Macro (Re)view (31/1) | Steady as it goes

As the spread of the coronavirus continued to rattle sentiment in markets, central banks moved into greater prominence this week, though overall their wait-and-see stances on policy settings were maintained. In the US, the Federal Reserve's FOMC voted unanimously to keep its benchmark interest rate target range unchanged at 1.50-1.75%, with the Committee maintaining its assessment that it has monetary policy appropriately calibrated to support to the continuation of its 11-year long economic expansion, robust labour market conditions and inflation returning to its 2% target. Chair Jerome Powell outlined post-meeting that the Committee had not altered its outlook and would need to see a deterioration in the data flow to the extent that it prompts "a material reassessment" of conditions to open the door for further rate cuts. However, it is noteworthy that in its decision statement the Committee downgraded its assessment of the pace of household spending from "strong" to "moderate"; a subtle but key change given the consumer has bolstered the US economy from enduring a more protracted slowdown over the past 18 months in response to trade tensions and weaker demand conditions offshore. Consistent with this change, while this week's initial read on Q4 US GDP growth came in stronger than anticipated at an annualised pace of 2.1%, consumption spending slowed from 3.2% to 1.8% annualised. Also notable was Chair Powell clearly articulating the concerns the Committee has with inflation persistently running below target. Aside from these developments, the theme of the post-meeting press-conference was largely centred on the Fed's treasury bill purchases — interpreted by many market participants as quasi quantitative easing — with Chair Powell outlining that at the current run rate (around $60bn mth) reserves were on track to sustainably "reach ample levels" (estimated to be no lower than $1.5 trillion) to ensure that fed funds rate remains within the target range without having to resort to the sort of frequent, large-scale interventions it has been making in the repo market since last September. As such, Chair Powell said as that point approaches, its monthly purchases and repo operations would begin to taper off. 

Over in the UK, the Bank of England appears to be no closer to cutting rates as the Monetary Policy Committee (MPC) voted 7-2 to maintain the Bank Rate at 0.75% for the third straight meeting in what was Governor Mark Carney's last in charge. The tone of the MPC's decision statement highlighted a patient approach, noting signs of stabilisation in the global economy and reduced uncertainty for businesses and households over the nature of the UK's withdrawal from the EU, with these developments contributing to the Bank's constructive outlook in its Monetary Policy Report for GDP growth to pick up from its current below-trend pace to above trend over the coming year. However, at the post-meeting press conference, Governor Carney outlined that caution was warranted as trade tensions could re-emerge and other risks, such as the coronavirus, could weigh on the global economy, while these more positive signals from the UK would need to be translated into the hard data, most notably from business investment. Given these uncertainties, Governor Carney highlighted that if the expected recovery in the domestic economy were to falter, more policy support was an option for the MPC. In Europe, GDP growth disappointed estimates expanding by just 0.1% in Q4, while the annual pace eased from 1.2% to 1.0% to its slowest in 6 years, confirming the bloc's growth pulse softened further over the second half of 2019 as uncertainty continued to weigh on trade and business investment. Meanwhile, January's flash estimate of inflation lifted from 1.3% to 1.4% in annual terms, though this impulse was driven by volatile items as the underlying pace of inflation slowed from 1.3% to 1.1% over the year. More encouragingly, labour market slack in the bloc continues to tighten with the unemployment rate falling unexpectedly from 7.5% to 7.4% in December to its lowest since May 2008. 

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Turning to domestic developments, in last week's review we highlighted how market pricing for a February Reserve Bank of Australia had been scaled back significantly (from around 60% to a 20% chance) following December's much stronger-than-expected employment data. Expectations fell even further to a little above 10% this week following Q4's Consumer Price Index data. While the report was consistent with the familiar theme from recent years of an inflationary pulse that is low and steady, headline CPI at 0.7% in Q4 surprised slightly to the upside of consensus (0.6%) and annual growth was expected to remain at 1.7% but firmed to 1.8% (see our full review here). Meanwhile, the RBA's preferred trimmed mean CPI measure matched consensus in the quarter rising by 0.4% and though the annual pace remained at 1.6% this was above the 1.5% outturn expected and, more importantly, was in line with the Bank's official forecast. Thus, despite languishing below the RBA's 2-3% target range for 4 years now (see chart of the week, below), Q4's inflation data relative to the Bank's own expectations suggest a rate cut at next week's board meeting is unlikely. 

Chart of the week

Also this week, NAB's Business Survey for December (note the results for this survey were collated in early January) showed a notable deterioration in confidence from a reading of 0 to -2 to be at its weakest in 6½ years, while conditions eased from +4 to +3 and remain at a well below-average level. The weakness in confidence aligns with a decline in capital expenditure to a below-average level, though at this stage employment intentions have held steady to point to jobs growth averaging around 18k per month for the next 6 months according to analysis from NAB Economics. For the outlook, the detail was soft with further weakness in forward orders and capacity utilisation at a subdued level.

Australia Q4 CPI 0.7%, 1.8%yr; trimmed mean 0.4%qtr, 1.6%yr

Australia's Consumer Price Index (CPI) printed above expectations on a headline basis in the December quarter. Meanwhile, underlying inflation based on the trimmed mean measure preferred by the Reserve Bank of Australia (RBA) was in line with its official forecast at 1.6% in annual terms and continues to remain well below its 2-3% target range. 

Consumer Price Index — Q4 | By the numbers 

• Headline CPI increased by 0.69% in Q4 to come in a touch above consensus (0.6%) and firmer than in Q3 (0.52%). Annual CPI lifted from 1.67% to 1.84% against an expected 1.7% rise, reaching its fastest pace since Q3 2018. 

• Details for the underlying measures are as follows;
• Trimmed mean inflation increased by 0.43% in the December quarter (expected: 0.4%, prior revised: 0.4%), which saw the annual pace unchanged at 1.57% (expected: 1.5%). 
• Weighted median inflation lifted by 0.36% in Q4 (expected: 0.4%, prior 0.36%), with the annual pace easing very slightly from 1.31% to 1.28% (expected: 1.2%). 
• The average of the underlying measures was little changed at 0.4% in Q4 (prior: 0.38%) and 1.42%Y/Y (prior: 1.44%Y/Y)

Consumer Price Index — Q4 | The details 

Looking into the headline CPI result, Q4's increase of 0.69% was slightly firmer than anticipated and was the strongest quarterly rise since Q3 2016. As an overview, the main contributors to the quarterly outcome were from alcohol and tobacco (+0.27ppt), food and non-alcoholic beverages (+0.24ppt) and transport (+0.18ppt). Groups subtracting from inflation in Q4 were; furnishings, household equipment and services (-0.03ppt), communication (-0.02ppt), health (-0.02ppt) and clothing and footwear (-0.01ppt).

   

From another perspective, the next chart shows the price changes recorded by each group in Q4 and for the year. 

Alcohol and tobacco prices jumped by 3.0% in Q4 to be up by 6.5% over the year. This was predominantly driven by an 8.4% rise in tobacco prices in the quarter (14.0%yr) linked with the remainder of the annual tobacco excise tax increase, effective from the final month of Q3. Alcohol prices declined by 0.7% in Q4 but were up by 1.4% year on year. 

The transport group saw prices firm by 1.5% in Q4 and rise by 2.8% over the year. The key factor was a 4.4% rise in petrol prices (2.9%yr) following increases in global oil prices and a softer Australian dollar. Moderating this increase, new vehicle costs declined by 0.6% in the quarter (3.4%yr). 

Food and non-alcoholic beverage prices lifted by 1.3% in Q4 and by 2.6% in annual terms. Most notably, fruit prices spiked by 6.8% in the quarter, while beef and veal prices lifted by 2.9%, with both being affected by drought conditions. The ABS reports that meat prices have also been driven up by strong global demand and by the spread of African Swine Flu in Asia. Takeaway meal and restaurant prices rose by 1.0% in Q4. 

The recreation and culture group lifted by 0.9% in the quarter and by 1.5% over the year. Q4's increase was driven mainly by a 7.3% rise in domestic holiday travel associated with the peak holiday period, suggesting that bushfire-related impacts have not yet been captured. On the other hand, international travel prices fell by 2.9% in the quarter coinciding with the off-peak seasons in Europe and the US. 

Insurance and financial services costs were up by 0.4% in the quarter but were up only modestly through the year (0.7%).

The key housing group continued its recent weakness, with prices virtually flat in Q4 (0.1%) and over the year (0.2%). In the quarter, rents were flat (0.2%yr), while new dwelling costs lifted by 0.4% (-0.1%yr). Utility prices fell by 0.3%, due mainly to regulatory changes that have resulted in lower electricity prices.

Education costs were little changed in Q4 (0.1%), with the annual pace at 2.9% reflecting rises from secondary education (4.2%) and primary education (2.9%). 

The largest fall in prices was recorded by the communication group that declined by 1.0% in Q4 and by -3.8% over the year. Strong competition between service providers continues to result in cheaper prices for consumers. 

Health prices slid by 0.3% in Q4 but were up by 3.2% over the year. Q4's decline reflected a larger number of consumers becoming eligible for subsidies available under the federal government's Pharmaceutical Benefits Scheme, which reduces out-of-pocket costs.

Clothing and footwear prices fell by 0.3% in Q4, though were up modestly in annual terms (1.4%). Q4's decline likely reflects widescale discounting by retailers over the Black Friday promotional period and this competition moderates the impact of the pass-through to prices from a lower Australian dollar.

The furnishings, household equipment and services group fell by 0.3% in the quarter to be up by 1.1% on the year. Discounting associated with Black Friday weighed on household textiles (-3.7%) and furniture (-1.4%) prices during the quarter. However, child care prices lifted by 1.5% in Q4 and are up strongly (7.2%) over the year. 

Overall, the breakdown of inflation continues to show that non-tradables (influenced by domestic factors) are the dominant source of inflation pressures (1.98%yr), though tradables inflation (reflecting global influences) has been on the rise in recent quarters (1.66%yr) reflecting the pass-through from a declining Australian dollar.  

Consumer Price Index — Q4 | Insights 

Inflation in Australia continues to remain steady and well below the RBA's 2-3% target range. The December quarter's results on the headline measure at 0.7%q/q and 1.8%Y/Y were slightly stronger than the consensus forecasts but a touch under the RBA's forecast from November's quarterly statement (1.9%Y/Y). The Bank's preferred trimmed mean measure matched consensus in Q4 at 0.4% but surprised to the upside in annual terms at 1.6%, however this was in line with the RBA's expectations. Overall, there looks to be little in today's report that would greatly alter the Bank's assessment of the inflationary environment. As such, markets have responded by further lowering pricing for a February rate cut to below 10%; this after last week's stronger-than-expected employment report prompted expectations to fall from around a 60% chance to around 20%.    

Macro (Re)view (24/1) | Markets given reason for caution

Global events were the key focus for markets this week as policymakers and business leaders made their annual trip to Davos in the Swiss Alps for the World Economic Forum where trade agreements and responses to climate change headlined discussions. This came as the International Monetary Fund (IMF) saw tentative signs of stabilisation in the global economy from its slowdown over much of the past couple of years, with the downside risks to the outlook assessed to be receding somewhat following the broad-based easing by central banks in 2019, the US-China phase one trade agreement and a reduced likelihood of a hard Brexit. However, the IMF's revised forecasts for global growth of 2.9% in 2019 (down from 3.0%) and 3.3% in 2020 (down from 3.4%) is consistent with an outlook that is subdued and relatively precarious given the potential for trade and geopolitical tensions to re-emerge, and for unforeseen events, such as this week's outbreak of the coronavirus in China that forced authorities to lock down at least three cities and cancel Lunar New Year celebrations in Beijing, to weigh on activity and unsettle sentiment in markets. 

As it was an unusually quiet week for data in the US, attention turned to Davos as discussions regarding a US-Europe trade agreement began to ramp up. US President Trump met with European Commission President Ursula von der Leyen, with the US wanting to reduce barriers to entry and increase access for domestic-based firms to markets on the continent. In media appearances, President Trump warned that in the absence of a new agreement, previously-threatened auto tariffs (of potentially as high as 25%) would be implemented. Meanwhile, discussions between the US and France over the latter's planned introduction of a digital tax, which Washington believes unfairly targets US-based firms, found a more conciliatory tone following talks between President Trump and President Macron. To that end, France suspended the implementation of the digital tax that was due to start in April, while the US will hold off threatened tariffs on French champagne and other consumer goods for now. The main US data point was January's flash Markit PMI readings, with the composite index firming slightly from 52.7 to 53.1 to indicate economic activity was expanding a moderate pace early in 2020. Conditions in the services sector improved from 52.8 to 53.2, though there was an unexpected slowing in the manufacturing sector from 52.4 to 51.7.

On the policy front this week, the European Central Bank's meeting went by largely as expected, with the Governing Council keeping its monetary policy stance on hold. In the post-meeting press conference, ECB President Christine Lagarde outlined that the recent data flow had been in line with the Bank's expectation for a stabilisation of the euro area economy at a moderate pace of growth, with weakness in manufacturing continuing to drag on activity. Friday's flash Markit Eurozone PMI readings were broadly consistent with that assessment, with the composite index unchanged at 50.9, while the services sector was expanding modestly at 52.2 and manufacturing was still in contraction at 47.8 but conditions had improved to a 9-month high. There was a subtle change in the ECB's assessment of economic conditions relating to inflation, where it noted "there are some signs of a moderate increase in underlying inflation", whereas at its previous meeting in December it described the increase as "mild". Of most significance at this meeting, the ECB's strategic review was officially announced, which will examine how the Bank uses its monetary policy toolkit to achieve its inflation mandate, though it will also take into account broader considerations in terms of how it may affect financial stability, employment, and environmental sustainability. The review is expected to be concluded by the end of the year, with President Lagarde in media interviews at Davos pushing back against the notion widely touted in markets that the presence of the review made changes in the ECB's current monetary policy stance less likely. 

Then to Asia, the Bank of Japan (BoJ) held its latest meeting where it kept its monetary policy settings unchanged, as expected. The BoJ has become slightly more constructive in its view of the outlook, due to a stabilisation of the slowdown in the global economy, fiscal support and accommodative financial conditions, with its GDP growth forecasts upgraded for 2019 (from 0.6% to 0.8%), 2020 (from 0.7% to 0.9%) and 2021 (from 1.0% to 1.1%). However, its inflation forecasts were trimmed by 0.1ppt in each of 2019 (0.6%), 2020 (1.0%) and 2021 (1.4%), and with the risks to its growth and inflation prospects still assessed as being to the downside, the Bank maintained its guidance that "it will not hesitate to take additional easing measures" if required.  

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Developments in Australia this week significantly altered the near-term outlook for monetary policy, with market pricing for a Reserve Bank of Australia rate cut in February falling from a near 60% chance to around 20%, while several forecasters, including three from the major banks (Westpac, CBA and ANZ), have now delayed the timing of their calls for the next cut. This came after December's employment data (released on Thursday) was much stronger than expected (full review here), just as was the case in November. On net, employment increased by 28.9k in December; well clear of the 10.0k rise anticipated by markets, extending the strength from November where employment accelerated by 38.5k (revised from 39.9k). However, the compositional split was uneven, with part-time employment accounting for all of the increase (29.2k) as the full-time segment fell (-0.3k), while employment growth in Q4 at 43.4k was the softest quarterly outcome since Q1 2018. Instead, as our chart of the week (below) highlights, the focus turned to the national unemployment rate that fell unexpectedly from 5.2% to  5.1% — its lowest level in 9 months — following on from a 0.1ppt decline in November. While this will be welcomed by the RBA, it remains elevated relative to its estimate of full employment (around 4.5%), while underemployment, unchanged at 8.3% in December, continues to point to a labour market with considerable spare capacity thus restraining wages growth and inflation pressures.  

Chart of the week

Meanwhile, the Westpac Melbourne Institute's Index of Consumer Sentiment fell by 1.8% in January to a reading of 93.4, with Westpac's Chief Economist Bill Evans reporting that the nation's bushfire crisis had weighed further on already weak confidence. The economic outlook remains a headwind for consumers, with January's readings for both the "next 12 months" (-5.4%) and "next 5 years" (-3.7%) declining sharply this month. Weak confidence and concerns around the outlook appear to be weighing on spending intentions, which remain at well below-average levels, with the index for "time to buy a major household item" declining by 1.8% in January to be down by 4.1% through the year. Assessments of family finances on a year ago (+0.7%) and for the next 12 months (+0.9%) improved slightly in January, likely supported by the strong gains recorded by Australia's equity market early in the new year. In the housing market, consumers remain confident that the recent upswing in prices will continue at pace with the "House Price Expectations" index lifting by 8.1% in January to be up by 58% on a year earlier. The "time to buy a dwelling" index increased by 5.7% in the month to 118.8, though this remains slightly below average (120) and Westpac Economics' expectation was that this component had likely reached its top in this cycle given that buying intentions had slipped by 6.4% since August coming after house prices troughed in June.  

Australian employment +28.9k in December; unemployment rate 5.1%

As was the case in November, Australia's labour market outperformed expectations in December, with employment rising by 28.9k and the unemployment rate falling unexpectedly to a 9-month low at 5.1%. Financial markets reacted by scaling back expectations for a near-term RBA rate cut.    

Labour Force Survey — December | By the numbers

• Employment (on net) increased by 28.9k in seasonally adjusted terms in December to outperform the consensus forecast for a rise of 10.0k. November's initially reported 39.9k gain was trimmed to 38.5k.   

• The national unemployment rate fell from 5.2% to 5.1%, where the market had expected it to remain at 5.2%, and is now at its lowest since March 2019.  
• Underutilisation eased from 13.5% to 13.4% to a 6-month low, though underemployment was unchanged at 8.3%. 

• The workforce participation rate held steady at 66.0%, as expected.

• Aggregate hours worked posted a 0.5% rise in December to 1.79bn hours (prior +0.2%), with the annual pace increasing from 1.7% to 2.3% driven by a base effect.  

Labour Force Survey — December | The details

For the second consecutive month, employment surprised to the upside of expectations rising by 28.9k in December  (expected 10.0k) following November's gain of 38.5k. With the labour force rising by 16.0k in the month, the total of unemployed declined by 12.9k, which resulted in the unemployment rate falling from 5.17% to 5.07% to be at its lowest level in 9 months.   

Breaking December's employment outcome down, the 28.9k rise came entirely from the part-time segment (29.2k) as full-time declined slightly (-0.3k). For the year as a whole, employment increased by 262.5k, with the pace lifting a touch from 2.0% in November to 2.1%. In 2019, full-time led (152.7k), though the pace slowed notably over the last few months of the year to 1.8%. However, some moderation came through from part-time employment, which lifted by 109.0k in 2019 (2.7%yr) and was concentrated over the second half of the year (92.8k).

Highlighting the slowdown that occurred towards the end of the year, employment growth was 43.4k (full-time -8.0k and part-time 51.5k) in Q4 and was well down from the previous quarters; 81.4k in Q3, 73.9k in Q2 and 63.9k in Q1. 

At the same time, the quarterly profile for unemployment improved gently towards the end of 2019; 5.1% in Q1, 5.3% in Q2, 5.2% in Q3 and 5.1% in Q4, which occurred as the rise in participation unsurprisingly slowed after running up to record-high levels. 

While part-time work accounted for all of the increase in employment in December, total hours worked posted their strongest monthly rise (0.5%) since last July. In annual terms, the pace accelerated from 1.7% to 2.3% to its fastest since March 2019, though this is likely overstated by a base effect as a -0.1% fall from December 2018 fell out of the calculation. Adjusting for the rise in employment, average hours worked per employee lifted from 137.6 hours to 138.0 hours in December to maintain its gradual uptrend from recent months. 

Turning to the state detail, unemployment rates fell for most states in December; New South Wales -0.1ppt to 4.5%, Queensland -0.6ppt to 5.7%, South Australia -0.1ppt to 6.2%, Western Australia -0.3ppt to 5.4% and Tasmania -0.5ppt to 5.5%. Victoria went against the trend, rising from 4.6% to 4.9%. 

The next chart shows employment growth in December was driven by New South Wales (+20.6k) and Victoria (+10.3k), with Tasmania rising modestly (+1.5k). However, declines came in Queensland (-3.6k), South Australia (-3.0k) and Western Australia (-5.3k). For Q4, strength in employment was concentrated in Victoria (26.6k), while New South Wales was next highest at 7.6k. Together, New South Wales (95.0k) and Victoria (90.3k) accounted for around 71% of national employment growth in 2019. 

Labour Force Survey — December | Insights

Markets responded to the stronger-than-expected detail in today's report by scaling back pricing for a February RBA rate cut from around 60% pre-release to around 30%, assessing that the near-term risks for further easing have reduced notably. However, next week's CPI report for Q4 remains crucial in deliberations. As far as today's details go, the outperformance in employment when taken with the upside surprise in November's report paints a constructive picture, and while employment growth is still relatively robust (2.1%yr) it clearly slowed over the second half of 2019. The RBA will be encouraged by a gradual downtrend emerging in the unemployment rate but it remains some way above its estimate of full employment at around 4.5% and spare capacity more broadly is still elevated.

  

Preview: Labour Force Survey — December

Australia's all-important Labour Force Survey is due to be released by the ABS at 11:30am (AEDT) today, which will cover the month of December. Markets assess the chance of a February RBA rate cut as slightly better than a 50/50 prospect, and today's report could be influential in lifting expectations further. 

As it stands | Labour Force Survey 

Employment contracted by 24.8k in October (revised from -19.0k) but recovered in November to post a much stronger-than-expected 39.9k increase against the consensus forecast for a gain of 15.0k. This ensured the annual pace of employment growth was little changed at around 2.0%, though this is near its softest pace since early to mid 2017. With the participation rate holding at 66.0%, the strong employment outcome comfortably outpaced growth in the labour force (23.1k) in the month and as a result, the unemployment rate unwound October's increase falling from 5.3% to 5.2%. Similarly, underutilisation (13.8% to 13.5%) and underemployment (8.5% to 8.3%) also fell to cancel out increases in October. Hours worked lifted by a modest 0.2% in November, with the annual pace firming from 1.4% to 1.7%. 

For a full review of November's report see here   

Market expectations | Labour Force Survey

The consensus call from Bloomberg's survey of economists is for employment to rise by a modest 12.0k in December, with estimates ranging from -10.0k to 20.0k. No change in the unemployment rate is expected from its current level of 5.2%, though this is on the low side of estimates that range up to 5.4%, while the rate participation is forecast to remain at 66.0% (range: 66.0% to 66.1%). 

What to watch | Labour Force Survey

The employment number is key in today's release. In the past 3 months, the outcomes have been; 13.3k in September, -24.8k in October and 39.9k in November, averaging 9.5k per month. This is well down from the 3-month average to September of 27.9k, in which employment increased by a total of 83.7k in the quarter. Employment clearly looks to be weaker in Q4, though the extent of the slowdown has been difficult to gauge given recent volatility with December's outcome to provide greater clarity here.  

 

Macro (Re)view (17/1) | Phase one deal finalised; risk rallies further

The long-awaited signing of the phase one trade deal between the US and China occurred in Washington this week, with the full text of the terms made public for the first time (see here). On the US side, the finalisation of the agreement ensures the 15% tariff applied on a $120bn tranche of consumer-related goods imported from China will be reduced to 7.5%, while a planned tariff that was to levied on a separate $160 list of Chinese-produced goods, including electronics and clothing, from December 15 remains suspended, though the 25% duty remains on a $250bn tranche of imports, with US Treasury Secretary Steve Mnuchin indicating this could form the basis of negotiations towards a phase two deal. In return, China has agreed to expand its purchase of US goods and services by at least $200bn above the level from 2017 over the next two years, with $76.7bn of this to come in year one followed by the remaining $123.3bn in year two. This is headlined by a requirement for China to increase its purchase and import of US agricultural products by at least $40bn per year for the next two years. In addition, China has granted concessions around intellectual property, forced technology transfers, allowing greater access to its domestic market for financial services firms and refraining from competitive devaluations of its currency. The agreement contains an overarching enforcement mechanism, whereby tariffs or other penalties can be implemented if disputes are unable to be resolved through bilateral consultation.

In the US this week, any immediate concerns of an impending softening in the household sector following last Friday's employment report were ameliorated by a solid outturn from retail sales that advanced by a stronger-than-expected 0.3% in December that accelerated the annual pace from 3.3% to a 16-month high of 5.8%, while core sales also outperformed rising by 0.5% in the month and by 5.7% through the year to its fastest pace since July 2018. Completing the set, the retail control group (more closely aligned with consumer spending in GDP calculations) lifted by 0.5% in December against an expected 0.4% rise, rebounding from a weak outcome in November (-0.1%). With inflation data during the week indicating a contained profile at 2.3%Y/Y to December on both headline and core basis, the US Federal Reserve can maintain its accommodative stance in 2020, particularly if the household sector were to show any sign of weakening, while according to reporting from Fox Business, the Trump administration is considering a fiscal stimulus package to take to the upcoming election.

Over in the continent this week, the Account of the European Central Bank's policy meeting in December conveyed the message that the Governing Council was reasonably constructive in the circumstances, noting they had seen signs of stabilisation in the data flow, and while the risks to the outlook were still "tilted to the downside" they were now assessed as being "somewhat less pronounced" due to an easing in the intensity of headwinds from offshore. In the near term, the Governing Council sees the outlook as being "muted" but is anticipating a "moderate recovery" to occur "later on". As such, and with new President Christine Lagarde focused on establishing a more unified Governing Council, the Account noted the current monetary policy stance "appeared fully appropriate, lending substantial support to growth and inflation developments", indicating that its wait-and-see approach is likely to remain the way forward. Developments in the UK appear to have reached a more nuanced juncture, with prospects for a Bank of England rate cut strengthening this week. On the data front, GDP growth contracted by 0.3% in the month of November to be tracking at just a 0.6% annual pace; inflation was weaker than expected sliding to a 3-year low in December on both headline (1.3%Y/Y) and core (1.4%Y/Y) measures (see chart of the week, below) and is well below the Bank's 2% target; and retail sales fell by 0.6% in December. This came after a speech from Monetary Policy Committee member Saunders in which he outlined his reasoning in voting for a rate cut at the previous two policy meetings.  

Chart of the week

Late in the week, the latest round of data from China was released and was constructive overall, suggesting that activity in the world's second-largest economy was showing signs of stabilising. GDP growth was 1.5% in Q4, which maintained the annual pace at 6.0%, while growth in 2019 came in at 6.1% — its slowest pace of expansion since 1990 — and was at the lower end of the 6.0-6.5% range targeted by authorities in Beijing. The highlight was a robust outperformance from industrial production rising by 6.9% through the year where the consensus was for growth of 5.9%, while retail sales at 8.0%Y/Y and fixed asset investment at 5.4%ytd printed slightly above forecasts.

In a light week in Australia, the strong performance of the nation's benchmark S&P/ASX200 equity index in the early days of the new year came into focus as it surpassed the 7,000 level for the first time and closed out the week at a record high. The main data point from the week was November's housing finance update where the upswing in commitments from mid-2019's trough remained intact rising by a further 1.8% in the month and by 5.9% over the year — its fastest pace in more than two years (reviewed here). The owner-occupier segment continues to lead the way, with the value of commitments expanding for a 6th straight month to be up by 10.0% through the year, while the investor segment saw a 2.2% rise in November but remained in contraction in annual terms at -3.2%. Overall, the report was consistent with improving established housing market conditions, driven by the combination of the passage of the federal election, RBA rate cuts and an easing in credit assessment criteria. In the week ahead, Australia's labour force data for December are due to be released on Thursday, with the median forecasts looking for employment to rise by 12.0k and the unemployment rate to hold at 5.2%. 

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Australian housing finance commitments up 1.8% in November

Australian housing finance commitments remain in their upswing from mid-2019's trough, rising by a stronger-than-expected 1.8% in November to be expanding at the fastest annual pace in more than 2 years at 5.9%. The owner-occupier segment continues to lead this upswing, with investors still lagging.  

Housing Finance — November | By the numbers

• The total value of housing finance commitments (excluding refinancing) lifted by 1.8% in November to $18.594bn, exceeding the median estimate for a 1.4% rise but softer than the 2.1% increase (revised from 2.0%) recorded in October. In annual terms, commitments expanded from 0.7% to 5.9% — its fastest pace since September 2017.  
• Owner-occupier housing finance commitments posted their 6th consecutive monthly rise with a 1.6% increase in November to $13.352bn (prior rev: 2.3%) as the annual pace strengthened from 5.5% to a 2-year high at 10.0%. 
• Commitments to the investor segment increased by 2.2% to $5.242bn (prior rev: 1.5%), though the annual pace still remains in contraction at -3.2% but is well down from -9.7% in the previous month. 

Housing Finance — November | The details 

As highlighted in October's housing finance review, this series is currently in transition as ABS shifts to a new methodology and to that end, the availability of estimates is somewhat limited at this stage. Nevertheless, the upswing in housing finance commitments from the troughs of mid last year remained intact in November rising by a further 1.8% in the month ($320m) to $18.594bn. The annual pace at 5.9% is now at its fastest since September 2017 and compares to its most recent trough of -22.0% in May 2019. The passage of the federal election held in May last year, 3 RBA rate cuts and an easing in guidance from the banking regulator APRA around credit assessment criteria appear to be the key factors driving the turnaround. 

The upswing has been led by the owner-occupier segment, with commitments up by another 1.6% in the month ($206m) to $13.352bn. At this level, commitments have risen by 10.0% on a year earlier to be expanding at their fastest pace in 2 years. At their most recent weakest point, owner-occupier commitments were contracting by 19.3% in the year to May 2019.

In the investor segment, commitments firmed by 2.2% in November ($115m) to $5.242bn to be down by 3.2% on the level from a year earlier but is well off the trough from February 2019 at -29.5%.   

 

The state-based details were generally constructive in November, most notably for owner-occupiers. For that segment, the outcomes were; New South Wales 2.1% (17.3%yr), Victoria 0.4% (11.0%yr), Queensland 3.4% (6.7%yr), South Australia 4.3% (6.2%yr), Western Australia 1.7% (-1.2%yr) and Tasmania -1.9% (-0.2%yr).

For the investor segment the details were; New South Wales 3.1% (-9.3%yr), Victoria 1.4% (4.5%yr), Queensland -0.2% (1.7%yr), South Australia 1.1% (-3.1%yr), Western Australia 5.9% (-4.1%yr) and Tasmania -1.4% (6.6%yr).

At this stage, the full suite of seasonally adjusted estimates for the number of housing finance approvals is not yet available, however; the Bureau reports the following details relating to the owner-occupier segment on a national basis;

• Approvals to purchase existing dwellings lifted by 0.1% in the month to 19,866 (-4.1%yr)
• Approvals to purchase newly erected dwellings increased by 2.2% in November to 3,441 (1.4%yr)
• Approvals for the construction of new dwellings fell by 8.4% in the month to 3,028 (-10.3%yr) 

Housing Finance — November | Insights

Today's report remained broadly consistent with the theme of improving sentiment in the established housing market conveyed by recent price data and capital city auction clearance rates. Much of that improvement in the established housing market has been centered in Sydney and Melbourne and the owner-occupier details in today's update are consistent with that. With further easing by the RBA remaining on the radar, strength in housing finance commitments appears to have further to run, with growth in housing credit (currently at a record low pace) likely to pick up in 2020 as a result. 

Macro (Re)view (10/1) | Markets fade latest bout of uncertainty

It is just a matter of days since the turn of the year and already markets have brushed with the sort of complex uncertainty that has presided over the past 18 months, albeit only fleeting in this instance, as geopolitical tensions between the US and Iran appeared to be escalating before a calmer state of affairs seemed to have ensued by the end of the week. Meanwhile, China's Commerce Ministry announced that Vice Premier Liu will visit Washington next week to formally sign the phase one trade agreement with the US.   

In Australia, the focus remains on the devasting welfare and ecological impacts on communities across the nation caused by the unfolding bushfire crisis. In response, the Federal government announced this week the establishment of a new agency tasked with coordinating rebuilding efforts with state and local authorities and will be funded with an initial contribution of $2bn over the next 2 years. The scale and length of the disaster are likely to mean the economic impacts will be much greater than this and as a result, GDP growth faces a hit across the December and March quarters. Following drought conditions over the past couple of years, the bushfires are likely to accentuate weakness in farm output, while tourism, which is a key industry within many of the impacted locations across the nation, will also be impacted with spillover effects for local commerce. Activity may have also been affected by health concerns relating to outdoor air quality due to smoke haze in the major capital cities. At a time of national suffering, consumer confidence has unsurprisingly taken a hit in early in the new year as conveyed by a 1.7% slump in this week's ANZ-Roy Morgan survey. With the consumer sector already fragile, a further weakening of confidence could potentially add to the downside risks to the outlook for household consumption spending.

The local data flow this week surprised to the upside of expectations, though covering the month of November it was too early to have captured any bushfire-related impacts. Dwelling approvals accelerated by 11.8% in November — their strongest rise in 9 months — coming in well above the consensus estimate of 2.0%, which more than made up for a weak October where approvals fell by 7.9% (see our review here). The result was driven by a surge in high-rise unit approvals in Sydney, though it was notable that house approvals nationally posted their sharpest monthly increase in nearly 4 years, potentially signalling the start of a stabilisation in dwelling approvals that have been in sharp decline for much of the past 18 months. 

In a result that went against the recent trend as commodity prices correct from highly elevated levels, the nation's trade surplus lifted to $5.8bn in November to come in sharply above the $4.1bn level expected (reviewed here). Export earnings increased by 1.8% in the month (5.5%yr) supported in the main by iron ore, with the underlying detail indicating this was driven by rising shipments as prices softened. In line with soft domestic demand conditions, import spending declined by 2.8% in November to be down by 3.1% through the year. Weakness over the past year is centred on capital imports (-3.9%m/m, -9.1%yr), while a weaker Australian dollar appears to be weighing on consumption spending more recently (-6.6%m/m, -2.9%yr). 

Rounding out the week, retail sales increased at their fastest pace in 2 years, advancing by 0.9% in November (see chart of the week, below) against an anticipated rise of 0.4%, with annual growth improving to an 8-month high of 3.2% (reviewed here). The result was boosted by Black Friday sales promotions, with online spending surging by 14.5% in the month, but may also be a sign that consumers were willing to part with some of their windfall from recent RBA rate cuts and tax relief. However, there is a risk this reflects a bringing forward of spending ahead of Christmas, while the bushfires may have also impacted spending in December. 

Chart of the week

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Shifting offshore, US events were highlighted by December's employment report, with non-farm payrolls rising by 145k in the month to slightly miss expectations for 160k, while revisions from the previous two months saw a net reduction of 14k. With the participation rate remaining unchanged at 63.2%, the unemployment rate matched the consensus forecast by holding at 3.5%. However, the broader measure of underemployment (U-6) fell to a new record low of 6.7%, indicating the labour market is yet to fully test its capacity constraints. The main surprise in the report was a slide in average hourly earnings growth from 3.1% to 2.9%Y/Y (vs 3.1% expected) to its slowest pace since July 2018. Overall, while employment growth appears to be slowing in line with a moderating economy, labour market conditions remain robust and wage pressures are contained. From a policy perspective, this appears unlikely to alter the view of the Federal Reserve, with the Vice Chair Richard Clarida in a speech this week describing the current monetary policy stance as being "in a good place" and "likely to remain appropriate" while the data flow is consistent with the Committee's baseline economic outlook. Vice Chair Clarida outlined that the action taken by the Committee to cut rates three times in 2019 had been "well timed" in providing insurance to the economy from headwinds offshore and disinflationary pressures. 

In other US news, this week's ISM non-manufacturing survey reported that conditions for firms in the services sector had strengthened in December, with the headline index increasing from 53.9 to 55.0. Driving this gain was a sharp 5.6ppt rise in business activity levels, though both the new orders (-2.2ppt) and employment (-0.3ppt) components softened. Overall, the picture for firms in the services sector remains in contrast to those in the manufacturing industry, with last week's ISM manufacturing survey showing a deterioration in conditions from 48.1 to 47.2 to indicate that activity had contracted at a faster pace in December. Notably, production slumped by 5.9ppt in the month, though there were at least signs that sentiment levels had improved from Q3.         

Over to Europe where events throughout the week conveyed a stabilisation of conditions in the bloc. According to the European Commission's economic sentiment indicator, confidence was broadly stable at a reading of 101.5 in December, which is around its long-run average level. The survey offered a somewhat mixed assessment of conditions, with confidence rising in the services (+2.2pts), construction (+2.2pts) and retail sectors (+1.0pts), only to be largely offset by weakness in the industrial sector (-0.2pts), consistent with ongoing weakness in manufacturing activity surveys in response to trade tensions and soft external demand, and from consumers (-0.9pts) on concerns around household finances. Notwithstanding, retail sales volumes lifted by 1.0% in November, though this followed declines of 0.3% in each of the two preceding months and the annual pace is moderate at 2.2%. Labour market conditions appear to remain solid, with the euro area's unemployment rate remaining at 7.5% in November to be at its equal lowest since July 2008. Inflation pressures, though remaining well contained, lifted in December as the flash CPI reading touched a 6-month high rising from 1.0% to 1.3% in annual terms.

In the UK, outgoing Bank of England Governor Mark Carney made notably dovish comments in a speech this week, indicating that if weakness in the domestic economy were to persist, the Bank had ample scope between conventional and unconventional measures to ease its policy stance further. Governor Carney's term concludes in mid-March where he will be succeeded by Andrew Bailey, the current chief executive of the UK's Financial Conduct Authority. 

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