Macro (Re)view (11/9) | Sentiment driving the outlook

A strong rebound in Australian consumer sentiment provided another reminder this week that virus-related developments are what matters most in terms of shifting the needle for the economic outlook. After falling by 9.5% in August as the severity of the virus outbreak in Victoria sent shockwaves across the nation, consumer sentiment according to the Westpac-Melbourne Institute's monthly index lifted by 18.0% to a reading of 93.8 in September, with the news from last week's national accounts reporting a historic 7.0% contraction in the economy in the June quarter seemingly brushed aside. This takes the index back to its level in June when the Australian economy was just starting to reopen from the nationwide shutdown that spanned between late March to mid-May, with the improvement coming as the reinstated containment measures in Victoria slowed new virus cases to a daily average of 76 in the first week of September from 471 a month earlier. How confidence has responded to the roadmap to reopening recently outlined by the Victorian Government, which proposes to leave the current activity restrictions largely in place until late October and requiring the case count to meet prescribed thresholds for these measures to be eased, is yet to be tested.

As was seen back in the May and June surveys, the improved outcomes on the health side have paved the way for a more optimistic view of the economic situation to play through. In September, consumers' outlook for economic conditions over the next 12 months bounced back by 41%, but as noted by Westpac's Chief Economist Bill Evans, near-term expectations are still very pessimistic being some 18% lower than the level that prevailed at the same point last year, while on a 5-year horizon the improvement was also notable at 18.9% to a level that is 2.1% higher over the year. Australians are also clearly noting the benefit of the Federal Government's fiscal support measures that have strengthed household balance sheets with family finances assessed as being 11.2% stronger going forward over the next 12 months and also 11.2% better than a year ago. Regarding discretionary spending, whereas the 'time to buy a major household item' sub-index fell by 13.2% in August, it rebounded by 16.3% in September, but a sense of the degree of caution that exists can be gauged when considering this component is still well down on its level from a year earlier (-12.1%). 

Other key aspects of the report were around the labour market and the housing market. While fears of job losses remain historically elevated at 139.2 (series average is 130.2), the 14.8% improvement this month points to a less heightened view of the situation and this appears in line with the stabilisation evident in the timely ABS payrolls data over August reported this week. As our chart of the week, below, shows, the pace of job gains has picked up recently in most states, while in Victoria the losses have slowed. 

Chart of the week

Meanwhile, the 'time to buy a dwelling' index in the Westpac-Melbourne Institute survey is reported to have lifted by 3.0% in September to be at a similar level (110.5) to back in June through the initial stage of the reopening. The easing of the national shutdown saw activity in the housing market get going again fairly quickly as highlighted by this week's housing finance data for July that showed lending commitments rising by a much stronger-than-expected 8.9%, with the owner-occupier segment leading the way posting its fastest month-on-month gain (10.7%) in more than 11 years (see more here). In the week's other main development, the NAB Business Survey for August reported a lessening in the severity of the weakness in firms' confidence (from -14 to -8) with Victoria showing the largest improvement of all the states with the virus outbreak coming under control. However, business conditions rolled over again (from 0 to -6) and notably provided a more pessimistic view on the labour market with the employment sub-index falling 11 points to -13, together with declines across the trading (-3pts to -2) and profitability (-4pts to -3) measures.

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Most of the attention offshore this week was in Europe for the latest ECB policy meeting. As was expected, the Governing Council made no change to its policy settings, but the interest going into the meeting mainly revolved around the updated set of staff macroeconomic projections and the recent appreciation of the euro. On the outlook, the ECB's baseline assessment is for the euro area economy contract by a slightly less severe 8% in 2020 compared to -8.7% previously, largely because the decline in GDP in the June quarter (finalised this week at -11.8%q/q) was better than expected, while the pace of the expected recovery was essentially unchanged at 5.0% in 2021 (from 5.2%) and 3.2% in 2022 (from 3.3%). Meanwhile on inflation, despite falling sharply in August on both a headline (-0.2%Y/Y) and core basis (0.4%Y/Y), the outlook remains unchanged this year at 0.3% before lifting to 1.0% in 2021 (up from 0.8%) and 1.3% in 2022 (no change). Core inflation is still seen at 0.8% in 2020, but the real surprise to markets was the upgrades in 2021 to 0.9% from 0.7% and in 2022 to 1.1% from 0.9%. The ECB's mandate targets inflation of below, but close to, 2%.   

This upgraded set of growth and inflation forecasts made for a difficult balancing act for ECB President Christine Lagarde in the post-meeting press conference; on the one hand suggesting the economic outlook was improving but on the other still weak and in need of support. Key for markets were President Lagarde's comments on the level of the euro, though the message repeatedly was that it was something the ECB "monitor" but "do not target". With no immediate concern evident, the euro was given the green light to rally further. A blog post by the ECB's Chief Economist Philip Lane the following day gave greater prominence to the appreciation of the single currency by noting that it "dampens the inflation outlook" and that while the Governing Council's easing of monetary policy since the pandemic had emerged was supporting the economy there was "no room for complacency", seemingly indicating the door was ajar for further action. Also touching on the FX theme, Cable declined sharply this week (-3.6%) as Brexit-related uncertainty weighed on the Sterling as the UK Government sought to rewrite elements of their withdrawal agreement with the EU.   

Over in the US, sentiment in markets has generally been risk-off over the past week in which tech-driven sell-off in US equities continued, with the Nasdaq index falling by 7.2% over the past fortnight, while long-end US Treasuries were bid. In the absence of a clear catalyst, the moves came during a holiday-shortened and generally light week for data in the US. Some rising concern may be evident over the willingness in Washington to reach a deal for the next fiscal stimulus package, the latest attempt never gaining any traction as the Republicans tabled a slimmed-down $500m proposal in the Senate that failed to secure enough votes to be progressed further. Given the Federal Reserve's recent shift to average inflation targeting, the data highlight was a stronger-than-expected outcome for CPI in August with the headline measure advancing to 1.3%Y/Y from 1.0% (consensus was 1.2%) while the core (ex-food and energy) reading, which had been expected to remain unchanged, firmed to 1.7%Y/Y from 1.6%.