Of particular focus for markets, the FOMC's decision statement highlighted a loss of momentum in inflation, identifying that both the headline and core measures "have declined and are running below 2%". That assessment followed data released earlier in the week showing that the Committee's preferred inflation gauge (Core PCE) slowed to a 1.55% pace over the year to March, which features in our chart of the week (below). A weakening inflationary pulse has been a key factor in driving expectations within financial markets for a rate cut by the end of the year, though in the post-meeting press conference Federal Reserve Chair Jerome Powell highlighted that was likely to be attributable to 'transitory' or once-off factors and in that sense does not appear to be impactful for policy considerations as yet.
Chart of the week
Chair Powell also highlighted that the Committee's outlook had recognised a moderation in the "cross-currents" from slowing global growth, uncertainty in trade negotiations and the possibility of a hard Brexit scenario. Furthermore, financial conditions were noted to have eased recently, mainly in response to the broad-based accommodative shift from global central banks. Friday's non-farm payrolls data will also add to the Committee's optimism, with employment increasing by 263,000 in April — sharply more than the 190,000 expected by markets. The unemployment rate fell from 3.8% to a 49-year low at 3.6%, though workforce participation eased by 0.2ppt to 62.8%. Wages growth lifted by 3.2% through the year, which missed expectations for a 3.3% rise.
Over in Europe, the first estimate of Q1 GDP growth for the 19-nation euro area was firmer than expected as activity lifted by 0.4% in the quarter and by 1.2% through the year. The quarterly result was also above the European Central Bank's (ECB) forecast for 0.2%. Though the detail is as yet limited, activity looks to have made a slightly improved start to the new year following a notable slowdown over the second half of 2018 that was driven by weaker external demand, country-specific factors, and geopolitical and trade tensions. In separately released data, the euro area's unemployment rate eased from 7.8% to 7.7% in March — its lowest level since September 2008. However, against those positives, April's Markit Purchasing Managers' Index (PMI) for the manufacturing sector was finalised at a reading of 47.9, indicating that activity remained firmly in its contractionary phase at the start of Q2, though in the 4 largest nations (Germany, Italy, France and Spain) there were some signs of stabilisation. The ECB is likely to retain its ultra-dovish policy stance highlighted by TLTRO-III (offering cheap funding to the banking sector), which is due to commence in September.
In the UK, the Bank of England (BoE) held its Bank Rate steady at 0.75% in a unanimous (9-0) vote on Thursday. The Bank's updated forecasts contained in its quarterly Inflation Report remain conditioned on an orderly withdrawal from the European Union and indicated a slightly improved outlook relative to 3 months earlier. However, output growth in the near term was expected to remain below potential given the prevailing uncertainties relating to Brexit. Also of note, the BoE's implied expectation for the path of the Bank Rate was lowered by around 15 basis points (0.15%) over the forecast period, brought on by a repricing for rates in the US and Europe.
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From a domestic perspective, the focus remained on the Reserve Bank of Australia (RBA) ahead of next week's policy meeting (7/5). Financial markets look to have scaled back their expectation for a rate cut to around a 40% chance from around 50% last week, while 14 of 26 economists surveyed by Bloomberg Australia are forecasting a 0.25% cut. The key consideration for the Board appears to be around whether robust labour market data is enough to offset a much weaker-than-anticipated inflation report for Q1 in which the core measure decelerated further away from the RBA's 2-3% target band. Since September 2016 when Governor Lowe's tenure commenced, core inflation has remained persistently below the 2% lower bound, though over that time the nation's unemployment rate has fallen from 5.6% to 5.0%. In that situation, the Bank has been prepared to forecast below target inflation without adjusting its key policy setting. That approach appears likely to hold next Tuesday, particularly as the Bank does not yet have an explicit easing bias in place. Next Friday's Statement on Monetary Policy could clear the path for that shift to occur given that downgrades to GDP growth and inflation forecasts are likely.
Data releases this week were mainly second tier. Private sector credit growth eased further in March to a 3.9% annual pace from 4.1%, led by an ongoing slowing in housing credit from 4.2% to 4.0% in year-on-year terms. Annual credit growth to owner-occupiers declined from 5.9% to 5.7% and eased to a new record low for investor borrowers at 0.7%. Staying with housing, CoreLogic's Home Value Index for April showed the national median property price fell by 0.5% in the month, taking the annual decline to 7.2%. The average weighted capital city median price also fell by 0.5% in April to be down by 8.4% through the year. The pace of those declines is moderating, mainly due to reduced falls in Sydney (-0.7%m/m and -10.9%Y/Y) and Melbourne (-0.6%m/m and -10.0%Y/Y). Building approvals pulled back by 15.5% in March, coming after unexpected increases in the previous two months (see our analysis here). Annually, approvals fell by 27.3% pointing to a significant deterioration in residential construction activity in 2019. Lastly, Markit's CBA Composite PMI index lifted slightly to a reading of 50.0 in April, indicating that activity levels remained broadly unchanged. In the services sector, new business inflows lifted after consecutive monthly declines, though employment fell slightly. Meanwhile, conditions in the manufacturing sector fell to a 3-year low, reflecting weakness in output and new order intakes.
