Independent Australian and global macro analysis

Friday, November 30, 2018

Weekly note (30/11) | Fed nearing neutral

This week markets were heavily focused on the US Federal Reserve, with speeches from key officials and the minutes from its November meeting. This weekend's G20 Summit in Buenos Aires sets as the next main risk event as leaders meet to discuss global trade tensions.

In the US, there were speeches during the week from Fed Chair Jerome Powell and Vice-Chair Richard Clarida. This was followed by the release of the November FOMC minutes on Thursday. Most of the attention was centered on Chair Powell's address to The Economic Club of New York. The main theme was that the outlook for the domestic economy remained strong, with unemployment expected to remain low, though inflation was forecast to hold around the 2% target. However, as has been the case recently, the comments were more nuanced to the risks to the growth outlook. It was highlighted that the Fed is not on a pre-set policy path and will instead be responsive to the strength of incoming data, acknowledging the lagging impact of policy tightening on economic conditions.

The Chair's address contained the line that rates, while historically low, "remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth". US equities rallied in response driving strong gains this week, interpreting this as a shift from the Chair's comments in early October where he had said that the Fed was "a long way from neutral". As it stands, the fed funds rate is at 2-2.25%, while the Fed's neutral range is estimated to be 2.5-3.5%. With the Fed to maintain its gradual approach to tightening, the key for markets is assessing how far rates will move within that range before pausing.

As detailed in the minutes, the FOMC members indicated that the next rate rise is likely to be justified “fairly soon”, while markets place the probability of a rate rise in December at around 80%. For 2019, the FOMC’s ‘dot-plot’ currently implies an expectation for three increases, though this will be updated at the December meeting. Slowing momentum in economic data has seen markets scale back their expectations, now pricing in only a little above one increase next year.

While the FOMC still assess risks to the outlook to be roughly balanced, the downside risks relate mostly to the increasing uncertainty arising from global trade tensions with potential impacts on employment and investment and the fading impact of tax cuts. These factors will warrant close attention of the FOMC and markets throughout 2019.

In Europe, ECB President Mario Draghi presented to European Parliament's Committee on Economic and Monetary Affairs. While growth in the euro area economy was noted to have lost some momentum, this was assessed to be a moderation towards its longer-run potential. With the economy progressing largely as expected, it was anticipated that the ECB will follow through on its plan to end its asset purchases at the end of the year. 

Meanwhile, the uncertainty relating to Brexit continued to run this week. The only firm detail for the path forward was the confirmation that the UK Parliament will vote on PM Theresa May’s draft agreement on the 11th of December.

— — — 

The main focus in Australia this week was data relating to business investment ahead of next week's Q3 National Accounts. On Wednesday, the Construction Work Done data for Q3 was much weaker than expected, falling by 2.8% with declines in residential, non-residential and infrastructure work (see our full review here). For the residential category, while activity is running at an elevated level it is likely to be around its peak in the cycle ahead of a moderation next year matching with weakening approvals data. While it was a soft quarter from non-residential and infrastructure construction, this is likely to be temporary with the pipeline of work for both in an upswing. Investment in commercial buildings (offices and warehouses) is supporting non-residential work and state government investment, particularly in transport-related projects, is driving the infrastructure side. 

Thursday's Capital Expenditure data posted an unexpected fall in Q3 of 0.5% on weakening mining sector construction reflecting the completion of major projects in the LNG sector (see our analysis here). However, investment in equipment, plant and machinery — which feeds into GDP calculations   lifted by 2.2%. Another positive aspect was the rise in investment intentions for the current financial year, upgraded by 4.4% compared to a year earlier. As our chart of the week shows, that increase is expected to be driven by a 6.8% rise in investment from the non-mining sector. Rising non-mining sector investment is key to the Reserve Bank of Australia's outlook for growth in the domestic economy.  

Chart of the week 

Wednesday, November 28, 2018

Australian CapEx plans on the rise

The latest capital expenditure data for the September quarter showed that investment intentions from Australian firms are on the rise, driven by the non-mining sector of the economy. Rising non-mining business investment is key to the Reserve Bank of Australia's outlook for growth in the domestic economy. Meanwhile, the detail for investment in Q3 was mixed. 

CapEx — Q3 | By the numbers

  • Actual capital expenditure fell by 0.5% in Q3 to $A29.354bn, which disappointed market expectations for a 1% rise (prior: -0.9%q/q revised from -2.5%q/q) 
  • Investment in equipment plant and machinery items (GDP input) increased by 2.2% in the quarter to $A13.709bn (prior: -0.3%q/q from -0.9%q/q)
  • Expenditure on buildings and structures fell by 2.8% in Q3 to $A15.645bn (prior: -1.3%q/q from -3.9%q/q) 

*Click charts to expand 
  • The 4th estimate of expected capital expenditure in the 2018/19 financial year was upgraded by 11.3% to $A114.099bn. This figure is 4.4% higher compared to the same point a year earlier. 

CapEx — Q3 | The details 

The capital expenditure data contains two main aspects — an estimate for the actual level of investment made by businesses in the quarter and details for their total expected level of investment for the financial year. These data cover only around 60% of total business investment in Australia and exclude the health, education and agricultural industries. 

In terms of actual investment in Q3, total capex fell unexpectedly by 0.5% to $29.534bn where the market had been forecasting a rise of 1%. This was weighed a 2.8% fall in spending on buildings and structures to $15.645bn. However, investment in items of equipment, plant and machinery — an input into GDP calculations  increased by 2.2% to $13.709bn. 

The ABS also categorises these data by industry. With overall capex falling by 0.5% in Q3, it was declining investment from the mining sector that weighed on the headline result, reflecting the completion of major projects in the LNG sector. The breakdown was; mining -2.7% ($8.425bn), while the non-mining sector saw investment lift modestly by 0.3% ($20.928bn). 

The non-mining sector is made up of manufacturing (+2.7% in Q3 to $2.473bn) and other selected (mainly services) industries (flat in Q3 at $18.455bn). 

Turning to the intentions component, Australian firms now expect investment in the current financial year to total $114.099bn. These expectations are based on estimate 4 for 2018/19, which was compiled by the Statistics Bureau between October and November. The previous estimate taken between July and August was $102.479bn. Firms have, therefore, lifted their investment plans for the current financial year by 11.3% over this time. Compared to the same point a year ago, investment intentions have risen by 4.4% (from $109.269bn). 

Investment intentions typically rise from estimate to estimate as firms become more certain in their outlook, though the magnitude of this increase was much higher than average (around 5.5% between estimates 3 and 4) and was the strongest upgrade between estimate 3 and 4 in almost 20 years.   

Looking at the industry breakdown, it is the non-mining sector that is expected to drive the rise in overall business investment. Non-mining business investment is forecast to rise by 6.8% in 2018/19 (to $80.707bn) compared to the previous financial year, with manufacturing +7.4% (to $9.725bn) and services +6.8% (to $70.982bn). 

Investment from the mining sector is still anticipated to drag — though very modestly — by -1.1% (to $33.356bn). Over recent financial years mining sector capital expenditure has been unwinding from the construction-driven boom in the early part of the decade and this has been a significant weight on overall business investment. There could be further weakness to come with major LNG projects now completed, though the drag is likely to be diminished compared to recent years. 

CapEx — Q3 | Insights 

Looking towards next week's Q3 GDP, the outcome from capital expenditure on equipment, plant and machinery was a modest rise of 2.2%, but yesterday's Construction Work Done data pointed to weakness from investment in non-residential construction, which was also evident in today's data. Non-mining business investment appears to be on a modest upward trend consistent with rising company profits and positive leads from surveys of business conditions and confidence and broadly in line with the expectations of the RBA.  

Tuesday, November 27, 2018

Australian construction work declines in Q3

In a soft lead towards next week's National Accounts, construction data for the September quarter was much weaker than anticipated. The Construction Work Done data feed into estimates for private sector investment in residential and non-residential construction for GDP purposes. 

Construction Work Done — Q3 | By the numbers 

  • The total value of construction work done in Q3 fell by 2.8% to $53.144bn, which was a vast disappointment on the market expectation for a 0.9% increase. Work done in Q2 was revised up to show an increase of 1.8%, compared to the initial estimate of 1.6%.  
  • Private sector construction work fell by 3.4% in the quarter to $40.231bn, down by 22.9% on the year (prior: +1.6%q/q and -3.5%Y/Y)
  •  Public sector construction work also fell by 1% in Q3 to $12.912bn for an annual gain of 9.4% (prior: +2.6%q/q and +17.5%Y/Y)  
*click to expand

Construction Work Done — Q3 | The details 

Looking at the private sector where the value of work done in the quarter fell by 3.4% ($40.231bn), engineering was the predominant drag with a 7.5% fall to $13.2bn (-49.3%Y/Y). That analysis reflects volatility within the engineering component that has been heightened in recent quarters due to the import of infrastructure assets for the LNG sector.

Building work — including residential and non-residential work — was soft in the quarter falling by 1.3% to $27.032bn (+3.5%Y/Y). This was the sharpest quarterly contraction since Q3 2016. 

For residential work, the decline was 0.9% in the quarter coming in at $19.398bn (+5.7%Y/Y). This was entirely attributable to a weak quarter for 'new' home building, which fell by 1.6% to $17.164bn. The value of alterations to existing homes posted a rise of 4.5% to $2.234bn (+9.8%Y/Y).

Non-residential work, which relates to commercial projects such as offices and warehouses, was also soft declining by 2.2% in Q3 to $7.633bn (-1.6%Y/Y). 

In the public sector, it was a similar outcome of broad-based weakness. Total construction work done fell by 1% to $12.192bn, with a decline in building work (housing and non-residential construction) which fell by 3.6% to $3.084bn, while engineering work — relating to government investment in infrastructure projects — was little changed (-0.1%q/q) at $9.828bn.

The state-based details on a combined private-public sector breakdown are provided in the table below. The weakness in residential construction was a trend experienced across most states in the quarter. The detail for non-residential construction was mixed in Q3. Investment in government infrastructure assets, particularly in ongoing transport-related projects, lifted further in New South Wales and Victoria in the quarter with those states needing to accommodate strong rates of growth in their populations.

Construction Work Done — Q3 | Insights  

These data will have key implications for next week's Q3 GDP growth figures, with the broad-based weakness pointing towards soft to negative contributions from housing construction, private sector business-related construction and also government investment. This tilts the risks to the downside for growth in the domestic economy in Q3, though there are several key inputs yet to be released.

More broadly, the construction work data are volatile from quarter to quarter and can be heavily impacted by factors such as adverse weather conditions. While Q3's data are weaker than expected, Q2's outcome came in much stronger than expected by the market (at +1.6% vs +0.8%) and this was revised higher in today's release (to 1.8%).

For housing construction, activity is elevated but is likely to be around its peak for the current cycle. A strong pipeline of work is supportive, but working in the other direction are weakening approvals, tighter financing conditions, and declining property prices. Meanwhile, investment in public infrastructure assets by state governments has much further to run. 

Friday, November 23, 2018

Weekly note (23/11) | Sentiment weak as markets test recent lows

This week was generally quiet in terms of major news headlines and economic data, however weak risk sentiment saw equity markets remaining highly volatile, testing their recent lows from October's correction that was initiated by a sharp move higher in US government bond yields. While that move has since been largely unwound, equity markets continue to be unsettled by a raft of concerns including a slowing global growth outlook, geopolitical uncertainty, and trade tensions. 

Taking a look at the US and it was shortened trading week amid the Thanksgiving holiday period. The recent flow of economic data has lost momentum, which has coincided with the Atlanta Fed's 'nowcast' measure that provides a forecast for economic growth sliding to 2.5% in Q4, down from 2.8% around a week earlier. This follows softer-than-anticipated outcomes from retail sales and industrial production last week, and over the course of this week data for residential construction and durable goods orders, which relates to business investment, also disappointed. 

Financial markets have responded to this slowing momentum by scaling back expectations for Federal Reserve interest rate increases in 2019. Markets are expecting a further rate increase in December but are now only fully pricing in two increases for 2019, which is below the implied expectation of the Fed for three increases next year according to their latest 'dot plot'. Commentary from Fed officials over the past week, including from Chair Jerome Powell, had appeared more nuanced by referencing trade tensions, fading fiscal stimulus, and financial market volatility. The softer outlook hit US equity markets heavily, resulting in declines of 3 to 4% over the week. 

Over in Europe, developments were much calmer compared to the Brexit-driven turmoil from a week earlier. Despite speculation that UK Prime Minister Theresa May would face a leadership challenge, there had not yet been enough support from within the Conservative party to trigger a no-confidence vote. In another encouraging sign for the PM, a draft declaration between the UK and the EU had been agreed relating to the transition arrangements post-Brexit between the two regions. The draft agreement will still ultimately need to be supported by the UK parliament.

Meanwhile, the minutes from the European Central Bank's meeting in November retained the assessment that the risks to the euro area economy were broadly balanced. While the downside risks had increased, recent data was still seen as consistent with a broad-based economic expansion and gradually higher inflation. Weak global sentiment and the prevailing uncertainties in the region combined to send Europe's major equity indices lower by around 1 to 2% this week.

Locally, the S&P/ASX200 index eased marginally this week, though there had been a very sharp decline in the IT sector in response to declines on the tech-heavy US Nasdaq index, while the Energy sector slid by 3.8% on continued weakness in oil prices. More broadly, our chart of the week shows that 2018 is shaping as a year that Australian investors will be keen to fade to the past with the ASX200 having fallen by around 6% year-to-date after being hit hard during October's correction in US markets. This followed a recovery after a volatile period across global markets in the early part of the year.  

Chart of the week 

— — —

This week in Australia, the Reserve Bank was in focus on what was otherwise a very light data calendar. On Tuesday, the minutes from the RBA's meeting earlier in the month were released, and later that evening Governor Philip Lowe delivered a speech titled 'Trust and Prosperity'  at the CEDA Annual Dinner in Melbourne. 

The minutes from the November Board meeting contained several points of interest, notwithstanding that earlier in the month the Bank published its detailed assessment of economic conditions and forecasts in its quarterly Statement on Monetary Policy. Overall, the Board remains confident in their outlook for the domestic economy, with output growth forecast to run well above trend in 2018 and 2019, averaging around 3.5% in year-ended terms. 

Non-mining business investment is expected to provide a strong contribution to growth driven by surveyed measures of business conditions running at above-average levels and an elevated pipeline of non-residential construction projects to work through.

For households, growth in consumption expenditure is expected to continue at around its current pace of 3% in year-ended terms over the next few years, broadly matching their forecasts for growth in disposable income. This would appear to indicate that the Board remains sanguine to the possibility of a negative-wealth impact from declining property prices, which, in general, were assessed to be largely contained to Sydney and Melbourne, with conditions mostly stable in the other capital-city markets.

Assessments relating to residential construction appeared less optimistic. The declining trend in building approvals was noted, though residential construction activity is still expected to add to output growth over the next year or two given that the pipeline of work is elevated. Meanwhile, liaison with developers had indicated that both pre-sales and financing for larger projects had become more difficult to obtain.

In assessing how the domestic economy had progressed, the Board highlighted that conditions had improved and that outcomes for output growth and the labour market had been stronger than anticipated relative to their expectations from 12-months earlier. This had been assisted by an income boost from a stronger Terms of Trade and a lower Australian dollar. However, wages growth and underlying inflation had only progressed largely in line with expectations. 

Looking ahead, the Bank upwardly revised its forecast for economic growth, while lowering its outlook for the unemployment rate and slightly lifting its anticipation for the pace of wages growth. Wages growth remains key for the RBA, with a gradual increase likely necessary for inflation to remain sustainably within the 2-3% target band. 

The overall assessment indicates that there has been little to dissuade the Board from their view that their policy stance is working towards supporting economic growth, while also achieving gradual progress in lowering the unemployment rate and in lifting wages growth and inflation. The Board retained its guidance that its next move in interest rates is more likely to be an increase than a decrease. However, financial markets continue to scale back expectations for this outcome, not fully pricing in an interest rate increase before at least April 2020.

Many of these themes were reiterated by the RBA Governor in his speech on Tuesday night, which also addressed the issue of trust in the financial sector in a clear reference to the ongoing Royal Commission into the banking and financial services industry. 

Governor Lowe did, however, provide some interesting commentary around the lag in wages growth to improvements in the broader economy. According to RBA analysis, between 1995 and 2012 growth in real hourly earnings had averaged 2% per year, but over the past 6-years there had been little growth in earnings on this measure. Though this had not been an exclusively Australian experience, it had contributed to a diminished sense of shared prosperity from the achievements of the domestic economy. 

It was highlighted that with earnings growth flat, household debt levels high and property prices declining these were factors working in the opposite direction to the RBA's expectation for growth in household expenditure to continue at its current 3% annual rate.

Friday, November 16, 2018

Weekly note (16/11) | Brexit turmoil adds to uncertainty

It was another week where heightened volatility was a key theme across global financial markets, which was driven by an array of geopolitical and macro event risks. The most prevalent was the unfolding turmoil relating to the draft Brexit proposal for the UK to split with the European Union (EU). 

Early in the week, the UK and EU had agreed to the wording of a proposed Brexit deal 
including the major point of contention to avoid border controls between Northen Ireland (UK) and Ireland (EU). Markets were cautious over what was to play out given that the proposal firstly needed the support of Prime Minister Theresa May's Cabinet, and then the Parliament. 

The Cabinet would give tentative approval but in a dramatic postscript, several government ministers announced their resignations on Thursday over the details of the proposed deal, which was triggered by Brexit Secretary Dominic Raab who had been closely involved in the negotiation of the draft agreement. PM May remained defiant on the deal that aims to maintain close ties with the EU, but now faces the threat of a leadership challenge and the broader possibility of the UK leaving the EU with no deal or even another referendum.

The market reaction saw the Pound knocked down heavily by more than 2% against the US dollar and yields on UK government bonds were cut to multi-month lows as expectations for future Bank of England interest rate rises were scaled back. A weaker Pound, however, saw the UK's FTSE100 equity index close near flat on Thursday. These sharp moves did not generally extend to non-Brexit related markets. 

Also in Europe, Italy re-submitted its budgetary proposal for 2019 where it maintained its plans increase its deficit despite being in breach of EU rules. The only revision that was made was a plan to reduce debt more sharply through additional privatisation of state-owned assets. While it is unclear how the EU will respond to Italy's defiance, markets drove Italy's 10-year government bond yield to 3-week highs and widened the spread to the safe-haven 10-year German Bund.  

Also in focus in the early part of the week was plunging oil prices, with crude oil recording a run of 12 straight declines — its longest run of losses on record — in response to a highly complex range of competing forces between increased output based on seemingly misplaced expectations for future prices against a slowing in forecast global demand next year, in line with a softening outlook for global economic growth.

The weakness in oil prices together with concerns relating to the financial sector hit US equity markets, which endured a run of 5 consecutive declines that was eventually halted on Thursday. Staying in the US, Federal Reserve Chair Jerome Powell maintained confidence in the growth outlook for the domestic economy but was slightly cautious around the impacts of trade tensions, fading fiscal stimulus, and financial market volatility. Regarding trade, comments from President Trump were welcomed by markets on Friday, indicating that further tariffs on China may not be imposed. Talks between the US President and China's President Xi scheduled for the upcoming G20 Summit will be a key focus for markets.       

Amid this backdrop, the local S&P/ASX200 benchmark equity index fell sharply this week by around 3.2%, with heavy declines across the industry sectors. Financials fell most (-4.6%) and the resources sectors were also under heavy pressure with Materials -3.1% and Energy -2.3%.      

— — — 

On a busy Australian data calendar this week, the labour market was the key focus. In October, total employment increased by 32,800, which was well ahead of the consensus view for an increase of 20,000. This continued the strengthening momentum seen in the labour market data over recent months. The most positive aspect of the report was that the nation's unemployment rate consolidated at 5% — its lowest level since April 2012  which eased concerns that the sharp decline from 5.3% to 5% last month may have been overstated by statistical volatility. 

Meanwhile, despite easing this year, employment growth ticked up to 2.5% on an annual basis in October. As our chart of the week highlights, strong employment growth over the past year or so has been a key factor in bringing the unemployment rate down, even as workforce participation remains around historic highs. 

Chart of the week

The downside was that spare capacity continues to remain at historically elevated levels and this is restricting an acceleration in the pace of wages growth (For our analysis of the October Labour Force Survey click here).    

This was confirmed in Wednesday's Wage Price Index data for Q3 (see our note here). Wages growth matched the market forecast in Q3 (+0.6%q/q and +2.3%Y/Y), but this was boosted by a stronger-than-normal increase to the national minimum wage that applied from the start of the quarter, while wages growth in the private sector continues to lag at 0.6%q/q and 2.1%Y/Y. Overall, there has been a gradual lift in the pace of wages growth over recent quarters, and the current annual pace, while subdued, was the strongest since Q1 2015. 

There were also updated surveys on business and consumer sentiment released this week. NAB's Business Survey was mixed in detail, with an easing in both confidence and conditions in October. Both measures appear to have moved past their peaks from earlier in the year but still remain above average. The forward-looking indicator for orders has slowed sharply compared to the first half of 2018, which matches with recent softening in other measures of business activity. Meanwhile, employment conditions were consistent with jobs growth continuing at around 20,000 per month according to NAB Analysts, a figure that would be sufficient to maintain downward pressure on the national unemployment rate.  

Westpac's Consumer Sentiment measure posted a surprise lift in November to 104.3. This was the 12th straight monthly read above the 100-level that separates optimists and pessimists. The detail showed that consumers were more confident about their own finances and the broader economic outlook, but this did not translate into an intention to increase spending. Consumers expect house prices to continue to decline, but given affordability concerns over recent years sentiment towards purchasing property posted a sharp rise in the month and is at its strongest level since March 2015.  

Wednesday, November 14, 2018

Australia's unemployment rate holds at a 6-year low in October

Strong momentum continued in Australia's labour market in October, with the nation's unemployment rate remaining at the 6-year low of 5% according to the latest official data released by the Statistics Bureau this morning.

Labour Force Survey — October | By the numbers 

  • Total employment increased by 32,800 in the month, well ahead of the market forecast for a 20,000 addition. September's initially reported increase of 5,600 was revised up to 7,800.
  • The seasonally adjusted unemployment rate held at 5.0%, with the market expecting a lift to 5.1%
  • Participation rate lifted 0.1ppt to 65.6% (mkt f/c 65.5%). There was an upward revision to the previous month from 65.4% to 65.5%. 
  • Total hours worked in October increased by 0.3% to 1.764bn hours (+2.1%Y/Y)
  • Underutilisation rate remained at 13.3%, while the underemployment rate was also unchanged at 8.3%

*Click on charts to expand 

Labour Force Survey — October | The Details 

The labour force saw the addition of 37,400 workers in October, which resulted in the participation rate ticking up to 65.6% on a seasonally-adjusted basis. Meanwhile, the economy added 32,800 jobs in the month, of which 42,300 were on a full-time capacity trimmed by a 9,500 fall in part-time positions. While the unemployed total did lift marginally (+4,600) the unemployment rate was unchanged at 5.03% from 5.01% last month.

The pace of employment growth has moderated from the very strong level seen late last year that extended into the early months of 2018 but continues to remain robust at around 2.5% on an annual basis and is well above the rate of growth in the working-age population (at around 1.6%Y/Y). The decline in the nation's unemployment rate over 2018 and participation rates holding around historic highs is, therefore, a logical outcome. 

Notwithstanding this, excess capacity in the labour market remains persistent and is most likely a key factor in ongoing softness in wages growth (see here for our analysis on yesterday's Q3 Wage Price Index data). The underemployment rate (workers that want more hours) held at an elevated 8.3% in October and the underutilisation rate (combining the underemployed and unemployed) remained at 13.3%. 

The total number of hours worked in October increased by 0.3% and by 2.1% over the past year. Adjusting for the increase in employment, average hours worked per employee were little changed in the month at 139.2 hours, which is slightly weaker than at the same point 12 months ago (139.8 hours) but is also not surprising given that employment growth in absolute terms has picked up by more than 300,000 over that time.

Across the states, the headline addition to national employment of 32,800 was split as follows; New South Wales +16.3k, South Australia +7.7k, Western Australia +3.1k, Tasmania +2.3k, Queensland -3.2k and Victoria -3.5k. The month-to-month outcomes are volatile, but as we have previously highlighted, employment growth on a quarterly and annual basis in New South Wales and Victoria continues to run well ahead of the other states. 

While that is not unusual given that New South Wales and Victoria account for well over half of Australia's labour force, a simple comparison of state unemployment rates shows a disparity in conditions relative to the other states. However, unemployment rates in Western Australia, South Australia and Tasmania have declined over the past year. Queensland's unemployment rate has drifted higher.    

The unemployment rates across the states in October are; New South Wales 4.5% (flat), Victoria 4.5% (-0.1ppt), Queensland 6.3% (+0.3ppt), Western Australia 5.7% (-0.3ppt), South Australia 5.4% (-0.1ppt), and Tasmania 5.3% (-0.4ppt). 

Labour Force Survey — October | Insights 

Overall, this was a strong report which came in clearly ahead of expectations on the two highlight indicators being employment growth and the unemployment rate. While the pace of employment growth has eased, it is still running above growth in the working-age population, which is likely to place further gradual downward pressure on the unemployment rate. This is consistent with the Reserve Bank of Australia's most recent forecasts where it lowered its outlook for the unemployment rate over the next couple of years to 4.75% by the end of 2020.    

Tuesday, November 13, 2018

Australian wages growth as expected in Q3: Still subdued

The Wage Price (WPI) Index for the September quarter showed that the pace of wages growth in Australia lifted in line with market expectations but still remains subdued, which lags an improvement in the nation's unemployment rate over 2018. 

Wage Price Index — Q3 | By the numbers
  •  WPI (total hourly rates of pay ex-bonuses) increased by 0.62% in Q3 (exp +0.6%, prior rev +0.55% — a downgrade from the initial estimate of +0.62%)
  • Annual growth in the WPI also met market expectations at +2.29%  a slight increase from the +2.14% pace in Q2  

*click charts to expand 

Wage Price Index — Q3 | The details 

The WPI is effectively a measure of wage inflation in the Australian economy. It is the primary measure which shows price changes employers pay for labour associated with particular jobs, removing the impact of quantity and quality of work, rather than the growth in income received by employees.

In Q3, the headline result showed that the WPI expanded by 0.62% to an annual pace of 2.29%, which is the fastest since March 2015. Breaking this down, the public sector continues to lead the index, with quarterly growth at 0.61% and an annual rate of 2.47%. This compares to the private sector at 0.55% in Q3 to 2.14% over the year. 

Analysis by the Australian Bureau of Statistics (ABS) showed that the Fair Work Commission's increase to the national minimum wage of 3.5% for 2018, which was stronger than in recent years,  made a sizeable contribution to growth in the WPI in Q3. Updated national minimum wage increases are effective from the start of Q3 each year. Basic-level calculations suggest that if this impact was removed, underlying growth in the WPI was tracking at around 2% in annual terms.  

What appears to be becoming more evident is that businesses are using bonuses in efforts to assist in staff retention while keeping growth in wages in check. The WPI measures including bonuses continued to lift in Q3 in both the private and public sectors.

Looking across the industries, the momentum is split with equal numbers of industries where wages growth is either below or above the national headline rate of 2.29%. Wages growth remains strongest in the healthcare sector, which has also experienced strong employment growth in line with the rollout of the Federal government's National Disability Insurance Scheme. At the other end of the scale, mining was able to lift off the floor of the table, possibly a reflection of increased profitability in the sector following surging commodity prices.  

Analysis of the state-level WPI data is presented in the chart, below. An important point to note is that growth in public sector wages outpaces that in the private sector in New South Wales, Victoria, Queensland, and South Australia. Tasmania is the only state where this trend is reversed.    

Wage Price Index — Q3 | Insights  

The pace of Australian wages growth remains subdued indicating that further strengthening in the labour market will be required to help drive stronger increases. While the nation's unemployment rate declined to its lowest in more than 6 years at 5% — historically considered to be around the level of full employment — in September, broader measures of labour market underutilisation remain elevated. 

Recent global experiences, particularly in the US, have suggested that unemployment rates have had to decline well below previously estimated levels of full employment to generate strong rates of wages growth, so this is also likely to be the case for Australia. This appears to be consistent with the Reserve Bank of Australia's expectations, with their commentary continuing to highlight that it anticipates that stronger wages growth will occur only gradually as labour market conditions tighten. The ABS will release its Labour Force Survey for October tomorrow (15/11).         

Friday, November 9, 2018

Weekly note (9/11) | Markets take it as it comes

There was plenty for markets to work through over the past week including the US midterm elections and central bank meetings, though things turned out mainly as expected and most equity markets were able to extend on the rally from the previous week. Volatility in financial markets remains elevated but is well down from the highs seen during October. 

US markets were able to post strong gains again this week, having now recovered approximately half of the heavy declines recorded in October as the detail of the corporate reporting season, in general, remains strong. Meanwhile, European markets have not recovered as quickly, weighed by slowing economic data, Brexit uncertainty and concerns regarding Italy's budget situation. Closer to home, China's major markets gave back the gains achieved last week as concerns over a slowing growth outlook weakened sentiment, which also impacted Hong Kong's Hang Seng index, falling by around 3.3% on the week. In Australia, the benchmark ASX200 index added around 1.2% following last week's 3.3% rally, with the financial, IT and consumer staples sectors all gaining more than 2%. 

— — —
This week's main risk event was undoubtedly the US midterm elections, which mark the completion of the first 2 years of President Trump's tenure. The result went broadly as the polls and markets had been expecting — the Republicans maintained their control of the Senate, but lost the House of Representatives to the Democrats for the first time since 2010. While the result means a split Congress, this has throughout history been a common situation in the US. In the day following the outcome, global equity markets saw a relief-inspired rally. 

Going forward, the key economic-related issues for markets will centre on a seemingly reduced likelihood for further tax cuts and deregulation within industries as this would require support from both houses, though President Trump will still have the scope to pursue his protectionist agenda on trade policy — the tariffs announced earlier this year on goods imported from China did not require support from the Congress, so ongoing negotiations with China's President Xi likely remain more relevant.

Also in the US, the Federal Reserve held its latest policy meeting where its assessments were little changed; the domestic economy remains strong, though it did note a moderation in business investment, while the labour market continues to tighten. As a result, the Fed continues to see the justification for further gradual increases in interest rates, the next of which is expected in December. 

To Australia, and it was the Reserve Bank in focus this week following Tuesday's policy meeting where the Cash Rate was kept unchanged at 1.5% for the 25th consecutive meeting (see here for our note). The Governor's statement that accompanied the decision foretold an upgraded outlook by the Bank for near-term economic growth, a lowered forecast for the unemployment rate and an uplift in inflation over the near-term after it was weakened by once-off impacts in the September quarter ahead of its Statement of Monetary Policy (SoMP).  

On Friday, November's SoMP confirmed the RBA had lifted its official forecast for economic growth by the end of 2018 to 3.5% from 3.25%, though this was influenced, in part, by statistical revisions that have boosted growth in previous quarters. Crucially, the RBA expects growth in household consumption to remain around 3% over the forecast period despite acknowledging the uncertainty to that outlook arising from softening property prices and high levels of household debt. 

Meanwhile, a stronger growth outlook has seen the Bank lower its unemployment rate forecasts across the board, declining to an average of 4.75% in 2020. Stronger wages growth, though, was still seen as a gradual process. Underlying inflation is now seen returning to within the 2-3% target range by the end of 2019, which is earlier than previously expected. 

Also on Friday, Australian housing finance data showed a continued deterioration in September (see our analysis here). As our chart of the week shows, lending to both owner-occupiers and investors is declining sharply, which reflects the impact of tighter lending standards, while softening property prices are also likely to be damping sentiment and demand. 

Chart of the week

Thursday, November 8, 2018

Australian housing finance continues to slide

Australian housing finance continues to weaken, with data for September showing a further deterioration in both commitments and value. Tighter lending standards and declining property prices are major factors working towards damping sentiment and demand for housing finance.   

Housing Finance — September | By the numbers 

  • Housing finance commitments to owner-occupiers fell by 1% in September, in line with the market forecast, to 50,673 (August -2.2%) to be down by 9.7% across the year 
  • The total value of housing finance committed in September to both owner-occupiers (excluding refinancing) and investors fell by 3.7% (August -3.9%) to  $A23.008bn, which is a decline of 14.2% over the year
Click to expand charts

Housing Finance — September | The details 

Looking across the segments, the weakness was broad-based. The value of lending to owner-occupiers fell by 4.3% in the month to $13.257bn — the weakest level since September 2016  and has fallen by 11.1% over the past year. For investors, lending fell by a further 2.8% in September to $9.75bn — its weakest since mid-2013 — representing an annual decline of 18.1%. 

Lending to first home buyers fell by a sharp 9.7% in the month to $2.969bn, which is down by a more modest 2.8% on an annual basis. The value of refinancing commitments declined by 4.1% in September to $6.11bn to be little changed over the year (+0.6%).   

Over the September quarter, the value of housing finance posted its 4th consecutive quarterly decline, falling by 5% to $71.757bn. This is the sharpest quarterly contraction since Q1 in 2010, while the aggregated level is the lowest since Q2 2014. The decline in the September quarter was almost identical in magnitude for owner-occupiers (-4.9%) and investors (-5.0%).  

Finance approvals to fund the construction of property, or to purchase newly completed property, also continue to soften falling by 3.6% in September and by 16.5% on an annual basis. The decline has been sharper for approvals for newly constructed dwellings (-21%Y/Y) fitting with the slowing trend in recent building approvals data.   

The state-level data provided some interesting detail. Approvals to owner-occupiers are falling fastest in Victoria, with falls of 4.3% in the month and 12.8% on the year. In New South Wales the declines were 1% in September and -10.1% annually. 

For the other states, South Australia fell by 3.3% (-6%Y/Y), Queensland -0.1%m/m (-7.2%Y/Y) and Tasmania -0.9%m/m (+6.5%Y/Y). Western Australia recorded its 3rd consecutive monthly increase at 4.7%, though approvals are still down 9.2% on the year.

 Housing Finance — September | Insights 

With the continuing impact of tighter lending standards and property prices softening on a national basis, the demand for housing finance continues to slide. This is consistent with further declines in property prices, particularly in Sydney and Melbourne where owner-occupier finance approvals have fallen heavily over the past year  though, this will also help to improve affordability in those cities. 

With further property price declines likely, the key risk to the real economy is the extent to which consumer spending may be negatively impacted by declining wealth. The Reserve Bank of Australia has, in general, remained sanguine regarding those risks in their commentary, while also highlighting significant uncertainty around their outlook.