Preview: RBA October meeting

The Reserve Bank of Australia (RBA) Board is on the road for its latest policy meeting that takes place in the Victorian state capital of Melbourne today. Since the Board lowered the cash rate in June and July to 1.00%, it has been on hold at the two meetings that have followed. At 2:30PM AEST, the Board is expected to announce another 25 basis point cut lowering the cash rate to 0.75%.     

The minutes from September's meeting contained a similar theme from the previous month, indicating the Board is closely monitoring an increasingly uncertain economic outlook offshore and a domestic economy operating well below capacity. Since cutting in June and July, the Board had used the ensuing period to assess the impact on the data flow. September's minutes indicated the threshold to cut again was close: "Taken together, recent outcomes suggested that spare capacity remained in the labour market and that the Australian economy could sustain lower rates of unemployment and underemployment".  

This was essentially the reasoning used to justify the previous two rate cuts given that the Board has identified that a tighter labour market is key to inflation sustainably returning to the 2-3% target band. At a speech in the New South Wales' Northern Tablelands last week, RBA Governor Philip Lowe reiterated this message: "there has been an accumulation of evidence over recent times that the economy can sustain lower rates of unemployment and underemployment than previously thought likely". 

Also significant were Governor Lowe's comments on global interest rate settings following the recent broad-based shift to easier policy stances by other central banks: "If we did seek to ignore these shifts, our exchange rate would appreciate, which, in the current environment, would be unhelpful in terms of achieving both the inflation target and full employment" and then went on to say "as a small open economy, we have to take the world and global interest rates as we find them". 

To recap, the key developments since the RBA's previous meeting have been;

• From offshore: Downside risks to the global economic outlook posed by trade and political uncertainty intensified and with inflation pressures remaining soft the US Federal Reserve and the European Central Bank eased their monetary policy stances. In the US, the range for the fed funds rate was lowered to 1.75-2.0% — the second time rates have been cut in the past 3 months. In Europe, the ECB announced a 5-point stimulus package extending on their use of unconventional measures, including; a further lowering of already negative interest rates, restarting quantitative easing, adjustments to forward guidance, a longer and cheaper form of funding made available to the banking sector, and a 'tiering' of the deposit rate effectively charged on banks' excess reserves. 

• Domestically: GDP growth in Q2 came in at 0.5% slowing the annual pace from 1.8% to 1.4% — its weakest since Q3 2009 (see here). The key dynamic was a further contraction in private sector demand, reflecting slowing household spending, weakness in residential construction activity and soft business investment, as robust public demand was kept in train by health-related spending. In contrast to slowing output growth, employment growth remained robust at 2.5% over the year to August — a dynamic helped explained by the ABS's detailed labour force data released last week indicating that almost all of this has been driven by the public sector. Specifically for August, employment increased by a much stronger-than-expected net 34.7k, though that was exceeded by growth in the workforce participation rate to a new record high at 66.2% (see here). As a result, spare capacity in the labour market increased in the month, with the unemployment rate rising from 5.2% to 5.3% — its highest level in a year — while the underemployment and underutilisation rates lifted to 8.6% and 13.8% respectively.    

Given the Board's clear focus on the labour market and the Bank's recent commentary, the rise in spare capacity reported in August's Labour Force Survey seals the case for the cash rate to be cut by 25 basis points to 0.75% today. That view is reinforced by the governor's comments on the implications of the recent easing by other central banks on the exchange rate and, in turn, the RBA's employment and inflation objectives. 

For reference, the cash rate futures market is pricing in a 78% chance of a rate cut at this meeting and the OIS pricing implies a slightly lower chance at around 74%. Meanwhile, 19 of 25 economists surveyed by Bloomberg Australia are forecasting a rate cut today. Note also that later tonight Governor Lowe is scheduled to deliver a speech (7:20PM AEST), which coincidently is the same sequence of events that occurred when the cash rate was cut in June and July. 

Macro (Re)view (27/9) | Markets contend with more uncertainty

In another week highlighted by uncertainty, political developments in the US and the UK led the headlines. In the US, the House of Representatives announced it would commence an impeachment inquiry into President Trump following news he had sought the Ukrainian government to assist with an investigation into one of the Democrats' leading presidential candidates for the 2020 election. Over in the UK, the Supreme Court reached a unanimous ruling that the request by PM Johnson to the Queen (subsequently approved on August 28) to prorogue parliament from early September to mid-October was unlawful.

On the policy front, the recent meeting by the US Federal Reserve highlighted a divergence of views on the Committee regarding interest rate settings and that was evident again this week. Vice Chair of the Federal Reserve Richard Clarida assessed that inflation expectations "were consistent with our price stability mandate", while Chicago Fed President Charles Evans stated that the two previous rate cuts now have the Committee "well-positioned". In addition, Dallas Fed President Robert Kaplan and Richmond Fed President Thomas Barkin, despite noting trade and political headwinds, were non-committal that further cuts were needed. Those pushing the case for an easier policy stance were Minneapolis Fed President Neel Kashkari as he saw "no evidence that the US economy is running at capacity or beyond capacity" and noted dove James Bullard, President of the St Louis Federal Reserve saying; "I think we could do a little more". 

On the US data front, GDP growth was confirmed at an annualised pace of 2.0% in Q2 and was unchanged from the previous estimate. The stated objective of the US Federal Reserve is to maintain its now 10-year long period of economic expansion and the consumer is key to this. Overall, US household consumption is still in robust shape supported by wage gains generated by a tight labour market, though there are reasons to be cautious. Growth in real personal spending on goods and services was softer than expected in August rising by just 0.1%, while the annual pace eased from 4.0% to 3.7%. Consumer sentiment according to the University of Michigan's index lifted off its 3-year low in the previous month to a stronger-than-expected 92.3 in September but is down noticeably over the past year impacted by economic uncertainty domestically and offshore. To date, this uncertainty has impacted mostly on business investment and while data for August was above expectations, durable goods orders have fallen by 3.0% in annual terms compared to a 12.4% pace a year ago, while the less volatile core orders (which exclude investment on transportation assets such as aircraft etc) have slowed to 0.2% from 7.5% in August 2018. Meanwhile, the Federal Reserve's preferred measure of inflation remained below target on a 12-month basis at 1.8% to August, though it lifted from 1.6% in the previous month.   

Across the Atlantic, European Central Bank President Mario Draghi used his appearance before the European Parliament to outline that the 5-point stimulus plan announced by the Governing Council at its meeting two weeks ago was necessary due to "a more rapid and extended slowdown than previously anticipated, persistent and prominent downside risks to the growth outlook, and a further delay in the convergence of inflation towards our aim". Key will be developments around global trade, and by extension manufacturing, given the exposure of the euro area economy to the external sector. For now, the services sector remains resilient highlighted by this week's IHS Markit Flash PMI reading of 52.0 in September, though as President Draghi commented; "The longer the weakness in manufacturing persists, the greater the risks that other sectors of the economy will be affected by the slowdown". These risks are genuine considering that Eurozone manufacturing conditions according to Markit's flash PMI weakened to an 81-month low in September at a reading of 46.0, while in Germany — the bloc's largest economy — conditions are considerably weaker at 41.4, which is a 123-month low. While remaining open to further monetary stimulus, President Draghi reiterated his ongoing call for a more balanced policy mix featuring enhanced support from fiscal policy and structural reform. 

Closer to home, the Reserve Bank of New Zealand elected to leave its benchmark interest rate on hold this week at 1.0%, with the Monetary Policy Committee (MPC) assessing that the economy was around full employment and inflation was within its target range. Following a 50 basis point cut at its previous meeting early last month, the Bank had observed a decline in borrowing rates and a depreciation in the domestic currency. While these factors, together with government spending, are anticipated to support domestic demand conditions over the next 12 months, the MPC does have scope to ease further "if necessary, to support the economy and maintain our inflation and employment objectives".

— — —

Turning to the domestic focus where the feature event of the week was a speech ("An Economic Update") by Reserve Bank of Australia Governor Philip Lowe ahead of next Tuesday's Board meeting. As shown in our chart of the week (below), market pricing indicates a rate cut next week as near to an 80% chance, while 19 of 25 economists surveyed by Bloomberg expect the cash rate to fall to 0.75%. 

Chart of the week

Governor Lowe's speech focused on developments in the global and domestic economies and highlighted caution around the outlook for both. Starting abroad, risks to the growth outlook were described as "increasingly tilted to the downside" due to geopolitical tensions weighing on firms' investment plans, while the dispute between the US and China was clearly driving the slowdown in international trade flows.

From a domestic standpoint, the governor highlighted that the extent of the slowdown in the Australian economy had been sharper than anticipated. To put this in perspective, in February's quarterly statement GDP growth over the year to the June quarter was forecast to be 2.4%, which was then cut to 1.7% in May and then subsequently retained in the Bank's August Statement on Monetary Policy. Ultimately, Q2's GDP growth outcome came in at 1.4% year-on-year (see here). The governor attributed this to slower global economic growth and rising uncertainty, weakness in household consumption growth and the impact of drought conditions weighing on farm output. 

In looking ahead, Governor Lowe outlined that the economy had "reached a gentle turning point" with growth expected to pick up modestly to around trend by next year. That assessment is on based on a combination of factors including; lower interest rates and tax cuts, a weaker Australian dollar, an elevated pipeline of infrastructure projects, a stabilisation of the major housing markets and a more buoyant resources sector. However, as the governor acknowledged; "there are some obvious risks to this outlook", which continue to mainly be around prospects for household consumption growth.

Perhaps a more pressing concern for the Board at next Tuesday's meeting will be the state of the labour market. Once again, the governor highlighted that while employment growth has been robust it has been met with rising workforce participation and thus the labour market has not tightened sufficiently to generate a pace of wages growth that would assist in driving inflation back towards the target range. As such, the assessment was that there has been an "accumulation of evidence over recent times that the economy can sustain lower rates of unemployment and underemployment than previously thought likely". In this context and as covered last week (see here), August's Labour Force Survey contained several weak details; the unemployment rate lifted to its highest in 12 months at 5.3%, while underemployment and underutilisation also increased.  

The other main consideration that points to a rate cut being delivered next Tuesday is the recent easing by other central banks, including the US Federal Reserve and European Central Bank. Governor Lowe outlined that in a global setting of lower interest rates, local resistance to this shift would place upward pressure on the exchange rate, which "would be unhelpful in terms of achieving both the inflation target and full employment". In closing, to achieve these objectives, the governor again reiterated that the Board stands ready to "ease monetary policy further if needed".

Macro (Re)view (20/9) | US FOMC cuts rates; RBA close to easing again

As widely expected, the US Federal Reserve's policy-setting committee (FOMC) cut the fed funds rate by 25 basis points to a range of 1.75-2.0% this week. This was its second rate cut in the past 3 months, and as Committee Chair Jerome Powell outlined in his post-meeting press conference, it was taken to "help keep the US economy strong... and to provide insurance against ongoing risks". These risks relate to weaker global growth and trade tensions. Incidentally, the OECD this week cited the impact of trade tensions as the basis for lowering its outlook for global growth in 2019 to 2.9% — its weakest pace since the GFC.  

As far as the policy outlook is concerned, Chair Powell maintained the guidance that the Committee "will act as appropriate to sustain the (economic) expansion" and avoided repeating the "mid-cycle adjustment" description that had rattled markets when it last cut rates in July. The Committee's updated economic projections indicated that little appears to have changed from its outlook presented 3 months ago. Overall, it remains constructive seeing sustained economic growth, robust labour market conditions and inflation lifting near to its target as the "most likely" outcomes. Of course, the precise policy settings to best ensure this remains the case has been the key issue facing the Committee for some time now, particularly as the risks to its outlook are largely exogenous from its purview. Unsurprisingly, divergence between Committee members' views on this issue was evident again. The vote went 7 to 3 in favour of the 25 basis point cut, and of the 3 dissents, 2 (George and Rosengren) had voted for no cut at all, while the remaining member (Bullard) called for a larger cut of 50 basis points. 

However, it was in the 'dot plot' of participants' individual projections for interest rate settings (including non-voters) where the divergence was most evident. The median projection was for rates to end 2019 at 1.75%-2.0% (i.e. factoring in the rate cut at this meeting), though 7 participants expected that rates would need to be cut again by 25 basis points before the end of the year, while there were 5 participants that had called for no change from the then prevailing level of 2.25%-2.5%. By end 2020, the median projection was for rates to still be at 1.75%-2.0%, which is in contrast to market pricing that is factoring in around 60 basis points of cuts being delivered between now and the end of next year. Markets appear to be confident the FOMC will eventually come into line with their point of view, and they have good reason to be. Consider that back in June, the dot plot pointed to rates ending 2019 unchanged at 2.25%-2.5% only for the Committee to end up cutting twice since then. 

One other point of interest from this meeting was that the Federal Reserve cut the interest rate it pays on banks' excess reserves by 30 basis points to 1.8% (see here). This came in response to a liquidity squeeze in short-term money markets this week, influenced by a combination of factors including company tax payments falling due, and resulted in the overnight lending rate between banks spiking above the fed funds target range. To prevent an inadvertent tightening in financial conditions from taking hold, the Federal Reserve was forced to inject liquidity into the system on several occasions this week, the first time it has had to do so since the GFC.     

In the UK this week, as expected the Bank of England unanimously voted to maintain its existing policy settings. The Bank noted an increased level of caution around trade tensions and, in turn, the global growth outlook. However, Brexit is a more pressing concern and until clarity on the manner of the UK's withdrawal from the EU is gained, it is reluctant to follow the easing actions of other central banks. That said, it recognises that underlying output growth has slowed, due largely to weakness in business investment and exports. The household sector is proving to be more resilient to Brexit and global uncertainties and despite the Bank noting that employment growth was softening, labour market conditions were still assessed as robust. As a result, strength in wages growth is helping to keep the Bank's inflation outlook over the near term anchored just below the 2% target. 

The Bank of Japan also met this week, and while its Policy Board made no changes to existing settings (see here), it highlighted slowing global growth and downside risks to the outlook as concerns and the possibility that "...momentum toward achieving the price stability target will be lost". In such a scenario, the Bank reiterated that it "will not hesitate to take additional easing measures". 

— — —

Locally, the minutes from the Reserve Bank of Australia's policy meeting from earlier this month in which the Board held the cash rate steady at 1.0% were published this week. The key theme remained intact; developments from both offshore, with respect to trade and geopolitical tensions, and domestically, notably around the labour market, are central to the Board's policy outlook right now. 

In terms of offshore developments, the Board is continuing to closely monitor the US-China trade situation, particularly in light of the recent escalation in tensions, which, in turn, have "intensified the downside risks to the global outlook". From the Board's perspective, these tensions have led to a significant weakening in trade volumes over the past year, while geopolitical uncertainty is also cited as a factor weighing on confidence and impacting firms' investment plans across the globe, most notably in the manufacturing sector.

From a domestic viewpoint, while the June quarter National Accounts were released the day after this meeting was held, these minutes showed that Q2's GDP growth outcome of 0.5% led by public demand and net exports amid weakness in private demand (see here) was in line with what the Board had anticipated. Also in focus, conditions in the Sydney and Melbourne housing markets were assessed to be on the improve, though turnover was still low and credit growth was contained despite record low mortgage rates. However, the state of the labour market undoubtedly remains key for the Board. Here, its conclusion was clear with recent data indicating; "...spare capacity remained in the labour market and that the Australian economy could sustain lower rates of unemployment and underemployment".

As such, Thursday's update of the labour market for the month of August was timely. Alas, the Board are, on balance, likely to have been left disappointed with the outcome (see our review here). On the plus side, employment was much stronger than expected for the second straight month rising by a net 34.7k in August against the market forecast for a 15k increase, though the composition was highly lopsided between part time (+50.2k) and full time (-15.5k) work. Rising employment continues to be met by an increasing supply of labour, with the participation rate lifting to 66.2% — the 4th time in the past 5 months it has reached a record high. In fact, on this occasion, participation (+38.8k) increased by more than employment resulting in the national unemployment rate lifting from 5.2% to 5.3% — its highest level in a year. Furthermore, the broader measures of underemployment and underutilisation increased to 8.6% and 13.8% respectively, indicating no progress has been made in lowering spare capacity over the past few months.

Following the employment data, pricing for an RBA rate cut at the next meeting in October moved noticeably higher to imply around a 75% chance of the cash rate falling to 0.75% in two weeks' time. This has the chance to move even higher next week with Governor Philip Lowe due to deliver a speech titled "An Economic Update" on Tuesday night (7:30PM AEST). It is likely Governor Lowe will continue to reiterate that while monetary policy has its role to play in lowering spare capacity, more support from fiscal authorities would be beneficial. 

Fortunately, there appears scope for that assistance to be forthcoming with the Federal Treasurer Frydenberg announcing this week that the underlying cash position in 2018/19 was -$0.7bn (see here). At 0.0% of GDP, the budget position has returned to balance for the first time since before the onset of the GFC and earlier than had been expected, as shown in our chart of the week, below. On Budget night in April, a deficit of $4.2bn (-0.2% of GDP) had been forecast for 2018/19, which was revised up from the initial estimate of -$14.5bn (-0.8% of GDP) in May last year. Key to the improvement has been the boost to national income from elevated commodity prices, while employment growth was also stronger than had been forecast over the past year. Receipts were only marginally higher (+$0.1bn) than anticipated back in April but ended up being $11.5bn above the previous year's forecast. On the other side of the ledger, payments had been revised down by some $4.6bn since April and by $6.6bn over the year, due mainly to underspend in the NDIS and lower GST distributions to the states. 

Chart of the week

Australian employment strong in August; unemployment rate rises to 5.3%

For the second straight month, employment growth surprised strongly to the upside of market expectations, though the national unemployment rate lifted to 5.3% in August to be at its highest level in a year.   

Labour Force Survey — August | By the numbers

• Employment increased by a net 34.7k in seasonally adjusted terms; well clear of the median expectation for a gain of 15k. July's initially reported increase of 41.1k was revised down 36.4k.

• The national unemployment rate lifted to 5.3% from 5.2%, where it had been anticipated to remain unchanged.
• Underutilisation lifted to 13.8% from 13.7% (revised from 13.6%), while underemployment hit 8.6% from 8.4% in the previous month. 

• Workforce participation increased by 0.1ppt to a new record-high of 66.2% (exp: 66.0%).

• Aggregate hours worked lifted by 0.2% in August (prior 0.5%) to 1.78bn hours with the annual pace ticking up from 1.9% to 2.0%.

Labour Force Survey — August | The details 

The headline unemployment rate lifted from 5.2% to 5.3% in August to be at its highest level in a year. However, rounding overstates the magnitude of the change; at 2 decimal places, it went from 5.24% to 5.25%, just as it did for the trend series data. This continues a gradual rise in unemployment after it ended 2018 at 4.98%.For the 4th time in the past 5 months, Australian workforce participation reached a new record high after rising by 0.1ppt to 66.2%. In absolute terms, this equated to participation rising by 38.8k in the month. This was faster than growth in employment at 34.7k, so as a result there was a 4.1k rise in unemployment to 716.8k. 

Looking further into August's 34.7k rise in employment, the composition was volatile with full time falling by 15.5k (its weakest month since May 2018) and part time surging by 50.2k (its strongest month since January 2017). 

In annual terms, total employment growth was little changed at 2.46% compared to 2.5% in July, though growth in full time work retraced from 2.81% to 2.16% as part time accelerated from 1.82% to 3.11%. In recent months, annual growth in the full time segment has slowed, though part time has picked up and this has helped to maintain an overall robust pace in employment.    

Notwithstanding robust employment growth, not only did the unemployment rate pick up in August there was also a rise in underemployment (counting workers who want and are able to work additional hours) from 8.4% to 8.6% and underutilisation (unemployed and underemployed) increased from 13.7% to 13.8%. Both of these measures returned to where they were back in May earlier this year. 

Aggregate hours worked were able to build on the 0.5% rise from July with a lift of 0.2% in August to 1.78bn hours. In annual terms, growth in aggregate hours worked was up marginally to 2.0% from 1.9% in July. However, once adjusted for the increase in employment, average hours worked per employee were virtually unchanged in August at 137.9 hours, which is 0.4% lower than it was a year ago. 

Turning to the states, the details were mixed in August. Unemployment fell in New South Wales (from 4.4% to 4.3%) and in Western Australia (from 5.9% to 5.8%), though it increased in Victoria from (4.8% to 4.9%), South Australia (from 6.9% to 7.3%) and Tasmania (from 6.0% to 6.4%). Queensland's unemployment rate remained at 6.4%.   

Employment outcomes in August were led by Victoria at +20.3k, followed by New South Wales with +16.7k. However, it was fairly bleak elsewhere with Western Australia +3.6k, South Australia +1.4k, Tasmania -0.1k and Queensland -7.2k.

Labour Force Survey — August | Insights

Once again we saw a strong monthly employment outcome, though on this occassion it was outpaced by another rise in participation. On the back of the rise in unemployment, underemployment and underutilisation, market expectations for a Reserve Bank of Australia rate cut as early as October have firmed to around a 3 in 4 chance. 

Preview: Labour Force Survey — August

Australia's monthly employment data are due to be released by the ABS at 11:30am (AEST) today. The report will cover the month of August where employment is expected to have moderated following a strong print in July, though no change is anticipated in the unemployment rate. 

As it stands | Labour Force Survey 

In July, the labour market rebounded from weakness in the previous month, as employment increased by a net 41.1k to easily easily surpass the 14k addition expected by markets. This lifted the pace of employment growth over the year from an already robust 2.4% to 2.6%. On a more near-term basis, its pace was unchanged on 3 and 6-month annualised terms at 2.6% and 2.4% respectively.

For the third time in the past 4 months, the workforce participation rate rose to a new record high, increasing on this occasion from 66.0% to 66.1%. The arithmetic was the rise in employment (41.1k) was closely matched by the increase in labour supply (41.9k), which resulted in the unemployment rate printing at 5.2% for the 4th consecutive month. More broadly, spare capacity is the key issue for the nation's policymakers and here the underutilisation rate increased from 13.4% to 13.6% and the underemployment rate was up from 8.2% to 8.4%.   

Driven by the strong increase in employment, aggregate hours worked firmed by 0.5% in July, while the annual pace lifted from 1.5% to 2.0%. However, after adjusting for the increase in employment, average hours worked per employee lifted by just 0.2% in the month to 137.9 hours, which is 0.6% lower than a year earlier.  


Market expectations | Labour Force Survey 

In today's release, the median forecast according to Bloomberg is for employment to rise by 15,000 in August; this is around a wide range of estimates from -14,000 to +32,000. The unemployment rate is expected to hold at 5.2% for the 5th month in a row, with individual forecasts varying from 5.1% to 5.3%, which is despite an anticipated decline in the participation rate from 66.1% to 66.0%.  

What to watch | Labour Force Survey

In the minutes of the Reserve Bank of Australia's September policy meeting that were released earlier this week, the Board's assessment of the labour market was summarised by the following line: "...recent outcomes suggested that spare capacity remained in the labour market and that the Australian economy could sustain lower rates of unemployment and underemployment". This indicates that the Board is close to the lowering the cash rate again, unless it sees some signs of progress in this report that spare capacity is being absorbed, either through a lower unemployment rate (currently 5.2%) or a fall in underemployment (8.4%) and underutilisation (13.6%). 

Australian property prices down by 0.7% in Q2

Australian house prices fell by a further 0.7% over the June quarter on a weighted average capital city basis, with the pace of decline on a year earlier remaining at -7.4% according to the ABS's latest Residential Property Price Index data released this morning. These outcomes were slightly more upbeat than the consensus forecasts for declines of 1.0% in the quarter and 7.7% year-on-year.   

The details across the capital cities in Q2 was;

• Sydney: -0.5% qtr, -9.6% yr 
• Melbourne: -0.8% qtr, -9.3% yr  
• Brisbane: -0.7% qtr, -2.7% yr  
• Adelaide: -0.6% qtr, -0.1% yr  
• Perth: -1.4% qtr, -3.9% yr 
• Hobart: +0.5% qtr, +2.0% yr   
• Darwin: -1.8% qtr, -5.0% yr  
• Canberra: +0.2% qtr, -0.4% yr 

• Weighted-average of capitals: -0.7% qtr, -7.4% yr   

Breaking the results down further, the decline in property prices in Q2 was led by units at -0.8% compared to -0.6% for houses, though over the year houses at -7.7% have sustained a larger fall than units at -6.5%. 

The chart, below, shows the results for established houses across the capitals in Q2 and over the year. The weakness over the past year has been broad based, though most focus attends Sydney and Melbourne given they are the two largest markets. The annual pace of decline in Sydney retracted from -11.0% in Q1 to -10.1%, while in Melbourne it remained at -10.5%. 

In terms of units (apartments), prices in Sydney and Melbourne have fallen by 8.6% and 5.8% respectively over the past year, which is noticeably less than the magnitude of declines for established house prices. In contrast, unit prices in Brisbane, Perth and Darwin have experienced large falls than what has been sustained by houses. In Canberra, unit price declines have matched those for established houses at -0.5%. Hobart is the clear standout, where unit prices are up by 6.1% over the year compared to a 1.3% increase for established houses.    

The comprehensive breakdown of results is provided in the table, below. 

Incorporating these latest results, the ABS estimates that the total value of residential property in Australia sustained a 5th consecutive quarterly fall with a 0.3% reduction in Q2 to $6.61 trillion, which is 4.5% down on the level from a year earlier. 

The ABS's property price data is, of course, a highly-lagged release; a point that is particularly relevant for the June quarter as conditions in the nation's property market appeared to turn following the outcome of May's federal election, with tax policy remaining status quo. Also of note, the Reserve Bank of Australia announced consecutive interest rate cuts in June and July, while banking regulator APRA eased its guidance around loan assessment criteria. All told, the most recent data available from CoreLogic to the end of August confirmed that national property prices posted their first monthly rise since October 2017.  

Source: CoreLogic

Macro (Re)view (13/9) | ECB delivers on stimulus

This week's events centred around the European Central Bank's (ECB) high-anticipated policy meeting, with the Governing Council raising its stimulus efforts to revive an ailing inflation and growth outlook in the bloc. In its revised macroeconomic projections, the ECB lowered its outlook for GDP growth in 2019 from 1.2% and 1.1% and in 2020 from 1.4% to 1.2%, mainly reflecting the impact of global uncertainties, trade tensions and weakness in the manufacturing sector, though there was no change to 2021's forecast of 1.4%. Softer headline inflation is now expected in 2019 (1.2% from 1.3%), 2020 (1.0% from 1.4%) and 2021 (1.5% from 1.6%), and while the outlook for core inflation in 2019 remained at 1.1% a weaker profile attends 2020 (1.2% from 1.4%) and 2021 (1.5% from 1.6%), which is well short of the ECB's target of below, but close to, 2%.

Faced with a deteriorating growth outlook, in which the risks "remain tilted to the downside", and a "continued shortfall of inflation with respect to our aim", ECB President Mario Draghi announced  a 5-point stimulus plan including;

• A 10 basis point cut to the deposit rate lowering it to -0.5%, while the other key interest rates were left unchanged
• An adjustment in forward guidance regarding the timing of future interest rate increases, which was previously calendar-based, switching to a state-based dependence on its inflation outlook sustainably converging to its target    
• Restarting quantitive easing (QE) from November at a pace of €20bn per month that will "run for as long as necessary" (see chart of the week, below) 
• A repricing of TLTRO III (a source of funding available to the banking sector) making these loans cheaper to obtain 
• The introduction of a 'tiering' system that will offset some of the charge applied to banks' excess reserves (that accrues from the negative deposit rate) held at the ECB

Chart of the week

In spite of the announcement of these measures, it is clear that there was not unanimous support among the Governing Council's members. President Draghi outlined that while there was "broad agreement" on the rate cut as well as the changes to forward guidance and TLTRO, views around QE were much more contentious. In the lead up to this meeting, several members had been vocal in opposing restarting QE, though as President Draghi stated "...in the end the consensus was so broad, there was no need to take a vote". The pace of monthly purchases has been set at €20bn per month, which slightly underwhelmed market expectations, however offsetting that there was no end date specified as to when purchases will wrap up. Given the ECB's increased use of unconventional monetary policy measures, President Draghi highlighted that the one area in which there is unanimity on the Governing Council is that "fiscal policy should become the main instrument" to help support demand conditions going forward.  

Also of note this week, US-China trade developments continued on their relatively conciliatory path of late. In response to a decision by China to exempt a list of US products from tariffs, US President Trump announced that the planned tariff increase from 25% to 30% on a $250bn tranche of imports from China (mainly relating to industrial products) would be delayed by two weeks to October 15 describing this "as a gesture of goodwill". Staying with the US, the focus quickly turns to next week's Federal Reserve policy meeting with markets having fully discounted a 25 basis point rate cut within pricing. Though a rate cut appears a foregone conclusion, it is interesting to note that around 37% of economists surveyed by Bloomberg are forecasting no change from the FOMC. This week's key US data was constructive, with core CPI over the year to August lifted from 2.2% to 2.4% — its fastest pace in more than 12 months — while retail sales growth was stronger than expected in August rising by 0.4% with the annual pace firming from 3.6% to a solid 4.1%. These data helped to further steepen the US yield curve, with the 10-year yield finishing the week at its highest since late July at around 1.9%.   

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In Australia this week, the latest business activity and consumer sentiment surveys showed further signs of deterioration, indicating that the weakness in private sector demand highlighted in Q2's National Accounts (see here) has extended well into the current quarter, which is despite the recent stimulatory responses from the nation's monetary and fiscal authorities through interest rate cuts and tax relief, together with the removal of relative uncertainty post the federal election outcome.

The National Australia Bank's Business Survey for August was headlined by a sharp fall in confidence from a reading of +4 in the previous month to a downbeat +1 outcome, with uncertainty offshore and a soft domestic economic outlook likely to be weighing. Unsurprisingly, confidence is highest in the mining industry, likely due to elevated commodity prices and a ramp-up in exports following the completion of major projects. However, confidence is generally fragile across the non-mining industries warranting caution around firms' investment intentions in the recent ABS Capital Expenditure Survey (see here). Employment expectations have also trended lower over recent surveys and are currently indicating that jobs growth will track around +16,000 per month over the next 6 months, which is a level that would be unlikely to keep the unemployment rate steady given the current pace of growth in the working-age population.

The business conditions index remains below its long-run average level after easing from a +3 reading to +1 in August. This reflected declines in the sub-components for trading (from +7 to +3) and profitability (from 0 to -3). Some offset came via the employment index lifting in the month (from 0 to +2). Conditions are currently strongest for firms in mining and finance/business/property services, though weakness is broad-based in construction, retail, wholesale, manufacturing, and utilities. Reflective of weak demand conditions, the forward-looking indicators were soft; firms' forward orders remain in decline after falling by 1 point to a reading of -4, and while capacity utilisation lifted by 1ppt to 82.0% this only recovered a fall of around this magnitude in the previous month and is currently around its average level. 

Turning to the household sector, the Westpac-Melbourne Institute's Index of Consumer Sentiment soured from neutral (100.0) to outright pessimism (98.2) in September, with concerns around economic conditions and family finances prevalent. Consumers' outlook for 'economic conditions next 12 months' fell by 3.1% to 92.6. The survey was in the field last week and thus likely reflects reactions to the soft GDP growth outcome for Q2 given that the National Accounts are widely reported in mainstream news services in Australia. Indeed a relatively high 33% of respondents had recalled noticing news pertaining to 'economic conditions', while 19.8% had noted news on 'international conditions' — its highest level in 4 years following the escalation in US-China trade tensions and heightened volatility in financial markets. Meanwhile, 'family finances vs a year ago' were assessed as remaining weak at 84.3 after easing by 2.5% in September, notwithstanding the RBA's June and July rate cuts and tax cuts to low-and middle-income earners. Focusing on the latter, Westpac's analysis highlighted a general reticence to spend with just over 1 in 2 households planning on spending less than half of their tax rebate and around 1 in 4 households looking to save the full amount.

Where stimulus is clearly having an impact is in the housing market, with consumers' views remaining constructive. This was evident with a 3.9% rise in house price expectations in September to 130.3, which have surged by 45.8% from the level before the federal election and RBA rate cuts. In addition, while the 'time to buy a dwelling' index declined by 2.9% in this month's survey at a reading of 123.3 it is sitting around its highest level in 5 years. As a result, demand for housing finance is on the rise with data released during the week showing a much stronger-than-expected 4.2% increase in owner-occupier loan approvals in July, while the total value of loan approvals surged by 5.1% in the month (see our analysis here).