In the US, the tech-heavy Nasdaq fell by 9.2% in October and the broader S&P500 lost 6.9%, although at their lows the declines were 12.4% and 9.4%, respectively. To round out the month, US markets posted back-to-back sessions where gains were in excess of 1% and this helped to lift markets in Asia and Europe off their lows. The issue for markets to ponder now is whether the lows are in, or if this proves to be transitory — only time will tell. For the moment, though, implied volatility on financial markets remains elevated, which has been reflected in some large intraday and daily moves, while the broader concerns relating to rising US interest rates, political uncertainties, the global growth outlook and trade still remain.
In noting this, sentiment appeared to be lifted this week following conciliatory rhetoric from US President Trump regarding trade developments with China, though the detail was light. In a Tweet, President Trump said that meetings with China's Present Xi were being scheduled during Argentina's G-20 Summit later this month. Also helping to lift sentiment was a pledge from China that further stimulus measures were being planned to help ward off slowing economic growth.
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It was a busy data calendar in Australia this week with several key updates released. The overall tone of the incoming data was titled to the soft side, though this did not come across as overly surprising and is therefore unlikely to alter the Reserve Bank of Australia's assessment of the domestic economy ahead of next week's meeting.
First on the list was building approvals for September (click here for our analysis), which followed their recent easing pattern. Approvals are slowing across all types of dwellings — not limited to high-rise units — reflecting factors including tighter financing conditions, softening property prices and concerns regarding oversupply within certain markets. However, the volume of residential construction work currently underway is elevated so the impact of slowing approvals will take some time to work through to activity.
Next up was the latest inflation data (see here), which was softer than expected at 0.4% on a headline basis in Q3 and 1.9% over the year. The quarterly inflation figure has now come in below expectations for 8-consecutive quarters. There were several once-off factors behind this result, with the most significant being a drag from childcare costs following changes to federal government subsidies. More importantly, core inflation — which is what the RBA analyses in policy decisions — appears to have lost momentum and has now run below the lower 2% target since December 2015. Following slow wages growth over recent years, the inflationary pulse remains soft in Australia. What inflationary pressures there are have mostly been limited to areas where pricing is influenced by government policy — such as utilities costs, childcare, private health insurance premiums etc — as opposed to market-based forces.
Credit growth to the private sector broadly matched expectations in September but has been moderating this year. Of particular note, credit growth for investment housing eased to an annual pace of just 1.4% — its slowest pace on record. Also on housing, CoreLogic's Home Value Index showed property prices declined by 0.6% on a national basis in October to be down 4.6% over the year. Sydney has led that decline, with prices down by 7.4% across the year.
The most positive data this week was September's update on international trade (see here). Australia's trade surplus exceeded $3 billion in the month blitzing market expectations for a result a little more than half that figure. Surging iron-ore prices were the main factor together with support from stronger LNG prices, which will provide a boost to national income in Q3's National Accounts, and feature as our chart of the week.
Chart of the week
Rounding out the week, retail spending slowed in September (see here) rising by just 0.2% in the month, with clear weakness in the discretionary areas of spending. While labour market conditions have been strengthening, there have been broader concerns relating to the outlook for household spending given slow wages growth, softening property prices and, as highlighted earlier from the inflation data, strong price increases in areas such as utilities. This will remain a key area of focus for the RBA.
