Key insights from the week that was.
In Australia, the Westpac-MI Consumer Sentiment Index fell 2.7% to 78.2 in November, its weakest reading since late-2022 and a level historically associated with periods of severe economic stress. Renewed cost-of-living and interest rate pressures were front and centre following another lift in inflation, including sharply higher petrol prices, and the RBA’s November rate increase. Mortgage holders are feeling the squeeze most acutely, with sentiment across this group falling to a record low. Consumers have become noticeably more downbeat on the near-term economic outlook – the relevant sub-index dropping 10.2% to be 22% below its long-run average. Job-loss fears also continue to edge up.
Businesses are similarly troubled. The latest NAB business survey showed confidence slipped further to –15 in October as conditions held near their weakest level since the pandemic. Of concern for the outlook, forward orders fell to –12, also the weakest read since the pandemic, and capital expenditure intentions deteriorated. Purchase costs continue to grow materially faster than selling prices, further compressing already tight margins.
Housing provides a clear example of how caution and tighter financial conditions can jolt activity. The value of new dwelling finance approvals plunged 15% in Q3, the largest quarterly decline in the series’ history, taking approvals 25% lower year-to-date. Investor lending bore the brunt of the adjustment, falling 30% over the quarter as higher rates combined with the housing tax changes announced in May. Owner-occupier lending also weakened, however, with first-home buyers proving particularly sensitive to the deterioration in affordability and market conditions.
Taken together, the data points to a further loss of momentum across the domestic economy, consistent with Westpac’s expectation for subdued growth and concern over downside activity risks.
Meanwhile, in the US, October’s headline CPI met our expectations but at 0.4% was a touch above the consensus view. Energy and food both contributed meaningfully to the result, but core inflation was also marginally stronger than forecast, +0.3%. Core goods inflation has accelerated over the past four months to average a gain of 0.2% as businesses look to pass tariffs, tech and energy input cost inflation through. Shelter meanwhile continued to rise at an above-average pace, gaining 0.3% in October.
The market impact of the October CPI report was accentuated by hawkish remarks from Fed Governor Waller prior to the release. He expressed confidence in economic activity and the labour market while showing significant concern over the strength and persistence of inflation, focusing on the passthrough of energy and technology input inflation. His conclusion for policy was clear: “if, as I expect, the monthly rate of inflation improves in October, I am leaning toward supporting an increase in our policy rate of 25 basis points at the FOMC’s December meeting”; but “if the October CPI inflation data out later today are similar to the past two monthly readings—with core CPI inflation around 0.3 percent or even higher—then a stronger policy move may be needed”.
Regional Fed Presidents Goolsbee, Logan and Hammack also kept the focus on inflation risks and stated or implied the FOMC needs to act. Market participants have responded to this week’s updates, pricing a 25bp hike in for the December and January meetings, and a cumulative 3.5 hikes by September. We believe this pricing overstates the need for policy tightening given core inflation ex shelter remains relatively benign at 2.4% on a six-month annualised basis and the labour market is balanced; but it will take time for price concerns to subside.
While we agree that the US economy is strong in aggregate, US households are under pressure from the cost of living, and their investment decision making is constrained by borrowing costs. Highlighting this, US existing home sales fell 5.5% in October after a downwardly revised 1.0% gain in September, leaving the level of sales below the cycle lows of 2009 and 2010. Our November Market Outlook will provide a full update on our expectations for the US and the world when released on Westpac IQ this afternoon.
