Key insights from the week that was.
The past week has provided evidence of the strong underpinnings of Australia’s recovery from the second wave of the pandemic. Meanwhile in the US, another inflation surprise was seen.
The NAB business survey reported a large jump in conditions and confidence in October to +11 and +21 respectively – both above-average reads. Behind these results was the re-opening of the NSW economy; Victoria’s lockdown nearing an end; and Queensland gaining confidence that their border would re-open before Christmas. Importantly, even with only one of the east coast states re-opening as the survey was sampled, national forward orders jumped 16pts. This highlights the scale of pent-up demand as well as optimism over the outlook. Both should drive employment and investment hence. Note, Australia’s investment outlook was a key theme in the November edition of our Market Outlook in Conversation Podcast, recorded on Tuesday this week.
The Westpac-MI consumer sentiment survey for November also reported a very positive view of the outlook on Wednesday. Households’ views on the economy in one and five years are currently 17% and 21% above average; further, expectations for the labour market are the strongest they have been since the mid-1990’s. While views on family finances are only around-average levels, the special question we ask ahead of Christmas each year on spending intentions recorded its second-best outcome since 2009. Following the survey’s release, Chief Economist Bill Evans provided an in-depth update on the detail of the report and the implications for consumption and housing.
Thursday then saw yet more good news vis a vis the recovery, this time with respect to the labour market. The loss of 46k jobs in a month, bang in line with our -50k forecast, is not normally a positive result, particularly when it is well below the market consensus estimate, +50k. However, month-to-month, this is a significant improvement following the loss of 146k and 141k jobs in August and September respectively. Further, participation in the labour force rose 0.13ppts in the month, signalling confidence that employment opportunities will increase as the recovery takes hold.
This is precisely how we view the outlook. While rebounding participation is expected to keep the unemployment rate above 5.0% for a few months, by the end of Q1 2022 it is expected to be well on its way to a sub-4.0% figure come December 2022, a level consistent with full employment.
Offshore this week, there was one release of particular significance. At 0.9%, the US CPI outcome for October was materially above expectations. It was not just the monthly outcome that was significant, but also the annual rate of 6.2%yr, a new three-decade high and three times the FOMC’s medium-term target of 2.0%yr. Further, there was breadth to the above results, with the core CPI up 0.6% in the month and 4.6%yr.
Market pricing for the US federal funds rate jolted higher following the CPI release, with 56bps of hikes priced in by December 2022 after the release compared to 41bps before. However: from the revised December 2022 starting point, rate hike pricing for 2023 and 2024 is little changed; and, using the 10-year yield as a predictor of the peak fed funds rate for this cycle, expectations for the coming hiking cycle remain very modest, with the current 10-year yield of 1.60% materially below the FOMC’s ‘longer-run’ projection for the federal funds rate of 2.50%.
Our own peak for the federal funds rate is 1.625% in late-2024, though between now and then we expect the US 10-year to rise to 2.30% end-2022 and to drift back only slowly to 2.00% by end-2024. The reason this is the case is that, despite the strength of current price pressures, like the FOMC, we continue to believe they will prove transitory.
In the US, fiscal support for consumer spending is fading quickly and, except for a few key items such as rents, it seems as though prices across the economy have largely reset, limiting further upside. Globally, production backlogs are being worked through. And, from a developed-world demand perspective, we must also recognise that real wages growth is currently going backwards, and many have leveraged up to invest in housing with lasting consequences for discretionary consumption, particularly as interest rates rise.
A final note for the week on currencies. The above US CPI outcome saw the US dollar DXY index leap higher from around 94 to 95.2 as we write – its highest level in more than a year. As elevated inflation is a global issue and given the reactive stance of the FOMC, we continue to believe the US dollar will lose ground into year end and in 2022. This trend should also be supported by the broadening recovery in the global economy and diminishing risks to the outlook. Near-term however, it is probable that the market will hold onto its positive US dollar bias.
