Key insights from the week that was.
Beginning in Australia, the Westpac-MI Consumer Sentiment survey delivered a lacklustre update on confidence. At 81.3, the headline index remains firmly entrenched at extremely pessimistic levels, an outcome that has only been associated with major economic dislocations over the survey’s near fifty-year history. Driving this sustained weakness in sentiment has been a marked deterioration in views over the economy’s prospects and family finances for the year ahead, with these sub-indexes now 10% and 16% below their respective long-run averages. The cost-of-living remains a considerable constraint for households, the sub-index covering spending intentions on ‘major household items’ nearly 40% below its long-run average.
Another key theme discussed by Chief Economist Bill Evans after the July survey’s release is the impact of inflation and interest rates on confidence. Curiously, the RBA’s decision to leave the cash rate unchanged in July offered no support; indeed, sentiment was much weaker after the meeting than before (77.9 vs. 88.0). Available data gives context to this result. Evidence over the past year suggests inflation has had a greater impact on confidence than interest rates. May’s deceleration in the Monthly CPI Indicator from 6.8%yr in April to 5.6%yr and the consequent rally in sentiment pre-RBA to 88.0 also support this thesis. However, in noting “Some further tightening of monetary policy may be required”, the RBA made clear that policy will likely have to be tightened further to get inflation sustainably back to target. The material chance of further hikes and a lengthy period of above-target inflation arguably drove confidence back down to 77.9 post-RBA, 1.6% below the final June outcome.
The emerging weakness evident in business conditions is becoming more consistent with consumers’ pessimistic view on the state of the economy. The NAB business survey indicates that the current assessment of business conditions has taken a material step back over the last two months, down from +15 in April to +9 in June. With forward orders posting consecutive declines over May/June against a backdrop of soft and fragile business confidence, the survey’s shift in tone is clear, foreshadowing the prospect of a further slowing in the economy over the remainder of the year.
Before moving offshore, it is worth highlighting that RBA Deputy Governor Michele Bullock has been appointed as RBA Governor for a seven year term commencing September 18. This development comes at a time where the RBA’s monetary policy processes and communication guidelines are being assessed and modified in light of the Government’s Review.
Events offshore this week also provided a number of notable headlines.
The Bank of Canada raised rates again by 25bps to 5% as fears of persistent inflation prompted action. This is the second rate hike since the BoC decided to pause earlier this year. Inflation has eased off the back of lower energy prices; however, broad-based strength remains elsewhere. Spending data shows evidence of excess demand across the economy, with household consumption driving GDP growth in the March quarter and more timely indicators like retail sales suggesting consumers have plenty of cash to splash. This comes alongside a housing market that is starting to find its floor. New projections suggest the CPI will hover around 3% for a year. The BoC experience is a perfect example of why central banks must be wary of the risks of ending their tightening cycle too soon.
South of the border, the US CPI made headlines as it came in softer than expected at 0.2%mth for both headline and core inflation. There were clear signs of a broad-based deceleration as momentum in goods and services ex-shelter continued to slow. However, shelter continues to cause concern, contributing a whopping 2.1ppts to annualised headline inflation in Q2 thanks to its 35% weight and 6.0% gain. Here is evidence that shelter has the capacity to create at or above target outcomes for inflation by itself should rent inflation hold up rather than decelerate as is our base expectation.
The Federal Reserve’s July Beige Book was also constructive for the inflation outlook. Economic activity was reported to have “increased slightly since May”, employment only “modestly”. Most significant for inflation is that the “unusually high [labour market] turnover rates in recent years appear to be returning to pre-pandemic norms” and contacts “in multiple Districts reported that wage increases were returning to or nearing pre-pandemic levels”. Despite this, signs of labour market slack have yet to show up meaningfully. Initial jobless claims fell to 237k, driving down the four-week average to 246.8k.
Across the Tasman meanwhile, the Reserve Bank of New Zealand kept rates steady at 5.5% in line with expectations. The statement noted “monetary conditions are constraining domestic spending as expected” and there was nothing to indicate their thinking had changed vis a vis keeping the OCR on hold until the second half of 2024. The next meeting will reflect the Committee’s view of the June CPI print and labour report. Should either come in stronger than expected, the central bank will be keen to get on the front foot and raise the policy rate by 25bps. It is Westpac’s view that they likely will.
Over east, the Chinese June price outcomes were weak, the CPI flat year-over-year and the PPI down 5.4%yr. Base effects are significant for these outcomes, the impact of Russia’s invasion of Ukraine on supply chains and energy and commodity prices falling out. However, excess capacity across the economy and a continued push to grow industry further amid a modest post-COVID rebound is also at play.
To counteract some of this weakness, the government has eased key policy rates and increased liquidity. They are also likely encouraging lending by the banks behind the scenes. Aided by these steps, M2 money supply rose 11.3%yr off a strong base in 2022, and new loans came in well above expectation in June at CNY3050bn. Benefitting both now and the medium-term, the trade balance remained wide in June at US$70.6bn albeit shy of expectations, US$74.9bn. To sustain this sizeable income inflow, Asian demand has to make up for weak and deteriorating developed-world demand.
