The spread of the Delta variant of Covid-19 cases that led to the lockdown in Sydney broadened out to lockdowns in several other major Australian cities over the past week, some of which are now easing. Caseloads nationally averaged 34 per day over the 7 days to June 30, but with only around 6% of the population fully vaccinated, the public health authorities have mandated tighter restrictions to curb transmissions. In looking ahead, the plan agreed by National Cabinet on Friday proposes for precautions and restrictions to become less stringent as vaccination rates rise. Throughout the pandemic, snap lockdowns have not derailed the recovery as activity typically rebounds very quickly on reopening, though the sheer size of the Sydney economy means that the lockdown there has the potential to weigh more substantially at the national level the longer it is required to be kept in place. It should be noted that official forecasts (including by Treasury and the RBA) factor in the impact of lockdowns, conditioned on outbreaks being small and the period of hard restrictions short. Thus it appears unlikely the situation will alter the course for next week's crucial RBA meeting. But with the Board widely expected to remove some of its accommodative policy by not extending the duration of its 3-year yield target past the April 2024 bond, it will clearly want to find the right tone on Tuesday. The main message from the RBA since the previous meeting has been the transition in the economy from recovery to expansion, but as this latest setback highlights, progress is not always smooth. An expansion in the RBA's bond purchase program is also expected, which is likely to include more flexibility with regard to the pace of purchases as underlying economic conditions evolve.
Data releases through the week remained strong, supportive of the momentum the economy was running with prior to these recent virus setbacks. The housing market remains a case in point, with robust conditions continuing as policy stimulus drives buyer demand while stock available on the supply side remains tight. Nationally, house prices according to CoreLogic's monthly index showed another elevated gain rising by 1.9% in June, albeit softening from the 2.2% rise in May. This lifted annual growth in house prices to their fastest pace since April 2004 at 13.5%. While growth in house prices remains strong, there were some signs of cooling in certain markets and segments. Prices in Perth (0.2%mth) and Darwin (0.8%mth) were much slower than in the other capitals, while price growth in the high end of capital city markets (top 25% of house prices) decelerated by more than in the middle and lower tiers, easing by 1.2ppts to 8.0% for the 3-months to June. Meanwhile, the spread in the outperformance of regional markets (17.7%yr) to capital city markets (12.4%) remains, but it is tighter than earlier in the pandemic. While demand has been supported by a range of stimulus measures, CoreLogic highlighted the effect tight supply was playing in the current price upswing. The group estimates there were around 126k new listings that came onto the market for the 3-months to June, but this was outpaced by sales transactions of around 167k over the period. With sales exceeding supply a persistent trend year to date, CoreLogic noted that the level of advertised stock was currently sitting 25% below its 5-year average.
On the demand side, May's housing finance update reported a stronger-than-expected rise in commitments of 4.9%, taking growth over the reopening period to 95.4% above the trough during the national lockdown 12 months earlier. Increasingly evident is the strength in investor commitments, which surged by 13.3% in May to a near 6-year high, compared to a 1.9%m/m rise from owner-occupiers. The investor segment has had a more delayed rebound than owner-occupiers, but their presence is increasing the longer the upswing in house prices extends and as first home buyer activity moderates following the expiry of the HomeBuilder scheme (discussed in detail here). The last piece to this is the impulse the rebound has given to housing credit growth, which in annual terms has lifted from a pre-pandemic pace of 3.1% to 4.8% in May. Over the period, annual credit growth to owner-occupiers has risen from 4.9% to 6.6% and from 0.1% to 1.6% in the investor segment.
News on the labour market extended the optimism coming out of May's very strong employment report. Job vacancies tracked by the ABS have surged to record highs rising by 23.4% for the 3-months to May at 362.5k to be 57.4% higher than pre-COVID levels (see chart below). Clearly, the demand for labour is strong and the good news is that it is broad-based in sectors across the economy, with vacancies relative to pre-COVID levels up 84% in household services, 63% in the good-related sector and 27% higher in business services. While this an encouraging sign for the outlook for employment growth and should lower unemployment further, it was covered in last week's review that 27% of businesses were finding suitable labour difficult to come by due to a lack of applicants, skills mismatches or because of the travel restrictions. Also this week, Australia's trade surplus widened in May, missing expectations but still coming in at an elevated $9.7bn (reviewed here). Exports advanced by 6.1%mth, with iron ore and rural exports reaching record highs, outpacing a 2.9%mth lift in imports.
Chart of the week
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Dominating the focus for offshore markets all week was Friday's US labour market update for June. While the report contained some strong elements, it did little to suggest that the "substantial further progress" the Federal Reserve wants to see in the recovery was near to being achieved. Employment on non-farm payrolls increased by 850k in June to outperform the median estimate for a 720k rise, while revisions to the prior two months added on a net 15k. This brought total employment to 145.8m, which is still around 6.8m below its pre-pandemic level. On the disappointing side was a slight uptick in the unemployment rate from 5.8% to 5.9% (vs 5.6% expected), while there was no change in the level of labour supply as the participation rate held steady at 61.6%, remaining well short of its level just north of 63% before the pandemic swept through. Overall, the US labour market is still very much in recovery mode with much happening beneath the surface. Employment continues to rise — June's 850k lift was the strongest outcome in a single month since last August — as vaccinations allow a wider reopening, though there are still significant hurdles in the way of people returning to work given the much lower level of participation. Another highlight in the US this week was the strong read on manufacturing conditions in June's ISM survey. Sector-wide activity levels softened slightly from 61.2 to 60.6 but are still at a highly expansionary level as the reopening continues to drive strong demand across a wide range of industries. As capacity struggles to meet this demand, bottlenecks through the supply chain remain evident. Higher prices have been the result with a further lift of 4.1ppts coming through in June taking the sub-index to its highest level since 1979. Another feature was that delivery times from suppliers became more lengthy, deteriorating by 3.7ppts in the month.
In Europe this week, the dovish messaging from key ECB officials continued as the latest inflation data came in close to expectations. CPI inflation in June was a touch ahead of consensus on the monthly pace at 0.3%, though the annual rate eased from 2.0% to 1.9%. But this includes the boost from the rebound in global energy prices (12.5%yr). Excluding this and other more volatile prices, core CPI is up only 0.9% over the year. Though inflation is set to rise further, the ECB expects this will prove transitory, allowing its very accommodative policy settings to remain in place. This currently includes asset purchases under its PEPP program running at an accelerated pace, reaching their fastest weekly net pace (for the week to June 25) since the depths of the pandemic at €24.3bn. In the UK, the Bank of England is also taking a similar view to the inflation outlook to that of the Fed and ECB, with Governor Andrew Bailey outlining in a speech this week that it is important that the MPC does not overact to temporarily strong growth and inflation rates by prematurely tightening policy as the recovery progresses. However, Governor Bailey also noted that the Bank needed to be alert to signs that indicate higher prices could be more persistent such as high savings driving consumer spending by more than expected, wage rises emanating from a tight labour supply, and inflation expectations drifting above the MPC's target. For the time being, the recovery in the UK still has a long way to go after the return to lockdown set back real GDP by 1.6% over Q1, leaving economic output 8.8% below its pre-COVID level.
