The path forward for Brexit is increasingly unclear. It appears PM May will now try to enter into negotiations with the European Union in an attempt to settle on a deal that can gain parliamentary support, though the indications are that there is little scope for this among European officials. Other possible outcomes range from an abandonment of Brexit, through either recision of Article 50 — which would allow the UK to unilaterally end the withdrawal process according to a recent ruling by the European Court of Justice — or by another referendum, to a hard-Brexit scenario, where the UK separates from the EU without an agreement.
The other major event this week was the European Central Bank's (ECB) latest meeting, where the Governing Council confirmed the conclusion of its asset purchase programme (APP) by year-end. Our chart of the week shows the APP over time, where total purchases have amounted to around 2.6 trillion euros.
Chart of the week
The ECB also maintained its forward guidance that rates are expected to "remain at their present levels at least through the summer of 2019, and in any case for as long as necessary". Meanwhile, the guidance provided regarding the maturing bonds the ECB has purchased under the APP was that they "intend to continue reinvesting, in full, principal payments from maturing securities -- for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary".
ECB President Mario Draghi highlighted that the focus of this meeting was around risks to the economic outlook, which was still assessed to be "broadly balanced" but "moving to the downside" due to "the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility".
Overall, President Draghi categorised the ECB's outlook as having "continued confidence with increasing caution". This was reflected in the updated macroeconomic projections, which saw the ECB's expectations for inflation lifted by 0.1ppt in 2018 (to 1.8%), then easing by 0.1ppt (1.6%) in 2019, before rising again to 1.7% in 2020. Meanwhile, expectations for the growth outlook were lowered slightly by 0.1ppt in 2018 (to 1.9%) and 2019 (to 1.7%).
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It was a quieter week on the data front in Australia following last week’s stacked calendar. Property-related data was in focus early in the week, with housing finance for October posting a surprise increase for both the owner-occupier and investor segments (see our analysis here). This was followed by the ABS’ residential property price indexes, which while a lagged release still provides some useful insight into recent movements in property prices across the nation's capital city markets. Accordingly, property prices on a national weighted-average basis were assessed to have fallen by 1.5% in the September quarter and by -1.9% over the year driven by declining prices in Sydney and Melbourne (see our note here).
The highlights of the week were the NAB Business Survey for November and the latest read from the Westpac-Melbourne Institute of Consumer Sentiment Index for December. Both are closely-watched indicators and can be market moving.
The NAB Business survey showed a further slowing in both conditions (-2pts to +11) and confidence (-2pts to +3) over November. As it stands, business conditions remain above average, though the confidence measure has fallen to a below-average level. The overall interpretation is that businesses are anticipating their assessment of conditions to reduce further in the period ahead. In line with a deterioration to the outlook, forward orders — a leading indicator for domestic demand — fell to a reading of 0 in the month from +3, which is now at a below-average level for the first time in around 2 years.
According to NAB economists, the employment index within the survey was still pointing a solid pace of employment growth at around 20,000 jobs per month, which would be sufficient to maintain downward pressure on the national unemployment rate. Meanwhile, inflationary pressures remain weak with the purchase costs and final product prices measures falling in November. Labour costs lifted modestly, though that also reflects continuing strength in employment growth.
The Westpac-Melbourne Institute Consumer Sentiment Index lifted to 104.4 in December from 104.3 in the previous month. The index recorded its 12th consecutive month above the 100 level that separates optimists from pessimists. In 2017, pessimists held sway in 10 of the 12 readings. In the analysis provided alongside the release, Westpac’s Chief Economist Bill Evans outlined that consumer sentiment was being supported by an outlook for interest rates to remain steady at their low level, strengthening labour market conditions and falling petrol prices.
The detail within the survey showed that consumers felt less confident that it was a good time to purchase property, though this had followed a sharp rise in the previous month indicating that declining prices were impacting sentiment in potential buyers. Regarding property prices, the Index of House Price Expectations lifted to 100 in December on a national basis indicating an even split of views for the future direction of prices. However, Westpac reported that in New South Wales and Victoria further price declines were still heavily anticipated.
Overall, consumer expectations for the economic outlook over the next 12 months had firmed during December but had deteriorated when broadening that outlook over the next 5 years. Another key point to highlight is that unemployment expectations lifted in the month, and while there has been a strong improvement in this component over the past year, the momentum has slowed and may be indicative of moderating labour market conditions.