Domestic events this week were consistent with an economy stuck between lockdowns and reopenings. With New South Wales starting to roll back restrictions, optimism for a strong rebound over the summer months is building. These dynamics were reflected in the September NAB Business Survey with lockdowns and restrictions driving trading conditions down from +14 to a below-average level of +5, though confidence surged from -6 to +13 on the back of reopening roadmaps announced by state governments in New South Wales and Victoria. But for this confidence to materialise in activity and investment, the key will be for vaccine targets to be met enabling restrictions to be progressively rolled back as outlined. For the time being, forward orders (-1) and capacity utilisation (78.4%) are at weak levels and reflective of the difficulties many businesses have come up against over recent months in terms of the impacts on trading and supply constraints.
Also clear is that households are carrying a fair degree of optimism for the period ahead. While consumer sentiment tracked by Westpac and the Melbourne Institute has declined by close to 8% since May, including a 1.5% fall in the October release, it has held up in the optimistic range throughout the current lockdown cycle. This suggests that households have largely assessed the Delta setback as a temporary shock and that fiscal support, which has been at similar levels to 2020, have bolstered sentiment. That appears to leave households well placed to drive the recovery once lockdowns are eased. However, that recovery is likely to be less rapid than last year due to much higher virus caseloads, the continuation of more restrictions and varying timelines for state reopenings.
September's Labour Force Survey confirmed further lockdown impacts with employment falling below pre-pandemic levels on the loss of 138k jobs in the month after August's 146.3k decline (reviewed here). The lockdowns have also driven a significant decline in the participation rate from record high levels above 66% earlier in the year to 64.5% in September. While the unemployment rate has drifted up slightly to 4.6%, the fall in participation has been driving it lower over recent months. In contrast, measures of underemployment (9.2%) and underutilisation (13.9%) have risen materially reflecting the disruptions to activity. However, there was an encouraging development for recovery prospects in this week's release with hours worked posting a 0.9% rise in September. Notably, this was driven by a 2.7% lift in New South Wales ahead of the easing of the lockdown and a 5.4% reopening boost in Queensland. That still left hours worked down by more than 3% nationally for the quarter but September's rise is an indication that the worst of the disruptions have likely passed (see chart below). This matches with other indicators such as job vacancies, mobility indexes and card spending that suggest the recovery is starting to move in the right direction.
Chart of the week
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Markets offshore continue to work through the implications of an outlook characterised by downside risks to growth and upside risks to inflation. This was the theme of the IMF's October World Economic Outlook in which the group downgraded forecast global growth in 2021 to 5.9% from 6.0%, citing supply shortages holding back output in advanced economies and a worsening pandemic situation in emergening markets due to inadequate vaccine distribution. At the same time, inflation in advanced economies for 2021 was upgraded to 2.8% from 2.4% but the IMF identified that further increases could materialise if demand continues to outstrip the capacity of supply chains to respond. Price action in the market has pulled forward the path for policy normalisation on the expectation that rising inflation will turn out to be longer lasting than thought consistent with the transitory assessment of many central banks, with yields steepening at the front end and heading lower at the long end of the curve.
In the US, CPI inflation in September came in a touch above consensus at 5.4%Y/Y (from 5.3%) while the core rate held steady but was also elevated at 4%Y/Y. Given that the main contributors to inflation in the month came from higher food (0.9%) and energy prices (1.3%), the FOMC is unlikely to be too perturbed. It will also note that durables — a significant driver of the surge in inflation associated with demand and supply imbalances brought on by the pandemic — has come off sharply since April-June when it recorded three consecutive increases of 3% or more. However, an uplift in housing costs (around one-third of the CPI) from 2.1% to 2.4%Y/Y for primary rents and owners' equivalent rent rising to 2.9%Y/Y from 2.6% is something to watch closely regarding the persistence of inflation.
For the time being, the core view of the Federal Reserve, as reiterated in the minutes from the September meeting, is that pandemic-related factors are temporarily pushing up prices. However, there was some caution expressed around rising prices feeding through to higher inflation expectations. At the meeting, the FOMC discussed a "mid-November or mid-December" start date for tapering its $120bn per month of asset purchases. The baseline scenario appears to be a $15bn per month taper ($10bn for Treasuries and $5bn for MBS) running through to mid next year, though "several participants" had pushed for a more rapid reduction in the monthly run rate. On the projections tabled at the meeting, the Committee was evenly split on the timing for the first rate hike, between late 2022 and early 2023. The other highlight from the US this week was an upside result on September retail sales rising 0.7%m/m, defying expectations for a 0.2% fall. The gains were broadly based across the categories and control group sales also outperformed with a 0.8%m/m lift, overall indicating that household spending is rebounding after a loss of momentum associated with the Delta variant.
Rounding out the week, across the Atlantic the divergence in signalling from the Bank of England and European Central Bank continues to evolve. In a newspaper interview, Governor Andrew Bailey at the BoE expressed concern with inflation running above its target, with the situation expected to be exacerbated given the prevalence of upside risks to its forecasts. However, over at the ECB a much more dovish tone remains in place. A speech by the ECB's chief economist Philip Lane emphasised the importance of underlying inflation with respect to its forward guidance, ensuring that monetary policy will not react to short-term price shocks.
