Macro (Re)view (11/10) | US dollar continues to advance

Growth and rate differentials continue to underpin broad-based support for the US dollar. The hawkish repricing of rate cut expectations in the US sees the 2-year treasury yield trading around 4%, at levels last seen in August before the Fed commenced its easing cycle with a 50bps cut. Next week, the ECB is expected to cut by 25bps, increasing the frequency of easing from the quarterly moves the governing council has made so far. Other highlights next week include employment data in the UK (Tue) and Australia (Thu), UK CPI (Wed) and US retail sales (Thu).   

It looks increasingly likely that the Fed's 50bps rate cut will be a one-off move, with the FOMC expected to downsift to more conventional 25bps increments as it moves through its easing cycle. The minutes from the September meeting reported that a 'substantial majority' of FOMC members supported a larger rate cut to start the easing cycle in the US, the move described as a 'recalibration of the stance of monetary policy' with the focus pivoting from returning inflation to target to concerns over the employment side of the dual mandate. However, the qualification that the 50bps cut should not be viewed as a signal of economic weakness or in the pace of easing going forward is consistent with what markets have heard from Fed officials since the September meeting, suggesting that 25bps rate cuts will be the play from here. 

Adding weight to this view is the incoming data, an upside CPI print in September coming on the back of last week's very strong payrolls report. Headline CPI came in at 0.2%m/m to 2.4%yr, down from 2.5% but above the 2.3% consensus while the core rate ticked up from 3.2% to 3.3%yr (vs 3.2% expected). In light of last week's significant upside surprise in payroll employment in September, markets were not dented too significantly by a notable rise in initial jobless claims (+23k to 258k) that was likely impacted by hurricanes.  

The minutes of the RBA's September meeting aligned with Governor Bullock's messaging on decision day that the Board does not have rate cuts on its radar nor is it concerned about policy divergence with many of its central bank peers now lowering rates. A lack of material developments in the run-up to the September meeting meant that it had been a straightforward call for the Board to leave the cash rate on hold (4.35%), while the accompanying guidance that rates would remain 'sufficiently restrictive' until more progress in made on lowering inflation toward its 2-3% target band was left intact. 

Of most interest in the minutes was the Board's discussion around the various scenarios that could influence the path for rates. A 'significant' weakening in economic growth or in the labour market is seen to be the most likely trigger for the Board to move into its easing cycle, while it would also act if inflation slowed more rapidly than forecast. Regarding the latter, the key for the Board will be how slower headline inflation driven by things such as government rebates on energy bills and lower fuel prices feeds through to underlying inflation. 

Alternatively, restrictive policy could be required for longer if household spending responds to the improvement in real incomes and underpins stronger labour market conditions and higher inflation than anticipated. Other factors that could require a more extended period of restrictive policy were the persistence of supply constraints or if post-pandemic productivity growth does not rebound as expected.

Turning to the key domestic data from the week, household support from the Stage 3 tax cuts and energy rebates appear to be gaining traction as consumer sentiment tracked by the Westpac-Melbourne Institute Index surged more than 6% in October as pessimsim around personal finances and the economy eased. Sentiment still remains very weak but this was at least a positive sign. In the NAB Business Survey, both confidence and conditions improved amongst firms in September while price pressures showed signs of easing.

Macro (Re)view (4/10) | US labour market shows renewed strength

It was another volatile week across asset classes with renewed geopolitical risk from the Middle East, a hawkish repricing of the Fed's easing cycle and concerns around fiscal deficits in Europe all in the mix. China continued to rally on the back of last week's stimulus announcements prior to closing for the golden holiday period. Rate differentials are seemingly back in favour of the US dollar; strong labour market data and comments Fed Chair Powell support a more gradual pace of rate cuts in the US, contrasting with ECB officials expressing concerns over headwinds to growth and Governor Bailey at the BoE hinting at hiking more aggressively. 

Renewed strength in the US labour market has reduced the risk of a hard landing in the near term, driving a hawkish repricing of the Fed curve. The expectation is that the Fed will now downshift to 25bps rate cuts following the initial 50bps move, while the extent of rate cuts priced through the cycle has pulled back by around 50bps from a week ago. After job openings surprised to the upside at 8mn in August early in the week, payrolls data came in hot leading into Friday's US session. 

Nonfarm payrolls surged by 254k in September, well above the 150k figure expected as revisions added back 72k to payrolls over the prior two months, reversing the trend of negative revisions. Arguably, the greater surprise came via the fall in the headline unemployment rate from 4.2% to 4.1% (vs 4.2%), a low since June, with the broader underemployment rate also declining from 7.9% to 7.7%. This retightening of the labour market came with participation holding at an unchanged 62.7% for the 3rd month in succession. An uptick in average hourly earnings growth to 4%yr (from 3.9%) rounded out the report. 

In the euro area, markets anticipate a more dovish ECB going forward as inflation continues to cool and concerns over the growth outlook are rising. Headline inflation slowed to 1.8%yr in September, down from 2.2% and the core rate eased from 2.8% to 2.7%yr, both outcomes in line with expectations. ECB President Lagarde told the EU Parliament this week that disinflation was accelerating while the economic recovery in the bloc was facing headwinds. Similarly, the ECB's Schnabel said a sustainable return to 2% inflation was 'becoming more likely' and that it could not ignore risks to economic growth.     

Upbeat Australian retail sales data combined with robust housing market conditions suggest the RBA will continue to hold off the start of its easing cycle. A solid 0.7% rise in national retail sales in August exceeded expectations and lifted annual growth to 3.1%, its fastest pace since May 2023 (reviewed here). A warm finish to the winter and spending in the lead-up to Father's Day underpinned an uplift in discretionary sales (0.8%) that drove the headline increase. The Stage 3 tax cuts, effective from July 1, may also have provided some support. 

With the effects of rapid population growth continuing to be felt in housing markets across Australia, CoreLogic clocked the national median housing price at $807k in September, a gain of 1% for the quarter and 6.7% over the year. Alongside rising housing prices, lending commitments extended their upswing with a further 1% gain coming through in August (reviewed here). At $30.4bn, commitments stand 31.5% above their cycle low in early 2023. Meanwhile, housing credit growth in August was running at a 5% annual pace. Staying with the housing theme, volatility in the higher-density segment saw dwelling approvals pulling back in August (-6.1%) from a sizeable gain in July (reviewed here). Lastly, the nation's trade surplus printed at $5.6bn in August (reviewed here), unchanged from the prior month around offsetting movements in exports (-0.2%) and imports (-0.2%). 

Australian housing finance extends in August

Australian housing finance commitments have continued to rise seeing a 1% gain in August (in line with consensus) to be up for the 7th month in succession. Lending to both major segments advanced: owner-occupiers 0.7% and investors 1.4%. Supply-demand dynamics are pushing up housing prices - higher interest rates notwithstanding - as a significant volume of homes remains tied up in the construction pipeline. This is driving increased lending and the associated credit growth.  

  

The suite of indicators released this week have underscored the strength of housing markets across the nation, despite the effects of higher interest rates. CoreLogic reported a 1% rise in the national median housing price over the most recent quarter to $807k, up 6.7% on a year ago. Housing credit growth has expanded alongside this at a 5%yr pace to August according to the RBA. Today's data from the ABS showed a further 1% rise in lending commitments to $30.4bn in August. Commitments are now 31.5% above the cycle low in January 2023, up 23% over the past 12 months.  

Commitments to owner-occupiers saw a 0.7% rise ($18.7bn) in the latest month. Although lending to upgraders (existing home buyers) increased (0.5%), underlying loan volumes declined (-1.1%) - pointing to the impact of rising housing prices. Meanwhile, construction-related lending was down 0.6% month-on-month, with loan volumes also soft (-0.5%). The first home buyer segment saw lending drop 0.4% on the prior month on a 1.5% decline in the number of loans written. 

Investor lending is pressing record highs following a 1.4% rise in August to $11.7bn, now only a touch below the previous peak ($11.8bn) in January 2022. Lending to the segment troughed early last year ($7.8bn) but has since surged as rising rents amid very low vacancy rates and increasing housing prices have encouraged investors.  

Australia's trade surplus steady at $5.6bn in August

Broadly offsetting movements in exports and imports held Australia's monthly trade surplus at $5.6bn in August, essentially in line with expectations ($5.5bn). The lower surpluses seen in recent months reflect exports retracing due to lower commodity prices and import spending remaining resilient.  

The trade surplus in August ($5.6bn) was unchanged from the prior month after July's surplus was revised down from $6bn in today's report. Although off its recent lows, the monthly surplus has seen significant compression over the past 18 months on lower commodity prices and elevated import spending. 

Exports declined for the first time since April softening by 0.2% in August to $43.2bn, down 7.4% over the year. Falls in rural goods (-3.9%) and non-monetary gold (-3.4%) weighed on exports; however, that was largely offset by a lift in non-rural goods (0.8%) on the back of higher coal exports (7.3%). Other major commodities were soft: iron ore -0.5% and LNG -1.8%.   

Imports declined for the third month running with a 0.2% fall coming through in August. However, imports remain elevated ($37.6bn) and are up on 12 months ago (3.4%). The decline in the latest month was driven entirely by consumption goods (-4.2%) led by a fall in vehicle imports (-7.5%). By contrast, capital goods (1.6%) and intermediate goods (1.8%) advanced in August, the latter driven by higher fuel prices.   

Australian dwelling approvals retrace in August

Australian dwelling approvals fell more than expected in August (-6.1%), retracing from a large rise in the prior month (11%). The volatility remains in the higher-density segment while detached approvals continued to lift posting their 7th consecutive monthly gain. Overall, higher interest rates and headwinds in the construction sector continue to weigh on dwelling approvals. 

August's 5.5% fall saw national dwelling approvals come in just below 14k, down from July's total of 14.9k - the highest level since May last year. Approvals have bounced around in recent months on volatility in the higher-density (or unit) segment, the August result continuing a sequence of sharp swings: May +5.9%, June -6.3% and July +11%. Smoothing the volatility, approvals for the 3 months to August averaged 14.1k, remaining in the low range of the past couple of years as higher interest rates and capacity pressures have impacted the home building sector. 

In the higher-density segment, approvals fell by 17.5% in August after a 34.6% surge in July. 3-month approvals to August averaged 4.7k, only slightly above cycle lows. Weakness continues to be most evident in high-rise units.  

 

Detached approvals climbed to their highest level in almost 2 years (9.5k) on the back of a further 0.6% rise in August, the 7th consecutive increase to be up 8.1% across the past 12 months. However, approvals in August are still down by a little more than a third on their earlier cycle peak in 2021.   

Alteration approvals - in value terms - continue to trend higher rising 1.4% to $1.1bn in August. Higher construction costs and robust demand have seen these approvals increase by almost 10% over the past year.

Australian retail sales rise 0.7% in August

Australian retail sales surprised on the upside of expectations posting a 0.7% lift in August (vs 0.4% forecast), the strongest gain since the start of the year. The ABS pointed to a warm finish to the winter and the early timing of Father's Day as the contributing factors. Although households remain under pressure from the cost of living and higher interest rates, sales increased by 3.1% across the year, the fastest pace since May 2023.   

Retail sales rose by 0.7% in August following a soft result in July (0.1%). This was the strongest gain for monthly sales since January. Over the 3 months to August, retail sales averaged a 0.4% increase, a modest pace but an improvement on the momentum in recent times. 

In the latest month, discretionary spending (0.8%) played a key role in the rise in the headline figure. Meanwhile, food sales (0.6%) were also solid. The ABS noted in today's release that unusually warm weather pulled Spring spending forward, boosting categories such as clothing and footwear (1.5%), liquor (2.8%), recreational goods (2.4%) and cafes and restaurants (1.0%). Spending in August was also supported by the timing of Father's Day, which fell on September 1. 

Spending growth was strong across most states in August. Gains of 0.7-0.9% were seen in New South Wales, Victoria, Queensland and Tasmania, but South Australia (0.3%) and Western Australia (0.4%) underperformed. Annual growth in the two largest states (NSW and Vic) is running in the 2-3% range, up from the lows earlier in the year but still subdued. 

Macro (Re)view (27/9) | RBA resists global easing cycle

A raft of stimulus measures from the authorities to support economic growth in China rocketed equity markets in the mainland and HK this week, a tailwind to other parts of Asia and Europe as well. In other policy-related developments, the Swiss National Bank cut rates; however, the RBA remained on the sidelines. Key labour market data in the US is out next week including September nonfarm payrolls and job openings for August, while Fed Chair Powell is also due to speak.  

A firmly on-hold RBA gave markets no sense at this week's meeting that it is concerned about policy divergence as central banks offshore continue to cut rates (reviewed here). The cash rate was maintained at 4.35%, a level unchanged back to November last year. Unlike in August, a hike was not considered on this occasion, but as Governor Bullock noted in the press conference strong labour market conditions - moderating job vacancies notwithstanding - mean near-term cuts remain off the table. In its decision statement, the Board retained the message that it needed to 'remain vigilant to upside risks to inflation' and that policy would stay 'sufficiently restrictive' until it gains greater confidence that inflation is on track to return to the 2-3% target 'sustainably'. 

The word 'sustainably' was added into the statement to emphasise the Board's focus on underlying inflation just as government rebates for household electricity bills are lowering headline inflation. Monthly data for August reported a fall in 12-month CPI from 3.5% to 2.7%, a 3-year low (reviewed here). Federal and state government rebates drove a 14.6% fall in electricity prices in the latest month following a 6.4% decline in July. Governor Bullock's press conference was prior to this release but it was made clear that the Board would not be cutting in response to falling inflation driven by these dynamics. That said the gauges of underlying inflation also softened in August to 3.1% (CPI ex-volatile items and travel) and 3.4% (trimmed mean), so this is at least progress in the right direction. In other news from the RBA, its half-yearly Financial Stability Review identified that households are weathering the effects from higher interest rates, but this would be at risk in the event of a sharper slowdown in the economy or if rates remained higher for a more extended period.   

In the US, Fed officials spoke after last week's decision to frontload the start of the easing cycle with a 50bps cut. The likes of Bostic, Goolsbee and Kashkari highlighted the need to dial back the tightness of monetary policy to guard against risks to the labour market. On inflation, the PCE price index softened from 2.5% to 2.2% at an annual rate in August, though the core index - the Fed's preferred measure - ticked up from 2.6% to 2.7%. For the core rate, however, the rise in the annual pace belies softer readings in recent months - the 3-month and 6-month annualised rates are at 2.1% and 2.4% respectively. It is this trend that saw the Fed pivot its focus away from inflation to the employment side of its mandate.      

Increasing risk of a hard landing in the euro area saw markets move to almost fully price in an October rate cut from the ECB. Economic activity contracted in September according to the latest flash PMI reading at 48.9 from 51.0 in August. While some of this decline can be attributed to a post-Olympics slowdown, cooling price pressures suggest the weakness runs deeper. The report noted that selling prices have fallen below a level consistent with the ECB's 2% inflation target, with services inflation slowing and goods prices falling. This was backed up by weaker-than-expected inflation reads in France (1.2%) and Spain (2.4%) ahead of figures for the euro area next week.