Domestically this week, the August labour force report showed the recovery in Australian employment extended to a third consecutive month, albeit coming against a deterioration in conditions in Victoria as the state was placed back into shutdown. Whereas the narrative pre-release was around gauging the extent to which the situation in Victoria would impact the broader labour market, as had been indicated by recent high frequency data points, the good news was that the result surprised even the most optimistic forecasts as employment increased by 111k against a median estimate that was positioned for a decline of 35k (reviewed here). Adding to the 347k increase in employment that occurred through the initial reopening effort in June-July, just over half (53%) of the 871.6k jobs that were lost when the pandemic hit have now been returned to the economy. Understandably, the Victorian shutdown had a notable impact on the labor market there, though not to the severity as occurred when the pandemic emerged initially, with the loss of 42.4k jobs.
Notwithstanding the headline employment result, with the shutdown coming back in Victoria, this weighed on the broader recovery in the Australian labour market. This was seen by the stalling in hours worked in August (0.1%) at the national level as a 4.8% decline in Victoria offset a 1.8% lift across the other states. Back in June, hours worked rebounded by 4.2% before lifting by another 1.3% in July. Those gains had reduced the decline in the level of hours worked on pre-pandemic times from a trough of -10.4% to -5.5%, but that progress stalled in August (-5.4%).
Chart of the week
Another area where the Victorian disruption was evident was in the level of workforce participation, which lifted by only 0.1ppt to 64.8%, whereas it had risen by a combined 2ppts over June-July. Weighing on the lift in the participation rate nationally was Victoria (-0.6ppt) as well as a surprising fall in Queensland (-0.5ppt). With headline employment rising sharply and with this muted increase in participation, there was a reversal of the recent rise in the national unemployment rate as it fell to 6.8% from 7.5% against an expected lift to 7.7%. However, given the underlying dynamics outlined, headline unemployment remains an imprecise gauge in the circumstances. More importantly, not least for policymakers, spare capacity in this labour market remains very elevated with underemployment at 11.2% and 18% on the rate of underutilisation.Certainly from the perspective of the RBA, the message from the Board in the September meeting minutes was that it will be leaving in place a significant degree of policy support to help the economy through what are very difficult and uncertain times. These latest meeting minutes explained that this elevated level of uncertainty around the economic outlook had justified the Board's decision to announce an expansion in the Term Funding Facility, which will provide the banking system with access to additional funding of around $57bn between October and June 2021, with the window for drawing down intial allowances ($84bn) due to close at the end of the current month, while the deadline for accessing additional allowances that become available from October 1 (currently around $68bn) was pushed out by 3 months to the end of June 2021. The minutes also provided insights around the Bank's bond-buying activity, noting that it had to contributed to the effective functioning of these key markets "alongside a significant increase in issuance" from government authorities and reiterated its commitment to step in with more purchases in support of its yield target (0.25% on 3-year AGS) and in the event of similar episodes of the turmoil seen earlier in the year when liquidity in global bond markets seized up. With the RBA backstopping the government and semi-government bond markets, the Board reasoned that the public sector was well placed to use their balance sheets to expand fiscal policy measures.
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Over in the US, the latest meeting of the Federal Reserve's FOMC made no changes to its policy stance, as expected, as the Committee's updated economic projections indicated its ultra-accommodative settings were likely to remain in place for years to come. After a persistent undershoot on its inflation goal (2%), the Fed's recent regime shift to average inflation targeting will now see the Committee aiming to lift inflation "moderately above 2 percent for some time", to secure longer-run inflation expectations at its targeted level of 2%. Market participants, in search of details as to the specifics on how this will be carried out, were largely left to keep looking by a Fed reluctant to make firm commitments given the uncertainties around the path the pandemic and its effects on the economy and future fiscal support plans. Committee Chair Jerome Powell outlined in his opening statement at the post-meeting press conference that by pledging to leave rates on hold (0-0.25%) until its maximum employment and inflation goals have been achieved and by continuing its asset purchases "at least at the current pace" ($80bn/mth of Treasuries and $40bn/mth of mortgage-backed securities) these actions would best support the economic recovery at the present juncture. Regarding the path of that recovery, the median projections based on the individual views of Committee members pointed to a less severe contraction in economic growth in 2020 (-3.7%) than previously expected (-6.5%) but a slower and more protracted rebound over the following years; 4% in 2021 (from 5.0%) and 3% in 2022 (from 3.5%). Meanwhile, with rates going nowhere, unemployment was expected to take until 2023 to get down to 4%, while the inflation outlook was only seen reaching 2% by the end of the forecast period. It is also worth highlighting that Chair Powell said that for these prospects to be attainable more fiscal support would likely be needed. In terms of the data in the US this week, the outturns were in line with the recent pullback in Citigroup Economic Surprise Index as retail sales disappointed with a 0.6% lift month-on-month in August against +1.0% forecast (control group sales declined 0.1% vs +0.3%), while industrial production was also softer than expected in rising by 0.4% in August (vs +1.0%) and housing starts (-5.1%m/m) and building permits (-0.9%m/m) rolled over after very strong increases in July.
Across the Atlantic, the Bank of England's Monetary Policy Committee (MPC) maintained existing settings at this week's meeting, with the Bank rate at 0.1% and the target for asset purchases at £745bn (currently standing at $684bn). The main change coming from the MPC was in the meeting minutes that elevated the prospect of negative interest rate policy from an option merely not being dismissed to now coming under increasing consideration, with the MPC having recently been briefed by BoE staff on possible plans for implementation ahead of discussions between the Bank and regulators later in the year. On economic conditions, the MPC assessed that the recovery was occurring gradually, with monetary and fiscal support helping to bolster household spending, though its durability was uncertain given that sentiment remained weak and the labour market was still being held up the government's furlough (wage subsidy) scheme. Data this week underscored this point through a modest uptick in the unemployment rate from 3.9% to 4.1% in July, though the BoE forecasts it to rise to 7.5% by the end of the year with the furlough scheme scheduled to be wound up at the end of October. On inflation, the MPC noted that the decline in headline annual CPI in August to 0.2% from 1.0% reflected a range of temporary government initiatives to support the economy, though it was unlikely to pick up materially over the coming months with wages growth and rents soft. Staying with the inflation theme, euro area CPI was this week confirmed to have declined by 0.2% through the year to August, while core CPI slowed to 0.4%Y/Y from 1.2% in July with a key influence behind this being a temporary VAT cut in Germany. Lastly, in Asia, the Bank of Japan's Policy Board left its monetary settings on hold at this week's meeting, maintaining the line that it would "not hesitate to take additional easing measures", as new prime minister-elect Yoshihide Suga vowed to continue of the regime established by his predecessor of pro-growth policies and structural reforms.
