In Australia, the RBA at this week's meeting validated an improving economic outlook and the global repricing at the front end of curves by withdrawing its 3-year government bond yield target and removing its 2024 guidance for rates to start rising. The RBA's updated forecasts in the November Statement on Monetary Policy factor in a larger hit to the economy from the recent lockdowns than previously anticipated, but it sees a strong rebound occurring over Q4 and Q1 following the rollout of the vaccine and easing of restrictions. This has driven the growth outlook for 2022 up from 4¼% to 5½%, moderating to growth around trend in 2023 at 2½%. Key to this week's moves from the Board was the upward revision to underlying inflation across the forecast period, reaching the midpoint of the target by the end of 2023. However, keeping it there will require a tighter labour market to generate a faster pace of wages growth, with Governor Philip Lowe saying in the post-meeting press conference that the Board could be patient with rates given this configuration of outcomes. For a detailed review of this week's RBA meeting see here.
To the activity data where retail sales volumes posted their steepest contraction on record with a 4.4% fall in Q3 (reviewed here). Combined, volumes across New South Wales and Victoria were down by 8.5% in the quarter, a significantly larger hit than seen at the outset of the pandemic (-5.4%) reflecting the tighter restrictions on in-store retail this time around. However, with national nominal sales returning to growth in September (1.3%) and the lockdowns now ended, a strong rebound is in prospect in the run-up to Christmas. The ongoing unwind of the HomeBuilder grants led to another fall in dwellings approvals, down 4.3%m/m in September (reviewed here), while housing finance commitments declined by 1.4% for the month heavily impacted by the lockdown in Victoria (reviewed here). Remaining with housing, CoreLogic reported a 1.5% rise in house prices nationally in October, to be 21.6% higher than a year ago. While prices remain on the rise, the pace of the gains is on a slowing trajectory. Meanwhile, Australia's trade surplus narrowed for the first time in 6 months but remained at an elevated level of $12.2bn in September driven by strength in prices for major commodity exports (reviewed here).
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The long-awaited decision from the Federal Reserve on tapering its QE purchases was announced at this week's meeting. Assessing that the US economy had made "substantial further progress" towards meeting its employment and inflation objectives, the Committee decided the time was right to start dialing back QE. Consistent with the plans discussed in the September minutes, the Committee announced a $15bn taper that will slow the monthly pace to $105bn initially. Purchases will then reduce to $90bn in December and are planned to keep slowing by $15bn per month thereafter so that QE is wound up by the middle of next year. However, the Committee noted that this schedule could be adjusted if "changes in the economic outlook" warranted it. The decision statement also made a tweak to the Committee's messaging on inflation. It now notes that elevated inflation was reflecting factors "expected to be transitory", a softer stance than its earlier assertion of "transitory".
Speaking in the post-meeting press conference, Chair Jerome Powell said that the central view of the Committee was that inflation would continue to be elevated well into 2022 but would eventually be reined in as the effects of the pandemic fade and the supply side of the economy recovers. Given that assessment, Chair Powell said that the Committee could be patient as it waited for inflation to slow, not wanting to raise rates and risk curtailing the pace of recovery in the labour market. On the labour market, encouraging news was at hand with nonfarm payrolls coming in above consensus at 531k in October vs 450k expected, indicating the economy is coming out of Q3's Delta-driven slowdown with momentum. Upward revisions saw a net 235k added back to payrolls for the prior two months. The strong employment outcome led to declines in both unemployment (4.6% from 4.8%) and underemployment (8.3% from 8.5%). However, the issue remains a constrained supply of labour, with the participation rate unchanged at 61.6% and still well down on pre-pandemic levels above 63%. This is adding to wages pressure, with annual growth in average hourly earnings pushing up from 4.6% to 4.9%.
At the Bank of England's meeting, market expectations for a rate hike were dashed as the Bank Rate was left unchanged at 0.1% in a 7-2 analysis by the Monetary Policy Committee. The minutes that accompanied the statement noted that "there was value in waiting for additional information on near-term developments in the labour market" before deciding to hike rates. With transitional effects from the recent end of the UK's pandemic furlough scheme playing out, the MPC will now have the benefit of more data to establish a better read on conditions ahead of its next rate decision in mid-December. The guidance from the MPC is that "some modest tightening of monetary policy over the forecast period was likely to be necessary" to meet the inflation target, with this process to start "over coming months". That markets have overdone this appears to be the MPC's central message. Governor Andrew Bailey noted in the post-meeting press conference that under the conditioning assumption of rates moving in line with the market curve, inflation would be coming in below target and an output gap would be emerging in the UK economy by the end of 2024, according to the forecasts published by the Bank this week in its November Monetary Policy Report. In the near term, the outlook for the UK economy is a challenging one, with forecast growth in Q4 2021 downgraded by 1ppt to 1% due to supply chain constraints and surging energy prices. These factors will keep the pressure on inflation, which is expected to rise to a 5% pace by April next year. Over in Europe, there was pushback on market pricing from the ECB, with President Christine Lagarde using a speech to say its forward guidance for raising rates was "very unlikely to be satisfied next year".
