Over in the US, Federal Reserve Chair Jerome Powell told the Congress at its semi-annual testimony that following the three rate cuts delivered in 2019, its monetary policy stance was now well-calibrated to support the continuation of the 11-year-long economic expansion, strong labour market conditions and progress towards its inflation target. However, Chair Powell outlined that considerable uncertainty pertains to the outlook, most notably the coronavirus, and consequently, the Committee is prepared to respond should conditions deteriorate to the extent that it prompts a "material reassessment" of its baseline view for the US economy. Chair Powell also used the occasion to impress on lawmakers the need for fiscal policy to play a more active role in any forthcoming downturn given the relatively limited scope the Federal Reserve now has to respond through conventional monetary policy. On the US data front, CPI inflation lifted above expectations rising from 2.3% to 2.5% over the year to January reflecting increases in rents, healthcare, and apparel prices, though the core CPI reading held steady at 2.3%Y/Y. Meanwhile, retail sales matched consensus rising by 0.3% in January, while sales excluding autos and gas slightly outperformed expectations (0.3%) with a 0.4% rise in the month. However, the retail control group (more closely aligned with consumer spending in GDP calculations) provided a softer analysis coming in steady on the month to be down from a 0.2% rise in December.
Moving to Europe, the German economy continues to lose momentum in the face of strong global headwinds as GDP growth flatlined in the December quarter reflecting weakness in exports, fixed investment and consumption spending and was just 0.4% higher through the year. The situation in Germany is broadly reflective of the euro area as a whole, where economic growth has weakened sharply over the past couple of years as trade tensions have impacted the export sector and weighed on business investment. As ECB President Christine Lagarde told the EU Parliament this week, fiscal and structural responses are required to support productivity and raise potential growth in the bloc, though on the surface there remains limited willingness from governments. In the European Commission's Winter Economic Forecasts released this week, GDP growth in the 19-nation euro area is forecast to remain subdued at 1.2% in 2020 and 2021, implying little improvement from its current 0.9% pace. Even those forecasts may prove optimistic given the risks remain "tilted to the downside", with the coronavirus outbreak threatening to derail that progress. Given the weak macro backdrop, as shown in chart of the week (below), the Euro-US dollar cross has declined to its lowest in nearly 3 years, though it is a different story in the equity market where Germany's DAX remains near record highs, while bonds in Europe have also seen a recent bid driving peripheral yields noticeably lower over the past couple of weeks.
Chart of the week
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In Australia this week, the latest sentiment indicators remained weak in line with subdued economic conditions domestically and an uncertain global backdrop. The NAB's Business Survey for January indicated that weakness in private sector demand had persisted into the new year; a situation not helped by confidence tracking near its level weakest since mid-2013 at a reading of -1, though this was at least slightly improved from December (-2). Business conditions were unchanged at +3 in the month and remain well below average overall. Within this, the profitability sub-index firmed from +1 to +2, while trading conditions eased from +6 to +5, however it was the decline in employment from +4 to +1 that stood out most, with NAB Economics indicating this read was consistent with employment gains of around 16k per month over the next 6 months; a more moderate outcome than predicted in the previous month's survey of around 19k per month and well below the 20.8k average achieved in the hard data over the second half of 2019. Meanwhile, weakness in forward orders continued and capacity utilisation remained around average.
Turning to households, the Westpac-Melbourne Institute Index of Consumer Sentiment lifted by 2.3% in February but remained firmly in pessimistic territory at 95.5. Westpac Economics attributed the improvement in sentiment in February to an easing in the nation's bushfires following widespread rainfall across many of the affected regions, while the coronavirus outbreak appeared only to have had a limited impact at this stage. Stronger perceptions of the economic outlook supported the overall rise in sentiment, with both the "next 12 months" (+5.4%) and "next 5 years" (+4.3%) indexes firming. A more subdued tone came through from views on family finances — a disappointing outcome considering the stimulus from rate cuts, tax refunds and an improving housing market — as the index tracking perceptions "vs 1 year ago" fell by 1.0% in February and remained broadly steady on the "next 12 months" horizon. Taking a closer look at the housing market, while house price expectations among consumers were essentially steady in February they have surged by almost 73% over the past 12 months, driven by the resumption of the RBA's easing cycle in 2019 and an easing in macroprudential controls by the banking regulator APRA. Accordingly, housing finance commitments are now in a sharp upswing and data this week confirmed a 4.4% acceleration in December that was well above consensus expectations and saw the annual pace quicken to its fastest in 33 months at 14.0% (reviewed here). Given the house price cycle is now on the rise and a sense from the RBA's recent communications that the hurdle to further rate cuts has risen, the "time to buy a dwelling" index in the Westpac-Melbourne Institute survey showed signs of deterioration with a 5.6% fall in February to 112.1 to be well down from the peak of 127 reached last year.
