps. There has never been a 125bp. The next extraordinary aspect of current market expectations is that of the eleven 100bp moves, ten have been in "safe" territory - that is when the moves have been TOWARD neutral. There was one 100bp tightening when rates were below neutral and nine 100bp cuts when rates were clearly well above neutral. It would really only be the 100bp tightening in December 1994 from 6.5% to 7.5% when there was a big move to push rates further AWAY from neutral. Readers will recall that the December 2004 move was at a time when markets expected multiple further moves (even after 275bps of tightening 3 year bond rates were 120bps above cash) but that large move which pushed rates further away from neutral proved to be enough to sufficiently slow the economy and the next move was actually down in July 1996.

Last week the RBA Governor indicated that the clue in the Minutes was indeed accurate. The Bank assessed that "neutral" was 5.25%. So markets are expecting a record move in the direction which is AWAY from neutral, even after rates have already been lowered by 200 bps over the last three months. During that recession period when the unemployment rate was rising from 5.6% to 10.9%, rates took nearly two years to get back to neutral and there was no four month period when rate cuts totalled more than 200 bps - let alone the 325 bps now anticipated by the markets.

So the moves anticipated by the market are way too ambitious. The argument that the December move has to cover two months (because there is no scheduled meeting in January) is naive. As we have seen on numerous occasions with the Fed a board meeting can be convened with a phone hook up if extraordinary circumstances warrant. Rates were cut in both January 1990 and January 1992.

We also know that the surprisingly large moves in October and November were not the original recommendations to the Board. Decisions were made on the day of the Board meeting to increase the cut from the original 50bps (to 100bps in October) and 50bps (to 75bps in November). The decisions appear to have been made following exceptionally poor news out of the US over the weekend (eg the Dow fell by around 10% during the period around the October meeting). Concern with not giving the market what it wants seems also to be limited. In both October and November the market was not expecting the result delivered by the Bank. In November there was the added risk of surprising the market when liquidity was limited due to a holiday in Melbourne.

We are not suggesting that there will be no move at all. Clearly the Bank has the intention to quickly move rates lower so that monetary policy is helping rather than hindering the economy. We assessed neutral as 4.5% but cannot deny the clarity of the Governor's observation that neutral is 5.25%.

We support an aggressive move of 75bps with an outside chance of 100bps but cannot manage the stretch to 125bps.

Since the last Board meeting on November 4 global economic conditions have deteriorated. Westpac's Commodity Price Index (WCFI) has fallen by 8% - but it has actually recovered by 6% in recent days. But prior to the November Board meeting (75bp cut) the Index had fallen 17%; prior to the October meeting (100bp cut) it had fallen by 17%.

Since the last Board meeting the Dow has fallen by 6% - a similar fall to the pre November meeting and around half (13%) the fall prior to the October meeting.

To be sure US data has deteriorated rapidly. US 3 year bond rates have fallen around 80bps since the last Board meeting whereas the falls were around 55bps prior to both the October and November meetings.

The Bank will also be aware of the risk of a negative growth quarter in September. Our current forecast for September quarter GDP, which will be announced at 11:30am the day after the Board meeting, is for growth of just 0.1% with the distinct possibility of a negative for non-farm GDP. Prospects for the December and March quarters are brighter as the economy benefits from the $10.4bn fiscal stimulus. However the Board will be aware of the response to the last negative growth result in December quarter 2000 when consumer sentiment fell 13.2% in the wake of intense media speculation about a recession.

On the local front there have been some encouraging economic signs amongst all the gloom - petrol prices have fallen from $1.38 per litre to around $1.00 in many places (compared to falls of only 12 cents before November meeting and no falls prior to the October meeting). Consumer Sentiment rose by 4%; mortgage applications with the major banks have responded very positively to the increase in the First Home Owners grant and the rate cuts; jobs growth was strong (up 35,000) in October; construction spending grew by 4.4% in the third quarter; the collapse in credit growth seems to be stabilising (three month annualised credit growth in the September quarter was 7.5% up from 6% in the June quarter); new home sales increased by 6.7% in October and the government is set to launch its $10.4bn fiscal stimulus package on December 8.

Thursday's survey of investment plans still points to expectations of a 24% increase in nominal business investment in 2008/09. When we saw the last estimate of a 29% increase, in the August Survey, we expected a much sharper reduction in investment plans for the November Survey. Certainly the 2009/10 expectations are likely to be down sharply when we get the first estimate in February but this survey is at least indicating that business investment can be relied upon to support growth in the first half of 2009 until the housing and public sector infrastructure investment cycles start to ramp up (see Fig 2).

Also, don't lose sight of how expansionary policy is likely to become. Based on our forecasts of the cash rate by mid 2009 (down to 3.5% compared to current market expectations of 2.75%) and the RBA's forecast of underlying inflation, the real cash rate will be significantly lower than at any time over the last 20 years.

This provides one measure of the extraordinarily stimulative stance being taken by the monetary authorities - in light of this, we query whether the Bank would be comfortable to push the cash rate down to 2.75% as currently favoured by the market (see Fig 3).

Real fixed rates also look to be extraordinarily expansionary. These fixed rates also encompass current market price expectations and emphasise just how expansionary policy is set to become even if the more conservative Westpac forecasts prove to be correct (see Fig 4).

We are also encouraged that our forecast that the unemployment rate will peak at around 6½% is not too "rosy ". Recall that Australian workers have been incredibly disciplined through this period of higher than expected inflation. Real wages have been falling sharply. That is apparent in the slowdown in consumer spending but also bolsters employment. The inevitable slowdown in the demand for labour will be partly cushioned by the current fall in real wages as workers price their services competitively (see Fig 5).

We are not moving our target 3.5% low point for the cash rate in this cycle and that includes a 75bp cut on December 2. Markets look to have overreached and are setting themselves up for yet another surprise - this time in the opposite direction!

Australia: Data Wrap

Q3 construction work done

• Construction activity surprised on the high side, increasing by 4.4% in Q3. This was on a jump in infrastructure work, as the segment resumed its upward trend, following a dip in Q2.
• Infrastructure activity increased by 10.4% in the quarter, with a sizeable lift in both public and private work.
• Non-residential building disappointed, declining by 2.4%. The credit crunch may well have begun to bite and we anticipate further declines for this segment.
• Residential building activity expanded by 0.9% despite weakness in new dwelling approvals.
• The construction sector will add about 0.5ppts to Q3 GDP. This acts to offset potential downside risks from other sectors of the economy (public and inventories).

Q3 CAPEX

• CAPEX advanced only modestly in the September quarter, rising by 0.6%, to be almost 16% higher than a year ago.
• The industry split tells the big picture story. Strength was again concentrated in the mining sector, which offset falls in the rest of the economy - manufacturing and services.
• We're staying with our Q3 GDP growth forecast of 0.1%, 1.8%yr - with equipment spend (down 2.4%) coming in line with our expectation.
• CAPEX intentions, which were scaled back modestly, remain surprisingly upbeat. We anticipate further more aggressive reductions to investment plans.
• The 4th estimate for 2008/09 spending was $102.7bn. This implies a 24% rise in nominal spending in 2008/09. That is a downgrade from the 29% rise implied by the survey three months ago.
• The weakening global environment - particularly during October - points to a less buoyant investment outlook.
• The good news is that momentum in the mining sector is helping to sustain the economy during 2008. As we move into 2009 and 2010, a growth rotation towards the currently weak consumer and the stalled housing sector is likely, as these sectors respond to aggressive RBA rate cuts and the fiscal package(s) of the Federal Government.

Oct private credit

• Credit grew by 0.6% in October, fractionally stronger than expected, with resilence in business lending.
• Credit growth has been relatively weak since April, with month growth expanding by an average of 0.6%, significantly slower than the 1.3% pace during 2007. The RBA's aggressive monetary policy tightening and the credit crisis have had a substantial impact.
• That said, credit growth has ticked a little higher from the low of the June quarter. This reflects a rebound in business credit, with firms more reliant on banks to raise funding.
• Housing credit growth remained subdued in October. Some improvement is likely in early 2009 as the boost from the RBA's recent aggressive rate cuts begins to emerge.
• Personal credit contracted further at this time of weak consumer spending and falling share markets.
• While the RBA's policy u-turn will provide some support to credit growth a return to the pace of 2007 is unlikely. Rate cuts will cushion but not fully insulate the economy from the global recession. Rising unemployment will constrain credit demand and housing affordability remains stretched.

Round-up of local data released last week

New Zealand: The Week ahead & Economic Wrap

Easy does it

Life isn't getting any easier for the RBNZ. Each time they have sat down to review interest rates this year, the global credit crisis has been deeper, the outlook for economic growth has deteriorated, and policymakers around the world have become more aggressive in their responses. Next Thursday's OCR decision will be another difficult one, though as in the October review, the case for a sizeable rate cut is a given - the question is more one of tactics. We see a 100bp cut as the most likely option, but we concede that a case can be made for either a bigger or a smaller move.

The global credit crisis continues to unfold at an astonishing pace, and perhaps more importantly, it is now clearly going to work on the real economy. Forecasts for world growth have been slashed, with the biggest revisions coming in November. New Zealand's major trading partners are expected to grow just 1.3% in 2009, compared to a relatively comfortable 2.6% expected just two months ago.

Forecasts for New Zealand growth in the December Monetary Policy Statement will be shaded down relative to September, reflecting the weaker outlook for global growth and commodity prices. The nearterm outlook is unlikely to change much, with another decline in Q3 GDP and a small bounce in Q4. However, growth for 2009 is likely to be closer to zero (previously 1.5%), with any prospect of recovery pushed out to 2010.

The September forecasts for real household consumption were extremely weak, with a 1% fall in the year to March 2009. If anything, this figure will need to be revised upward - the June 2008 outturn was not as weak as expected, and lower fuel prices have helped to restore households' purchasing power. Bear in mind that the RBNZ has long wanted to see a mild consumer recession, in order to ease the inflation pressures that have accumulated over several years. The difference is that, in the past, aiming for a mild recession meant keeping monetary policy tight in order to slow the economy; now, it means bringing monetary settings below neutral in order to avoid a deeper recession.

Inflation has clearly slipped down the list of concerns for the near future. Sharp increases in fuel and food prices saw annual inflation peak at 5.1% in September this year; a reversal of these forces could see the annual rate down to 1% or less in a years' time. Beyond this, the RBNZ will expect weaker activity to bring medium-term inflation back within the 1-3% target range, and we tend to agree with them. An undershoot of the target over the medium term is unlikely in their forecasts though - they can simply 'top up' the inflation track with more easing.

The case for a substantial easing in overall monetary conditions is clear. And with a high degree of certainty that the economy is slowing, the RBNZ should have no qualms about moving towards their endpoint quickly. However, the question of how much to deliver on the day is far from straightforward, particularly as there are many factors pulling in the same direction as monetary policy at the moment.

The first is that the monetary policy transmission mechanism is working - a crucial difference between New Zealand and the likes of the US or the UK. Wholesale interest rates have fallen sharply in anticipation of steep OCR cuts, and these have quickly been passed on to retail rates. In fact, with a large rate cut a near-given for next week, banks haven't waited to pass it on to mortgage rates. This also means that mortgage rates have now passed a crucial point: the average homeowner is now able to refix their mortgage at a lower rate than before, freeing up cash to use elsewhere.

The second is that the exchange rate is also contributing to an easing in overall monetary conditions. The trade-weighted index is more than 10% below where the RBNZ expected it to be in September, and has been enough to offset the decline in export commodity prices so far. We would emphasise that the fall in the currency is not doing the RBNZ's job for them on its own, nor should we expect it to; it is simply serving its role as a buffer against global shocks.

The third is that fuel prices have fallen significantly in recent months, reducing inflation in the near term but boosting (real) spending over the medium term. Finally, personal tax cuts from 1 October have also left more cash in people's pockets. In fact, we expect the combination of lower interest rates, lower fuel prices and tax cuts to provide a substantial fillip to consumer spending, at least through the last few months of this year.

The market is anticipating a cut of at least 100bp next week, and opinion is swinging towards a 150bp move. Our feel is that a 100bp cut, plus a weaker currency, plus lower mortgage rates, plus the sharp fall in fuel prices, plus tax cuts, would be enough to tide the RBNZ over until the next review in January. However, we acknowledge that they could easily decide to do more than 'enough' - since July, they have erred towards earlier / larger rate cuts, and with hindsight they will have little reason to regret it. A 100bp cut would see swap rates reverse some of their most recent falls, though with the market focused on an endpoint for the OCR of 4% or less, the relentless fall in short-term rates should quickly resume.

Round-up of local data released last week

Data Previews

Aus Q3 company profits

Dec 1, Last: 14.3%, WBC f/c: 5.5%

Mkt f/c: 3.5%, Range: -9.0% to 8.0%

• Company profits leapt 14% in the June quarter and a further rise, of 5% or more, in the September quarter is expected.
• The mining sector, in particular iron ore and coal, is driving the sharp increase. After a 40% rise last quarter, an increase of over 25% is possible. Notably, the RBA non-rural commodity price index increased 20% in the September quarter. In part, this reflected the boost from a 6% depreciation of the Aussie.
• Profitability in the broader economy, after surprising with a 5.6% increase in the June quarter, is expected to deteriorate. Weak turnover, at a time of still rising input costs, is impacting as evident from business surveys reporting a decline in the profit index. A 5% fall in non-mining sector profits would not surprise, which would be in line with the 2000/01 episode.

Aus Q3 inventories

Dec 1, Last: 0.3%, WBC f/c: 0.3%

Mkt f/c: 0.6%, Range: 0.1% to 2.0%

• We are forecasting inventories to rise by just 0.3% in the September. That would be the same as last quarter - hence inventory accumulation would be neutral for quarterly GDP growth (pending any revisions). The risks to this view are for a weaker outcome.
• At this time of subdued turnover, firms will be limiting inventory accumulation - with most generally able to adjust 'just in time' hence limiting any unintended run-up in inventories.
• A sharp slowing of inventory accumulation was evident in the June quarter, with growth of just 0.3% after a 1.5% increase in the first quarter of the year. That saw inventories subtract 0.5ppts from Q2 GDP growth.

Aus Q3 current account balance, AUDbn

Dec 2, Last: -$12.8bn, WBC f/c: -$12.8bn

Mkt f/c: -$11.1bn, Range: -$8.0bn to -$12.8bn

• Monthly data showed a non-rural price led 11.3% jump in Q3 exports (vs +15.8%qtr prev). The domestic demand slowdown dented import volumes growth, but higher prices from the 6% fall in the AUD/USD more than offset, lifting import growth to 6.3%qtr in Q3 (vs +3.7%qtr prev). Still, this allowed a $2.7bn improvement in the net trade position to a $1.433bn surplus.
• This will be offset by a rise in the net income deficit to $14.2bn from $13.3bn. While a greater Australian equity market underperformance vs the US (after adjusting for $A fall) relative to Q2 will reduce net equity income outflows, this will be more than offset by higher net debt income outflows from higher US short term yields and the $A fall.
• This gives a current account deficit of $12.8bn (4.3% of f/c GDP), equal to the originally released Q2 level (4.4% of GDP).

Aus Q3 net exports contribution to GDP, ppts

Dec 2, Last: 0.0ppts, WBC f/c: -0.4ppts, Mkt f/c: -0.3ppts

• While export values jumped 11.3% in Q3, this was mainly driven by higher prices (led by non-rural bulks), with slower growth in non-rural volumes and weaker rural volumes. We expect an overall 0.5%qtr rise in export volumes (vs 2.7%qtr prev), slowing annual growth to 4.4%yr (from 6.1%yr).
• The domestic demand slowdown has hit import volumes of consumer goods (values fell 0.6%qtr despite consumption goods import price index rising 2.1%qtr), but gains in capital goods offset (values up 8.5%qtr, prices up 0.7%), lifting total import volumes 2.0%qtr in Q3 (vs +2.2%qtr prev).
• This slowing in export volumes growth, but still firm import volumes growth, implies a deterioration in the net exports contribution to GDP growth from zero ppts in Q2 to -0.4ppts in Q3.

Aus Q3 public spending

Dec 2, Last: 1.8%, WBC f/c: 0.9%, Mkt f/c: 1.0%

• Public spending is forecast to increase by a moderate 0.9% in Q3, following an above par 1.8% rise last quarter. Such an outcome would add almost 0.2ppts to quarterly growth.
• Public consumption expanded by a relatively brisk 4.6% over the last year, with a 1.2% increase in Q2. It would appear governments are responding to electorate demands for additional staff in the public sector (health, education etc). We expect a further 1% increase in Q3.
• Public investment (20% of total public spending) is in an upswing, as state governments lift capital works after decades of inadequate expenditure. Spending is up 10.4% over the year, although with a bumpy profile. We've factored in a relatively flat result for Q3. We anticipate a pull-back in nonconstruction investment after a sizeable rise in Q2.

Aus Oct retail trade trends

Dec 2, Last: +0.2% (-1.0% sa), WBC f/c: flat% (-0.4% sa)

Mkt f/c: 0.1% (0.1% sa), Range: flat (-1.0% sa) to 0.2% (1.0% sa)

• Trend retail sales rose 0.2%mth in Sep with growth in the three prior months revised down from 0.3%mth to 0.2%mth. The shift was due to a sharp 1%mth drop in sales in seas. adj'd terms in Sep, although monthly figs needs to be treated with extra caution as survey changes have increased volatility.
• The boost from tax cuts in July has waned quickly revealing a weak underlying trend to sales that we expect to carry into Oct. Severe financial turmoil saw consumer sentiment slump 11% in the month, back towards 16yr lows. The RBA's 100bp interest rate cut will give some support but is more likely to lift spending from Nov due in part to a delayed pass-through to mortgage rates. Lower fuel prices will also shore up demand, and the $8.4bn injection from the Govt's fiscal package wll add more lift in Dec-Jan. Overall, retail sales are forecast to drop 0.4% in Oct in seas. adj'd terms leaving trend growth flat.

Aus RBA policy announcement

Dec 2, Last: -0.75% to 5.25%, WBC f/c: -0.75% to 4.50% Mkt f/c: 4.50%

• The RBA is cutting interest rates aggressively so as to quickly shift the stance of policy from very restrictive at the start of September with a view to moving into the expansionary zone.
• We expect the cash rate, down 2.0% in the space of three months, to be cut a further 0.75% to 4.50% at the December meeting. The RBA next meets in February.
• Global economic and financial market conditions have surprised on the low side - particularly during October as the credit crisis intensified. This points to the prospect of domestic activity slowing down by more than expected earlier this year - when the RBA was tightening policy aggressively. The RBA now expects near term growth to be "quiet a slow pace" and anticipates that inflation, which is well above the target band, will soon begin to moderate.

Aus Q3 GDP

Dec 3, Last: 0.3%, WBC f/c: 0.1%, 1.8%yr

Mkt f/c: 0.2%, Range: -0.3% to 0.5%

• The Australian economy has slowed under the weight of the RBA's aggressive tightening of monetary policy early in 2008 and the global credit crisis, which has triggered a world economic recession.
• The economy appears to have experienced very little to no growth in the September quarter. Non-farm GDP may have declined fractionally - if so, that would be the first negative since Q4 2000.
• Consumer spend was very subdued in the quarter, housing construction was broadly flat and we suspect so too was business investment, notwithstanding strength in mining. We estimate that net exports subtracted 0.4ppts from growth.
• Public spend and the farm sector, rebounding from drought, are likely to support activity.

Aus Oct international trade balance, AUDbn

Dec 4, Last: +$1.460bn, WBC f/c: +$1.8bn

Mkt f/c: +$1.5bn, Range: +$0.1bn to +$3.9bn

• The trade balance rose $220mn in Sep to a surplus of $1.460bn. Total X jumped 7.5%, led by non-rural price gains with a 7.3% AUD/USD fall, and further strength in bulks X. Total X trend growth was 2.1%mth with non-rural trend growth a strong 2.9%mth. With the currency price boost, M bounced 7%, but this left in place a slowing uptrend (1.5%mth) with consumer goods M continuing a six month downtrend.
• With AUD/USD -16.2% in Oct, the RBA non-rural commodity price index leapt 11.6%, but offsetting falls in USD rural prices left the AUD rural index near steady. Non-rural X are f/c to rise 2.8% but weaker rural X will constrain total X to a 2.1% rise. Despite the AUD fall, merchandise M data implied only a 0.8% rise in goods M (implying weak vols) and we f/c +0.9% for total M. This gives a $1.8bn surplus, a new record high.

Aus Oct dwelling approvals

Dec 4, Last: -7.2%, WBC f/c: -1.0%

Mkt f/c: flat%, Range: -5.0% to 3.0%

• Dwelling approvals slumped 7.2% in Sep after falling 5.5% Jul-Aug. Q3 marked a significant deterioration in Australia's housing sector as mortgage interest rates hit 9.6%.
• Weakness is expected to carry into October with a further 1% decline in approvals forecast. The RBA cut rates by 25bps in Sep and by another 100bps in Oct. The Govt also trebled the grant to first home buyers constructing or purchasing a newly built dwelling. However, these measures would have had little impact on approvals in the month which will instead be more of a reflection of previous high interest rates, the constrained funding environment and heightened concerns about the global financial crisis. That said, there are signs that policy moves (including a further 75bp rate cut in Nov) are stimulating demand with industry data on finance approvals and new home sales posting solid gains in October.

NZ RBNZ Monetary Policy Statement

Dec 4, Last:6.50%, WBC f/c: 5.50%, mkt f/c: 5.00%

• The credit crisis continues to ravage financial markets, and the world economy is now rapidly losing steam. New Zealand will be hit by lower commodity prices and weaker export demand.
• T he RBNZ will be aiming to bring financial conditions well into 'easy' territory. A high degree of certainty about the economic slowdown means they can move quickly.
• However, monetary policy has many friends, and we feel that a cut of 'just' 100bps would be enough to do the job for now.

US Nov ISM factory & non-manufacturing surveys

Dec 1, Last: 38.9, WBC f/c: 38.2

Dec 3, Last: 44.4, WBC f/c: 42.0

• The factory ISM continued its Sep plunge in Oct, falling to its lowest since 1982, with all activity components sharply weaker. The ISM said that manufacturing appeared to be experiencing significant demand destruction associated with the financial crisis, hurricane disruption and the lagged impact of prior energy price gains. The latter two of those three should abate now but we suspect they only account for a very small component of the October ISM collapse. With the regional Fed factory surveys finding new lows in Nov, we expect the national ISM factory index to slip further too.
• The non-manufacturing ISM fell to its lowest since the survey's 1997 inception in Oct, and we expect that record low to be exceeded in the Nov survey, though collapsing gasoline prices may help limit the extent of the decline.

Bank of England and European Central Bank: more cuts

Dec 4, BoE Last: 3.0%, WBC f/c: 2.50%

Dec 4, ECB Last: 3.25%, WBC f/c: 2.75%

• The BoE policy committee voted unanimously for the surprise 150bp rate cut on Nov 6, indeed the minutes revealed that a 200bp cut was considered. With the central projection for the CPI in two years 1% below the 2% target even after the cut to 3%, the BoE has clearly signalled that further steep cuts are likely. We expect a minimum cut of 50bp in December. While a 75bp cut is a realistic possibility it could be argued that the fiscal stimulus announced on 24/11 was large enough for the BoE to opt for the more conservative option. More cuts are likely in 2009.
• The less agile ECB only cut 50bp on Nov 6 but collapsing CPI inflation and sharply weaker news on the economy pointing to a deepening recession should see the ECB deliver a further 50bp cut with more to come in early 2009. ECB chief Trichet will reveal new staff eco projections at the press conference.

US Nov non-farm payrolls

Dec 5, Payrolls ch' Last: -240k, WBC f/c: -340k

Dec 5, Unemployment rate % Last: 6.5%, WBC f/c: 6.9%

• Payroll employment plunged 240k in Oct and Sep's 159k fall was revised to a 284k slump, the first back to back declines of greater than 200k since the 2001 recession. The separate household survey showed a 297k fall in Oct, the sixth consecutive decline in what is normally a volatile series.
• Economic activity is contracting sharply in the current quarter. November saw a sharp rise in lay-off announcements across many industries, captured by accelerating initial claims on unemployment insurance. Ongoing claims, a measure of the level of unemployment, rose above 4mn for the first time since the early 1980s. The jobs indices in many Nov business surveys were especially weak.
• We expect this weakness to be reflected in a 340k payrolls decline and a further spike in the jobless rate to just shy of 7%.

Westpac Institutional Bank
http://www.westpac.com.au

Disclaimer

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