This week's communications from the Reserve Bank of Australia reiterated that an easing in its monetary policy stance at its November meeting is all but locked in. At that meeting, the Board will cut its interest rate structure by lowering the targets for the cash rate and 3-year Australian Government Bond yield and the rate on the Term Funding Facility from 0.25% to 0.1%, while it is also likely to announce its intention to expand its bond-buying operations to focus on the 5-10 year segment of the yield curve. The minutes from the October meeting outlined that the view of the Board was that with the economy continuing to open up, it was expected that additional easing in its monetary policy stance "would gain more traction than had been the case earlier". The transmission of these actions into the real economy is seen as coming largely through exchange rate effects and lower bond yields as its balance sheet expands to be closer to the level of expansion that has occurred in other central bank balance sheets. As discussed during a speech by the RBA's Assistant Governor Christopher Kent this week, the term Funding Facility will also contribute significantly to expanding its balance sheet over its duration. Drawings under that facility stand at $83bn with its maximum size currently around $200bn. The speech also emphasised the importance that the RBA will be placing on its balance sheet in terms of judging the overall stance of its policy settings going forward.
Local data this week was consistent with the RBA's overall assessment that the economic recovery is likely to occur gradually amid considerable uncertainty. The October flash PMI lifted to a reading of 53.6 from 51.1 in the month prior (readings > 50 signal expansion), indicating that the expansion in economic activity had picked up pace as more restrictions had been rolled back. This had mainly benefitted services sector activity (53.8 from 50.8), though at a level insufficient to prevent businesses from reducing employment. Meanwhile, activity in the manufacturing sector continued to advance, though at a slower pace (52.3 from 53.5) as production and sales volumes moderated amid continuing supply-side headwinds, including from border restrictions disrupting delivery times. Staying with business conditions, the ABS's latest impacts of covid-19 survey was indicative of a theme of stabilisation as firms adjust to a new normal of operating (see here). On the consumer front, the advance estimate of retail sales in September pulled back by 1.5% following August's 4% fall. While retail spending remains robust at 5.2% higher over the year and 4.6% above its pre-pandemic level (see chart of the week below), the momentum is slowing as the earlier pent-up demand coming out of the shutdown that was enhanced by the receipt of stimulus measures fades. Data on the labour market through the latest ABS payrolls report indicated that employment had weakened broadly across the nation by around 1% over the back end of September into early October, though based on the short history of the series in which the data have tended to be revised higher, this likely overstates the extent of the decline. As the reopening progresses, the demand for labour continues to improve as highlighted by a further 6.4% rise in the Federal Government's internet vacancies index to 144k from a trough of 71.5k in April but this is still well down on the level that prevailed a year earlier (-12.2%).
Chart of the week
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In offshore developments, China continues to lead the way out of the depths of the pandemic-induced recession in the global economy. In the September quarter, GDP growth in China lifted by 2.7% to drive the annual pace up from 3.2% to 4.9%, though these outcomes were softer than had been anticipated by markets at 3.3% in the quarter and 5.5% through the year. More importantly, though, was that the nature of the recovery appears to be broadening out to households after initially being driven by industrial output as activity recommenced out of the shutdown. Retail sales picked up to a 3.3% annual pace in September, well ahead of the median estimate (1.6%) and up from 0.5% in August. Meanwhile, industrial output continued to advance rising to 6.9% year-on-year from 5.6% previously. The other factor worth noting is that the GDP outcome was depressed by a very strong lift in imports of 13.2% for the year to September, reflective domestic demand conditions strengthening with activity post-shutdown gathering momentum.
Over in Europe, the situation remains precariously placed as surging virus cases in the continent have led to more restrictions coming back, raising the risk that the recovery there could start to unwind over the winter months. The warning signs of this are already emerging as private sector economic activity according to the flash PMI in October slipped into contractionary territory at 49.4 from 50.4 in September. The decline would have been sharper but for a resilient manufacturing sector with the pace of expansion in activity lifting to 54.4 from 53.7. But conditions in the services sector are deteriorating falling to 46.2 from 48.0 as restrictions and concerns over the virus led to activity pulling back. These developments come ahead of next week's meeting by the European Central Bank's Governing Council and while it is expected that no changes in policy settings will be the call on Thursday, the message from key officials from the bank of late has been one of no complacency given the weakness in the most recent inflation data and that was reiterated in remarks by President Christine Lagarde this week. Meanwhile, in the UK, rising virus cases and the broadening impact of restrictions led to Chancellor Rishi Sunak announcing an expansion of the Government's fiscal support measures for workers and businesses. At the Bank of England, a speech this week by Deputy Governor Dave Ramsden outlined that while the prospect of negative interest rates remains under consideration, it is more likely to explore other options first, particularly with there being "plenty of headroom" to expand asset purchases.
Lastly in the US, despite the logistical challenges of being on the doorstep of the presidential election, prospects for a near-term fiscal stimulus package are not being ruled out, though markets have become less sensitive to the news headlines around this. On monetary policy, with central bank balance sheets in focus across the globe, the Federal Reserve's balance sheet touched a new record high this week rising by $25.8bn ($24.8bn of this was in Treasury purchases) to $7.177tn. Certainly, more here will be forthcoming if this week's move higher in long-end Treasury yields — the 10 and 30-year maturities rising to their highest since March — is sustained. Turning to this week's US data, the flash PMI for October indicated that the pace of expansion in the economic recovery had lifted to a 20-month high at a reading of 55.5 from 54.3 in the month prior. Activity in both the services (56.0) and manufacturing sectors (53.3) lifted in October as businesses responded to rising demand as the economy opened up further. Another bright spot in the recovery has been a robust housing market helped by the tailwind from ultra-low rates. Existing home sales accelerated by 9.4% in September, while building permits outperformed expectations in advancing by 5.2% in the month to reach their highest level since March 2007 at 1.553m.
