Key insights from the week that was.
Sentiment was key for Australia this week, while offshore we received further insight into the FOMC’s views on the outlook.
Through much of 2019, the NAB business survey has been a sombre read, and this was again the case in September. Though business conditions rose 1pt, this gain only partly reversed August’s decline and leaves the index below its long-run average. Business confidence meanwhile fell 1pt to a well-below average read of 0. Notably, the survey points to weak confidence curbing business investment intentions, with the capital expenditure index at a 5 ½ year low. The employment index rose slightly in the month, but at its current level points to job gains averaging 18k per month hence, down from 28k per month recently. While not an outright weak result, this highlights that the unemployment rate is more likely to move higher from 5.3% over the coming year (we believe to 5.6%) than down towards the RBA’s estimate of full employment at 4.5%.
Turning to consumer sentiment, our Westpac–MI survey provided a very disappointing update in October, the headline index falling 5.5% to a four-year low of 92.8. Typically rate cuts are a positive for sentiment, but as highlighted by Chief Economist Bill Evans, currently “Consumers are looking behind the reason for the rate cut and, arguably, the absolute level of rates and getting nervous”. Global developments remain a clear and pressing negative for sentiment. However, domestic conditions are also unnerving. Family finances versus a year ago and for the year ahead both fell sharply in October and are well below long-run average levels. Indeed, the year-ahead view is currently at a 5-year low. Consumer unemployment expectations are still broadly sanguine, but persistently weak wages growth is clearly having a material impact on the consumer mindset, so too the limited benefit to after-interest-and-tax incomes from recent monetary and fiscal easing. It is not surprising then that the ‘time to buy a major household item’ index is at a four-year low, and that the official data for retail sales continues to disappoint.
On the housing market, recent price gains are expected to continue over the coming year, with house price expectations now up 54.4% since May 2019. This is leading to strong investor interest, ABS housing finance data reporting a strong 10% pick-up in the value of investor loans over July/August. Interestingly though, ‘time to buy a dwelling’ declined another 5.4% in October to be below its long-run average. Affordability is clearly an issue for owner occupiers, particularly in NSW and Victoria.
Then to the US, where the views of the FOMC were the focus this week. The tone of the FOMC September meeting minutes was sanguine on the economy. However, Committee members did show greater awareness of global risks and the impact they were having on the US economy. It was notable that the potential pass-through of weakness in investment and net exports to employment (and hence consumption) was singled out as a risk by the Committee because, through 2019, available data has increasingly suggested this ‘risk’ is becoming a reality. Specifically, the ISM employment measures have moved sharply lower and the JOLTs hiring and job openings measures have ceased trending higher. Moreover, as highlighted this week in a speech by Chair Powell, the FOMC now know that their labour market is carrying less momentum than previously thought, with the BLS flagging a forthcoming material negative revision to nonfarm payrolls employment growth for the year to March 2019. While not included in the official revision, this also likely means that more recent estimates of US employment growth are optimistic as well.
Chair Powell remains clear in his communication that it is best to be pro-active with policy and that there is currently no downside risks to easing. While arguably more optimistic on the strength of the economy, the Committee is also keen to actively manage the risks before them, else the US again find itself stuck at policy’s effective lower bound. Consequently, while not priced into their expectations at September, we continue to expect the federal funds rate will be cut four more times by June 2020 to 0.875%. On our expectations, this will sustain US economic growth near trend and a historically-low unemployment rate. Against global uncertainties, this outturn will see the US dollar remain strong over the year.
In that regard, recent updates on the US-China trade war and Brexit were mildly positive, but the underlying issues are no less resolved.
Delegates from the US and China met for the first time since July this week. As would be expected, negotiations remain guarded, but steps were made in the right direction. China indicated a willingness for a ‘partial’ trade deal, likely involving the purchases of US agricultural commodities in exchange for the suspension of the October 15 tariff increase to 30% from 25% on $250bn of Chinese imports to the US. President Trump is scheduled to meet with Vice Premier Liu He tonight.
On Brexit, while UK PM Johnson’s meeting with German Chancellor Merkel was unproductive, his meeting later in the week with Irish Taoiseach Varadkar went better. At the conclusion of the meeting, both leaders agreed that they see a pathway to a potential deal. While a deal is unlikely to be found before the October 17-18 EU Summit, and as such an extension to the October 31 Brexit date is most likely, any indications towards the foundation of a future agreement will be in focus over the next week. However, with the current Parliament seemingly unworkable, it is likely a way forward will need to follow a UK general election.
