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.
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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.
