Attention in Australia has turned towards next week's Federal Budget that will be handed down by Treasurer Josh Frydenberg on Tuesday evening. The deficit for 2019/20 will be announced at $85.3bn (4.3% of GDP), while the deficit for 2020/21 that was forecast in the Government's July economic and fiscal update to come in at $184.5bn (9.7% of GDP) will take a sizeable downgrade to well in excess of $200bn, with the budget position to deteriorate following the reversal of the reopening of the Victorian economy and additional support measures that are expected to be announced. It has been widely touted that the focus of this Budget will centre on the bringing forward of personal income tax cuts that were scheduled to commence in mid-2022 to be made retrospective from mid-2020, while other initiatives likely to feature are around the path forward for the key income support measures of JobSeeker and JobKeeper, infrastructure spending and business investment. A support package of around $1.5bn for the nation's manufacturing sector will be forthcoming as discussed by Prime Minister Scott Morrison in an address to the National Press Club this week. Reform is also likely to feature given the Government's recent focus on skills and training and industrial relations to support a labour market still very much in recovery mode after it was upended by the measures enacted to contain the pandemic. Next Tuesday will also coincide with the RBA's monthly policy meeting. Whereas market pricing for additional easing by the Board had firmed last week, that has largely been unwound over recent days with no change to existing settings (0.25% target on the cash rate and 3-year AGS and 0.25% on TFF funding) likely to be the decision.
On this week's domestic data flow, retail sales pulled back by 4.0% for the month in August (7.1%yr) as the impact of the Victorian shutdown saw turnover in the state fall heavily by 12.6% (see here). However, spending on a combined basis excluding Victoria was soft falling by 1.3% in the month and with discretionary spending pulling back sharply, this appears to line up with the weakness in consumer confidence that occurred in August. This negative impact on confidence appears to have moderated in September, though the Federal Government's income support measures were tapered towards month's end. Building approvals softened broadly as expected in August easing back by 1.6% coming after a 12.2% surge in July that reflected reopening dynamics (see here). A 12.9% decline in unit approvals more than offset a further advance in house approvals of 4.6% after recording an 8.1% lift in the month prior (see chart of the week, below). Approvals for residential alteration work increased by 7.0% to $748m, taking the value of work approved over the past 3 months to $2.2bn. The key factor here, and in the upturn in house approvals, has been the Government's HomeBuilder scheme and with the policy clearly gaining traction in the market, some form of extension beyond its end of year cut-off date could be announced in next week's Budget. Remaining with the housing theme, capital city property prices according to CoreLogic's Home Value Index declined for a 5th straight month in September, albeit at a moderated pace of -0.2% (4.9%yr), reflecting the impact of a 0.9% fall in Melbourne and a 0.3% softening in the Sydney market. Sales volumes have improved markedly since the shutdown and this has contributed to housing credit growth staying resilient at 3.2% through the year to August against the sharp slowdown in private sector credit growth (2.2%yr) over recent months in line with the weakness in the economy.
Chart of the week
To offshore developments where momentum in the lead up to the US election was derailed by the news of the confirmed virus cases of President Trump and the First Lady, leading to increased uncertainty over the path forward in the campaign and the outlook for policy in the near term with both sides of the House still yet to agree to terms on next fiscal stimulus package. On economic developments, some of the gloss of the recovery in the US labour market since the reopening was dulled by a softer-than-expected nonfarm payrolls report in September as employment lifted by 661k against the median estimate for a rise of 859k. While upward revisions saw a further 145k jobs added over July and August, the employment outcome in September was by a considerable margin the slowest outturn in this recovery phase going back to May, possibly raising concerns over its sustainability given the risks that lie ahead. An upside surprise came through on the unemployment rate which fell to 7.9% (vs 8.2% expected) from 8.4%, though this did come alongside a decline in the participation rate of 0.3ppt to 61.4%, while the level of underemployment also continues to decline coming in at 12.8% and has improved by 10ppts over the past 5 months. In other key data points from the US this week, personal spending moderated to a 1.0% lift in August from a 1.5% pace in July, though this was stronger than the median estimate for a 0.8% rise, while in annual terms the rate of decline eased to -1.9% from -2.6%. The ongoing recovery in consumption spending continued despite a sharper-than-expected fall in personal income of -2.7% in August (4.7%yr), which contributed to a decline in the saving rate from 17.7% to 14.1%. Meanwhile, the ISM manufacturing index for September eased to a reading of 55.4 from 56.0 in the month prior. The result pointed to a moderately softer pace of expansion in the sector as growth in the new orders (-7.4pts) and production (-2.3pts) components slowed.
Over in Europe, the annual ECB and Its Watchers conference took place during the week with the highlight being the speech by ECB President Christine Lagarde that outlined some of the key considerations that are the focus of the bank's currently-underway strategic review. Findings from the review are still expected to be up to 12 months away, but it was discussed that the ECB could potentially move to a make-up strategy on inflation to compensate for the lengthy period in which measured CPI has fallen short of the Governing Council's single mandate of below, but close to, 2%. While the ECB currently targets headline inflation, President Lagarde raised the idea that it could shift to focusing on core inflation with underlying measures described as being "more responsive to economic slack" and less affected by volatility. Certainly, short-term factors, such as the reductions in Germany's value added tax rates as a pandemic response measure to support the economy there, are currently weighing on inflation dynamics in the euro area. On Friday, the flash estimate of headline CPI in the euro area declined 0.1ppt to -0.3% through the year to September, while core inflation slowed further to a record low of 0.2%Y/Y. As such, ECB Vice-President Luis de Guindos in an interview with MNI pointed out that base effects would see the pace of inflation rebound, but on current projections, this would still be well below target at 1.0% next year and 1.3% in 2022. Meanwhile, Brexit discussions between the UK and the EU made some progress this week; however, the statement from the EU's chief negotiator Michel Barnier highlighted there remained "persistent serious divergences" between the sides, notably the rules and enforcement mechanisms that will apply to its trading relationship. Lastly, coming in a week of increased uncertainty, a speech from the Bank of England's Chief Economist Andy Haldane gained attention in which he cautioned against over emphasising risks to the outlook at the exclusion of the positive developments that have occurred in the recovery so far.
