Australian economic updates released during the week remained strong and were consistent with the momentum in the recovery. In terms of households, though retail sales declined in February, the 0.8% decline was not as severe as expected (-1.1%) and was attributable to short lockdowns that were enacted in the states of Victoria and Western Australia (reviewed here). Key is that outside these states turnover advanced by 0.9%m/m driven by solid growth in the discretionary categories, while growth nationally of 9.1% over the year underlines the strength that has been evident in retail spending since the reopening. Strength in housing market conditions has also been a key factor in the recovery on the back of policy stimulus measures. The upswing in housing finance hit a pause in February as commitments fell for the first time in 9 months with a 0.4% decline, but the level was still very elevated at $28.6bn and is nearly 49% higher than a year earlier (reviewed here). While February's decline was driven by owner-occupiers (-1.8%), commitments to the segment are up 55% over the year, and investor loans showed further strength in the month (4.5%) to lift the annual pace to 31.6%.
The effect of strong financing conditions continues to be reflected in rising house prices, which advanced by 2.8% nationally in March (5.9%yr) according to CoreLogic making this its strongest month-on-month gain since the late 1980s. Meanwhile, dwelling approvals rebounded by 21.6% in February as house approvals established a new record high level with builders continuing to bring forward projects ahead of the end of the HomeBuilder grants scheme (reviewed here). Also setting records of late has been the trade surplus, though it moderated from January's all-time high of $9.6bn to $7.5bn in February (reviewed here). This narrowing reflected a softer result from exports (-1.3%m/m) as strength in iron ore retraced together with a lift in import spending (4.5%m/m). Notably, imports of consumption goods are running at their strongest annual pace in 11 years at 22.1%, indicative of the strength in demand conditions with the domestic recovery well underway. But, perhaps the highlight report this week was the surge higher in job vacancies, which lifted by 13.7% in the 3 months through February to be up almost 27% over the year. With the state of the labour market to undoubtedly be a key focus at next week's RBA meeting, the rise in job vacancies following on from February's strong employment report will give encouragement to the Board that its policy settings are well calibrated.
Events offshore this week were headlined by President Biden's $2.25 trillion stimulus plan to revitalise infrastructure investment in the US. This latest proposal comes on the back of the packages already enacted in December ($0.9tn) and March ($1.9tn), which were focused on providing immediate and direct relief to households in the wake of the pandemic, mainly through stimulus cheques and extending unemployment assistance. The Biden Administration's infrastructure plan is longer-term in nature by distributing spending over an 8-year timeframe, while its cost is to be mainly offset through a hike in the corporate tax rate from 21% to 28%, raising $2tn over 15 years. But its passage through the Congress will be far from straightforward with Republicans already lining up to oppose the plan. But for the time being, the focus remains on the strength of the reopening in the US, highlighted by March's labour market report. Employment on nonfarm payrolls increased by 916k in the month, its strongest rise going back to August and well clear of the 660k rise expected by markets. Both headline unemployment (6.0% from 6.2%) and underemployment (10.7% from 11.1%) declined in the month and are well down on their pandemic crisis peaks from April of 14.8% and 22.9% respectively. However, with employment still 8.4 million down on its pre-pandemic level and with the participation rate now substantially lower at 61.5%, this is a recovery that has a long way to go yet. With Q1 drawing to a close during the week it is worth reflecting on the key narrative that played out in markets through the steeping of yield curves. Expectations for a very strong recovery in the US economy supported by extraordinary monetary and fiscal stimulus and an accelerating vaccine roll-out were reflected in a doubling of the 2s/10s Treasury yield spread over the quarter, which is now out to its widest since mid-2015 (see below).
Chart of the week
In Europe this week, pandemic developments remained in focus with President Macron enacting a third shutdown across France in an effort to contain a rising spread of virus cases. The move only intensified criticism of the vaccine rollout in the continent, which was described as "unacceptably slow" by Europe's top official within the World Health Organization. In macro news, inflation remained subdued in March, defying market expectations for a pick-up in price pressures. Headline CPI lifted to 1.3%yr from 0.9% but was weaker than the 1.4% pace forecast, while underlying inflation slowed unexpectedly to 0.9%yr from 1.1%. With much market interest residing around the inflation outlook globally, ECB Chief Economist Philip Lane provided a timely analysis of the dynamics in Europe. The main points here were that any upcoming spike in inflation will be assessed as transitory by the ECB due to a range of technical and statistical factors, while the outlook for inflation remained subdued due to elevated spare capacity resulting from pandemic-related effects. Key to the ECB meeting its inflation target is "sustained wage pressures" emanating from a labour market that is "sufficiently hot". Meanwhile, ECB President Christine Lagarde warned bond markets during a Bloomberg TV interview this week that it would use its full range of tools to push back against higher yields if that threatens to tighten financing conditions.
