Central bank divergence was a key theme in markets over the past week. US data was consistent with expectations for 50bps rate hikes from the Fed, while in Europe officials at the ECB remained cautious as inflation lifted to record highs and in Japan the BoJ pledged to ramp up bond-buying in defence of its yield curve control policy. Domestically, the focus was on the federal budget while the RBA will have its say at next week's meeting.
Fiscal support was maintained in the Australian Federal Budget...
A stronger-than-expected rebound in the Australian economy from the Delta wave lockdowns and surging commodity prices created headroom for the government to deliver more fiscal stimulus in its 2022/23 Budget. Higher forecast government revenues have been used to fund $26.1bn of new stimulus through to 2022/23, centred on cost of living support including reduced fuel duty, one-off payments and tax relief with the inflation outlook lifting well above the pace of wages growth in the near term.
However, despite these headwinds and unlike many other countries facing downside risks to growth, the GDP growth outlook in Australia was revised up, with the pace seen running well above trend in the current financial year (4.25%) and next (3.5%) on the back of robust household consumption. That is underpinned by a labour market expected to keep tightening with the unemployment rate falling into the 3s in 2022/23.
By keeping fiscal support going, the budget measures will help in sustaining the current momentum in the economy. With the recovery from the pandemic secured and with a robust outlook in place, the government plans to gradually withdraw fiscal support, reflected in an $84.2bn improvement in the cumulative deficit to 2025/26. Full analysis of the Budget is available here
...as economic conditions remain strong
Data released this week was robust overall, indicating the Australian economy had quickly brushed aside the effects of Omicron. National job vacancies lifted by 6.9% for the 3 months to February, resetting to a new record high at 423.5k, equivalent to 3% of the labour force and up 86% on a pre-Covid level comparison. Labour demand is broad based across the economy and advanced further over the latest period in business services (6.9%), household services (3.7%) and in the goods-related sector (5.2%). With participation already at record highs, the labour market is tight and an unemployment rate sitting at 4% is set to keep falling. The feed-through to wages and inflation is the key issue in focus at next week's RBA meeting.
Building approvals rebounded at multiples of the expected rise posting a 43.5% increase in February after a disrupted start to 2022 (reviewed here). Higher-density approvals in Sydney and Melbourne have shown a lift in momentum of late. Housing finance commitments declined unexpectedly in February (-3.7%), likely reflecting the slowdown from Omicron and the summer holiday period (reviewed here). However, CoreLogic reported conditions in the housing market are starting to diverge, with prices declining in Sydney and Melbourne but rising in the other capitals in March. A broader slowdown in the housing market shapes as likely through 2022 as affordability concerns, increased supply and expected interest rate increases take hold.
A tightening US labour market pushes wages higher...
A solid March nonfarm payrolls report reflected further tightening in the US labour market, leading to upward pressure on wages. Employment increased by 431k on the month and while that missed expectations for a 490k rise, there was an upward revision of 95k made to payrolls over January and February. Rising employment more than offset an uptick in the participation rate to 62.4%, driving a fall in the unemployment rate from 3.8% to 3.6% and pushing the broader underemployment rate down from 7.2% to 6.9%, with both measures at their lowest since the onset of the pandemic. Further declines can be expected with there being almost 11.3 million job openings still to be filled. With demand for labour strong, growth in average hourly earnings lifted from 5.1% to 5.6%Y/Y.
...as inflation keep climbing
Key US inflation measures saw further increases in February. The headline PCE inflation rate was up at 6.4%Y/Y (from 6%) and the Fed's preferred underlying measure firmed to 5.4%Y/Y (from 5.2%) on the back of a 0.4% rise in February. Trimmed mean PCE inflation (an alternative measure that removes the most volatile price movements) was at 30-year highs ticking up from 3.5% to 3.6%Y/Y. February marked 12 months since the start of the acceleration in price pressures, meaning that the hurdle for inflation to keep rising now becomes higher. One of the major drivers of inflation over the past year has been durable goods (11.4%Y/Y), though it came in flat in February for its weakest month-month reading since November 2020 and this component will be a key one to watch.
Euro area inflation hit record highs in March
The spillover effects from the Ukraine war were in full flow with the flash estimates of euro area inflation breaking out to new record highs in March. Headline inflation surged from 5.9% to 7.5%yr (vs 6.7% expected) as both energy (44.7%yr) and food prices (5%yr) accelerated in response to disrupted supply chains.
There is likely to be more upward pressure coming through the pipeline to consumer prices with the war continuing to unfold, while the lockdowns in China will disrupt trade further. Communications from ECB officials this week, including from President Christine Lagarde and Chief Economist Philip Lane, reflected a cautious approach to policy amid a highly uncertain outlook. Optionality and flexibility were reiterated as key given the upside risks to inflation and downside risks to growth. But markets have largely looked past these messages and are priced for rates to start rising later in the year.