Key insights from the week that was.
As Australia’s COVID-19 outbreak continued to challenge authorities this week, we received an update on the consequences for both businesses and households.
NAB’s business survey signalled a sharp decline in both business conditions and confidence, down 14pts and 19pts respectively in July. Given their individual starting points: conditions are at their lowest level since November 2020, but still above the long-run average; while confidence is materially below its historic average, at levels last seen in July/August 2020.
Unsurprisingly, confidence and conditions were weakest in NSW in the month. As the survey was taken 20-30 July, confidence and conditions arguably will have soured further since, with Sydney continuing to record high levels of new cases and most of the other states having experienced an outbreak.
Looking ahead, forward orders point to near-term weakness in activity; but, all considered, the trading conditions, employment and profitability indicators are constructive for recovery. We continue to expect the combined effect of the vaccine drive and restrictions to quell current outbreaks, allowing for a vigorous recovery from the December quarter into 2022.
Australian consumer’s willingness to spend will be key in bringing about this economic rebound. On this front, the August Westpac-MI consumer sentiment survey provides a positive view. While the headline index fell a further 4.4% in August, at 104.1, consumer sentiment is still well above the lows seen during the national lockdown of 2020, circa 76. Indeed, sentiment is stronger now than it was the year prior to the pandemic.
From the detail of the survey, belief in the vaccines looks to be a key source of strength for sentiment, both with respect to health outcomes and the economy. The 1-year and 5-year economic outlook sub-components remain above average despite this month’s developments. And views on family finances also remain near average, although spending intentions have wavered – ‘time to buy a dwelling’ and ‘time to buy a major household item’ are both sub-par.
Of course, the decision on whether to buy a dwelling is not only affected by immediate challenges related to the virus, but also structural affordability concerns. House price expectations signal consumers anticipate a further deterioration on this front.
Globally on the virus, numerous anecdotes of concern over delta’s spread within China and other Asian nations have surfaced this week. Another large outbreak (or outbreaks) in the region cannot be ruled out but, on the data to hand, the US looks to be in a much worse predicament.
Despite having fully vaccinated over 60% of their population aged 18 and over, this week, the US has been reporting over 120,000 new COVID-19 cases a day. This is around half the peak of December/January’s wave prior to the vaccination drive – it should be noted that the number of tests being completed is also about half that seen over the prior period. Worryingly, hospitalisations related to the virus are also rising rapidly, with the new cases occurring amongst the unvaccinated population.
More of a focus for markets this week on the back of last Friday’s impressive million job gain have been additional comments by FOMC members signalling a shift in the stance of US monetary policy over the next month. Chair Powell’s address to the Jackson Hole economic symposium in late-August is expected to lay the foundation for a taper decision at the September FOMC meeting. We expect the taper to subsequently begin in January and run for six months to June 2022.
Despite the market’s focus on US recovery and the next steps for monetary policy, that the US dollar DXY index has again failed to break above the low-93’s signals to us that participants are increasingly coming to the realisation that this period of US exceptionalism is near an end.
While outsized employment gains will persist for a time, this is catch-up growth seeing as the labour market recovery was delayed by supply issues. GDP growth meanwhile has peaked and will now decelerate back to trend on an annualised basis come the end of 2022. In the near-term, monetary policy in the US is set to run broadly in line with that in the UK, Canada and Europe, with all three jurisdictions to partially or fully taper around year end. It is only through 2022 that justification for a more material tightening cycle will build in the US versus the other nations above. As detailed in on page 12 of our August Market Outlook, dissipating US’ outperformance with respect to the virus and economy is therefore set to weigh on the US dollar to March 2022; but thereafter, the monetary policy outlook will drive a rebound.
