Independent Australian and global macro analysis

Tuesday, July 30, 2019

Australian Q2 CPI 0.6%, 1.6%yr; trimmed mean 0.4%q/q, 1.6%yr

Australian headline inflation according to the Consumer Price Index compiled by the ABS lifted by 0.6% in the June quarter in a stronger-than-forecast result, which lifted the annual pace to 1.6%. The Reserve Bank of Australia's key measure, the trimmed mean, printed at 0.4% in the quarter, with the annual pace remaining at 1.6% and continues to run well below the lower band of its 2-3% target.

Consumer Price Index — Q2 | By the numbers 
  • Headline inflation lifted by 0.61% in Q1 to outpace the market forecast for a 0.5% rise (prior 0.0%).
  • Over the year, headline inflation increased from 1.33% to 1.59%, which was stronger than the 1.5% pace anticipated by markets.

  • Underlying inflation, averaging the trimmed mean and weighted median measures, increased as expected by 0.4% in Q2 (prior revised: 0.23%), while the annual pace eased from 1.51% to 1.42% but was higher than the 1.35% pace anticipated.   
  • Trimmed mean inflation, the RBA's key measure, lifted by 0.42% in the June quarter (exp 0.4%, prior revised 0.3%), while the annual pace softened a fraction from 1.64% to 1.61% but met the market's forecast for 1.6%. 
  • Weighted median inflation posted a 0.37% rise in Q2 (exp 0.4%, prior revised 0.15%), though the annual pace eased from 1.37% to 1.24% (exp 1.2%). 

Consumer Price Index — Q2 | The details  

As was anticipated, today's report confirmed that the headline CPI figure rebounded in Q2 due to higher petrol prices. Automotive fuel (part of the transport group) accounted for more than half (0.33ppt) of the quarterly rise in the CPI of 0.6%.

The next highest contribution came from the health group (+0.12ppt), largely reflecting the impact of annual increases in private health insurance premiums that occured at the start of the quarter. 

Alcohol and tobacco added a combined 0.09ppt to the quarterly CPI figure, though that was almost entirely driven by tobacco (+0.08ppt) from excise increases. 

It was a better quarter as far as retail prices go, with clothing and footwear (+0.06ppt) and furnishings, household equipment (+0.06ppt) reversing declines from Q1. Household services contributed a modest 0.1ppt, due entirely to increases from child care costs. 

The main weights on inflation were from housing (-0.05ppt), which mainly reflected declines in utility costs, while rents added 0.1ppt to be offset by a 0.1ppt fall from new dwelling purchase costs, and from food and non-alcoholic beverages (-0.08ppt) that reflected declines in fruit and vegetable prices, notwithstanding the impact from drought conditions.      

The next chart shows the percentage changes in price levels for each of the categories in the quarter and over the year. 

Tradables inflation (prices determined by global factors) lifted by 1.2% in the June quarter, indicating some pass-through from a weaker domestic currency, which more than offset declines of 0.3% in Q4 and 0.6% in Q1, and accelerated the annual pace from 0.4% to 1.1%. Inflation from non-tradable sources (reflecting domestic factors) lifted by 0.3% in Q2, which saw the annual pace holding at 1.8%. 

Consumer Price Index — Q2 | Insights 

Today's report was a touch stronger than had been anticipated for headline inflation in the June quarter, though that was due largely to the impact from higher petrol prices. Overall, pricing pressures across the Australian economy remain subdued. The trimmed mean outcome of 1.61% over the year is in line with the RBA's forecast from its May quarterly statement, so it is possible that the Bank will remain with its call for a return to the 2% lower band (currently forecast for mid-2020) in August's statement (due out on the 9/8). However, it is still highly likely  that the Board will cut the cash rate again by year's end given that the national unemployment rate has been drifting higher in 2019. Markets are fully priced for a 25 basis point rate cut by October. 

Preview: CPI -- June quarter

Australia's latest inflation report is due to be released by the ABS at 11:30am (AEST) today for the three months ending June. Matching the experiences of most other major advanced economies inflationary pressures in Australia have been soft over recent years. Not since the December quarter of 2015 has annual underlying inflation been within the 2-3% band targeted by the Reserve Bank of Australia (RBA). However, as Governor Philip Lowe outlined during a speech in Sydney last week that is a target the Bank remains committed to. 

In order to achieve that objective, the Bank has recently concluded that tighter labour market conditions will be required to generate a faster pace of wages growth and, in turn, lift inflationary pressures. That was the Board's rationale for lowering the cash rate by a total of 50 basis points at its past two meetings to 1.0%. Though, as Governor Lowe highlighted last week, the Board is prepared to ease the cash rate further and another soft inflation report today would provide a strong signal for them to do so.

As it stands CPI 

Headline inflation, which is based on prices changes in a fixed basket of goods and services from one quarter to the next, stalled in Q1 (0.0%) missing expectations for a 0.2% rise. That saw the annual pace decelerate from 1.8% to 1.3% -- its lowest since Q3 2016 and well below the consensus call for 1.5%. The key influences in Q1 were weakness in petrol prices, retail goods, and housing costs.    

Underlying (or core) inflation, which removes the impact of extreme price changes, also slowed sharply in Q1 with the average of the trimmed mean and weighted median measures declining from 0.42% to 0.19% quarter-on-quarter and from 1.73% to 1.42% year-on-year. Those outcomes were vastly below the 0.4%q/q and 1.65%Y/Y expectations implied by the average of the consensus forecasts. The RBA's preferred measure is the trimmed mean, of which the quarterly figure slowed from 0.47% to 0.28% (expected was 0.4%) and the annual pace eased from 1.82% to 1.6% (expected was 1.7%). Lastly, the weighted median measure fell from 0.36% to 0.1% in the quarter (exp 0.4%), which saw the pace over the year declining from 1.64% to 1.24% (exp 1.6%). 

For a full review of Q1's inflation data see here

Market Expectations CPI 

Today's report is expected to show a slight lift in the headline pace inflation, due mostly to a notable rise in petrol prices over the June quarter. For core inflation, a stronger quarterly outcome is expected, though the annual pace is likely to ease further highlighting the lack of broad-based pricing pressures.  

Based on estimates compiled by Bloomberg, headline inflation is forecast to rise by 0.5% in Q2 (around a range from 0.3% to 0.8%) and lift the annual pace from 1.3% to 1.5%. Core inflation is expected to average 0.4% in the quarter and ease from 1.42% to 1.35% over the year. Within those estimates, the trimmed mean is forecast to show a 0.4% quarter-on-quarter rise, slowing the annual pace from 1.6% to 1.5%, while the weighted median is also tipped to rise by 0.4% in Q2 but remain little changed through the year at 1.2%. 

What to watch CPI

The key number to watch out for in today's release is the trimmed mean. The detailed forecasts published by the RBA in May's Statement on Monetary Policy have trimmed mean inflation at 1.6% over the year to the June quarter, which is a touch above today's expectation for 1.5%. 

The cash rate futures market is fully priced for another 25 basis point RBA rate cut by October (see chart, below), though if the trimmed mean were to come in notably below consensus, we would likely see expectations for a cut in September firm sharply and place further pressure on the $A. In that situation, we could also anticipate the RBA to revise lower its profile for inflation and thus delay the forecast return to the 2% lower band (currently set for June 2020) in August's quarterly statement that is due to be released on the 9/8. 

Monday, July 29, 2019

Australian dwelling approvals fall 1.2% in June

Australian dwelling approvals fell by 1.2% in June in a result that disappointed market expectations for a modest increase. Approvals declined sharply over the June quarter, around weakness for units and houses, after a 0.9% increase in Q1.

Building Approvals — June | By the numbers
  • Total dwelling approvals (including the private and public sectors) fell by 1.2% in June to 14,295 (seasonally adjusted) coming against market expectations for a 0.2% rise. Last month's initially reported increase of 0.7% was revised down to 0.3%. 
  • The decline in dwelling approvals over the year accelerated from -19.2% (revised from -19.6%) to -25.6%.
  • Unit approvals recorded a 3.9% fall in June (prior rev: +0.7%) to 5,608 to be down by 38.1% through the year (prior rev: -27.9%)
  • Approvals for houses lifted by 0.5% in the month (prior rev: +0.1%) to 8,687, though the annual decline steepened to -14.5% from -12.0%.

  • In trend terms, total dwelling approvals fell by 1.3% in June and by 20.9% over the year, with houses -0.8%m/m and -15.2%Y/Y and units -2.0%m/m and -27.8%Y/Y. 

Building Approvals — June | The details 

In the June quarter, total approvals fell by 7.3% to an aggregate of 43,197 (seasonally adjusted). That followed a 0.9% rise in Q1, but that was an aberration given that as per the chart (below), approvals have declined in 5 of the past 6 quarters. The detail in Q2 was; houses 25,961 (-4.4%q/q) and units 17,236 (-11.2%q/q).  

Looking at the granular detail (which is not seasonally adjusted) over the past 3 months, the aggregate for houses picked up by 4.1% compared to the total from March, while townhouses posted a relatively modest 1.2% rise. The low-rise unit category increased by 9.5% over the quarter, though the high-rise segment saw an 8.7% decline.  

The state-based detail was broadly weak in June and over Q2. Only Victoria recorded an increase in total approvals in the month (+9.7%), while Queensland was the only state to post a quarterly increase (+4.3%). Approvals in most states remain sharply down on a year earlier. 

The table (below) provides a more in-depth breakdown of the headline details for the states in June and over the year.

The value of alteration work to existing residential properties lifted by 1.2% in June to $725.3m to back up a 1% rise in the previous month. Over the year, the value of work approved swung from -2.1% in May to +9.3% in June. In the non-residential category, the value of work approved jumped by 9.6% in the month to $4.13bn to be up by 23.7% over the year. 

Building Approvals — June | Insights

Buoyed by the recent interest rate cuts from the Reserve Bank of Australia, May's federal election outcome and banking regulator APRA easing its guidance around loan serviceability criteria, sentiment in the housing market has undoubtedly improved. That is highlighted by the outturns from recent auction clearance rates, CoreLogic's price data and the detail from Westpac-Melbourne Institute's Consumer Sentiment Index. Notwithstanding, the outlook for residential construction activity remains weak for the remainder of 2019 and then into 2020 (see chart, below). 

Friday, July 26, 2019

Macro (Re)view (26/7) | Global outlook worsens; ECB to step up stimulus

Developments this week reinforced the concerns of markets and policymakers regarding the global economic outlook. Referencing the impact of the recent escalation in US-China trade tensions and ongoing geopolitical uncertainties, the International Monetary Fund (IMF) was again prompted to revise lower its forecast for global output growth in 2019, this time from 3.3% to 3.2%. Though a minor revision, it continues a trend of downgrades. At the same point a year earlier, the IMF anticipated global growth in 2019 to be 3.9%. That forecast was subsequently lowered to 3.7% in October, then to 3.5% in January, followed by 3.3% in April. 

Most notably, the manufacturing sector is weighing on the outlook, as trade tensions have weakened confidence and investment, while disruptions to established supply chains caused by the implementation of tariffs contributed to a near-stalling in global trade volumes over the year to the March quarter. These dynamics were evident in the latest round of global 'flash' Purchasing Managers' Index surveys released this week by IHS Markit, with eurozone manufacturing activity contracting further in June to its weakest in 6½ years (the reading for Germany fell to a 7-year low), while conditions in US manufacturing
slumped to their lowest in a nearly a decade. In contrast, the services sector, which tends to be more domestically focused, is appearing to be more resilient to the global uncertainties given that conditions remain expansionary in the eurozone and the US, albeit around a moderating trend. 

The latest meeting of the European Central Bank's (ECB) Governing Council was this week's highlight, where no change to its 
existing policy measures was the call on Thursday. That was largely anticipated by markets, though pricing for a rate cut to be announced had increased noticeably over the preceding days. In his post-meeting press conference, ECB President Mario Draghi could not have been more clear by stating that the economic outlook "is getting worse and worse" after earlier identifying in his introductory statement that "softening global growth dynamics and weak international trade" as well as declining sentiment in response to "the prolonged presence of uncertainties" from trade and geopolitical tensions and emerging market vulnerabilities as the key influences. 

In the end, the Governing Council decided to opt for more time to consider its response, though the decision statement has prepared markets for a rate cut to be announced at its next meeting in September, and also mentioned that other stimulus options, including enhancing its forward guidance, tiering of the negative deposit rate applied on banks' excess reserves and restarting its asset purchase programme, are on the table. The precise combination of measures the Governing Council may settle on seems far from decided, though it will have the benefit of publishing an updated set of growth and inflation forecasts at the September meeting to explain its course of action. 

Over in the US, GDP growth slowed from an annualised pace of 3.1% in the March quarter to 2.1% in Q2, though that was stronger than the consensus forecast for 1.8%. The headline result concealed a contrasting dynamic between households and businesses, as shown in our chart of the week (below). Underpinned by ongoing strength in the labour market, household spending accelerated from an annualised pace 1.1% in Q1 to 4.3% in the June quarter, led by the durable goods category. 

However, as the Federal Reserve (Fed) continues to highlight, the risks to their baseline economic outlook reside mostly around business investment in response to trade tensions and weaker global growth. Those concerns are well-founded given that business investment fell sharply in Q2, driven mostly by weakness in spending on structures, and subtracted from overall economic output. Also indicative of the intensification of uncertainties businesses are facing, the boost to growth in Q1 from inventories and net exports was more than reversed in the June quarter. As a result, the Fed is all but certain to cut its benchmark interest rate target by 25 basis points to 2.0-2.25% next week.

Chart of the week 

The other main development from abroad this week was in the UK, where Boris Johnson secured a comfortable victory in the Conservatives' leadership ballot to replace Theresa May as Prime Minister. It appears that the new PM will use the threat of a disorderly Brexit in an attempt to secure a new withdrawal agreement from the European Union, which he has said must exclude the Irish backstop solution to retain free movement of goods, services and people between Ireland (part of Europe) and Northern Ireland (part of the UK). Officials in Brussels were quick in rejecting such a proposal during the week, thus increasing the risk of a hard Brexit on October 31 and placing further pressure on the Sterling, currently trading at 2-year lows against the US dollar.   

— — —

In Australia this week, the highlight was a speech by Reserve Bank Governor Philip Lowe on "Inflation Targeting and Economic Welfare" to the Anika Foundation Luncheon in Sydney. The speech broadly outlined the factors weighing on inflation, both in Australia and offshore, but reaffirmed the RBA's commitment to its inflation targeting regime. 

The governor highlighted that a substantial pick-up in workforce participation over the past couple of years had not been expected by the RBA and had meant that strong employment growth had essentially been met by new entrants into the labour force, thereby limiting the pace of wages growth and, in turn, inflation. Thus, soft inflation and the persistence of spare capacity had justified the Board's decision to cut the cash rate by a total of 50 basis points at its previous two meetings, which the governor said will "support demand in the Australian economy" in combination with "recent tax cuts, higher commodity prices, some stabilisation in the housing market, ongoing investment in infrastructure and a lift in resource sector investment". 

In looking ahead, Governor Lowe said "the Board is prepared to provide additional support by easing monetary policy further" in order to help reduce spare capacity to support inflation returning to the 2-3% target. Markets are priced for an additional 25 basis point rate cut by year's end that would lower the cash rate to 0.75%.  

— — —

Friday, July 19, 2019

Macro (Re)view (19/7) | RBA set to pause as labour market remains in focus

The domestic perspective was informed this week by the minutes from the Reserve Bank of Australia's July meeting and by June's update on the labour market. The RBA's July meeting minutes reiterated that the decision to follow June's rate cut with a further 25 basis points of easing was taken to support employment growth, with the Board focused on reducing excess capacity in the labour market to shore-up its outlook for growth and inflation. With the cash rate now at 1.0%, the minutes indicated that the Board is set to take a pause as it awaits data to assess the response, though it is prepared to announce further easing "if needed" to support output growth returning to trend and inflation lifting back to target. 

Developments in the labour market remain the Board's primary focus, with July's minutes highlighting the unemployment and underemployment rates and wages growth as the key indicators to watch. Thus, the latest update from the ABS on the labour market released on Thursday was timely. Employment was expected to slow in June, though the outcome of just 500 jobs on a net basis was well below the 10,000 addition anticipated by markets and was against the very strong outturns from April (42,000) and May (45,300). While employment growth was robust in Q2, the annual pace moderated from 2.9% to 2.4%, with risks of a further slowdown over the second half of the year, as highlighted in this week's NAB Business Survey for Q2. The July minutes confirmed the RBA Board acknowledges this risk.  

Despite the soft employment result in June, the unemployment rate held at 5.2% for the third consecutive month, as workforce participation was little changed. While there was no improvement on that front, as our chart of the week (below) highlights, the positive from June's report was that the underemployment rate fell from 8.6% to 8.2% and the underutilisation rate declined from 13.7% to 13.3%. Those declines only retraced increases from the past couple of months but would clearly be welcomed by an RBA Board intent on reducing excess capacity. For our full review of June's Labour Force Survey see here

Chart of the week

The key event on the domestic calendar next week occurs on Thursday, with RBA Governor Philip Lowe scheduled to deliver a speech in Sydney on Thursday titled "Inflation Targeting and Economic Welfare". Q2's inflation data are due to be released the week after on 31 July. 

— — —

Turning to developments offshore, GDP growth in China slowed in line with expectations from 6.4% to 6.2% over the year to Q2; the slowest pace since the early 1990s but still within the authorities' target for 2019 of 6.0-6.5%. The easing in momentum reflects the impact of a weaker contribution to activity from external trade in response to tariffs and ongoing tensions with the US. Weakness has also been evident in imports, indicating that the uncertainty is weighing on business confidence and investment. Regarding households, retail sales growth outpaced expectations at 9.8% over the year to June, with consumption supported by large-scale tax cuts implemented earlier this year, though a weaker business sector has been raising concerns over the employment outlook. Stimulus through investment in public sector infrastructure projects is expected to ramp up to help underpin economic activity. 

In the US, Federal Reserve Chair Jerome Powell gave a speech in Paris, which reiterated the accommodative tone from last week's testimony to the Congress, notably that the FOMC saw a strengthened case for easier policy and was prepared to "act as appropriate to sustain the (economic) expansion". That comes in response to slowing business investment and weakness in the manufacturing sector due to uncertainty prompted by trade tensions and slowing global economic growth. In contrast, household consumption is strengthening supported by a robust labour market, with growth in the retail sales 'control group' lifting by a stronger-than-expected 0.7% month-on-month in June as the annual pace accelerated to 4.6%. 

Nevertheless, the FOMC remains on track to cut its benchmark interest rate when it meets at the end of the month. The only question for markets is whether it will be by 25 or 50 basis points. Expectations towards the latter surged to as high as a 2 in 3 chance from around a 1 in 3 probability following a speech by New York Federal Reserve President and Vice-Chair of the FOMC, John Williams, titled "Living Life Near the ZLB" early on Friday morning (Australian time). The overall tone was one of proactivity, arguing for policymakers to "take swift action when faced with adverse economic conditions" on the basis that "it's better to take preventative measures than wait for disaster to unfold". In particular, even in the case of a low r-star (neutral interest rate setting), "when you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress". Such was the market reaction, the New York Fed later issued a clarification, noting that the speech was based on academic research and was not intended as policy guidance ahead of the FOMC's next meeting. Markets remain fully priced for a 25 basis point cut on July 31 and place the chance of a 50 basis point cut at around 1 in 2. 

Over in Europe, anticipation is beginning to build ahead of next week's policy meeting of the European Central Bank's Governing Council. A survey released by Reuters (see here) showed that the most likely outcome according to a little under 60% of economists polled was a change in forward guidance. A rate cut is then expected to be announced at the following meeting in September, while around 40% of respondents see the ECB re-commencing quantitive easing this year, up from around 15% in the previous survey. In the UK, markets appear to be pricing in an increased risk of a no-deal Brexit, with the Sterling falling to a 2-year low against the US dollar. That came despite strong data showing the unemployment rate held at its 44-year low of 3.8% in May, while the pace wages growth lifted to its highest since mid-2008 at 3.6% year-on-year. The results from next week's Conservative leadership ballot are expected to be announced on Tuesday, in which Boris Johnson is favoured to become the UK's next Prime Minister after campaigning on a pledge to deliver Brexit by 31 October, with or without a deal. 

Wednesday, July 17, 2019

Australian employment slows in June

The Australian labour market added a softer-than-expected 500 jobs on a net basis in June, while the headline unemployment rate remained at 5.2% for the third consecutive month. The most encouraging aspect of today's report was a decline in the broader measures of spare capacity, retracing increases from the previous two months. 

Labour Force Survey — June | By the numbers
  • Employment increased by a net 500 in seasonally adjusted terms; well below the median forecast for a rise of 9,000. May's initially reported increase of 42,300 was revised up to 45,300.  
  • The national unemployment rate was unchanged at 5.2%, in line with the consensus forecast. 
  • The underemployment rate fell from 8.6% to 8.2%, while the underutilisation rate improved from 13.7% to 13.4%.
  • The participation rate remained at its record high achieved in the previous month at 66.0%, whereas it had been anticipated to ease to 65.9%.
  • Aggregate hours worked were flat in the month at 1.77bn hours, stabilising after declines in April and May, as annual growth fell from 2.1% to 1.6%.

Labour Force Survey — June | The details 

As highlighted in our preview, employment was expected to moderate in June, in part because statistical volatility looked to have helped drive the very strong gains seen in April and May, and that was not expected to be repeated on this occasion. That expectation was broadly vindicated, though the moderation occurred at a more rapid pace. The net increase of 500 jobs was the weakest outturn since July last year and was split between a 21,100 rise from full-time work and a 20,600 fall in part-time positions. These outcomes saw the annual pace of total employment growth slow from 2.9% to 2.4%, with full-time easing from 3.1% to 2.9% and the more volatile part-time segment halving from 2.4% to 1.2%. 

For Q2, net employment lifted by 87,700, its strongest quarterly gain in a year, while the annual pace of employment growth was in line with where it was at the end of the March quarter.   

At two decimal places, the unemployment rate lifted from 5.19% to 5.24%. That occurred because the net increase in employment of 500 fell well short of meeting the addition of around 7,000 new entrants into the workforce. 

Notwithstanding, the underutilisation rate (including the unemployed and those workers who want and are able to work more hours) fell from 13.75% to 13.43%, while the underemployment rate (those employed who want and are able to work more hours) declined from 8.55% to 8.19%. The underemployment rate is a critical measure the Reserve Bank of Australia looks at to determine the level of spare capacity in the labour market, as it highlighted in its July meeting minutes that were released earlier this week.   

These improvements in underutilisation reference a better outcome from hours worked on this occasion. Following back-to-back declines, aggregate hours worked steadied in June at 1.77bn hours, though the annual pace (which is volatile) fell from 2.1% to 1.6%. After adjusting for the modest increase to employment, average hours worked per employee remained at 137.8 hours. This followed declines of 0.5% in April and 0.7% in May. However, the through-the-year pace was unchanged at -0.7%. 

Turning to the state details, there was little positive news to report given that only one state, Western Australia, saw its unemployment rate decline. The details for June were (change across Q2 in brackets); New South Wales held at 4.6% (+0.2ppt), Victoria +0.2ppt to 4.8% (+0.2ppt), Queensland +0.3ppt to 6.5% (+0.4ppt), South Australia +0.2ppt to 5.9% (steady), Western Australia -0.4ppt to 5.8% (-0.2ppt), and Tasmania +0.4ppt to 6.8% (+0.1ppt). 

The next chart shows the net employment outcomes from each state on a monthly (lower bars), quarterly (middle bars) and annual (upper bars) basis. 

Labour Force Survey — June | Insights

Employment moderated sharply in June, but that followed very strong outcomes in April and May. Overall, Q2 was fairly robust in terms of employment growth at 87, 700 and was a notable improvement on Q1's total of 67,400. For some time, though, the forward-looking indicators for labour demand in private surveys and advertisements have indicated that employment growth is likely to slow. To support employment growth against those headwinds, the RBA delivered consecutive rate cuts in June and July. The minutes from July's meeting confirmed that the Board would continue its close focus on the labour market, in which the key indicators are the unemployment and underemployment rates and wages growth, and is prepared to deliver further easing "if needed".   

Preview: Labour Force Survey -- June

Australia's latest labour market update is due to be released by the ABS at 11:30am AEST today. The survey will cover the month of June, coinciding with the first of two 25 basis point rate cuts announced by the Reserve Bank of Australia in response to an accumulation of excess capacity in the labour market. 

As it stands Labour Force Survey 

For the third consecutive month employment surprised to the upside of market expectations, with May's report showing a net increase of 42,300 jobs that accelerated past the median forecast for a rise of 16,000. April's outturn was equally impressive rising by 43,100 compared to the consensus call of 15,000. Employment growth continues to strengthen, with the annual pace rising to 2.9% in May; up from 2.6% in the previous month and 2.2% at the end of 2018. In response, workforce participation has been lifting in kind and reached a new record high of 66.0% in May. 

Thus, the unemployment rate held at 5.2% in May, disappointing an expected fall to 5.1%, while underemployment drifted from 8.5% to 8.6% and underutilisation remained at 13.7%. As was the case in April, strong participation and employment outcomes were unable to generate a rise in aggregate hours worked; falling by 0.3%, while a base effect saw the annual pace lift to 2.1%. For a full review of May's report see here   

Market expectations Labour Force Survey 

Employment is expected to moderate in June, with the median forecast situated at +9,000 between a range from -10,000 to +24,000. Absent revisions to previous months, the unemployment rate is expected to hold at 5.2% for the third straight month, though there are some estimates for a decline to 5.1%.

What to watch Labour Force Survey

With little change expected in the unemployment rate, the focus will turn to employment growth. Expectations are set low ahead of today's release; the forecast 
for 9,000 jobs to be added into the economy in June is the lowest consensus call from economists since December 2017 and is well below the 15,000 to 20,000 range usually predicted. The shift down in expectations can be explained by two factors. 

Firstly, statistical volatility may help to explain the very strong employment outcomes from April and May -- the incoming sample group on both occasions had an employment to population ratio that was higher than the group they were replacing and above that for the overall sample. Meanwhile, the same characteristic was held by the group that concluded its involvement in the survey in May. Thus, economists have seemed to have concluded that, on balance, employment is likely to moderate due to the high benchmark the new incoming group would have to exceed to help drive another spike in jobs growth.

Secondly, the call is likely some recognition of the recent softening seen in the forward-looking indicators of labour demand, notably job vacancies and employment intentions from private surveys.     

Friday, July 12, 2019

Macro (Re)view (12/7) | Fed to cut in July; Australian sentiment weakens

The US Federal Reserve is almost certain to announce its first interest rate cut since the global financial crisis at the FOMC's upcoming meeting later this month in response to an increasingly uncertain economic outlook. The minutes from the Committee's June meeting released this week highlighted notable caution around their overall constructive outlook for the US economy prompted by the recent escalation in trade tensions and slowing activity from abroad, with the key implication that "...many (members) judged that additional policy accommodation would be warranted if they continued to weigh on the economic outlook". 

Fed Chair Jerome Powell extended on this point during his semiannual testimony to the Congress this week by highlighting that since the June meeting "it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook". Thus it was of no surprise to see that markets have a 25 basis point rate cut fully priced in for July, while they have also been giving genuine consideration to the idea that a 50 basis point cut was a possibility again after it had seemingly been taken off the table following last Friday's strong non-farm payrolls data. Those more aggressive expectations were moderated slightly in response to Thursday's US CPI data, with core inflation stronger than expected at 2.1% over the year to June (shown as our chart of the week, below), which could support a rise in the FOMC's preferred measure of inflation, the core PCE index, towards its 2% target.   

Chart of the week

From a domestic standpoint, the Committee's main concern appears to be around the outlook for business investment, with Chair Powell highlighting that measures of confidence had weakened of late in consequence to the elevated uncertainty from trade tensions and slowing economic activity in major export markets. A July rate cut would be intended to assuage those concerns given that conditions in the household sector appear to have rebounded in Q2 with strength in the labour market supporting a lift in consumption spending. As we highlighted in our review on the 28/6 (see here), while US GDP growth was strong in Q1 at an annualised 3.1% pace that was underpinned by solid contributions from net exports and inventories; components that are not typically indicative of underlying momentum in activity. Household consumption and business investment are the areas that will determine the growth trajectory over the medium to long term, with the latter now mired by an uncertain outlook. 

Over to Europe where the Account of the European Central Bank's June policy meeting was released this week. The overall tone was in line with comments from ECB President Mario Draghi late last month that the Governing Council, like their US counterparts, have become increasingly alert to the downside risks to their economic and inflation outlooks from persistent uncertainty relating to trade and geopolitical factors and "... needed to be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments, as appropriate". The overall expectation of the Governing Council is that these uncertainties will remain persistent and thus require them to consider all of their options including adjusting the timing of forward guidance for interest rate increases, resuming quantitive easing and potentially taking the benchmark deposit rate further into negative territory. More clarity on the path the ECB will take should be available in two weeks' time following the Governing Council's policy meeting at its Frankfurt headquarters. 

— — 

Consumer and business surveys were the main focus in Australian this week. The Westpac-Melbourne Institute's Index of Consumer Sentiment posted a surprisingly steep 4.1% fall to a near 2-year low reading of 96.5 in July. The fall into outright pessimism occurred despite the survey being conducted last week (1-5 July) that coincided with news of the Reserve Bank of Australia (RBA) lowering its benchmark interest rate by 25 basis points to 1.0% and the federal government's tax relief measures being cleared by the parliament. This survey has shown interesting results of late; sentiment increased notably in April in response to the federal government's 2019/20 Budget, while it declined in June following the RBA's first rate cut since mid-2016, though GDP growth figures for Q1 that were released in that week confirmed a sharp slowing in momentum.

July's decline in sentiment was centred on a deterioration in the economic outlook, both over the near and longer terms. The sub-index tracking expectations over the next 12 months plunged by 12.3% in the month and by 17.4% from a year earlier to hit a 4-year low. The outlook over the next 5 years also weakened by 6.7% in the month to be down by 12.2% over the year.  A weakening outlook for the domestic economy is weighing on consumers' views towards family finances over the next 12 months, which declined by 8% in the month to fall into the pessimistic range, while concerns around the labour market saw unemployment expectations rise by 5.8% in July to now sit above its long-run average for the first time in 2 years. 

Sentiment towards the housing market has clearly been buoyed by the RBA's back-to-back rate cuts, with the index measuring 'time to buy a dwelling' lifting by 5.4% to its highest level in 4½ years at a reading of 123.2, while house price expectations continue to surge; rising by a further 8.9% this month to 119.4 after a 22.7% acceleration in June but still remains suppressed relative to the long-run average level of 125. These developments are yet to be reflected in the housing finance data, with May's update released this week showing another soft outturn (see our review here). 

Also this week, the NAB's Business Survey for June confirmed that momentum in the private sector continues to slow and remains broad-based across the industries. Business confidence retraced most of its post-election rise after declining from +7 to a below-average reading of +2. Firms reported a marginal improvement in operating conditions from +1 to +3, though as has been the case over recent months the index continues to languish below its long-run average. However, in contrast to concerns highlighted by consumers, firms reported a solid gain in the employment index indicating that that the national unemployment rate was likely to remain contained over the coming months. Meanwhile, the leading indicators pointed to a soft outlook given weakness in forward orders and a slowing trend in capacity utilisation.