Macro (Re)view (30/10) | Q3 rebound tempered by rising risks

Both the US and euro area economies this week reported strong rebounds in activity in the September quarter as shutdown orders were lifted, though this progress is now at risk of faltering due to the ever-present threat of the virus as the northern winter draws near. At the centre of these concerns is Europe where surging case numbers have led to a broadening and tightening of restrictions across the continent, with France and Germany — the two largest economies in the bloc — entering national shutdowns of differing magnitudes, though not as stringent as was implemented during the first wave. The deterioration in the situation has had an immediate impact on the data to hand for October, as seen last week by the euro area PMI reading falling into contractionary territory (49.4), while this week the recent recovery in the European Commission's economic sentiment index stalled (90.9) and the employment expectations measure was starting to turn over (89.8). Just a short while ago, conditions were looking very different on the back of a strong rebound in economic activity through the initial phase of the reopening. After a 15.1% decline in output over the first half of the year, euro area real GDP was reported this week to have rebounded by a much stronger than forecast 12.7% in the September quarter (-4.3%Y/Y). While this still left the level of GDP in the euro area 4.3% lower than its pre-pandemic level, the momentum was heading in the right direction (see chart, below). 

Where things stand now, however, was best summed up by the message from European Central Bank President Christine Lagarde at this week's post-policy meeting press conference that "the economic recovery is losing momentum more rapidly than expected". While the Governing Council left its policy settings unchanged at this meeting, the decision statement effectively gave the pre-commitment that more stimulus will be forthcoming in December by noting it "will recalibrate its instruments" to coincide with the release of an updated set of economic forecasts that factor in these latest virus-related developments. With the economic outlook deteriorating in response to more restrictions on activity, President Lagarde outlined that preparatory work is already underway in determining what its next steps will be but the message was that it will be examining all of its instruments, including its various asset purchase programs and term funding schemes. Also at the ECB this week, its latest bank lending survey was released for the September quarter that reported banks' credit standards had tightened over the period as businesses deal with the fallout from the pandemic. 

Chart of the week 

  

As there were further signs this week of the strength in the recovery of the US economy, markets were left to consider its durability amid an acceleration in virus cases to their highest daily level of the pandemic so far on Thursday (88.5k) and uncertainty around the policy outlook, in particular on prospects for fiscal stimulus, on the doorstep of the presidential election. There may have been some sense of fragility to these concerns evident in the latest University of Michigan consumer sentiment data with the current economic conditions index declining by 2.2% in the month of October. This uncertainty follows the strongest rise in quarterly GDP on record in the US as the reopening effort led to output printing at an above consensus pace of 7.4%q/q (-2.9%Y/Y). Coming after Q2's 9.0% contraction, this left the level of GDP still 3.5% below where it was before the pandemic hit (see chart, above). On the underlying details, after falling by 9.6%q/q in Q2, household consumption rebounded by 8.9%q/q with spending on goods accelerating (9.8%q/q) helped by earlier stimulus measures as services demand made an incomplete recovery (8.5%q/q). Perhaps of most surprise was the strength that came through in business investment, with equipment spending surging by 14.2%q/q, though this was moderated by weakness in non-residential construction (-3.9%q/q). Highlighted in last week's review was the robustness that has been evident in the US housing market since the reopening and this was underscored in the GDP report with new residential construction advancing by 12.3% in Q3 to stand 5.1% above the level that prevailed at the end of 2019.      

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Turning to the domestic perspective, the main focus of the past week was the September quarter Consumer Price Index (CPI) data. After recording its sharpest quarterly fall on record of -1.9% in the shutdown-impacted June quarter, headline CPI rebounded by 1.6% in the September quarter, coming in slightly above the median estimate of 1.5% (full review here). Driving the reversal was the end of the period of free childcare services as one of the Federal Government's pandemic response measures amid the shutdown and higher petrol prices in response to a lift in demand as restrictions eased. On this result, annual CPI lifted off its 23-year low of -0.3% to 0.7%, which compares with its 2.2% pace in the March quarter ahead of the onset of the pandemic. Outside the impact of childcare fees returning and petrol prices recovering the inflationary pulse was very weak. Housing inflation was flat in Q3 as rents declined for a second consecutive quarter on the effects of rent reduction mechanisms and higher vacancy rates, utilities prices went backwards on support measures from state governments and new dwelling costs were capped to a modest rise in response to the Federal Government's HomeBuilder scheme. The report this week reiterated that government policy decisions were behind the disinflationary shock that hit the economy in the June quarter and while has partially reversed, inflation on an underlying basis remains a long way below the Reserve Bank of Australia's 2-3% target range. 

The Bank's preferred trimmed mean measure came in at 0.4% on the quarter to more than offset Q2's 0.2% fall, though the annual pace held steady at 1.2%. Inflation is currently a secondary consideration for the RBA relative to its full employment objective, but this outcome only adds weight to the widespread expectation in the markets that the Board will announce a significant easing in its monetary policy stance on Tuesday. The expecation is the the Board will cut its rates structure by 15 basis points to 0.1% across the targets for the cash rate and 3-year Australian Government bond yield and on the Term Funding Facility. In addition, given the recent speech from Governor Philip Lowe that highlighted the importance of balance sheet expansion, it is likely that the Board will announce its intention to buy government bonds in the 5 to 10-year maturity range. Markets have been speculating about the possibility of a target of $100bn for these purchases, though my read on the situation is that it is unlikely to go down the path of a defined target, with the focus instead to be on retaining maximum flexibility to adjust purchases across the curve in these uncertain times as required, dictated either by economic conditions or market functioning and more on this will be covered in next week's preview.     

Australian Q3 CPI 1.6%; 0.7%yr

Australia's Consumer Price Index (CPI) rebounded as expected in the September quarter rising by 1.6% as the Federal Government's decision to provide free childcare services during the shutdown came to an end and petrol prices lifted. Annual CPI lifted off a 23-year low of -0.3% to 0.7%.  

Consumer Price Index — Q3 | By the numbers 

• Headline CPI lifted by 1.6% in the September quarter to come in a touch above the median estimate of 1.5%. In Q2, CPI posted its largest quarterly fall on record of 1.9%. In annual terms, CPI lifted from its 23-year low of -0.3% to 0.7%. 
• Details for the underlying measures (which are seasonally adjusted);
• Trimmed mean lifted 0.41% (expected: 0.4%, prior rev: -0.14%), leaving the annual pace essentially unchanged at 1.19%. 
• Weighted median firmed by 0.33% (expected: 0.3%, prior rev 0.07%) as the pace through the year held at 1.27%. 

Consumer Price Index — Q3 | The details 

Coming after the sharpest quarterly fall on record (-1.9%) in the June quarter reflecting the impact of the Federal Government's free childcare policy during the shutdown and much lower petrol prices, headline inflation rebounded in Q3 as these effects were largely reversed. Free childcare services (outside of Victoria) ended on July 12 while the reopening of economies worldwide during the quarter led to increased demand for oil lifting petrol prices.

In terms of the contributions to the quarterly CPI outcome of 1.6%, the leading group was the furnishings, household equipment and services (1.06ppt) of which childcare accounted for almost all of this increase adding 0.95ppt. The transport group added 0.38ppt to headline CPI, led by a 0.31ppt contribution from automotive fuel. Alcohol and tobacco remained a source of inflation (0.16ppt), while the recreation and culture group (0.16ppt) — a figure largely propped up by imputed contributions from both essentially unavailable domestic and international travel services due to border closures — was supported by strong demand for home entertainment equipment. Meanwhile, the end of free childcare also had an impact on the education group (0.11ppt) as out of pocket costs for families for outside school hours care services returned.  

 

The next chart provides the percentage price changes across each of the groups for the September quarter and in annual terms. Furnishings, household equipment and services increased by almost 12% in Q3 on a statistically spectacular 1,382% rise in childcare costs (they fell 95% in Q2), albeit this still leaves them 26.3% lower than in March, and stronger household goods prices (furniture 6.4%q/q and major appliances 5.3%q/q). Meanwhile, the 2.1% rise in the education group was driven by an 11.1% lift in fees for outside school hours care. Transport costs were up 3.4% in the quarter as petrol prices advanced by 9.4% and new vehicles by 2.5%. The key housing group was flat in Q3 due to the impact of state government initiatives to lower utilities costs (-1.1%) and introduce mechanisms allowing impacted tenants to negotiate reductions to rents (-0.2%). Meanwhile the Federal Government's HomeBuilder scheme helped to restrict new dwelling costs to just a 0.5% rise. Over the past year, alcohol and tobacco (8.1%) and food and non-alcoholic beverages (3.4%) have seen the strongest price rises of all the groups.   

An interesting theme that has emerged out of the pandemic is the uneven nature of its impact on inflation. The services sector has been hardest hit by the restrictions and as a result inflation has weakned sharply over the past two quarters such that it is now lower through the year (-0.2%), while at the same time raising demand for goods (household appliances, home entertainment etc) has seen inflation move higher to 3.1%Y/Y from 2.7% pre-pandemic. 

Consumer Price Index — Q3 | Insights 

Amid the effects of the pandemic, it is difficult to get a clear read on the inflation dynamics occurring in the economy from the CPI data alone due to measurement issues as discussed by the ABS here. The weak pace in underlying inflation (that removes the volatile price changes) however is a key factor driving expectations for the RBA to ease its policy stance at next week's meeting.     

Preview: Australian Q3 CPI

The effects of the pandemic and government policy decisions to support households led to the sharpest quarterly fall in Australia's Consumer Price Index (CPI) on record with a 1.9% decline in the June quarter as the annual pace dropped to a 23-year low of -0.3%. Today's report for the September quarter will see some reversal of these effects through the return of out of pocket costs for childcare services in most states and higher petrol prices, though the data will continue to be affected by measurement issues due to the shutdown in Victoria and shifts in consumption patterns in response to continuing restrictions on activity.  

As it stands | CPI 

Headline CPI declined sharply in the June quarter by 1.9%, slowing the annual pace from 2.2% to a 23-year low at -0.3%. For the first time on record, quarterly underlying inflation based on the RBA's preferred trimmed mean went negative coming in at -0.2% as the annual pace slowed to 1.2% from 1.8%. 

The major influences on these outcomes were the Federal Government's decision to make the cost of child care services free between early May and mid-July, which subtracted 1.3ppts from headline CPI in Q2, and greatly reduced petrol prices on weak demand in Australia and across the globe due to the impact of shutdowns, taking 0.8ppt from quarterly CPI. 

In addition, there were a range of cost-saving measures announced by state governments to support households through the pandemic, including price freezes on various charges that would typically rise in July each year, reductions in utilities prices and mechanisms for tenants to negotiate rent reductions. Meanwhile, private health insurers delayed scheduled premium increases for at least 6 months. Outside of alcohol and tobacco excises, there were some price increases that came through in the June quarter. These were notably in the retail sector where a surge in demand for non-durable items (such cleaning and personal care products like sanitisers) and household furniture through the shift to work from home arrangements led to higher prices, while usual discounting at the supermarkets became less prevalent.   

Market expectations | CPI 

Today's report is unlikely to shift the markets all that significantly, not least because it is already fully expected that the RBA will ease its monetary stance at next week's Board meeting. For the headline measure, markets look for a 1.5% rebound in Q3 (range: 0.5% to 2.1%). The trimmed mean is forecast to lift by 0.3%q/q on the median estimate.  

What to watch | CPI 

Pandemic-related effects will continue to heavily impact the CPI data. The continuation of the shutdown in Victoria means that today's outcome will continue to be affected by measurement issues as discussed by the ABS here. Furthermore, the onset of the pandemic and the measures implemented to contain it have significantly shifted previous consumption patterns, and given that the CPI  uses a fixed basket methodology it is not well placed to capture these effects as they occur. Given these crosscurrents, gauging current inflation trends from the CPI readings in isolation is not straightforward. For today's report, the most significant contributors adding to the CPI outcome will be the unwinding of free child care services (in all states outside of Victoria) that will largely reverse the 95% decline in price for those services in Q2 and the rebound in petrol prices. Weighing on inflation will be the impact of the Federal Government's HomeBuilder grants scheme that in effect lowers the purchase price of newly constructed houses (up to a limit of $750k).         

Macro (Re)view (23/10) | RBA easing locked in for November

This week's communications from the Reserve Bank of Australia reiterated that an easing in its monetary policy stance at its November meeting is all but locked in. At that meeting, the Board will cut its interest rate structure by lowering the targets for the cash rate and 3-year Australian Government Bond yield and the rate on the Term Funding Facility from 0.25% to 0.1%, while it is also likely to announce its intention to expand its bond-buying operations to focus on the 5-10 year segment of the yield curve. The minutes from the October meeting outlined that the view of the Board was that with the economy continuing to open up, it was expected that additional easing in its monetary policy stance "would gain more traction than had been the case earlier". The transmission of these actions into the real economy is seen as coming largely through exchange rate effects and lower bond yields as its balance sheet expands to be closer to the level of expansion that has occurred in other central bank balance sheets. As discussed during a speech by the RBA's Assistant Governor Christopher Kent this week, the term Funding Facility will also contribute significantly to expanding its balance sheet over its duration. Drawings under that facility stand at $83bn with its maximum size currently around $200bn. The speech also emphasised the importance that the RBA will be placing on its balance sheet in terms of judging the overall stance of its policy settings going forward.

Local data this week was consistent with the RBA's overall assessment that the economic recovery is likely to occur gradually amid considerable uncertainty. The October flash PMI lifted to a reading of 53.6 from 51.1 in the month prior (readings > 50 signal expansion), indicating that the expansion in economic activity had picked up pace as more restrictions had been rolled back. This had mainly benefitted services sector activity (53.8 from 50.8), though at a level insufficient to prevent businesses from reducing employment. Meanwhile, activity in the manufacturing sector continued to advance, though at a slower pace (52.3 from 53.5) as production and sales volumes moderated amid continuing supply-side headwinds, including from border restrictions disrupting delivery times. Staying with business conditions, the ABS's latest impacts of covid-19 survey was indicative of a theme of stabilisation as firms adjust to a new normal of operating (see here). On the consumer front, the advance estimate of retail sales in September pulled back by 1.5% following August's 4% fall. While retail spending remains robust at 5.2% higher over the year and 4.6% above its pre-pandemic level (see chart of the week below), the momentum is slowing as the earlier pent-up demand coming out of the shutdown that was enhanced by the receipt of stimulus measures fades. Data on the labour market through the latest ABS payrolls report indicated that employment had weakened broadly across the nation by around 1% over the back end of September into early October, though based on the short history of the series in which the data have tended to be revised higher, this likely overstates the extent of the decline. As the reopening progresses, the demand for labour continues to improve as highlighted by a further 6.4% rise in the Federal Government's internet vacancies index to 144k from a trough of 71.5k in April but this is still well down on the level that prevailed a year earlier (-12.2%).  

Chart of the week

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In offshore developments, China continues to lead the way out of the depths of the pandemic-induced recession in the global economy. In the September quarter, GDP growth in China lifted by 2.7% to drive the annual pace up from 3.2% to 4.9%, though these outcomes were softer than had been anticipated by markets at 3.3% in the quarter and 5.5% through the year. More importantly, though, was that the nature of the recovery appears to be broadening out to households after initially being driven by industrial output as activity recommenced out of the shutdown. Retail sales picked up to a 3.3% annual pace in September, well ahead of the median estimate (1.6%) and up from 0.5% in August. Meanwhile, industrial output continued to advance rising to 6.9% year-on-year from 5.6% previously. The other factor worth noting is that the GDP outcome was depressed by a very strong lift in imports of 13.2% for the year to September, reflective domestic demand conditions strengthening with activity post-shutdown gathering momentum.

Over in Europe, the situation remains precariously placed as surging virus cases in the continent have led to more restrictions coming back, raising the risk that the recovery there could start to unwind over the winter months. The warning signs of this are already emerging as private sector economic activity according to the flash PMI in October slipped into contractionary territory at 49.4 from 50.4 in September. The decline would have been sharper but for a resilient manufacturing sector with the pace of expansion in activity lifting to 54.4 from 53.7. But conditions in the services sector are deteriorating falling to 46.2 from 48.0 as restrictions and concerns over the virus led to activity pulling back. These developments come ahead of next week's meeting by the European Central Bank's Governing Council and while it is expected that no changes in policy settings will be the call on Thursday, the message from key officials from the bank of late has been one of no complacency given the weakness in the most recent inflation data and that was reiterated in remarks by President Christine Lagarde this week. Meanwhile, in the UK, rising virus cases and the broadening impact of restrictions led to Chancellor Rishi Sunak announcing an expansion of the Government's fiscal support measures for workers and businesses. At the Bank of England, a speech this week by Deputy Governor Dave Ramsden outlined that while the prospect of negative interest rates remains under consideration, it is more likely to explore other options first, particularly with there being "plenty of headroom" to expand asset purchases.

Lastly in the US, despite the logistical challenges of being on the doorstep of the presidential election, prospects for a near-term fiscal stimulus package are not being ruled out, though markets have become less sensitive to the news headlines around this. On monetary policy, with central bank balance sheets in focus across the globe, the Federal Reserve's balance sheet touched a new record high this week rising by $25.8bn ($24.8bn of this was in Treasury purchases) to $7.177tn. Certainly, more here will be forthcoming if this week's move higher in long-end Treasury yields — the 10 and 30-year maturities rising to their highest since March — is sustained. Turning to this week's US data, the flash PMI for October indicated that the pace of expansion in the economic recovery had lifted to a 20-month high at a reading of 55.5 from 54.3 in the month prior. Activity in both the services (56.0) and manufacturing sectors (53.3) lifted in October as businesses responded to rising demand as the economy opened up further. Another bright spot in the recovery has been a robust housing market helped by the tailwind from ultra-low rates. Existing home sales accelerated by 9.4% in September, while building permits outperformed expectations in advancing by 5.2% in the month to reach their highest level since March 2007 at 1.553m.

      

Business Impacts of Covid-19, October survey

The latest ABS Business Impacts of Covid-19 Survey for the month of October indicated that conditions were continuing to stabilise as Australia's economic recovery progresses. The previous survey for September reported that almost 2 in 3 businesses across the nation were operating in a modified way due to the pandemic, though the effects of this could be moderating as businesses become more accustomed to this new normal. 

The October survey was based on a sample of 2,000 businesses (response rate was 63%). Since the July survey, businesses have been asked about the monthly change in their revenue, operating expenses and number of employees. Back in July in the early stages of the reopening, 47% of businesses reported a month-on-month fall in revenue but this had declined to 31% by October. Almost 1 in 2 businesses (49%) assessed revenue had held steady in October compared to 32% back in July. Interestingly, considering the easing in restrictions that has since occurred, the percentage of businesses reporting a rise in revenue in October (16%) is the same as it was in July, though forward-looking expectations have improved. The profile pertaining to operating expenses appears consistent with increased activity post reopening with a larger share of businesses reporting an increase or no change in costs than in July, while only 8% now said that costs had declined compared to 16% 3 months ago. With more activity coming back, 85% of businesses said employee numbers were stabilising (up from 80% in July) and the percentage of businesses reporting a decrease in employees had reduced to 7% in October from 13% in July. 

Source: ABS 

The sequential improvement in conditions that has occurred the longer the reopening has gone on can be seen in businesses' expectations for month-ahead revenue. The share of businesses expecting revenue to increase in the coming month in October (18%) is the highest it has been over the cycle of the survey, and expectations for declines have reduced.  

Source: ABS 

According to this survey, 21% of businesses had sought additional funds since the onset of the pandemic. By size, medium-sized businesses (20-199 people) (27%) were more likely to have required additional funds than both large (200 or more people) (24%) and small businesses (0-19 people) (21%). The chart below shows the extent to which businesses in each measured industry have sought additional funds. Not surprisingly, some of the industries most affected by the restrictions feature prominently, led by accommodation and food services (35%). 

Source: ABS 

Across businesses of all sizes, the most common reason for needing additional funds was to support operating expenses as revenue fell in response to the restrictions that affected normal trading. Some business also used the funds for capital expenditure purposes, with investment made in new equipment and machinery to allow them to operate under modified conditions, such as a shift away from face to face delivery of goods and services to home or online delivery. 

Source: ABS 

For businesses that had not sought additional funds, the most common reasons for that being the case were that they had sufficient funds (83%) and a reluctance to increase debt (49%). Businesses also mentioned a lack of capital expenditure requirements (47%) and investment oppottunities (45%), though the measures announced in the recent Federal Budget, notably the expansion to asset write-offs, are likely to shift the outlook somewhat here.    

Lastly, there has been a decline in the percentage of businesses that have deferred loan repayments to 7% from 16% in May, though there are significant differences across the industries. Some 31% of businesses in accomodation and food services continue with loan deferrals compared to much lower levels in other hard-hit industries such as arts and recreation (6%), retail (6%) and education and training (2%). 

Macro (Re)view (16/10) | RBA shifts its policy regime

The week's events domestically were highlighted by a significant speech from the Reserve Bank of Australia Governor Philip Lowe that has outlined a shift in the central bank's policy regime. Following a similar shift from the US Federal Reserve in late August, there is to be a change in the RBA's reaction function, with the labour market to be its main focus as the economy recovers from the pandemic crisis. Governor Lowe provided clarity on how the Bank's forward guidance will evolve to match this shift. The current forward guidance emphasises that rates will not start to rise until "progress is being made towards full employment" and that it has confidence that inflation "will be sustainably within the 2-3 per cent target band". Going forward, Governor Lowe outlined that greater prominence will be given to its full employment objective, just as this week's labour market data for September showed a stalling in the recovery through the loss of 29.5k jobs and an uptick in the unemployment rate to 6.9% (see our full review here).

Previously, the thinking was that as the labour market improved over the next few years, the forecast path for inflation would rise and this would ultimately lead to rates needing to be hiked preemptively to prevent the economy from overheating. However, over the period ahead, the sensitivity to inflation forecasts will be turned down, with the RBA to focus on speeding up the labour market recovery by actively using their policy tools to lower unemployment. Inflation pressures will need to actually materialise before this focus changes. This shift in thinking around forward guidance is in effect a de facto easing in the RBA's monetary policy stance and the foreign exchange and bond markets have responded accordingly. While it was already widely expected, given that there is still scope for the RBA to lower its rates structure, the shift almost certainly demands that the targets for the cash rate, 3-year Australian Government bond yield and Term Funding Facility rate all be lowered from 0.25% to 0.1% at the November Board meeting. Whereas financial stability considerations previously may have been a barrier, potential risks are seen to be mitigated by higher employment supporting balance sheets and reducing troubled loans.       

Governor Lowe also provided insights into the importance of relativity in terms of the RBA's monetary policy stance compared to other central banks offshore. In an environment where rates across the globe are either at or close to their effective lower bounds, balance sheet expansion has been key. The RBA's balance sheet has expanded by around 7% of GDP this year, but as the governor noted this is smaller than what has occurred in other economies and the RBA is now working through what the impacts of this might be, such as on the level of the exchange rate and longer-term bond yields. In comparison to the actions of other central banks that are more focused on the longer-end of their yield curves through asset purchases, the RBA's actions have been directed at keeping short-end rates anchored via its yield target. It, therefore, appears likely that the RBA will move towards a quantitative easing program where it would purchase a certain amount of government bonds within 5-10 year maturities. Speculation of this saw the 10-year Commonwealth Government bond fall to its lowest level since April (see chart below). It is possible that expanded bond-buying could be announced at the November meeting, though there are a few details the RBA is working through here so it could take a bit more time.   

Chart of the week

 

The likelihood of further RBA easing coming soon after the Federal Budget, together with the nation's progress in managing the pandemic, appeared to be the key factors in a surge in consumer sentiment according to the Westpac-Melbourne Institute's index in October. The monthly reading advanced by 11.9% to 105.0, its highest level since mid-2018. The earlier stimulus measures from the Government and RBA continue to be reflected in the family finances sub-indexes 'vs a year ago' +6.2% (+15.7%yr) and 'next 12 months' +9.4% (+18.7%yr) and this is also consistent with the strengthing evident in household balances sheets in the latest ABS Household Impacts of COVID-19 Survey for September (see here). The contribution that strengthened household balance sheets can play in Australia's recovery was an aspect covered by Governor Lowe in his speech this week, with the key to deploying this being the public maintaining confidence in the authorities to manage the pandemic and support the economy. 

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Switching the focus offshore, the IMF this week published its latest World Economic Outlook for October with the group now forecasting a smaller contraction in global GDP this year of -4.4% compared to -5.2% in its June update, which reflects the earlier than anticipated lifting of shutdowns, though a slightly slower rebound of 5.2% is expected to ensue in 2021 from 5.4% previously. Outside of China, the projected recovery in 2021 is still likely to leave GDP below pre-pandemic levels in both advanced and emerging economies due to the extent of scarring that has occurred in labour markets and elevated uncertainty that has reduced investment spending. As outlined by the IMF, the most prominent risk to its outlook remains the path of the virus, as seen in Europe and the UK this week where rising virus cases have necessitated the tightening of containment measures. After negotiating a successful initial phase in the reopening over the northern summer, the outlook in the continent has quickly deteriorated with the PMI data indicating that economic activity was already slowing ahead of the resurgence in the virus. The situation in the UK is also looking increasingly complex with the government establishing a 3-tiered alert system that mandates different sets of restrictions to apply in local areas depending on the severity of the virus. Meanwhile, on the Brexit front, UK PM Boris Johnson elevated the rhetoric surrounding current negotiations with the EU expressing a preparedness for a no-deal scenario come January 1 next year. 

In the US, conflicting headlines around prospects for a new round of fiscal stimulus ahead of the upcoming election continued over the past week. Though it is still possible a pre-election package could be agreed upon, Treasury Secretary Steven Mnuchin conceded this would be "difficult". The data from the US was mainly positive this week, highlighted by a stronger-than-expected retail sales report for September with turnover advancing by 1.9%m/m against the median estimate for a 0.7% lift. More positively, control group sales (more closely aligned with consumer spending within GDP calculations) surprised to the upside by a higher magnitude coming in at 1.4%m/m compared to just 0.2% expected. Clearly, there are risks in terms of the sustainability of this momentum in the absence of more stimulus, though notwithstanding this, consumer sentiment firmed a little in October from a reading of 80.5 to 81.2 driven by a 4.2% rise in the expectations component for future economic conditions. Meanwhile, headline CPI matched expectations in printing at 0.2%m/m and 1.4% through the year to September, while the core measure was also in line with consensus rising by 0.2% in the month as the annual pace held steady at 1.7%.

Australian employment -29.5k in September; unemployment rate 6.9%

Momentum in the recovery of the Australian labour market stalled in September reflecting the impact of Victoria's shutdown, though employment gains in the other states moderated at the same time. Despite a decline in the level of employment and a rise in the unemployment rate, hours worked were able to advance in the month.  

Labour Force Survey — September | By the numbers

• Employment (on net) declined by 29.5k (seasonally adjusted) in September, though this was less severe than anticipated (-40.0k) and August's initially reported gain of 111.0k was revised up to 129.1k. A further 35.5k jobs were lost in Victoria as the shutdown in the state persisted.  

• The national unemployment rate lifted by 0.09ppt to 6.94% — slightly below consensus for a rise to 7.0%.   

• Workforce participation rate ticked down from 64.87% to 64.76%, weighed mostly by a 1.04ppt fall in Victoria (to 62.99%).

• Aggregate hours worked advanced by 0.5% in the month coming off a soft reading in August (-0.1%) to 1.688bn hours (-5.0%yr), though outcomes across the states were mixed.  

Labour Force Survey — September | The details

Whereas employment defied expectations in August rising by 129.1k (on a revised basis) against a forecast decline of 35.0k, the weakness that has been evident in the high-frequency payrolls data recently showed up in today's report for September. Total employment fell by 29.5k in the month (full time -20.1k and part-time -9.4k), stalling the recovery that has been taking shape since the reopening of the national economy in mid-May.

The main factor in this outcome was the further deterioration in conditions in Victoria as the shutdown of the state following a second wave of virus infections continued. Employment in Victoria fell by 35.5k following on from a 37.2k decline in August. Compared to its pre-pandemic level in March, Victorian employment as of September is lower by 218.8k. Tasmania was the only other state to see employment fall in the month (-2.5k). However, in the states where employment lifted, the gains were generally much more modest in September compared with August; New South Wales +3.3k from +34.0k, Queensland +32.2k from +56.0k and Western Australia +2.9k from +31.8k. South Australia saw a slight elevation to +8.7k from +7.3k in August.      

Despite the momentum in employment stalling in September, hours worked lifted by 0.5%m/m nationally to be up by 1.7% over the quarter. Outcomes across the states were mixed with gains in New South Wales (2.1%), Queensland (1.7%), South Australia (1.5%) more than offsetting declines in Victoria (-2.1%), Western Australia (-0.1%) and Tasmania (-2.2%).  

In terms of the recovery, the pandemic and ongoing restrictions continue to have a greater impact on hours worked than on employment, though the latter is being partially covered by the Government's wage subsidy scheme. The level of hours worked is 5.1% down on pre-pandemic times compared to a 3.3% contraction in the level of employment.

The effects of this can be seen in the measures of underemployment and underutilisation. Although the unemployment rate lifted to 6.94%, both underemployment (+0.1ppt to 11.38%) and underutilisation (+0.2ppt to 18.32%) remain significantly higher reflecting that many Australians either cannot get (or are not able to due the restrictions) work as many hours as they would like.     

The other factor to consider in this is that these increases in unemployment, underemployment and underutilisation occurred despite a fall in the level of workforce participation. Nationally, the participation rate fell by 0.12ppt to 64.76%, stalling its recovery. This was almost exclusively due to a collapse of 1.04ppt in participation in Victoria to a 16-year low at 62.99%. There were also modest declines in Western Australia (-0.14ppt to 67.74%) and South Australia (-0.05ppt to 62.49%).   

Labour Force Survey — September | Insights

Today's report showed the impact of the Victorian shutdown on the recovery in the national labour market with employment declining, though not as severely as anticipated, resulting in the unemployment rate ticking up even as the level of workforce participation eased. The positive aspect was that despite these dynamics, hours worked still advanced in September to record a robust gain over the quarter. 

Preview: Labour Force Survey September

Australia's latest labour force survey is due to be published today at 11:30am (AEDT) covering the month of September. The nation's labour market defied market expectations in August as the recovery in employment continued through an increase of 111.0k against the median estimate for a decline of 35.0k. Meanwhile, the unemployment rate rolled over from a 22-year high of 7.5% falling to 6.8%, whereas it had been expected to lift to 7.7%. Markets are looking for these outcomes to partially reverse in today's report. 

As it stands | Labour Force Survey

Employment increased by a net 111.0k in August following on from the gains in June (227.8k) and July (119.2k). In total, a little more than half of the 871.5k jobs that were lost during the national shutdown have now been recovered. In August, the gain was led by the part-time segment (74.8k), though the recovery in the full-time category appeared to be establishing some momentum as it put together its second consecutive monthly gain (36.2k). The impact of the reversal of Victoria's reopening was evident through a decline in employment in the state of 42.4k against gains elsewhere across the rest of the nation. A special note from the ABS attributed the strength in national employment in August to self-employed workers.

The nation's unemployment rate declined unexpectedly as it fell from 7.5% to 6.8%, while underemployment was unchanged at 11.2%. This occurred alongside a small uptick in the level of workforce participation from 64.7% to 64.8%, albeit still well below its pre-pandemic level at around 66%. 

The recovery in hours worked stalled in August (0.1%) as the impact of Victoria's shutdown (-4.8%) offset increases across the other states. This came after increases in total hours worked nationally of 4.2% in June and 1.3% in July. This now leaves hours worked down by 5.4% compared to their pre-pandemic level in March. A full review of the August report is available here   

Market Expectations | Labour Force Survey

In today's report, markets look for weakness to come through. The median estimate is for employment to fall by 40k, though this is a low conviction call given the range of estimates sits between -90k to +100k. While it proved to be a poor guide last month, the ABS's weekly payrolls data showed a fall in the employment index of 0.7% (non seasonally adjusted) over the reference period covered by today's report. The unemployment rate is forecast to partially unwind its improvement in August lifting from 6.8% to 7.0%, with the range between 6.5% on the low side to 7.5% on the high side. 

What to watch | Labour Force Survey

Amid the volatility in the data and with the Victorian economy still in shutdown mode, the best indicator of activity in the labour market continues to come from the hours worked measure. The state detail is also of importance, not only in Victoria, as it will show how the progressive recoveries in each state are faring.   

ABS Household Impacts of COVID-19 Survey: September

The latest Australian ABS Household Impacts of COVID-19 Survey for September has provided key insights around consumer activity, finances and the labour market. This survey covered the period between 11-21 September and was based on around 1,500 responses from a sample of 4,900 households. The key findings are discussed below. 

ABS Household Impacts Survey | Household Activity

This survey showed the change in frequency that has occurred across a range of activities over the 6-month period from before the onset of the pandemic to mid-September. Due to the impact of social distancing and Victoria's shutdown, the prevalence of working from home arrangements (at least once a week) has almost doubled to 40% in mid-September from 21.5% back at the start of March. 

Ongoing restrictions and precautionary behaviour have contributed to the frequency of weekly activity declining over the period for; public transport usage (8.5% from 22.3%), patronage at bars and restaurants (16.8% from 35.8%), participation in social gatherings of more than 10 people (8.9% from 26.8%), visiting public parks or recreation spaces (39.2% from 52.4%), exercising at a gym or playing sport (23.5% from 39.7%) and going shopping (72.8% from 85.3%). Seasonal effects could potentially account for at least some portion of these declines, though the overriding factor is undoubtedly the pandemic and ongoing containment measures. While the fiscal and monetary response in Australia has been very significant, this cannot fully offset the impact of the pandemic due to the nature of the measures required to contain it that involve restricting activity. 

These findings give more context to the separate high-frequency mobility data that indicate activity still remains below pre-pandemic levels across the capital cities, even in the cities outside of Melbourne that have been able to maintain progress in their reopenings.  

ABS Household Impacts Survey | Household Finances 

Where the fiscal and monetary responses can and have been effective is in shoring up household balance sheets. In mid-April, before the Government's income support measures (enhanced JobSeeker payments and JobKeeper wage subsidy) had taken effect, a notably high proportion of households reported a deterioration in their finances (31.4%) as the labour market was breaking down. By mid-June, this was corrected down to 18.7% as these measures played through, which then moderated to 16% by mid-September. Looking at this from another perspective, there has been a sequential improvement in the proportion of households reporting a stabilisation in their finances from a low of 54.9% in mid-April to 65.7% in June and 71.8% in September.    

Source: ABS

However, it should be noted that the level of the Government's income support measures has since been tapered. In late September, the enhancement to the JobSeeker payment reduced from $550 to $250 per fortnight, while the JobKeeper wage subsidy was lowered from a flat rate of $1,500 per fortnight to $1,200 for full-time workers and $750 for part-time workers, while the eligibility criteria for businesses to participate was tightened. It could be argued that the tapering to some extent comes as a response to the improvement in the underlying economic conditions and that household balance sheets, having been strengthened by the earlier stimulus, are now in a better position to weather this given the strong boost to the level of saving that occurred over the June quarter. 

Still, as per the chart below, for each of the areas of spending, a much greater proportion of respondents expected they would be decreasing their level of spending over the coming month than increasing it. Potentially, this could be in anticipation of needing to cut back in response to the tapering of income support, though it might also be a sign that the level of pent-up demand, particularly in the more discretionary areas (leisure activities, eating out etc) that accumulated during the shutdown is now reducing. Additionally, spending on household goods ran up very strongly earlier in the year as people made preparations to work from home, so it is understandable spending expectations here would start to moderate after purchases were made. 

Source: ABS

ABS Household Impacts Survey | Labour Market  

While the ABS's other high-frequency data on the labour market through the weekly payrolls reports have been indicating that employment growth has recently slowed, the responses in this survey suggest it has been more of a stabilisation, though the data points are not directly comparable. The level of respondents saying that they had a job was 68.3% in September, which was essentially unchanged from August. The official Labour Force Survey in August reported that the level of employment in August was around 3.2% lower than where it was pre-pandemic but up from a trough of -6.7% in May.  

Macro (Re)view (9/10) | Support for the Australian economy extends

It was a heavy-duty week of events domestically as Australia's fiscal and monetary policymakers featured prominently. On Tuesday, Treasurer Josh Frydenberg presented Federal Budget 2020/21 which contained an additional $41.4bn of new measures to impact in the current financial year following on from the $118.4bn of announcements included in the July Economic and Fiscal Update (reviewed here). All up, this elevates the scale of the Government's economic support measures to 7-8% of GDP in 2021/21, which, given the severity of the shock sustained by the domestic economy from the emergence of the pandemic, is a response of an appropriate magnitude. As expected, there was a material deterioration in the projection of the budget deficit for 2020/21 from $184.5bn (9.7% of GDP) as of July to $213.7bn (11% of GDP), widening from a deficit of $85.3bn in 2019/20 (see chart of the week, below). Although this sees Government net debt rise sharply from its pre-pandemic level of around 19% of GDP to 36.1% of GDP by the end of the current financial year, the interest cost of this debt is at historically low levels. 

Chart of the week 

The focus of Budget 2020/21 was around providing incentives for firms to hire and invest and boosting household income. Included is a new hiring credit scheme for firms to take on previously unemployed young workers, while there was an expansion of the wage subsidy policy for new apprentices and trainees. On investment, 99% of Australian firms will now be able to fully write-off depreciable assets (unlimited in number and value) in the year they are installed through to June 2022, while to support cash flow the Government has introduced temporary carry-back provisions that will enable firms to offset losses incurred against profits made since 2018/19. Household income receives a much-needed boost through the earlier introduction of the Government's Stage 2 tax cuts and retention of the low- and middle-income offset for 2020/21. The key assumptions contained in the budget were for a 1.5% contraction in GDP in the current financial year to turn to a 4.75% rebound in 2021/22 supported by earlier stimulus and as a virus vaccine becomes widely available allowing the economy to open up more widely and restoring activity and employment.         

At this week's RBA meeting, the Board left policy settings unchanged (0.25% target for the cash rate and 3-year Commonwealth bond yield and 0.25% on the Term Funding Facility), though the tone of the statement from Governor Philip Lowe continued the theme common in the Bank's recent communications in outlining a preparedness to provide more support to the economic recovery (see here). At the forefront of the Board's thinking is the labour market with the statement noting that it views reducing the high level of the unemployment rate as "an important national priority" and to that end, it "continues to consider how additional monetary easing could support jobs as the economy opens up further". The statement also acknowledged the move in market pricing that has an easing in monetary policy at the November meeting as its base case. The expectation is that the Board will lower its interest rate structure by 15 basis points to target 0.1% on the cash rate and 3-year segment of the yield curve and reduce the cost of liquidity to the banking sector under the Term Funding Facility (TFF) to 0.1%. There is also some speculation that an expansion of its bond-buying activity could be announced, which would be more directly at the 5-10 year segment of the curve. It will be of interest going forward to gauge how the Bank views the effectiveness of each of the various tools it is currently using. This week's statement for example emphasised the role that the TFF was playing in boosting liquidity to lower borrowing costs, reinforcing that the Board announced an expansion to the program at the September meeting. The RBA this week also published its latest half yearly Financial Stability Review, which outlined that the despite the risks to the outlook, not least from the pandemic, the strong position of domestic banks' balance sheets would contribute to the continuation of lending to help sustain the economic recovery. On the data this week, housing finance commitments soared at a record monthly pace of 12.6% in August driven by policy stimulus measures (see here), while the nation's trade surplus narrowed to a 2-year low at $2.6bn in August with imports gathering pace as the economy reopens (see here). 

— — —

In terms of developments offshore, markets remain focused on the lead-up to November's presidential election in the US and the on again off again narrative around prospects for a near-term fiscal stimulus package. By week's end, this was more weighted to being on again than not with the Republicans and Democrats showing a renewed willingness to coming a little closer to agreeing on the scale of the package required. Another theme of importance is the virus situation in Europe where the case count is on the rise to levels well above the first wave earlier in the year and although governments in the region are reluctant to return to widespread shutdowns again, various restrictions on activity are being reimposed and based on the prior episode this will weigh on sentiment and slow the path of the economic recovery. With data limited in both the US and in Europe this week, markets instead focused on the latest commentaries from the Federal Reserve and European Central Bank. The minutes from the Fed's FOMC meeting in mid-September highlighted that the Committee generally anticipated that additional fiscal stimulus would be forthcoming, though if that expectation were not to be realised then the risk was that the momentum in the recovery would slow. In light of the Fed's recent shift to an average inflation targeting regime, some members were in favour of the Committee providing greater clarity to markets around its asset purchases and how this would contribute to meeting its objectives of maximum employment and price stability. The account of the ECB's Governing Council meeting in early September appeared to convey a greater degree of caution than initially interpreted by markets following President Christine Lagarde's post-meeting press conference on the day. Members of the Governing Council agreed that strength in the single currency posed risks to both the growth and inflation outlook. Specifically on the latter, the most recent easing in the ECB's monetary policy stance in June through the expansion of its pandemic emergence purchase programme (from €750bn to €1,350bn) was seen as helping to lift inflation expectations, though a stronger euro could risk offsetting this.