Key insights from the week that was.
In Australia, the CPI was centre stage this week. The September print again highlighted that inflation pressures are largely absent, with the headline measure up 0.5%, 1.7%yr – well below the bottom of the RBA’s 2.0–3.0%yr target range. In the quarter, price gains were concentrated in administrative prices such as tobacco as well as sectors that have previously seen persistent weakness (household contents & services and clothing & footwear being examples). A weaker Australian dollar looks to be passing through to consumer prices, but only at the margin.
Some of these inflationary pressures are excluded from core inflation. The remainder are being offset by next-to-no growth in house purchase costs and rents. As a result, core inflation was only 1.2% in six-month annualised terms. We expect this soft trend to persist, with core inflation to peak at just 1.9%yr in the September quarter 2020.
Turning to housing, dwelling approvals surprised to the upside in September, rising 7.6%. However, this follows a 10.2% decline through July/ August. As a result, while removing downside risk from the outlook, the downtrend in housing investment remained intact at September.
While house price growth has leapt higher on market optimism and low turnover, and new lending has rebounded 12% in the three months to August, total housing credit growth remains soft, up just 3.1%yr at September. Clearly existing borrower repayments are yet to adjust to lower interest rates, restricting total credit growth. This is the result of a mix of active and passive saving decisions by households. It is a positive for financial stability, but a negative for consumption growth.
On the positive front, following the May election, business credit has bounced back, from 0.9% at June to 3.7% at September in three-month annualised terms. That said, further gains are uncertain given the challenging outlook. As highlighted by RBA Governor Lowe this week, globally the benefit of lower interest rates continues to be offset by heightened risk premiums amid geopolitical instability and soft global growth.
While the RBA is set to remain on hold in November and keep its Statement on Monetary Policy forecasts unchanged, by February, we believe the case will have been made for a cut to 0.50%. Our New Zealand team also now believes the final cut in this RBNZ rate cycle will come in February rather than November.
Having cut the federal funds rate for a third consecutive time at the October meeting, the US FOMC showed confidence in the US outlook. However, GDP data released the same day showed business investment continuing to contract in the September quarter; and into the December quarter, partial data points to not only a continuation of this reluctance to invest, but also this sentiment passing to hiring decisions and, at the margin, consumer spending. To keep activity growth near trend; see inflation tend to target; and hold the unemployment rate near its 50-year low through 2020, we continue to see a need for the federal funds rate to be cut down to 0.875% by mid-to-late 2020.
Needless to say, a key risk to the US outlook surrounds the ongoing US-China trade war. This week saw the first piece of disappointing news for some time, albeit from unnamed sources. Bloomberg reported that Chinese officials have high doubts about the prospects of a long-term trade deal beyond the current “phase one” deal due to an unwillingness to negotiate on the thorniest issues. The US and China responded to the report by stating that negotiations are progressing well and President Trump later went on to tweet that a new location to sign the phase one deal will be found.
Turning to Europe, a number of key data points were released this week. Q3 GDP growth printed at 0.2% and saw the annual pace round down to 1.1% from 1.2%yr. Core inflation also remained muted, tracking at a 1.1%yr pace in October. The labour market remains solid however – the unemployment rate held at 7.5% in September, only 0.2ppts from historic lows.
Lastly on the UK, this week saw the EU agree to a flexible extension of the Brexit deadline until January 31. If the UK Parliament ratifies PM Johnson’s Withdrawal Agreement Bill (WAB) in advance of the deadline, then the UK will leave on the first day of the following month.
Following this announcement, the UK Parliament voted in favour of a December 12 general election. PM Johnson had been pushing for an early election in order to re-establish a working majority in Parliament and allow for the passing of the WAB. Polling currently suggests he is on track to achieve that outcome.
Of course, polling is an inexact science and a smooth exit is far from guaranteed. If the vote returns a hung Parliament, the Brexit impasse will remain rigid. Alternatively, if a Labour-led coalition were to achieve a majority, a second referendum would be back on the table. In that respect, the election is the key pivot point in the Brexit end game, and traditional voting lines will no doubt be tested over the upcoming campaign period following the dissolution of Parliament on November 6.
