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.
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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
