An initial easing of restrictions in Melbourne signalled an important moment in Australia's recovery as the sun set on the last of the Delta lockdowns in place since June. A high and rising national vaccination rate (now above 70%) gives optimism that reopenings are now sustainable. An expansionary reading in October's preliminary PMI (52.2 from 46) for the first time since June reflects the change in conditions with the disruption from lockdowns fading as firms prepare for a strong summer rebound. The services sector has benefitted most from the easing in restrictions with activity lifting to 4-month highs (52 from 45.5), necessitating firms to increase hiring to meet pent-up demand. Further expansion was recorded in the manufacturing sector (57.3 from 56.8), though the increase in backlogs sitting on firms' order books points to the impacts afflicting global supply chains from input shortages and increased delivery times. Supply issues emanating offshore come at a time when large parts of the domestic economy coming out of lockdown, putting pressure on input prices for both services and manufacturing firms. More detail on this will come to hand in next week's Q3 CPI data.
Reports in the survey of strong labour demand were consistent with the 4.9% lift in job vacancies tracked by the National Skills Commission for September (see chart below). Driving that increase was New South Wales — vacancies there surging by 16.7% — as firms readied for reopening. This appears to have translated into a steadying of conditions in the labour market, with the ABS's payrolls index rising by 0.2% over the second half of September compared to a 0.6% fall over the first half. Meanwhile, there were more encouraging signs from the high frequency indicators this week on mobility as New South Wales moved clear of the 80% vaccine threshold, triggering a further easing of restrictions, and from bank card data where momentum in discretionary spending continues to build.
Chart of the week
The minutes from the RBA's October meeting held firm to recent themes, with the Board expecting the recovery to recommence as states start to reopen and for wage and inflation pressures to rise only gradually, though it did acknowledge there was some upside risk. However, there is no sign of any forthcoming shift in policy — in fact, the commitment to existing settings was reaffirmed after the bond for the yield target had followed global yields higher with rate hike expectations being pulled forward. For the first time since February, the RBA made purchases in support of its 0.1% target on the 3-year yield, while it also lifted the cost of borrowing the April 2024 line from it (from 0.25% to 1.0%), making it much more expensive to short the bond and place upward pressure on its yield.
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Risk sentiment in markets offshore has generally remained well supported over the week despite the ongoing concerns around the outlook for inflation and the implications that might have on growth. In China, the headwinds from the deleveraging of the property sector, increased regulatory compliance and Covid-related impacts on industrial production came together to slow Q3 GDP growth from 7.9%Y/Y to 4.9%Y/Y (vs 5.0% expected). In better news, retail sales rebounded by more than expected to 4.4%Y/Y, with the durability of that momentum key to growth prospects.
Over in the US, the focus has remained on inflation dynamics during a quiet week on the data front. In speeches from Fed Governors Waller and Quarles, upside risks to the inflation outlook stemming from the persistence of a constrained supply side struggling to match pace with demand were cited. With tapering of the $120bn monthly pace of Fed asset purchases widely expected to be announced at the November meeting, markets are continuing to bring forward expectations for the timing of the lift-off in rates. Pricing now has two Fed rate hikes factored in for 2022, a more aggressive path than conveyed in the recent dot plot of FOMC members' projections where expectations are divided around late 2022 and early 2023 for the first rate hike. Ahead of the November meeting, the latest Fed Beige Book characterised growth as having slowed to a "modest to moderate rate" with supply chain constraints, labour shortages and the impacts of the Delta variant key headwinds. Meanwhile, the key insight on inflation was that there seemed to be more confidence amongst firms that they could pass through higher input costs onto end prices faced by households.
Expectations for a November rate hike from the Bank of England have firmed further on the comments from the Bank's chief economist Huw Pill in an FT interview after the strong indications from Governor Bailey that with inflation running well above the 2% target the time to respond was nearing. UK inflation moved marginally lower in September to 3.1%Y/Y for the headline rate and to 2.9%Y/Y on the core reading, but rising energy prices and supply shortages will keep the heat on with Pill saying that the pace could lift to around 5% by early 2022. In Europe, the economy remains on track in its recovery, though the momentum is starting to fade as October's preliminary composite PMI reading came in at 54.3, signalling its slowest rate of expansion in 6 months. Supply chain constraints are a major issue in the manufacturing sector — activity there falling to an 8-month low — restricting firms' output and their ability to receive and deliver goods on schedule. A slowing in the services sector from 56.4 to 54.7 was attributed to the fading effects of the summer reopening and renewed Covid concerns.
