Key insights from the week that was.
In Australia, the only update of note this week was October’s Westpac-MI Consumer Sentiment Survey, which ultimately disappointed with a –3.5% decline to 92.1. Combined with last month’s fall, all gains over May to August have been erased and sentiment is now back into outright pessimistic territory. The most recent fall appears to be largely a consequence of renewed fears over the cost-of-living following the latest stronger-than-expected inflation update.
This looks to have fed through to households’ opinions on family finances. Both sub-indexes tracking current views and expectations deteriorating sharply back below long-run averages (–4.8% and –9.9% respectively). This coincided with the lift in expectations around mortgage interest rates. That said, while some consumers appeared to be ‘bracing for the worst’ as far as last week’s RBA’s decision was concerned, the Board’s non-committal and cautious language accompanying the decision went some way towards calming these fears. On the economy, consumers have become more downbeat on the year-ahead outlook (–2.5%) but remain fairly agnostic on the medium-to-longer term outlook (+1.4%).
Against this backdrop, consumers’ spending intentions remain a clear laggard in the survey detail. At 97.2, the ‘time to buy a major household item’ sub-index is some 21% below long-run average levels. This strikes a similar tone to official household spending data which is pointing to a more modest recovery following a solid showing in Q2 (which was buoyed by temporary factors including insurance payouts, abnormal seasonality, and EOFY sales). Going forward while a recovery is clearly underway, households’ ‘value-conscious’ attitude suggests that underlying momentum is still subdued. As a result, spending growth may remain patchy over the coming months and quarters.
This implies that the projected recovery in household spending is unlikely to be a decisive factor in the RBA’s near-term policy decision. Instead, as Chief Economist Luci Ellis highlights in this week’s essay, attention will be focused on upcoming labour market and inflation data ahead of the RBA’s November decision – the RBA has almost certainly not yet decided whether or not to cut the cash rate in November with these updates set to be the big deciding factor.
Offshore, the US government failed to reach an agreement on spending extending the shutdown and continuing to disrupt the release of official data. Consequently, attention was focused on the minutes of the FOMC’s September meeting.
The minutes struck a balanced tone with members highlighting both upside risks to inflation and growing downside risks to employment. The decision to cut rates by 25bps was motivated by weaker labour market conditions which also led them to “no longer characterize labor market conditions as solid”. Though downside risks were emphasised, the FOMC also affirmed they did not see a sharp deterioration in labour market conditions and that softer job gains were a function of both labour demand and supply, the latter reflecting the impact of fewer migrants. The view on inflation was more encouraging with the minutes noting that “excluding the effects of this year’s tariff increases, inflation would be close to target” and that they “perceived less upside risk to their outlooks for inflation than earlier in the year”. While concerns around inflation had subsided, the committee continues to expect an increase in inflation in the near-term and are attuned to how this is being transmitted into inflation expectations. We anticipate the FOMC will cut the federal funds rate once more this year, consistent with their view that ” it likely would be appropriate to ease policy further over the remainder of this year”.
Closer to home, the Reserve Bank of New Zealand cut its OCR by 50bps, a move that was out of consensus with the market but anticipated by our New Zealand colleagues. The Committee’s concern around excess capacity motivated the larger move though a 25bp cut was also considered. Forward guidance provided in the Media Release suggests further reductions are likely, we expect a 25bp cut in November. Further details on RBNZ’s announcement can be found here.
