Macro (Re)view (20/11) | Australian recovery builds momentum

Australia's labour market was the focus of attention this week for both the markets and the nation's policymakers. The key theme that emerged was that the recovery in the labour market regained momentum after showing signs of stalling recently, and although a long and uncertain path still lies ahead it is clear that there is a willingness from policymakers to keep accommodative settings in place for the duration of that journey. After softening in September weighed by the impact of the shutdown in Victoria, the labour market defied market expectations for further weakness by rebounding aggressively in October (see here). Employment (on net) surged higher by 178.8k in the month against a median estimate that was positioned for a decline of 27.5k after a 42.5k fall in September. Driving this result was an 81.6k contribution to employment in Victoria as preparations for the reopening were made in advance of the easing of restrictions, though the gains in employment were spread across the nation. The composition of October's employment outcome could be conveying a key development as the full-time segment (+97.0k) outperformed part-time (+81.8k) for the first time in the reopening phase. So far, the recovery has been driven by part-time employment being restored as restrictions were eased, but a broadening out of the momentum to the full-time segment would be significant, pointing to the durability underlying economic activity. 

Another encouraging sign was the lift in hours worked rising by 1.2% for the month nationally, with a 5.6% boost coming through in Victoria. From its pre-pandemic baseline, hours worked have recovered from a trough of -10.4% to -3.8%, while the impact on employment has been less severe (-6.7% to -1.7%) helped by the support of the Federal Government's wage subsidy policy (see chart of the week). Victoria also accounted for a large share of the surge in the national participation rate that advanced by 1ppt in October to 65.8%. The strength in employment was able to limit the rise in the headline unemployment rate to 7.0% from 6.9%. Meanwhile, the boost in hours worked helped drive both underemployment (-1ppt to 10.4%) and underutilisation (-0.9ppt to 17.4%) lower. However, spare capacity remains highly elevated and this will continue to place downward pressure on wages growth and inflation. Spare capacity in addition to the rising prevalence of wage freezes and delays of earlier agreed increases in enterprise agreements contributed to slowing the Wage Price Index to new record lows at 0.1% in Q3 and 1.4% over the year (see here).  

Chart of the week 

This week's communications from the RBA again unscored the central bank's commitment to the labour market recovery. The November Board meeting minutes outlined that despite the progress made during the initial phase of the reopening, the recovery was forecast to be "protracted and uneven" and pointed to a "large shortfall in activity and employment from levels that would be consistent with full employment". Hence, this was the basis of the Board's decision to ease its policy stance at that meeting including lowering its rates structure by 15 basis points to 0.1% across the cash rate, 3-year bond target and Term Funding Facility, and by announcing a $100bn quantitive easing program, while it also pledged to "do more if necessary". Further, and as Governor Philip Lowe elaborated on during a speech this week, the nature of the Board's forward guidance has shifted to a focus on actual rather than anticipated outcomes of inflation; in effect signalling that accommodative monetary policy will be maintained until such a time that the labour market has tightened materially and wages growth is much higher than it is currently. In other developments this week, October's preliminary estimate of retail sales (based on around 80% of total turnover) lifted by 1.6% in the month as the early stages of the reopening saw turnover in Victoria rebound by 5.2%. This came after declines nationally in the prior two months (-4.0% in August and -1.1% in September), but momentum could be building again into the Christmas period taking October's outturn into account with the trends in high-frequency credit card data over November as Victoria opens up more widely and the recent surge in consumer confidence readings. The ABS also released its latest household and business Covid-19 impacts surveys. There were signs that some types of household activity had risen over October from the month prior (see here), while businesses' capex plans were gaining some traction in response to the recent incentives announced in the Federal Government's 2020/21 Budget.

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Turning to the offshore perspective, the tension between the hopes that potential vaccines bring and the near-term risks of the pandemic continued to be the main theme across markets this week. Further positive news on the effectiveness of both the Pfizer and Moderna vaccines in development provided the optimism, but the negatives came from the increasing rate of virus cases in the US leading to the re-introduction of restrictions across several sates, including in New York where public schools have been ordered to close. Highlighting the risks posed to the economy in the near term, retail sales for the month of October slowed to a 0.3% rise — its weakest outturn of the reopening phase — missing the consensus forecast for a 0.5% increase, while control group sales (more closely aligned with consumer spending for GDP purposes) disappointed by a larger margin coming in at 0.1% against 0.5% expected. In addition to virus-related concerns, the result could also be reflecting the impact of earlier fiscal support measures fading and seemingly slim prospects for a new package to be agreed by the Congress in the near term. Also disappointing was the figure on initial jobless claims that lifted week on week for the first time in 5 weeks rising to 742k from 711k, with the consensus being for a small decline to 700k. Much better news continues to come from the housing market which has been a source of strength so far in the economic recovery in the US. Housing starts have now returned to around their pre-pandemic level after rising by another 4.9% in October to the up by 64% on the trough during the shutdown, while existing home sales advanced for a 5th straight month with a 4.3% gain in October. On the policy front, it was a consistent message from Federal Reserve officials this week including Evans, Mester, Kaplan and Bostic around rising risks and uncertainty for the economic outlook posed by the latest surge in the virus, emphasising the importance of fiscal and monetary support. The request late in the week from the US Treasury Secretary Steven Mnuchin for unused funding appropriated under the CARES Act to the Fed for some of its emergency lending programs to be returned and repurposed by Congress clearly came as a surprise, with the central bank issuing a response that said these facilities still had an "important role as a backstop for our still-strained and vulnerable economy". 

In Europe, the vulnerability of the economy to the resurgence in the virus and return to shutdowns in the continent continued to be the main message from ECB President Christine Lagarde this week. Speaking virtually to the European Parliament, President Lagarde outlined that the encouragement provided by the news on the progress of vaccines was not enough to offset the downside risks the economy is currently confronted with as activity in the services sector is pulling back, uncertainty weighs on consumer spending and business investment responds negatively to soft demand conditions. Given this, President Lagarde said that it was the role of the ECB to "preserve favourable financing conditions" and that its PEPP and TLTRO programs had shown their effectiveness in this regard throughout the pandemic, both of which are expected to be adjusted by the Governing Council at the December meeting to provide further easing in the monetary policy stance. Fiscal support is also key and President Lagarde emphasised to the Parliament that the €750bn EU recovery fund "must become operational without delay"; that call coming after Hungary and Poland voted early in the week to veto the package that was initially agreed to back in July over the details of implementation. Meanwhile, over in the UK Brexit negotiations reportedly made some ground this week, though differences with the EU still remain. The two sides are attempting to strike a trade deal before the transition period ends on the 31 December, but any deal would still need to be ratified by the EU Parliament before that date otherwise tariffs and border checks would start being applied on UK-produced goods entering into Europe.