Key insights from the week that was.
Global markets have remained cautious this week amid ongoing concern over inflation and interest rates, and as China’s National Party Congress has taken place.
In Australia, the October RBA meeting meetings kicked off the week’s information flow. As detailed by Chief Economist Bill Evans, the document gave a detailed assessment of the case for hiking 25bps (their eventual decision) and 50bps (the market’s prior expectation) at the October meeting. Arguing for 50bps were inflation and wage risks, particularly while the economy remains strong; the cash rate not being especially high; and the potential for the market and/or community to question the resolve of the Board. In favour of a 25bp hike however, was recognition that downside risks to activity growth are building; that inflation could subside quickly; and also the lag between the change in policy and its impact. Also clear from the minutes was that reducing the pace of hiking to 25bps per month is not a sign of a near-term pause, with “further increases in interest rates over the period ahead” expected.
The September labour force survey subsequently surprised to the downside, with only 900 jobs created in the month. The unemployment rate was unchanged to 1 decimal point, though to 2 decimal points it rose from 3.48% to 3.54% as participation remained unchanged but the size of the labour force grew. While we expect employment growth to remain robust into 2023, accelerating growth in the population will limit further downside for the unemployment rate, and help to better match labour supply and demand.
Next week for Australia, both the Q3 CPI and second Federal Budget 2022 are due. On the CPI, Westpac expects a strong 1.1% rise in headline inflation, taking the annual rate 0.4ppts higher to 6.5%yr. Notably, without state energy rebates, the Q3 forecast would have been higher still circa 1.8%, in line with the gain seen in Q2. The trimmed mean core measure is anticipated to gain another 1.5% in Q3, in line with Q1 and Q2 and enough to lift the annual rate to 5.6%yr. Our preview details our expectations for all the key components of the CPI. Note as well, this week’s New Zealand CPI highlights that risks related to inflation remain skewed to the upside, requiring central banks globally to slow their economies in an attempt to balance demand with supply. With NZ annual inflation now above 7% and showing continued momentum, Westpac expects the RBNZ to raise their cash rate to a peak of 5.0% (previously 4.5%).
For October’s Budget 2022, while the new Australian Government will have the benefit of an improved starting point, a weaker economy over the forecast horizon sets the scene for some tough discussions and, potentially, decisions next May in Budget 2023. In the interim, the updated Budget 2022 is expected to emphasise the priorities of the new Labor Government, with a particular focus on the policies they took to this year’s election. The key themes are discussed by Chief Economist Bill Evans in this week’s video update, while our written preview provides full detail on both our policy expectations and the Government’s forecasts.
Turning to China, the spotlight has remained on the National Party Congress and President Xi’s degree of control, particularly after this week’s data (including Q3 GDP) was delayed with little notice and no explanation. So far, President Xi and the Party have emphasised their desire for China’s position in the global economy to continue to strengthen while remaining resolute in their belief in the success of COVID-zero as well as their geopolitical views, particularly for Taiwan. As we have seen throughout the past year, China is pursuing the growth opportunities open to it through efficiency; productivity; and expansion into Asian markets. As this economic development is achieved, China’s position in the region and global economy will continue to strengthen. While this opens up opportunity for greater trade and growth for the region overall, it also raises the probability of geopolitical uncertainty and volatility continuing as the West (particularly the US) seeks to preserve its position and influence. The end of the 2022 Congress, particularly changes to the leadership, will be closely watched at the weekend.
For the US, data has been light this week, though that received has clearly highlighted the impact of higher interest rates on the economy, particularly housing. In September: existing home sales fell for an 8th consecutive month; the NAHB housing market index fell for a 10th consecutive month to be near its pandemic lows; and housing starts and permits remained volatile, well below their cycle highs. The Federal Reserve’s Beige Book more broadly pointed to a soft economy, with growing risks over the activity outlook and evidence of businesses beginning to question their staffing plans. These developments highlight that FOMC officials must give greater weight to downside risks for activity in 2023; although, until then, it seems Committee members hawkish resolve will remain.
Finally to the UK. After only 44 days in office, Liz Truss has officially resigned as Prime Minister and the Conservative Party leadership election is due to take place in the next week. This comes after weeks of financial market turmoil following the announcement of Truss’ economic plan, centred on significant and unfunded fiscal stimulus in the form of generous tax cuts at a time of historically elevated inflation. This was rightfully received poorly by many, even in Truss’ own government, resulting in most of the fiscal plan being scrapped in the week leading up to her resignation. Since Truss took over the Prime Ministership, the 11ppt difference in voting intentions (Labour 42%; Conservatives 31%) has now widened to a staggering 29ppts (Labour 52%; Conservatives 23%). A more responsible fiscal plan that is cognisant of the risks to inflation, but supportive to households and businesses over the tough period ahead, is necessary to avoid excessive financial tightening from the Bank of England.