Independent Australian and global macro analysis

Friday, May 17, 2019

Macro (Re)view (17/5) | RBA closer to easing

Despite Saturday's upcoming federal election, the focus of local markets continued to remain firmly on the Reserve Bank of Australia's (RBA) policy outlook as prospects for a rate cut firmed, possibly by as early as June. Last week's Board meeting and subsequent quarterly statement were clear in identifying labour market developments as the key focus for the Bank. In that context, there were two instructive data points released this week — April's Labour Force Survey and Q1's Wage Price Index report. 

April's labour force report contained mixed detail as employment growth strengthened while the unemployment rate and broader measures of excess capacity increased (read our full review here). After a solid Q1, employment increased by a net 28,400 in April — near twice the market forecast for +15,000. That outturn strengthened the pace of employment growth through the year to 2.6% (net rise of 322,900) from around 2.2% at the end of 2018. However, as per our chart of the week (below), the unemployment rate lifted to 5.2% from an upwardly revised 5.1%, due to the participation rate rising to a new record high of 65.8%. A lift in the unemployment rate in that situation is not a negative per se, but a rise in the underemployment rate to 8.5% (+0.3ppt) and underutilisation rate to 13.7% (+0.4ppt) suggests that conditions are softer than required.  

Consistent with that assessment, growth in the Wage Price Index remained subdued at 0.5% in Q1 (expected +0.6%) and 2.3% through the year (read our review here). Wage inflation is trending higher but the progress remains gradual and arguably slower than expected considering the strength in the labour market over the past couple of years.

Remaining with the labour market theme, this week's NAB Business Survey for April was notable in that the employment index reading fell to -1, which was its first negative result since late 2016. According to NAB economists, that indicates employment growth is likely to slow to around 14,000 per month if that result is confirmed in upcoming reads. More broadly, business confidence ticked up to a reading of 0 but remains well below average, while business conditions softened (from +7 to +3) having turned down noticeably over the past year. 

Meanwhile, households remain slightly optimistic according to Westpac-Melbourne Institute's Index of Consumer Sentiment following a 0.6% month-to-month rise to 101.3 in May. The headline reading has come in above the 100-line that separates optimists and pessimists in 10 of the past 12 surveys. The main contribution to the rise came from a surge in the 'family finances vs a year ago' index (+6.3%), which according to Westpac likely reflects the benefit of consumers having more time to assess the details from April's Federal Budget that had been favourably received. Increased media coverage firming consumers' expectations for an RBA rate cut may also be supporting. After rising in April, sentiment towards house price expectations and purchasing a property declined in May, with the latter still below average indicating that affordability is a lingering constraint notwithstanding the ongoing correction. Unsurprisingly then, data out this week for March showed that housing finance approvals and commitments resumed their slide to -13.8% and -18.4% respectively in through-the-year terms (for our full review see here). 

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US-China trade tensions continued to dominate the focus of global markets this week, remaining highly sensitive to tweets from US President Trump and news headlines. Last Friday, the US confirmed a tariff increase from 10% to 25% on a $200bn tranche of Chinese imports. In response, China had vowed to "take necessary countermeasures" and those details were announced during the week, with tariff increases ranging from 5% to 25% to be applied to $60bn of US imports taking effect from 1 June. With the ball back in the US' court, a public hearing is due to take place on June 17 regarding a further $300bn tranche of imports from China that could be subject to a tariff of up to 25% from early July. Any substantive progress towards a resolution appears unlikely until Osaka's G20 Summit in late June, with indications that President Trump and President Xi are set to meet. In more optimistic news, a decision regarding the US imposing tariffs on auto imports from Europe and Japan has been delayed by up to 6 months according to media reports. 

The re-escalation in trade tensions is a clear headwind to the global growth outlook as it was across the second half of last year, though markets had clearly expected those concerns to abate in 2019. The prevailing sentiment is that the impact will be felt more by China than the US, mainly because China's exports to the US account for a much larger share of its economy compared to the reverse situation. Markets will look to the high-frequency data for confirmation of that view and that was forthcoming this week as industrial production in April slowed to 5.4% from 8.5% in annual terms, fixed asset investment from businesses eased to 6.1% on a year-to-date basis and retail sales faltered to 7.2% through the year  its slowest pace in nearly 16 years. 

Over to Europe where the data flow pointed to a stabilisation after activity lost momentum over the second half last year. The 2nd estimate of GDP growth in Q1 was unchanged at 0.4% in the quarter and 1.2% through the year and employment growth also matched expectations at 0.3% in Q1 and 1.3% on the year. Meanwhile, inflation on a headline basis lifted slightly to 1.3% year-on-year to April, while the core measure remained steady at 1.7%. Finally, Brexit developments came back onto the radar late in the week, with cross-party talks between the Conservatives and the Opposition breaking down. PM May's draft Brexit deal is due to return to the parliament in early June, with prospects for gaining support having clearly lengthened.