Key insights from the week that was.
A quiet week for data saw the market’s focus remain on inflation. This was most notably the case in New Zealand and Australia, with the NZ Q3 print received this week and Australia’s Q3 outcome due next week.
New Zealand’s Q3 CPI report was a spectacular outcome, with the quarterly gain of 2.2% above the RBNZ’s annual inflation target. At September, annual inflation is 4.9%yr, up from 3.3%yr three months earlier and the highest read since 2011’s GST spike. As discussed by our New Zealand economics team, the strength being seen in inflation is broad-based, with “a potent cocktail of supply-side cost pressures and strong demand” present. On the supply side: global production disruptions have reduced the availability of many manufactured goods and increased their price; transport and energy costs have also surged. Regarding demand, its underlying strength and the reduced set of goods and services available for purchase as a result of travel restrictions have amplified the inflation pulse and buoyed inflation expectations.
While the inflation pulse will moderate as life returns to ‘normal’, inflation is expected to remain firm over the forecast horizon. Consequently, the RBNZ is expected to raise the cash rate at the November, February and May meetings before pausing to assess conditions.
Despite being affected by many of the same influences, inflation in Australia is a stark contrast to that in New Zealand. Versus their 2.2% Q3 gain, we expect next week’s ABS release to report a 0.8% increase in Australian consumer prices over the three months to September, 0.5% on a core, trimmed mean, basis. That will leave annual headline inflation at 3.1%yr and trimmed mean inflation circa 1.9%yr. Even on a six-month annualised basis, trimmed mean inflation is only expected to print at the bottom of the RBA’s 2-3%yr target range. All of the detail underpinning our expectations can be found in the CPI preview, along with an assessment of the risks.
As detailed again in this weeks October RBA meeting minutes, the Board continues to believe that, while there are risks, inflation is unlikely to sustainably be in the 2-3%yr target range before 2024, warranting the cash rate remain on hold until then. Meanwhile, market pricing has moved significantly on global inflation concerns and New Zealand’s Q3 outcome. The market now sees the first rate hike by the RBA in late-2022, just ahead of Westpac’s forecast of Q1 2023.
Critical to the policy decisions of the RBA over the forecast period will be wage gains, with growth of more than 3.0%yr believed necessary by the RBA to sustainably meet their inflation target. While, as yet, there is little evidence of a broad-based pick up in wage growth in Australia, there is resilience in employment.
Indeed, this week’s payroll release from the ABS suggests employment may have moved into recovery mode in late September, after the reference period for September’s labour force survey. The payrolls release is volatile and not seasonally adjusted, but it clearly points to the possibility of an abrupt end to the large-scale job losses induced by the recent lockdowns. If employment surprises to the upside in October, then the peak unemployment rate for this contraction may be below our current forecast of 5.1%, revised down from 5.4% before the September labour force survey was released. Such an outcome would lead to strong confidence in the employment rebound and, come the end of 2022, the return of a tight labour market.
Data in the US this week was secondary in nature and proved of little significance for the market. Participants were instead focused on the fiscal outlook, which remains very mirky, and concerns over inflation. From speeches by Governors Quarles and Waller, it is clear that the FOMC maintain a high degree of confidence in the US economy despite a likely poor read for Q3 GDP next week. In terms of the risks, their minds are focused on upside potential for inflation. This focus makes clear that, barring an unforeseen event, the taper decision will be made at the November meeting and proceed to mid-2022. The market has also come to our view on the timing of a first fed funds rate hike, pricing it by December 2022. It is worth noting though that the baseline view of the FOMC, Westpac and the market is still for a measured, reactive tightening cycle, to 1.625% by late-2024 on our forecasts. Such an outturn would arguably still be supportive of growth around trend at the end of the forecast period and beyond.
Finally on China. This week’s Q3 GDP update and September partial data were in line with our expectations. While Q3 was hit by COVID-19 fears and headwinds associated with authorities’ 2020 regulatory changes for residential construction, the September retail sales print implies consumption activity bounced back strongly late in the quarter. Previously released data, the NBS services PMI and trade data for September in particular, also point to a strong rebound in momentum into Q4. As a result, we hold to our 8.5%/5.7% GDP forecasts for 2021 and 2022 despite the uncertainties related to Evergrande and global production.