Market themes continue to develop around prospects for policy normalisation in the US following the hawkish interpretation taken away from last week's Federal Reserve meeting. A host of public appearances by FOMC members this week provided a range of differing perspectives on the matter. On the dovish side is Committee Chair Jerome Powell who in a Testimony appearance this week reiterated to lawmakers that high inflation readings would likely prove transitory, easing as the supply-side constraints evident in the reopening process abate. Also leaning dovish is New York Fed President John Williams who expects high inflation to roll over towards the Committee's 2% target next year and hold around that pace in 2023. More hawkish comments in calling for rate hikes in 2022 on the basis that high inflation could persist came from the likes of St. Louis Fed President James Bullard, the Atlanta Fed's Raphael Bostic and President of the Dallas Fed Robert Kaplan. On asset purchases, both Bostic and Kaplan thought that the progress in the recovery meant that the timeline for tapering could be brought forward. Meanwhile, several other Committee members, including current voters Bowman, Daly and Barkin, also spoke publically this week but did not put forward predictions around the timing for liftoff. The Fed's preferred measure of inflation continued to lift rising to 3.4%Y/Y in May from 3.1%, matching the median estimate. Meanwhile, personal income (-2.0%m/m) and spending (0.0%m/m) continued to unwind after the stimulus payments earlier in the year. For the second consecutive month, services spending (0.7%m/m) outperformed goods spending (-1.3%), but a return back towards their pre-pandemic shares of spending still remains a long way off.
Switching to Europe where, as covered last week, officials from the European Central Bank continued to press the need for policy to remain very accommodative to guard against the risk of financing conditions tightening and potentially weighing on the recovery. ECB President Christine Lagarde told the European Parliament this week that the economy was expected to rebound sharply over the second half of the year and that while inflation would likely rise further, it was mainly the result of temporary factors from reopenings and supply-side constraints. Strong preliminary PMI readings for June reflected the optimism around the near-term outlook in the euro area, with activity on the composite index (59.2) rising at its fastest pace in 15 years, driven by a rebounding services sector with restrictions easing. Households also sense the optimism as the EU's consumer confidence indicator lifted further in June to sit close to record highs. In the UK, the Bank of England left all policy settings unchanged, maintaining rates at 0.1% and asset purchases at £895 at this week's meeting. The Monetary Policy Committee gave a relatively upbeat assessment of conditions in noting that the UK economy was on track to return to pre-pandemic levels of output before the turn of the year and that as the rebound occurred, a period of excess demand was expected leading to inflation temporarily spiking above the 2% target. The strong outlook will continue to see markets speculating on when rate hikes might come across the MPC's radar, though any hint of this was avoided in this week's statement.
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Turning to developments in Australia where the pandemic is starting to cause problems again through increased caseloads in New South Wales leading to a localised lockdown in Sydney and the reintroduction of internal border controls. But at the same time, Victoria continues to reopen from its recent lockdown and capacity restrictions in Queensland are being rolled back further. High-frequency data on consumer confidence will likely fall sharply on the back of these COVID concerns when it is reported next Tuesday given that it will be coming off a 1.3% rise for the week through to 19-20 June that was largely attributed to May's strong labour market update (see here), while the readings in Sydney (5.2%wk/wk) and for the rest of the state (2.8%wk/wk) had shown more elevated gains over the period. May's advanced estimate of retail sales showed the impact of the early stages of Victoria's lockdown as spending in the state fell by 1.5%m/m around a familiar stay-at-home composition with basic food up sharply (4.0%m/m) as discretionary categories all declined. But despite the fall in Victoria, offsetting gains of 1.5% came through in Queensland and Western Australia, which resulted in national turnover increasing very slightly (0.1%) on the month prior. This left monthly retail sales 7.4% higher than a year earlier, with the level at $31.1bn remaining sharply above their pre-pandemic trajectory.
Also highlighting the impact of the disruption to activity from the Victorian lockdown was the 0.9% fall in the ABS's national payroll jobs index for the fortnight to 5 June. Unsurprisingly, payroll jobs showed the sharpest decline in Victoria (-2.1%), though the readings across the other states had also been soft. However, there remained positive signs for the strength in labour market conditions continuing as internet-advertised job vacancies reported by the government lifted by a further 1.9% in May to be at their highest level (as a per cent of the labour force) since 2011 at around 1.8%. While the strong rebound in the economy helps to explain the acceleration in labour demand, there are also other factors that are contributing to elevated vacancies. Insights into this were provided in the ABS's latest business survey for June in which 27% of firms reported encountering difficulties finding suitable labour for their requirements. For firms in this situation, the top 3 reasons cited behind the difficulties included a lack of applicants (74%), skills or qualifications mismatches (66%), and the impact of the border closures (32%). Of late, there has been speculation of an acceleration in wages growth given the strength in the labour market. But that seems more likely to be more of a micro than a macro story. Higher wages might go some way to encouraging more applicants to industries that need labour, but it seems unlikely to be the response from firms if they perceive that the required skills either aren't available in the first instance or, secondary to that, if suitable labour can't be easily accessed. Consider also that while broad measures of conditions in the labour market continue to strengthen, employment in many industries is still recovering from the COVID crisis and is yet to return to pre-pandemic levels more than a year on from the national lockdown (see chart below). With the recovery still having some way to go, a broad-based uplift in wages appears an unlikely scenario.
Chart of the week
As noted by the RBA's Assistant Governor Luci Ellis in a speech this week, accommodative monetary policy settings will remain appropriate for as long as spare capacity in the economy persists. Somewhat pushing back against the notion of pre-emptive tightening was the interesting observation that with the pandemic leading to many structural adjustments in the economy, this process can be made smoother if policy settings continue to support robust demand conditions. Ellis outlined that if the economic recovery can be sustained into a durable expansion, workers will be able to more easily shift between industries and businesses will be able to more readily adapt their operating models.
