Australian housing finance down 1.4% in September

Australian housing finance commitments contracted by 1.4% in September, posting back-to-back declines for the first time since the outset of the pandemic. Victoria's lockdown weighed heavily on owner-occupier commitments, which nationally were down 2.7%m/m. In a repeat of what was seen in August, investor commitments were resilient to the broader weakness rising by 1.4%m/m. After surging to a record high level earlier in the year, housing finance commitments are now retracing as stimulus measures have expired or are getting close to running their course, while affordability concerns due to rising house prices and some modest tightening of policy settings will also have their say. 

Housing Finance — September | By the numbers

• Housing finance commitments ($ value, ex-refinancing) were down 1.4% for the month in September to $30.3bn, coming off the back of August's 4.3% fall. Annual growth slowed further, from 47.4% to 35.5%. 
• Owner-occupier commitments declined by 2.7%m/m (prior: -6.6%m/m) to $20.7bn (20.8%yr from 33.5%) 
• Investment commitments increased by 1.4%m/m (prior: 1.5%m/m) to $9.6bn, with annual growth standing at 83.2% from 92.2% previously.   
• Total refinancing activity contracted sharply, down 9.1% for the month (prior: 3.2%m/m) for its largest decline since last November, to around $16.2bn. That lowered annual growth to 24.7% from 58.1%. 

Housing Finance — September | The details 

Australian housing finance commitments fell further in September (-1.4%) after registering their sharpest month-on-month decline in 15 months in August (-4.3%). The major influence over this period has been the Delta lockdowns in New South Wales and Victoria. This month, New South Wales stabilised but Victoria pulled the national figure down as activity was severely curtailed by the lockdown. 

Owner-occupier commitments were down 2.7% for the month, a more moderate decline than seen in August (-6.6%). This was driven by a 12.7% fall in Victoria while Tasmania saw a small decline (-1.3%). Within the segment, there were broad-based falls: upgraders -2.4%, first home buyers -1.9% and from the construction-related area -5.4% with the earlier boost from the HomeBuilder scheme continuing to unwind.       

The weakness in commitments was also reflected in the approvals data, shown in the charts below. Construction-related approvals are falling at a faster rate than for upgraders with the HomeBuilder effect passing through. First home buyer approvals have retraced to mid-2020 levels on the withdrawal of incentives to that group, with affordability concerns likely also a contributor.  

Lending to the investor segment defied the broader weakness, lifting by 1.4% in the month. While still expanding, the pace has slowed markedly over the past 4 months from the surge seen earlier in the year. 

Refinancing activity fell sharply in the month, down 9.1% on an aggregated basis for its steepest decline since November 2020. But it must be said that refinancing hit a record high in the prior month and is still at very elevated levels. Refinancing to owner-occupiers fell 9.6%m/m and was down by 8.4%m/m to investors. 

Stepping back, the quarterly picture showed a sharp divergence between owner-occupiers and investors, though the effects of the lockdowns are a complicating factor in trying to reach conclusions. Total commitments were down by 2.6% in Q3, weighed by the owner-occupier segment contracting by 6.6%. Aside from the lockdowns, the end of the HomeBuilder scheme and the withdrawal of incentives to first home buyers was also occurring, with commitments to that group down 15.2% on the quarter. Investor commitments posted a 7.9% lift in Q3, with the tightening in some rental markets (outside Sydney and Melbourne) and rising house prices positive fundamentals for the segment.  

Housing Finance — September | Insights

An overall mixed picture in September as the lockdown in Victoria had an outsized impact on the headline result. Owner-occupier commitments were generally flat to higher across most of the other states and are at very elevated levels. Investor commitments remain on the rise but the momentum has slowed. Looking ahead, the reversal of stimulus measures still has further to run, while the effect of house prices — shown to have risen by more than 20% nationally over the year in the latest release from CoreLogic — on affordability are headwinds. There is also the recent announcement from APRA on the increase to serviceability buffers and speculation of further macroprudential measures. If interest rates are to rise sooner than currently expected by the RBA, that could also slow conditions more rapidly.

Macro (Re)view (29/10) | Policy reappraisals

The push from markets to bring forward rate hike expectations well ahead of the timelines signalled by central banks was on again this week, and nowhere more so than at home. Last Friday, the RBA had for the first time since February come back to the market to defend its 0.1% 3-year yield target following a small upward deviation. But this week it stayed on the sidelines as the yield on the targeted April 2024 line surged above 0.75% (see here). All indications are that the Board's current 2024 guidance will be recalibrated to the new forecasts to be presented in the November Statement on Monetary Policy, consistent with an earlier rise in the cash rate. Over at the Bank of Canada, the Governing Council came through with a hawkish set of announcements; new QE purchases are to cease, and with the inflation target expected to be hit sooner a rate rise is now forecast for "the middle quarters of 2022" from the "second half of 2022" previously. In contrast, vastly more patient stances were reiterated by the European Central Bank and Bank of Japan at their respective meetings this week, with the latter going against the trend by revising down its 2021 inflation outlook in its revised forecasts.   

Coming back to Australia, this week's Q3 CPI report (reviewed here) and the inaction from the RBA were the catalysts for the extraordinary repricing seen in the domestic bond market. Annual headline inflation actually slowed from 3.8% to 3.0%, but it was the stronger-than-expected outcome on underlying inflation at 2.1%Y/Y, which has moved back inside the RBA's target band for the first time in 6 years, that seems to have prompted a reappraisal on the outlook. That said, significant pandemic-related volatility is continuing to push and pull on the inflation data and this was accentuated by the Delta lockdowns in Q3. This week's developments are certainly interesting in the context of RBA Governor Philip Lowe's Anika Foundation speech in September where in relation to meeting the inflation target he said: "It won't be enough for inflation to just sneak across the 2 per cent line for a quarter or two"; and that confidence in delivering sustainable 2-3% inflation would require: "wages... to be growing by at least 3 per cent" — something the official data are yet to show. In that speech, Governor Lowe had also strongly pushed back against the market pricing at the time for rates to start rising in 2022. The other interesting aspect is whether there will be any implications for the QE program if the RBA's guidance on rates comes forward. In September, the Board effectively pledged to keep QE running on autopilot through the summer at the rate of $4bn per week, giving time for the domestic recovery to gather pace before making its next move. A faster taper from February or even ending the program at that date could now be genuine options. On the recovery itself, there was good news as retail sales returned to growth in September with a 1.3% rise after falling in each of the 3 prior lockdown-impacted months. High-frequency data on card spending suggests the rebound in spending in the run-up to Christmas will be carrying strong momentum.  

In the US, markets are keenly awaiting next week's Federal Reserve meeting. With the Committee's stipulated pre-condition of "substantial further progress" on employment and inflation thought to have been achieved, a formal tapering timeline is expected to be announced. Indications are that the taper will be in the order of $15bn per month, leading to the end of QE by around the middle of next year. With markets pushing for a more aggressive response to high inflation — its preferred core PCE deflator is running at 3.6%Y/Y — the Fed will be keen to continue to emphasise that the hurdle to start hiking rates has a substantially more stringent test attached to it than tapering QE. It will also be of interest to gauge the Fed's reading of the economy in light of the slowdown seen in Q3. The impacts of the Delta wave and supply constraints lowered GDP for the period to growth of 0.5%q/q from 1.6%q/q in Q2. Growth in real personal consumption came in little more than flat for Q3 (0.4%) from a robust pace in the prior quarter (2.9%). The effects of supply constraints hit goods consumption, which swung from growth of 3.1% in Q2 to a 2.4% fall in Q3, while the surge in the Delta variant weighed on services consumption as quarterly growth eased to 1.9% from 2.8%. Aside from the slowdown in household consumption, both business investment and net exports weighed on Q3 output.  

Across the Atlantic, the response by ECB President Christine Lagarde to the opening question in the press conference of "...inflation, inflation, inflation" summed up the focus of the Governing Council. With pandemic-related factors and surging energy prices pushing up inflation, the ECB has shifted to a more balanced view of the situation, expecting these pressures to persist for longer. This came as October's initial estimate of euro area inflation surged ahead of expectations to 4.1%Y/Y, its fastest since mid-2008. However, President Lagarde was clear in emphasising that its analysis still leads it to conclude that inflation will slow in 2022. A strong summer reopening rebound in the euro area was confirmed by an upside surprise on Q3's GDP growth outcome of 2.2% following the 2.1% increase in Q2, with the economy now just 0.5% short of returning to its pre-pandemic level. But the momentum is fading as output is running up against supply constraints, while risks around the virus will be present over winter. In the UK, the question is whether the Bank of England will commence its hiking cycle by taking its policy interest rate from 0.1% to 0.25% at next week's meeting. But the focus this week was on Chancellor Sunak's Autumn Budget. An elevation in the growth outlook to 6.5% for 2021 (from 4%) following the rapid rollout of the vaccine has the economy on track to return to pre-Covid levels by the turn of the year, while a reduction in the estimation of longer-term pandemic scarring effects have established a strengthened fiscal position for the government. This adds with increased taxes to fund a commitment to boost spending on public services by £150bn per year out to 2024/25, with the balance of the windfall saved for a later date. Accordingly, there has been a reduction in the profile for public borrowing, with Gilt issuance for 2o21/22 now forecast to be around £58bn lower than anticipated back in April.   

Australian Q3 CPI 0.8%, 3.0%Y/Y

Australian headline inflation matched expectations in the September quarter, moderating from a 13-year high to 3.0%Y/Y. The underlying measures came in above consensus, lifting above 2% for the first time since 2015. While that may prompt an upward revision to the RBA's forecasts it will take more than that to shift its 2024 guidance on rate hikes. 

Consumer Price Index — Q3 | By the numbers 

• Headline CPI came in on consensus at 0.8% in Q3, in line with Q2's outcome, while the seasonally adjusted CPI also printed at 0.8%. Base effects slowed annual CPI from 3.8% to 3.0% (vs 3.1% expected) on the headline rate and from 3.7% to 3.0% on the seasonally adjusted measure. 

• The underlying measures (which are seasonally adjusted) printed to the upside of expectations, clearing 2% for the first time since 2015;

• Trimmed mean was 0.7%q/q (vs 0.5%), lifting the annual rate to 2.1% (vs 1.8%) from 1.6%. 

• Weighted median increased 0.7%q/q (vs 0.5%) as the 12-month pace firmed from 1.6% to 2.1% (vs 1.9%). 

Consumer Price Index — Q3 | The details 

Australian inflation in the September quarter continued to be buffeted by pandemic-related volatility. The effects of earlier government measures to support households through various subsidies and rebates are fading and boosting inflation, but the lockdowns in place through the quarter created new crosscurrents with many items unavailable, making it difficult to establish a clean read on conditions. Markets will be buoyed by the stronger-than-expected outcomes on the underlying measures, which have moved above the RBA's 2% lower target for the first time since 2015, as a sign that inflationary pressures are broadening.  

The main drivers of inflation in Q3 came from new dwelling purchase costs as the dampening effect from the federal government's HomeBuilder grants diminished and from fuel as rising demand amid global shortages sent prices higher. These two items contributed 0.63ppt to the quarterly CPI figure. The effects of the global supply chain bottlenecks on prices for consumer durables are visible, though the impact is significantly lower than seen in many other countries.       

Inflation in the housing group posted a 1.7% rise for the quarter, its fastest rise in 4 years. This was driven by a 3.3% surge in new dwelling prices as demand, boosted by stimulus measures, has run up against materials shortages and supply disruptions. Construction-related grants have held down the measured purchase price of new dwellings over the past two quarters, but with these schemes either closing or winding down fewer government subsidies were distributed, leading to the acceleration. Rents were only modestly higher in Q3 (0.2%), weighed by further declines in Sydney (-0.5%) and Melbourne (-0.3%) amid the locdowns, though declining vacancy rates were pushing up rents across the other capitals. 

The transport group CPI lifted by a strong 3.2% in the quarter as rising global oil prices pushed up the cost of filling up further. Automotive fuel prices rose by another 7.1% in Q3 following the increases of 8.7% and 6.5% in the previous two quarters. Fuel prices are up 24.6% over the year, accounting for almost one-third of the rise in annual inflation.

With consumer demand robust, the signs of the supply-chain bottlenecks and semi-conductor shortages were evident through the rise in prices for consumer durables. This included rises in Q3 for furniture and furnishings (3.4%), new vehicles (1.4%) and computers and AV equipment (1.8%). The one major exception was a substantial fall in clothing and footwear (-3.8%) as the lockdowns in New South Wales and Victoria led to retailers cutting prices to clear winter inventories. This subtracted 0.14ppt from quarterly inflation.     

In other highlights in the report, food & non-alcoholic beverages were held to a 0.3% rise for the quarter by falling fruit & vegetables prices (-3.5%) due to seasonal conditions boosting supply and the lockdowns hitting demand from restaurants.

Consumer Price Index — Q3 | Insights 

The outcomes for underlying inflation at a 2.1% annual rate are likely to prompt an upward revision to the RBA's central forecasts next week. The recent October minutes did flag the potential for this to occur. As they currently stand, the Bank's underlying inflation forecasts do not show trimmed mean inflation rising to the lower 2% target until mid 2023. The question is whether that scenario prompts any shift on its 2024 guidance for rate hikes. Given the RBA's shift in reaction function from forecasts to actual outcomes, I do not see that as likely. The speech from Governor Lowe in September makes it clear that the RBA wants to see inflation around the middle of the 2-3% target band and to have wages growth running at around 3% to give it confidence that it can sustainably deliver this aspect of its mandate; outcomes which are yet to occur. 

Preview: Australian CPI Q3

Australia's inflation report for the September quarter is due for release at 11:30am (AEDT) today. Government policy decisions and shifts in spending patterns associated with the pandemic are having a significant impact on inflation and the lockdowns seen through Q3 add further complexity to the mix. In today's release, annual headline inflation is expected to moderate from a 13-year high as base effects fade while the underlying measures are forecast to remain below the bottom of the RBA's target band. With markets shifting aggressively ahead of the RBA's 2024 guidance on rate hikes, to as early as Q3 next year, will there be enough in today's report for that outlook to hold up? 

As it stands | CPI 

Headline inflation came in at 0.8% in the June quarter, stronger than both the consensus estimate (0.7%) and Q1's outcome (0.6%). The annual rate accelerated to its highest since Q3 2008 at 3.8% from 1.1%, driven largely by the reversal of pandemic-related price falls. 

The underlying measures lifted modestly in Q2 to 0.5% from 0.4% on both the trimmed mean and weighted median measures. Base effects took the trimmed mean up to 1.6%Y/Y from 1.1%Y/Y and to 1.7%Y/Y from 1.3%Y/Y on the weighted median.   

Inflation readings are being impacted by a range of crosscurrents, mostly related to the pandemic. Fuel prices returning to pre-pandemic levels and the unwinding of some government measures (including free childcare and electricity rebates) to support households have made the largest contributions to the rise in annual headline inflation. A notable contribution in the June quarter came from an unseasonal rise in fruit and vegetable prices after supply was impacted by floods and cyclones on the east coast. 

On the other hand, a number of government subsidies, such as the HomeBuilder policy, discounted airfares and voucher schemes were weighing on inflation. Within the housing group (around 24% of the CPI), new dwelling costs (8.5% of the CPI) contracted by 0.1% in the quarter, held down by the HomeBuilder grants and state government initiatives. Without these subsidies, the ABS reports the quarterly rise would have been 1.9%. The federal government's half price airfares package to support domestic tourism led to a 1.3% fall in domestic holiday travel & accommodation, weighing on the recreation & culture group in Q2 (-0.1%). Meanwhile, meals & takeaway foods fell in Q2 (-0.7%), reflecting voucher schemes in New South Wales and in Melbourne that lowered out-of-pocket costs of dining out.  

Market expectations | CPI

The consensus forecast is for headline inflation to have risen by 0.8% in Q3, with the range of estimates sitting between 0.5% to 1.1%. Annual inflation is expected to come back to 3.1% from 3.8%, with the 1.6%q/q rise from Q3 2020 falling out of the calculation. For the underlying measures, the consensus for both the trimmed mean and weighted median is 0.5% on the quarter. The annual pace for the trimmed mean is expected to firm to 1.8% from 1.6% and to 1.8% from 1.7% for the weighted median.  

What to watch | CPI 

The complexities in assessing the inflation dynamics are elevated given the Q3 lockdowns across large parts of the nation, leading to the unavailability of many items in the CPI basket. As far as policy goes the underlying measures are key. The recent RBA October meeting minutes signalled upside risks to its subdued underlying inflation outlook, which the Bank does not see hitting the middle of the 2-3% target band over the forecast period out to 2023. A close watch should also be on the housing group as it presents an upside risk to overall inflation as the dampening effect of the HomeBuilder grants on dwelling prices recedes and as conditions in rental markets improve. 

Macro (Re)view (22/10) | New dawn in the recovery

An initial easing of restrictions in Melbourne signalled an important moment in Australia's recovery as the sun set on the last of the Delta lockdowns in place since June. A high and rising national vaccination rate (now above 70%) gives optimism that reopenings are now sustainable. An expansionary reading in October's preliminary PMI (52.2 from 46) for the first time since June reflects the change in conditions with the disruption from lockdowns fading as firms prepare for a strong summer rebound. The services sector has benefitted most from the easing in restrictions with activity lifting to 4-month highs (52 from 45.5), necessitating firms to increase hiring to meet pent-up demand. Further expansion was recorded in the manufacturing sector (57.3 from 56.8), though the increase in backlogs sitting on firms' order books points to the impacts afflicting global supply chains from input shortages and increased delivery times. Supply issues emanating offshore come at a time when large parts of the domestic economy coming out of lockdown, putting pressure on input prices for both services and manufacturing firms. More detail on this will come to hand in next week's Q3 CPI data. 

Reports in the survey of strong labour demand were consistent with the 4.9% lift in job vacancies tracked by the National Skills Commission for September (see chart below). Driving that increase was New South Wales — vacancies there surging by 16.7% — as firms readied for reopening. This appears to have translated into a steadying of conditions in the labour market, with the ABS's payrolls index rising by 0.2% over the second half of September compared to a 0.6% fall over the first half. Meanwhile, there were more encouraging signs from the high frequency indicators this week on mobility as New South Wales moved clear of the 80% vaccine threshold, triggering a further easing of restrictions, and from bank card data where momentum in discretionary spending continues to build.

Chart of the week 

The minutes from the RBA's October meeting held firm to recent themes, with the Board expecting the recovery to recommence as states start to reopen and for wage and inflation pressures to rise only gradually, though it did acknowledge there was some upside risk. However, there is no sign of any forthcoming shift in policy — in fact, the commitment to existing settings was reaffirmed after the bond for the yield target had followed global yields higher with rate hike expectations being pulled forward. For the first time since February, the RBA made purchases in support of its 0.1% target on the 3-year yield, while it also lifted the cost of borrowing the April 2024 line from it (from 0.25% to 1.0%), making it much more expensive to short the bond and place upward pressure on its yield. 

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Risk sentiment in markets offshore has generally remained well supported over the week despite the ongoing concerns around the outlook for inflation and the implications that might have on growth. In China, the headwinds from the deleveraging of the property sector, increased regulatory compliance and Covid-related impacts on industrial production came together to slow Q3 GDP growth from 7.9%Y/Y to 4.9%Y/Y (vs 5.0% expected). In better news, retail sales rebounded by more than expected to 4.4%Y/Y, with the durability of that momentum key to growth prospects. 

Over in the US, the focus has remained on inflation dynamics during a quiet week on the data front. In speeches from Fed Governors Waller and Quarles, upside risks to the inflation outlook stemming from the persistence of a constrained supply side struggling to match pace with demand were cited. With tapering of the $120bn monthly pace of Fed asset purchases widely expected to be announced at the November meeting, markets are continuing to bring forward expectations for the timing of the lift-off in rates. Pricing now has two Fed rate hikes factored in for 2022, a more aggressive path than conveyed in the recent dot plot of FOMC members' projections where expectations are divided around late 2022 and early 2023 for the first rate hike. Ahead of the November meeting, the latest Fed Beige Book characterised growth as having slowed to a "modest to moderate rate" with supply chain constraints, labour shortages and the impacts of the Delta variant key headwinds. Meanwhile, the key insight on inflation was that there seemed to be more confidence amongst firms that they could pass through higher input costs onto end prices faced by households. 

Expectations for a November rate hike from the Bank of England have firmed further on the comments from the Bank's chief economist Huw Pill in an FT interview after the strong indications from Governor Bailey that with inflation running well above the 2% target the time to respond was nearing. UK inflation moved marginally lower in September to 3.1%Y/Y for the headline rate and to 2.9%Y/Y on the core reading, but rising energy prices and supply shortages will keep the heat on with Pill saying that the pace could lift to around 5% by early 2022. In Europe, the economy remains on track in its recovery, though the momentum is starting to fade as October's preliminary composite PMI reading came in at 54.3, signalling its slowest rate of expansion in 6 months. Supply chain constraints are a major issue in the manufacturing sector — activity there falling to an 8-month low — restricting firms' output and their ability to receive and deliver goods on schedule. A slowing in the services sector from 56.4 to 54.7 was attributed to the fading effects of the summer reopening and renewed Covid concerns.  

Macro (Re)view (15/10) | Recovery optimism builds

Domestic events this week were consistent with an economy stuck between lockdowns and reopenings. With New South Wales starting to roll back restrictions, optimism for a strong rebound over the summer months is building. These dynamics were reflected in the September NAB Business Survey with lockdowns and restrictions driving trading conditions down from +14 to a below-average level of +5, though confidence surged from -6 to +13 on the back of reopening roadmaps announced by state governments in New South Wales and Victoria. But for this confidence to materialise in activity and investment, the key will be for vaccine targets to be met enabling restrictions to be progressively rolled back as outlined. For the time being, forward orders (-1) and capacity utilisation (78.4%) are at weak levels and reflective of the difficulties many businesses have come up against over recent months in terms of the impacts on trading and supply constraints. 

Also clear is that households are carrying a fair degree of optimism for the period ahead. While consumer sentiment tracked by Westpac and the Melbourne Institute has declined by close to 8% since May, including a 1.5% fall in the October release, it has held up in the optimistic range throughout the current lockdown cycle. This suggests that households have largely assessed the Delta setback as a temporary shock and that fiscal support, which has been at similar levels to 2020, have bolstered sentiment. That appears to leave households well placed to drive the recovery once lockdowns are eased. However, that recovery is likely to be less rapid than last year due to much higher virus caseloads, the continuation of more restrictions and varying timelines for state reopenings. 

September's Labour Force Survey confirmed further lockdown impacts with employment falling below pre-pandemic levels on the loss of 138k jobs in the month after August's 146.3k decline (reviewed here). The lockdowns have also driven a significant decline in the participation rate from record high levels above 66% earlier in the year to 64.5% in September. While the unemployment rate has drifted up slightly to 4.6%, the fall in participation has been driving it lower over recent months. In contrast, measures of underemployment (9.2%) and underutilisation (13.9%) have risen materially reflecting the disruptions to activity. However, there was an encouraging development for recovery prospects in this week's release with hours worked posting a 0.9% rise in September. Notably, this was driven by a 2.7% lift in New South Wales ahead of the easing of the lockdown and a 5.4% reopening boost in Queensland. That still left hours worked down by more than 3% nationally for the quarter but September's rise is an indication that the worst of the disruptions have likely passed (see chart below). This matches with other indicators such as job vacancies, mobility indexes and card spending that suggest the recovery is starting to move in the right direction. 

Chart of the week

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Markets offshore continue to work through the implications of an outlook characterised by downside risks to growth and upside risks to inflation. This was the theme of the IMF's October World Economic Outlook in which the group downgraded forecast global growth in 2021 to 5.9% from 6.0%, citing supply shortages holding back output in advanced economies and a worsening pandemic situation in emergening markets due to inadequate vaccine distribution. At the same time, inflation in advanced economies for 2021 was upgraded to 2.8% from 2.4% but the IMF identified that further increases could materialise if demand continues to outstrip the capacity of supply chains to respond. Price action in the market has pulled forward the path for policy normalisation on the expectation that rising inflation will turn out to be longer lasting than thought consistent with the transitory assessment of many central banks, with yields steepening at the front end and heading lower at the long end of the curve. 

In the US, CPI inflation in September came in a touch above consensus at 5.4%Y/Y (from 5.3%) while the core rate held steady but was also elevated at 4%Y/Y. Given that the main contributors to inflation in the month came from higher food (0.9%) and energy prices (1.3%), the FOMC is unlikely to be too perturbed. It will also note that durables — a significant driver of the surge in inflation associated with demand and supply imbalances brought on by the pandemic — has come off sharply since April-June when it recorded three consecutive increases of 3% or more. However, an uplift in housing costs (around one-third of the CPI) from 2.1% to 2.4%Y/Y for primary rents and owners' equivalent rent rising to 2.9%Y/Y from 2.6% is something to watch closely regarding the persistence of inflation. 

For the time being, the core view of the Federal Reserve, as reiterated in the minutes from the September meeting, is that pandemic-related factors are temporarily pushing up prices. However, there was some caution expressed around rising prices feeding through to higher inflation expectations. At the meeting, the FOMC discussed a "mid-November or mid-December" start date for tapering its $120bn per month of asset purchases. The baseline scenario appears to be a $15bn per month taper ($10bn for Treasuries and $5bn for MBS) running through to mid next year, though "several participants" had pushed for a more rapid reduction in the monthly run rate. On the projections tabled at the meeting, the Committee was evenly split on the timing for the first rate hike, between late 2022 and early 2023. The other highlight from the US this week was an upside result on September retail sales rising 0.7%m/m, defying expectations for a 0.2% fall. The gains were broadly based across the categories and control group sales also outperformed with a 0.8%m/m lift, overall indicating that household spending is rebounding after a loss of momentum associated with the Delta variant. 

Rounding out the week, across the Atlantic the divergence in signalling from the Bank of England and European Central Bank continues to evolve. In a newspaper interview, Governor Andrew Bailey at the BoE expressed concern with inflation running above its target, with the situation expected to be exacerbated given the prevalence of upside risks to its forecasts. However, over at the ECB a much more dovish tone remains in place. A speech by the ECB's chief economist Philip Lane emphasised the importance of underlying inflation with respect to its forward guidance, ensuring that monetary policy will not react to short-term price shocks. 

Australian employment -138k in September; Hours worked 0.9%

Australian employment was down a further 138k in September, falling to its lowest level since the turn of the year as lockdowns continued to impact the labour market. In an encouraging development, hours worked lifted in the month ahead of the reopening in New South Wales, indicating the recovery should recommence from October. With labour demand as indicated by job vacancies holding up at high levels through the lockdowns, there is reasonable optimism for a strong recovery over the summer.

Labour Force Survey — September | By the numbers

• Employment (on net) fell by 138k in September, more than the market consensus of -110k. The ABS kept August's decline of 146.3k unchanged in today's release. 

• Australian unemployment posted its first rise in 11 months, ticking up from 4.5% to 4.6% but coming in lower than the 4.8% expected.

• Labour force participation declined from 66.2% to 64.5% — contracting by 1.7ppts over the quarter to be at its lowest since June last year.

• Hours worked posted a 0.9% lift for the month supported by rebounds in New South Wales and Queensland but fell by 3.1% nationally for Q3. 

Labour Force Survey — September | The details

With Delta lockdowns continuing in New South Wales and Victoria and restrictions tightening in the ACT, the Australian labour market deteriorated further in September as employment fell by another 138k. After the 146.3k decline in August, national employment has fallen to its lowest level since the start of the year, retracing below pre-pandemic levels.

Whereas in August both full-time (-68k) and part-time employment (-78.2k) declined, this month saw a much more uneven composition. There was a rapid acceleration of job losses in the part time segment to -164.7k but full-time employment lifted by 26.7k. Part-time employment was hit very hard in Victoria (-101.7k) as the lockdown tightened while New South Wales saw further weakness (-26.4k). Employment in the full-time segment was boosted by a reopening in Queensland (56.3k) and a modest rebound in New South Wales as firms positioned for restrictions easing (18.3k).  

Ahead of the Delta lockdowns, the participation rate was sitting just off record highs but the stay-at-home mandates and the design of income support payments have driven a significant decline, down another 0.65ppt in September to 64.5%, its lowest since June 2020. Participation in New South Wales has fallen below the depths of last year, now at a 17-year low at 61.8%, while participation in Victoria (65%) is at its weakest in nearly a year. Meanwhile, with similar restrictions imposed in the ACT, its participation rate at 68.2% has plunged to its weakest since 1983.   

In an upside surprise, hours worked lifted by 0.9%m/m in September after falls of 0.2% and -3.7% in the past two months. That left hours worked down by 3.1% for the quarter, giving a reasonable guide to the decline in GDP over the period. In August, total hours had fallen to 2.9% below pre-pandemic levels but September's rise has reduced that to -2%. 

With hours in New South Wales (2.7%m/m) moving off the lows ahead of the reopening now underway, the worst of the Delta impact on the Australia labour market should be behind us. That said, Victoria is likely to see further weakness come through next month. Across the other states, a sizeable boost came from Queensland (5.4%) as the south-east region rebounded from a lockdown in the month prior, with other rises coming through in South Australia (0.2%), Western Australia (0.7%), Tasmania (0.5%) and the NT (3%). These gains were pared by a 10.5% fall in the ACT as the lockdown crunched hours worked to a 6-year low. 

As with the first wave of the pandemic, the Delta lockdowns (in many cases more restrictive than in 2020) have had a larger impact on hours worked than employment, highlighting the importance of the role income supports have played over the period. However, the impact to both has been less severe than seen at the outset of the pandemic given that some states have remained open this time around, while firms and workers in states under lockdown have become more accustomed to new ways of operating despite the restrictions. Difficulties in finding labour have probably also made firms more reluctant to reduce staff levels over recent months.    

There was a small uptick in the national unemployment rate, from 4.5% to 4.6%, making this its first increase since October 2020. Despite the significant weakness in employment over the past three months (-281.2k), the unemployment rate has been mechanically held down by a 334.4k contraction in the labour force over the period. Measures factoring in the impact of the loss of hours worked have risen materially since the Delta lockdowns, giving a more accurate reflection of conditions. 

Labour Force Survey — September | Insights

Today's report should confirm that the low point of the Delta setback for the Australian labour market is in. The lift in hours worked was supported by a rise in New South Wales and with that state now reopening, activity will start to rebound. However, the recovery will be weighed by Victoria until restrictions ease there, expected to be later this month or early November. Further optimism for the rebound in the labour market comes from the RBA's liaison program and high-frequncy indicators tracking job openings that have shown many firms are looking to hire ahead of a wider easing of restrictions over the summer. 

Preview: Labour Force Survey — September

With lockdowns continuing to disrupt activity across Australia's two largest states, the ABS's monthly Labour Force Survey for September, due today at 11:30am AEDT, is expected to extend the weakness in employment, hours worked and participation reported in August.  

As it stands | Labour Force Survey

Lockdowns and restrictions in place across much of the nation to curb the spread of the Delta variant led to a 146.3k fall in employment in August (vs -80k expected), its sharpest deterioration since the 2020 national lockdown (reviewed here). This lowered total employment to 13.02 million, leaving it just above pre-pandemic levels. Going into the month, employment had slowed to a 3.1k rise from 28k in June as restrictions in Sydney started to tighten.

As with earlier lockdowns, part-time employment was hardest hit falling by 78.2k in the month. Employment in the segment is now at an 11-month low and is below its pre-pandemic level. The loss in full-time employment extended from -5k in July to -68k in August, but its level was still 1% higher than prior to COVID. 

The effects of stay-at-home mandates and income support payments drove a further 0.8ppt fall in participation to 65.2% — its lowest since September 2020 and 1.1ppts off March's record high. Despite the fall in employment, a larger decline in the labour force (-168.1k) pushed the measured unemployment rate lower, from 4.6% to 4.5%. A more accurate reflection of conditions was reported through the escalation in both underemployment (9.3% from 8.3%) and underutilisation (13.8% from 13%).

Hours worked were down heavily in August (-3.7%), to be 2.9% below pre-pandemic levels. Significant declines were posted by states in lockdown; New South Wales -6.5%, Victoria -3.4%, and Queensland -5.3%. 

Market expectations | Labour Force Survey

With lockdowns persisting in New South Wales and Victoria and similar restrictions extending into the ACT, the labour market continued to deteriorate in September. The ABS's high-frequency series had payroll jobs falling by 2.1% over the reference period of today's report. The market consensus is for employment to fall by 110k around a band of estimates from -25k to -225k.

The national unemployment rate is forecast to rise from 4.5% to 4.8%, though the wide range of estimates (from 4.5% to 5.4%) reflects the limited visibility over the situation. In any case, given the large falls in participation and hours worked, the unemployment rate is not the best indicator of current conditions. 

What to watch | Labour Force Survey

The change in hours worked will continue to provide the most accurate reflection of lockdown impacts and will help to firm up estimates of the contraction in Q3 GDP. Measures of underutilisation will remain on the rise with restrictions holding many people back from going to work. Together with the large fall expected in employment, the participation rate is likely to decline sharply again in September.