Key insights from the week that was.
The RBA Board met for the final time for 2021 this week. There was no change in the policy stance and their outlook was broadly in line with that seen in November. On policy, the market’s expectation that the US FOMC will accelerate their taper – with the process to now end in March 2022, in our view – has not affected the RBA’s approach to asset purchases. Confirmed in the decision statement is that the current purchase pace of $4bn per week will continue until at least February 2022. At that time, progress towards their targets for full employment and inflation; market functioning; and the actions of other central banks will dictate the next step for the RBA.
Westpac continues to expect weekly purchases will be reduced from $4bn to $2bn at the February meeting, with the program to conclude by the May Board meeting. The growth outlook is certainly supportive of the expectation that an end to extraordinary policy stimulus is in sight for Australia. The better-than-expected Q3 GDP outcome of -1.9% and evidence of strong momentum since means the “economy is [now] expected to return to its pre- Delta path in the first half of 2022” instead of the second. This expectation is in line with our own view, as detailed by Chief Economist Bill Evans’ video update this week and in conversation with the economics team in the latest Market Outlook in conversation podcast.
The only data point of significance for Australia this week was the ABS’ weekly payrolls survey. For the two weeks to 13 November, payrolls were reported to have risen by only 0.2%. However, this follows a 1.7% gain in payrolls since 16 October, setting the scene for a robust increase in employment in November.
Indeed, comparing the payrolls data for the labour force survey reference period in October and November suggests there is upside risk to our +175k forecast for the month and that healthy gains will also be seen in hours worked. The November labour force survey will be a key release for Australia next week; it is due for release on Thursday 16 December, along with the Federal Government’s Mid-Year Economic Outlook for which we have released a preview.
Another key theme in this month’s Market Outlook in conversation podcast was the opportunity before the global economy as 2022 begins. While significant risks remain, the data flow of recent weeks has continued to point to strong job creation and robust momentum in activity across the developed world. This is despite difficulties in containing delta in the US and Europe, and the threat omicron poses to confidence and activity.
As discussed in depth in our end-of-year edition of Market Outlook, China’s outlook is particularly promising, with authorities’ dual circulation strategy and restrictions on borders expected to result in growth above 5.5% in both 2022 and 2023, in year-average terms. The latest financing and trade data was supportive of such an outlook this week, with aggregate financing up 23% year-to-date in November versus 2019 (prior to the pandemic) and the trade surplus remaining near historic highs.
To us, it is not a surprise that China’s Renminbi and other key Asian currencies have outperformed during this recent period of US dollar strength. Simply, these nations have recovered from successive waves of the pandemic and their long-term capacity for economic development is now shining through. For FX, the breadth and self-sustaining nature of this growth argues for continued outperformance against the US dollar and other currencies into the medium-term. A full view of our expectations for interest rates and FX to end-2025 can be found in our latest set of long-term forecasts.
Given the global economy’s strength, dynamic policy making by the FOMC and other major central banks is not to be feared. Instead, as a baseline expectation, it is best to hold that authorities will continue to adapt their decision making to the evolving circumstances, actual and expected, reducing inflation risks and sustaining growth at or above trend. As a result, we continue to believe that the rate hike cycles to come through 2022-2024 will be modest versus history, but also that policy rates and term interest rates will sustain at or near peak levels to the end of the horizon as healthy growth continues.