Turning to US domestic events, the Federal Reserve's meeting minutes from September where the policy-setting committee cut its benchmark interest rate by 25 basis points to 1.75-2.0% were released. While the committee remains upbeat in its outlook conveyed by its baseline expectation for a continuation of the economic expansion, a robust labour market and inflation converging to target, its decision to cut was based on an intensification of downside risks, notably from trade tensions, a more fragile global growth outlook, and rising geopolitical risks. This theme was reiterated by committee Chair Jerome Powell during a speech this week and with 7 committee members assessing at the September meeting that rates would need to be lowered again before year's end, markets continue to expect another 25 basis point cut will be announced at this month's meeting that takes place on the 29-30 October.
Over in Europe, the account of the European Central Bank's policy meeting last month were released. While members of the Governing Council were in agreement that the monetary policy stance needed to be eased to support inflation returning to its mandated target of below, but close to, 2%, there was a wide divergence of views around the proportionality of the response. Overall, the Governing Council agreed with the ECB's updated staff projections showing downgrades to the GDP growth outlook in 2019 and 2020 and assessed the risks "remained on the downside" due to geopolitical uncertainties, trade tensions, and emerging market vulnerabilities, while concerns around falling inflation expectations were also expressed. The consensus view was that a package of stimulus measures was required, though reservations were evident around individual elements — notably on restarting quantitive easing.
Arguments for restarting monthly asset purchases were premised on demonstrating a commitment to acting in accordance with their mandate and to also prevent financial conditions from tightening, with long-dated yields relative to those at the front end of the curve identified as still potentially having more scope for compression. However, others had argued against this proposal, stating either that financial conditions were already sufficiently accommodative and asset purchases in this context would be less efficient in driving a further compression of the term premia, or that it should be seen as an option of "last resort" to be saved for a more severe deterioration in the outlook. The one area in which the Governing Council members are in agreement is that governments, where they have the capacity to do so, "should act in an effective and timely manner" as fiscal policy would be more effective in addressing the prevailing headwinds than a further easing of the monetary policy stance.
Rounding out the week, the UK remains on track to avoid a technical recession but it is still an economy very much mired by Brexit-related uncertainty. After contracting by 0.2% in Q2, GDP growth over the 3-months to August was 0.3% with the annual pace slowing from 1.3% to 1.1%. The manufacturing sector is taking the brunt with activity contracting by 1.1% over the past 3 months, while firms are also faced with the headwinds from trade tensions and a weaker global economy. There were at least some constructive headlines on Brexit late in the week, with PM Johnson and Irish counterpart PM Varadkar issuing a joint statement saying they "could see a pathway to a possible deal" that would facilitate an orderly UK withdrawal from the EU.
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Developments in Australia during the week were highlighted by the latest surveys of business conditions and consumer sentiment, which continued to indicate that the flow-through from recent monetary and fiscal stimulus measures has to date been limited. The National Australia Bank's (NAB) Business Survey for September showed mixed outcomes for confidence and conditions, however both appear to be consolidating around well below-average levels, indicating that firms' investment plans may be at risk of being scaled back as has been the experience in other economies recently. Overall, business confidence fell from +1 to 0 and is around its weakest level in 6 years. Notably, confidence was weakest for manufacturing firms, with the sector mired in a global contraction due to trade tensions and weakening global economic growth, and also for construction firms as activity in the residential sector continues to roll over.
Business conditions saw a marginal improvement in September, rising from +1 to +2, but are well below the long-run average level of +6 and have endured a sharp slowdown over the past 12-18 months. While the trading and profitability sub-indexes improved by 1 point in the month to readings of +4 and -2 respectively, they both remain at below-average levels. In contrast to weakness in confidence and conditions, firms appear to remain willing to hire given the employment sub-index increased by 1 point to an above-average reading of +3 in the month. According to NAB's analysis, this indicates employment is forecast to rise by around 18,000 jobs per month over the next 6 months, though that would be a step down from recent outturns in the official data that have averaged around 26,000 jobs per month so far in 2019. Together with weak confidence, the leading indicators pointed to a continuation of existing conditions given that forward orders and surveyed capital expenditure are now at below-average levels, with the latter falling to a 5½-year low in September.
Turning to the consumer, pessimism deepened in October with Westpac-Melbourne Institute's Index of Consumer Sentiment showing a 5.5% deterioration to a 51-month low of 92.8. The survey was taken last week and captured responses to the Reserve Bank of Australia's (RBA) latest interest rate cut. As our chart of the week, below, shows, in this current easing cycle that commenced back in late-2011, consumer sentiment has generally risen in the months where the RBA has delivered rate cuts, however this has not been the case with 2019's rate cuts as sentiment has fallen by 0.6% in June, 4.1% in July and now 5.5% in October.
Chart of the week
Clear in this month's survey was that views towards economic conditions have deteriorated on a 12-month (-6.0%) and 5-year (-9.1%) outlook. This could suggest consumers have assessed 2019's rate cuts to be a response to a weakening domestic economy, while concerns over global developments may also be a factor. Against this backdrop, the outlook for spending is challenged as views on family finances relative to a year ago fell by 4.9%, while the assessment for the next 12 months was down by 3.7% in October. Thus, to date, it appears the RBA's rate cuts and the federal government's tax cuts have not yet taken hold with consumers, which appears consistent with last week's retail sales data for August (see here).
The exception to this is in the housing market, with consumers' expectations for prices accelerating by a further 5.9% in October. Westpac reports that since May's federal election, the House Price Expectations Index is up by some 54%, likely reflecting the fading of uncertainty around potential changes in tax policy and the announcement of 3 RBA rate cuts. These developments appear to be bolstering activity, with this week's housing finance data for August confirming a 3rd straight monthly increase in the value of lending commitments to both the owner-occupier and investor segments (see here). In the investor segment, August's 5.7% rise in lending commitments was its fastest monthly increase in nearly 3 years and follows a 4.2% rise in July, while in the owner-occupier segment commitments were up by a more modest 1.9% in August, though this came after rises of 4.2% and 5.4% in the past 2 months. As a result, there appear to be renewed concerns over affordability, notably in New South Wales and Victoria, with the 'time to buy a dwelling' index in October's consumer sentiment survey sliding by 5.4% to a below-average reading of 116.6.
