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
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).
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).
