Key insights from the week that was.
As COVID-19 new cases spread across Sydney and to Queensland this week, increasing risks to the outlook, available partial data continued to highlight the economic slack already present.
The most notable print for Australia was the June quarter CPI. The 1.9% quarterly decline in headline prices is unparalleled in the 74-year history of the survey. Policy-induced price declines for items such as childcare (-95%) and education (-3.7%) were the key contributors to this weakness. However, even after these temporary one-offs are stripped out, inflation is still abnormally weak, the trimmed mean core measure coming in at -0.15% for the quarter, leaving the annual rate at an all-time low of 1.2%yr. Arguably the best CPI evidence of COVID-19’s shock to the core of our economy is the housing rent component which fell 1.3% in Q2. This component measures all new and existing rent contracts; to achieve this 1.3% aggregate decline, the fall in newly contracted rents over the period would be many times larger than 1.3%, particularly in metro areas.
Given the churn experienced in the rental market and the dramatic labour market deterioration which continues to evolve, it is not surprising that dwelling approvals have jolted lower. Total approvals hit an 8-year low in June after declining 20% in the past two months, with the decline concentrated in unit approvals, particularly high-rise. This trend points to the effect of COVID-19 on construction lingering for several years.
COVID-19 also continues to materially affect consumption, as highlighted by Westpac’s new card tracker index. Most significant is the growing divergence between Victoria and the other states, in line with their respective new case counts. For the nation overall, the key theme is the impact social distancing restrictions continue to have on the services sector. An in-depth assessment of consumer sentiment and expectations is presented in Westpac’s July Red Book.
Moving offshore, the US has again been the market’s focus. The July meeting communications delivered all that the market wanted, with the Committee focused on the risks stemming from COVID-19’s continued spread and willing to do all it takes to counter the virus’ negative consequences.
In terms of the risks before the FOMC, most immediate is the lasting consequence of the sharp decline in activity seen through the first half of the year and the immanent end of legislated fiscal stimulus. While several fiscal policy options are presently being debated in Congress, none are likely to arrive soon enough to neutralise the loss of support which begins this week. Moreover, it seems likely that the scale of any second stimulus program will be smaller than the first, locking in a fiscal drag for the economy through the second half of 2020.
As yet, the FOMC is not ready to commit to further easing. But come September, if the virus is continuing to spread and/or the loss of fiscal support proves greater than participants currently anticipate, then expect a full discussion of policy options and triggers come September. Potentially, depending on the state of the economy and skew of risks, that meeting could also see a further easing of policy – either through an increase in monthly asset purchases or the adoption of yield curve control with a focus on the 10-year yield.