A volatile September quarter drew to a close during the week, a period that saw a resurgent virus, growth concerns, rising inflation and tentative signalling of the start of policy normalisation by central banks all in the mix. These themes were the main topics of discussion at the keynote panel event at this week's ECB forum in which the heads of the ECB, Fed, BoE and BoJ noted that supply constraints associated with reopenings of economies were holding back recoveries and adding to inflation pressures. While these factors are broadly expected to ease over time, they were seen as likely to persist for longer than initially anticipated. The rise of the Delta variant has led to significant disruptions within supply chains at a time when global demand for goods has surged, with prices rising sharply as a result of these imbalances. Product shortages were weighing on output, with activity data through PMIs across the globe reporting that many firms are working through elevated backlogs sitting on their order books. But while there is a broad consensus on the analysis of the issues at hand, global central banks are setting up to take varying moves on policy and that is likely to be a theme that will play out over Q4 and into next year.
In the US this week, Fed Chair Jerome Powell during testimony told lawmakers that reopening effects and supply chain constraints had been more pronounced and persistent than expected, but inflation was anticipated to moderate back towards the 2% target as these factors abate. While conditions are nearing closer to warranting a tapering in the $120bn run rate of monthly asset purchases, likely in November, it was the shifting expectations coming out of last week's Fed meeting around the path of rate hikes to start in late 2022 or early 2023 that has driven a steepening in US and global yield curves. High inflation has been another driver here, with the Fed's preferred core PCE measure holding at a 3.6% annual pace in August (chart below). Meanwhile, signs of the Delta impact may have been in play despite a solid rebound in personal spending of 0.8%m/m in August after falling 0.1% in July. Growth in services spending eased back to 0.6% from 1.1% in each of the previous three months, which came alongside a rebound in goods spending of 1.2%m/m from July's -2.1% outcome. Next week in the US, the highlight will undoubtedly be September's non-farm payrolls report where early expectations are sitting at around a 500k gain.
As for Europe, a speech titled 'Monetary Policy during an atypical recovery' by ECB President Christine Lagarde was used to reiterate that its forward guidance had been recalibrated to allow its reaction function to focus on inflation dynamics one and two years ahead rather than on volatility in the near term. As President Lagarde outlined, the reopening and pandemic-related falls were contributing to the high rate of inflation, which according to the September flash estimates had accelerated to 13-year highs for both the headline (3.4%Y/Y) and core measures (1.9%Y/Y) (chart below). The ECB expects inflation will moderate towards its 2% target in the months ahead, with price pressures not assessed to be broadly based across the economy, and with it seeing little sign of a feed-through to higher wages. In the UK, while also assessing its recent rise in inflation to 9-year highs as transitory, Governor Andrew Bailey at the Bank of England in a speech this week noted that it was alert to the risk of higher prices becoming entrenched in rising inflation expectations. The adjustment to policy in such a situation would come from higher rates, and Governor Bailey said that it was possible that move could occur before its asset purchases had been completed by around the end of the year.
Turning to Australia, the housing market was a key focus this week with conditions remaining robust around lockdown disruptions. Housing prices according to CoreLogic posted a further gain in September, up 1.5% on the national median to be 20% higher over the year in response to strong demand from an expansive package of stimulus measures amid low levels of supply on the market. In that context, housing credit growth continues to expand rising at its fastest pace since 2018 at 6.2%Y/Y through August. The risks posed to the economy from a period in which housing credit is "materially outpacing" household income growth was highlighted in the quarterly statement from the Council of Financial Regulators this week, with macroprudential measures approaching their radar screen. For now, lockdowns in New South Wales and Victoria have weighed on demand as housing finance commitments posted their sharpest fall in 15 months with a 4.3% contraction in August (reviewed here). However, commitments to both owner-occupiers and investors remain at very elevated levels. On the supply side, dwelling approvals surprised with a 6.8% lift in August against expectations for a 5% fall (reviewed here). The HomeBuilder scheme brought forward a significant volume of approvals from mid 2020 but that has subsequently retraced by 20% since its March expiry date. Other data points this week were heavily impacted by lockdown restrictions with retail sales down for a third month running with a 1.7% fall in August, while national job vacancies contracted by 9.8% for the 3-month period to August. But with vacancies still very elevated to pre-covid levels, indications are that strength in underlying labour demand is holding up through the ongoing disruptions.
