Macro (Re)view (29/3) | Rates reappraisal no headwind to risk

The first quarter of the year has drawn to a close, providing a chance to reflect on some key themes that have played out in markets. Notably, there was a significant reduction in the amount of policy easing from the Federal Reserve priced for this year, driving higher bond yields and a stronger US dollar. Despite this, equity markets still rallied broadly to record highs; US markets gained 9-10% and Europe was up 12%, but the standout was Japan surging in the order of 20% as the Yen slid to its lowest level against the USD in three decades.  

Key inflation data in the US was largely in line with expectations. Following an upwardly revised 0.5% rise in January (from 0.4%), the core PCE deflator lifted 0.3% in February. Although the annual pace ticked down from 2.9% to 2.8%, the outturns from the opening months of the new year have seen the 3-month (3.5%) and 6-month (2.9%) annualised rates accelerate from a sub-2% pace at the end of 2023. This confirms there has been a lift in inflationary pressures in early 2024. Following the report, Fed Chair Jerome Powell said returning to 2% inflation will be a "sometimes bumpy path", with the Committee needing more confidence in the outlook before it could cut rates. Earlier in the week, Fed Governor Waller outlined that the recent data argued for a reduced extent of policy easing or a later start to the easing cycle. 

Australian CPI inflation printed at 3.4%yr in February, coming in below the 3.5% consensus estimate and leaving the pace unchanged since December. Downside misses on headline inflation in the past two reports suggest that inflationary risks are continuing to ease and that Australia has seemingly avoided the sort of pick-up in inflation seen in US in the early part of the year. However, there were elements in the report that were less encouraging, including trimmed mean inflation ticking up from 3.8% to 3.9% and services prices elevating from 3.7% to 4.2%. Overall, the report broadly validates the RBA's inflation outlook but also its caution. My review of the CPI report has more analysis here. Also of note domestically this week, February retail sales moderated to a 0.3% month-on-month rise, slightly weaker than the 0.4% lift expected; however, discretionary categories outperformed (0.6%), with the ABS linking this to spending associated with the Taylor Swift Eras Tour (see here). Meanwhile, despite a 6.1% retracement in the 3-months to February, job vacancies remain elevated at just over 360k, the data consistent with an easing but still-robust labour market.   

There were few catalysts out of either Europe or the UK to shift markets this week. Markets continue to anticipate both the ECB and the BoE to begin cutting rates from June. The risks look to be for a later move from the BoE, with the ECB having guided towards June for some time now. In the UK, final revisions confirmed a 0.3% contraction in Q4 GDP (-0.2% year-ended). Household consumption declined by 1% over the back half of 2023 as cost-of-living pressures and higher interest rates weighed on demand. Meanwhile, the UK's current account deficit deteriorated from 3% to 3.9% of GDP in Q4. This was driven by a widening in the underlying trade deficit (1.3% to 1.8% of GDP), with exports declining and imports increasing. 

Australian retail sales rise 0.3% in February

Australian retail sales were up 0.3% in February, slightly below the 0.4% rise expected. Spending in discretionary categories (0.6%) underpinned the lift in retail sales, with the ABS attributing this strength to the Taylor Swift Eras Tour. Retail sales have been highly volatile over recent months due to seasonal effects, but the underlying momentum is soft with February sales ($35.9bn) only marginally higher (0.8%) than their level last October. 

February sales moderated to a 0.3% rise following a sequence of volatile outcomes around the turn of the year. This stretches back to November when Black Friday discounting drove an acceleration in turnover (1.5%) in the lead-up to Christmas; this was followed by a pullback in December (-2.1%) and then a rebound in January (1.1%). 

Overall, this leaves the level of retail spending only a little above where it was in October, prior to the period of seasonal volatility. Discretionary spending (total sales ex-food) lifted by 0.6% in February, outperforming the increase in headline sales; however, both are running at around the same pace in annual terms: headline 1.6% and discretionary 1.5%, which is weak relative to the pace in growth in the population at 2.5% according to the ABS's latest estimate.      

Clothing and footwear spending surged by 4.2% in the month - its strongest rise since January 2023 - driving the rise in discretionary spending. The ABS credited this result to fashion, accessories and merchandise sales associated with the Taylor Swift concerts in Sydney and Melbourne. Flow-on effects were also evident at department stores (2.3%) and cafes and restaurants (0.5%m/m). These gains were attenuated by softness in food (-0.1%), while household goods (-0.8%) and 'other' retailing (-0.4%) also eased. 

Notably, the increase in turnover at the national level was driven almost exclusively by New South Wales (0.6%) and Victoria (0.7%), with the Eras Tour generating additional spending in the host cities of Sydney and Melbourne. Spending across the other states (ex-territories) declined by 0.2% in the month, weighed by Queensland (-0.5%) and Tasmania (-0.4%). 

Australian CPI 3.4% in February

Australia's 12-month inflation rate remained at 3.4% in February, unchanged since December and defying expectations for a rise to 3.6%. Progress over recent months has been encouraging and suggests inflation remains on track to come back to the RBA's target band, but services prices remain a sticking point in terms of holding the Board back from cutting rates. 

February's report was a little mixed. Encouraging progress continued regarding headline inflation, though the underlying measures showed signs of stickiness. Headline CPI was unchanged at 3.4%, halving from its pace this time last year (6.8%) and down even more significantly from its peak at the end of 2022 (8.4%). Further declines look likely with inflation in 3-month annualised terms now 2% and 2.2% in 6-month annualised terms, indicating the recent momentum is consistent with inflation below the midpoint of the RBA's 2-3% target band. 

However, the RBA has repeatedly communicated caution around the inflation outlook, reaffirming this at last week's meeting. Both of the key measures of underlying inflation are showing slower progress than the headline CPI; CPI ex-volatile items and holiday travel eased from 4% to 3.9% (in seasonally adjusted terms), the trimmed mean measure also printed at 3.9%, firming from 3.8% in January. 

Higher underlying CPI is underpinned by elevated services inflation, which was reported to have lifted from 3.7% to 4.2%. The increase can be explained by the data for February incorporating a much broader range of services price updates than in the January series. Looking past the month-to-month movements, the chart below shows 12-month services inflation has fallen materially over the past year, though it still remains high. 

A notable contributor to higher services inflation in February was insurance, which is up by 16.5% over the past year, with rising claims, natural disasters and reinsurance costs all playing a role. Housing-related inflation remained at 4.6%yr, though rents firmed from 7.4% to 7.6% reflecting very low capital city vacancy rates. 

In the other direction, declining holiday travel and accommodation prices (-1.3%yr) are a weight on services inflation. The ABS reported that although the Taylor Swift Eras Tour boosted hotel prices in Sydney and Melbourne, this was more than offset by seasonal falls for airfares and accommodation in other parts of the country post the school summer holiday period. 

Other key components in food and fuel prices saw contrasting movements. Food inflation softened from 4.4% to 3.6%, its slowest since January 2022; however, fuel inflation lifted from 3.1% to 4.1%. 

Macro (Re)view (22/3) | Fed easing supports soft landing outlook

What shaped as a pivotal week for G10 central banks delivered a broadly dovish surprise that is now set to drive the market narrative for the foreseeable future. Bond yields are lower after the Federal Reserve reaffirmed that it is moving towards an easing cycle; the SNB announced a surprise 25bps rate cut; while the BoE and RBA meetings were seen as communicating a more dovish message. Although the BoJ hiked rates by 10bps and abandoned its unconventional measures of Yield Curve Control and ETF and REIT purchases, Governor Kuroda indicated that accommodative monetary policy would be maintained. With the assessed probability of a soft landing for the US economy increasing, the dollar strengthened and equities rallied to new record highs.

Domestically, the focus was on the shift from the RBA at this week's meeting to a neutral stance on the policy outlook. The Board held rates at 4.35% but the decision statement made an impact by removing the line that "a further increase in interest rates cannot be ruled out" and replaced it with a more balanced position of "the Board is not ruling anything in or out". The shift acknowledges the progress made on inflation but still conveys caution with the Board continuing to assert there remains an imbalance between aggregate demand and supply. My review covers the meeting in further detail here. Also this week, a 116.5k surge in employment in February printed nearly 3 times higher than the expected rise (40k), driving the unemployment rate down from 4.1% to 3.7%. The report confirmed the labour market remains resilient, with the weakness in employment around the turn of the year reflecting seasonal shifts in hiring post the pandemic. For more analysis, please see my review here. 

The Federal Reserve remains on track to cut rates later in the year, undeterred by expectations for stronger US economic growth and higher inflation in the near term. The policy-setting FOMC left rates on hold at 5.25-5.5%, with Chair Powell reaffirming at the press conference that rates had likely peaked and that if the economy evolved as expected, it would "likely be appropriate to begin dialing back policy restraint at some point this year". Although the recent data has shown an uptick in inflation, this was judged to be due to seasonal factors and was therefore not expected to derail progress back to the 2% inflation target. 

Importantly, it has also not dented the FOMC's outlook on rate cuts, with the Committee retaining the projection for 3 rate cuts in 2024 in the updated Summary of Economic Projections. This is despite the incoming data prompting the FOMC to raise its forecast for the key core PCE deflator to end the year at 2.6% from 2.4% previously. Meanwhile, stronger-than-expected data saw the FOMC lifting its forecast for GDP growth for this year from 1.4% to 2.1%, resulting in a slightly lower unemployment rate of 4% from 4.1% previously. Another key development coming out of the meeting was that Chair Powell communicated that the FOMC would be looking to slow the pace of balance sheet reduction (currently targeted at $95bn/mth) "fairly soon". Chair Powell said the intention was to transition from "abundant" to "ample" reserves and that by taking a more gradual approach, it could guard against undue liquidity strains emerging.  

A dovish tinge to the Bank of England's decision to leave Bank Rate unchanged at 5.25% has shifted market pricing for the start of the easing cycle into June from August. The MPC voted 8-1 to hold, with the split notable due to members Haskel and Mann siding with the majority after scrapping their calls to hike rates further. As was the case at the February meeting, member Dhingra was again the sole voter supporting a rate cut. Summarising the tone of the MPC, Governor Bailey said there had been "further encouraging signs" inflation was coming back to target - in February, headline CPI slowed from 4% to 3.4%yr and the core rate eased from 5.1% to 4.5%yr - but it was still too early to be cutting rates. Although the guidance that monetary policy would need to be "restrictive for an extended period" was retained, the minutes noted that rate cuts would still leave policy at a restrictive setting given the current level of Bank Rate. Over in Europe, ECB President Lagarde's opening remarks at the ECB and its Watchers Conference continued to guide towards a June start date for the first cut of the cycle.

Australian employment 116.5k in February; unemployment rate 3.7%

The Australian labour market has regained momentum, with a post-summer holiday surge in employment driving the unemployment rate back below 4%. Employment more than rebounded from a decline around the turn of the year, which was less severe than initially reported. Today's report provides optimism that the labour market remains resilient to the slowdown in the economy. 

By the numbers | February 

• Employment increased by a net 116.5k on a seasonally adjusted basis in February, well above the 40k rise expected. Backward revisions revised the fall in employment over December-Janaury to -46.5k from -62.2k.  
• The headline unemployment rate fell by more than expected declining from 4.1% in January to 3.7% in February (vs 4% forecast). With underemployment falling from 6.7% to 6.6%, the total underutilisation rate decreased from 10.8% to 10.3%, a low since October. 

• Labour force participation ticked up from 66.6% (revised from 66.8%) to 66.7%, sitting slightly below the record high seen in November (67%).  

• Hours worked rebounded by 2.8% in February following a 2% fall in January. Annual growth was unchanged at 0.8%. 

The details | February  

February's report confirms that the labour market slowdown either side of the new year was seasonally related, with activity subsequently rebounding after the summer holidays had wound down. The employment figure posted for February was a net increase of 116.5k (seasonally adjusted) - the largest one-month rise since November 2021 - delivering a far greater rebound than was expected after employment declined over December-January (-46.5k). 

February's surge in employment can be explained by shifting hiring patterns in the post-covid labour market. The ABS has picked up that many more people now commence new jobs and move into employment after the summer holiday period than was the case prior to the pandemic. According to today's report, 4.7% of employed people in February were not employed in January. At the same time, the proportion of workers who moved out of employment in February was 3.1%, little changed compared to recent years. This resulted in a net inflow into employment of 1.6ppts, an extremely large increase in historical terms and this drove the headline employment outcome. Over time, the ABS will be able to recalibrate its seasonal adjustment processes to account for this shift, but for the moment the data are very volatile, with employment weakening around the turn of the year and then surging after the summer holiday period.   

Smoothing the volatility, the 3-month average increase in employment to February was 23.3k. This indicates employment is running at an annualised pace of around 2%, returning to the sort of momentum that was seen at the end of Q3 last year. Indicators such as job vacancies - while down from their peaks - remain at elevated levels and suggest that the pace of employment growth can pick up.

This will be key to keeping upward pressure on the unemployment rate in check as growth in the labour force is still running at a strong pace on the back of post-covid population growth. 

In February, the strength of the employment outcome drove a large fall in the unemployment rate from 4.1% to 3.7%. Whether or not sub-4% unemployment can be maintained remains to be seen; the participation rate saw only a modest lift in the month from 66.6% to 66.7% and will likely rise further towards the record highs seen in late 2023 as the year progresses. Declines in both underemployment (6.7% to 6.6%) and underutilisation (10.8% to 10.3%) reversed earlier increases and are consistent with the labour market regaining momentum. 

Rounding out the report, the lift in employment helped to generate a rebound in hours worked of 2.8% in the month. This more than reverses January's 2% decline, which was seasonally related with many people away from work on annual leave. 

In summary | February 

On the whole, this was an encouraging report in that it confirms the weakness in the labour market over the summer was seasonally related rather than reflecting underlying economic conditions. It essentially indicates a regaining of momentum in the labour market after the holiday period. I don't think it will change either the RBA's assessment of the labour market or its outlook. At Tuesday's meeting, RBA Governor Bullock said the labour market remained tight but that a gradual easing is expected as the year progresses.   

Preview: Labour Force Survey — February

Australia's Labour Force Survey for February is due to be published at 11:30am (AEDT) today. Nearly 2 years of sub-4% unemployment came to an end in January as employment disappointed heavily to the downside of expectations for the second month running. Seasonality appears to have impacted employment around the turn of the year, but a rebound in February is needed to validate that assessment. At its meeting on Tuesday, the RBA acknowledged that while conditions have eased, it continued to describe the labour market as being tighter than is consistent with a return to the 2-3% inflation target.    

A recap: Employment failed to rebound, driving the unemployment rate above 4% 

After employment closed out 2023 with a sizeable fall (-62.7k), the rebound expected in January (25k) failed to materialise as a broadly flat net outcome of 0.5k (full-time +11.1k and part-time -10.6k) was posted. Although seasonality likely explains the weak outcomes over December and January, the level of employment at around 14.2 million is little changed since October. 

With employment losing momentum, the unemployment rate lifted from 3.9% to 4.1% - its highest since early 2022 - as the participation rate remained at 66.8%. Together with a rise in the underemployment rate (6.5% to 6.6%), total underutilisation increased from 10.4% to 10.7%, movements consistent with easing tightness in the labour market.  

A large 2.5% decline in hours worked in January coincided with the peak summer holiday period and likely reflects seasonal volatility. However, the sharp slowing in the annual growth rate indicates that hours worked are responding to softer economic conditions. 

A seasonal rebound is expected in February 

The expectation is that after employment was weak over the summer holiday period it will pick up in February with a 40k increase forecast (range: 15k to 55k). Hiring patterns post the pandemic have shifted, with many more people now moving into employment after the summer holidays. As of January, the ABS reported that around 210k people were waiting to start new jobs, well up from a pre-covid average of around 120k. The ABS's payrolls series lifted by 2% for the month to mid-February, indicating that many people have moved into employment since the summer holidays. This rise in payrolls is comparable to recent years and this has previously translated into a strong employment outcomes in the February Labour Force Survey. 

With employment tipped to rebound, expectations are that the unemployment rate will ease back to 4% from 4.1% as of January. The main risk to this forecast is that if the participation also rebounds back towards the record highs seen late last year, then the unemployment rate may hold or potentially even rise.  

RBA extends pause in March

The RBA maintained its key rates at current levels (cash rate 4.35% and Exchange Settlement rate 4.25%), extending its pause for a third meeting in succession. A cautious RBA said that it is 'not ruling anything in or out' from a policy perspective, but the decision to remove the reference to this including 'a further increase in interest rates' is hard to interpret in any other way than the Board softly signalling the peak for the tightening cycle. The Board reaffirmed that policy will remain data-dependent, reflecting uncertainty over how the economy will evolve. Taking a less forward-looking approach is vulnerable to a scenario where more of the downside risks start coming to fruition. Markets are pricing in around 2 rate cuts by year-end, a reasonable outlook in my view. 

Despite the recent inflation data coming in broadly in line with the RBA's forecasts, remaining on track to return to the 2-3% target range from next year (reaching the midpoint in 2026), the messaging in today's Board statement and in Governor Bullock's press conference was cautious. In short, the Board hasn't seen enough signs to indicate that inflation is headed back to 2-3% on a sustainable basis. It still judges the labour market as tight and unit labour cost growth 'remains very high'. Concern, therefore, remains around services prices. 

The statement noted that elevated services inflation is consistent with excess demand in the economy, a point later reiterated by Governor Bullock. The RBA's narrative is that while the growth rate in the economy has slowed sharply (and is unequivocally weak for consumption), demand remains at a level that exceeds the supply capacity of the economy. I remain unsure as to how the RBA can be as adamant as it is on this point, but if growth remains weak then this imbalance it is seeing will continue to diminish.  

In the concluding paragraph, the wording that 'a further increase in interest rates cannot be ruled out' was scrapped in place of 'the Board is not ruling anything in or out'. While it doesn't preclude another hike - as unlikely as it is - the change still seems purposeful. The tightening cycle started in May 2022 and in every decision statement up until today, there has been a clear reference inserted to indicate the possibility or expectation of higher rates. Notably, 'not ruling anything in or out' means there is no direct pushback to rate cut pricing. The next RBA meeting is on 6-7 May.  

Preview: RBA March meeting

The RBA Board is set to hold its key policy rate at 4.35% at today's meeting (2:30pm AEDT). With recent data coming in broadly in line with RBA forecasts, the focus will be on the tone of the Board's statement and the messages from Governor Bullock in the post-meeting press conference. The Board is holding onto a tightening bias, but inflationary risks are receding with the economy slowing sharply and the labour market easing. 

Today's meeting shapes another case of steady as it goes for the Board. Key data outcomes have been in broad alignment with RBA forecasts and commentary from officials at the central bank has been scarce in recent weeks. The key message from the Board at the February meeting was that it was not yet confident that inflation was heading back to target on a sustainable basis, meaning that it could not rule out "a further increase in interest rates". That contrasts with market pricing that is pushing towards discounting two RBA rate cuts in the back half of the year, while many of its central bank peers overseas have moved on from signalling the peak for rates in the cycle and are discussing the timeline for policy easing.    

Key judgments the RBA has made look unlikely to change in light of recent data. Disinflationary trends appeared to remain intact in early 2024 as the headline CPI held at 3.4%yr; however, the January report contained limited updates on services prices, the component of the CPI basket the RBA is watching the closest. Another point the RBA has been strong on is that inflation remains elevated due to demand conditions exceeding the capacity of the economy to supply goods and services. Although I have reservations about that assessment, the RBA has said that this imbalance it has seen is easing as the economy slows. I think this is how the Board will frame its interpretation of what was a weak GDP outcome of 0.2% in Q4 and 1.5% in year-ended terms.

The Board's analysis of the labour market will also be important. Tightness in the labour market clearly eased over the course of 2023 - the 3-month average for the unemployment rate ended the year at 3.9% compared to 3.5% in December 2022 - and wages growth looked to be peaking at just above 4% in the Q4 update received late last month. For the moment, the Board's priorities are on the inflation side of its mandate, but the risks to the employment side look to be increasing. A policy pivot that removes the possibility of further tightening and opens the dialogue to rate cuts probably requires more attention to shift to the risks to the labor market outlook. 

Macro (Re)view (15/3) | Over to the Fed and BoJ

Equity markets were patchy this week as stronger-than-expected US inflation data drove Treasury yields higher and lifted the dollar. The positioning ahead of next week's Fed meeting indicates that markets sense the policy-setting committee may signal fewer rate cuts this year than the 3 currently projected as its central forecast. Outcomes from key wage negotiations in Japan were seen as clearing the runway for the BoJ to exit from negative rates at next week's meeting.  

An interesting Fed meeting awaits next week. Economic activity and the labour market remain resilient and there are signs that the disinflationary process is losing momentum. This economic backdrop has led markets to scale back their expectations for Fed rate cuts from as many as 7 at the start of the year to the 3 signalled by the FOMC in their December forecasts. Much of the interest, therefore, is around whether the FOMC retains this forecast for 3 rate cuts this year in light of recent data. 

This week, February reports for consumer (CPI) and producer prices (PPI) surprised on the high side of expectations. Headline CPI was 0.4%m/m, rising from 3.1% to 3.2% at an annual pace (vs 3.1% exp). This was the strongest month-on-month rise since September, with an uptick in energy prices (2.3%m/m) being a major contributor. However, the core rate also came in at 0.4%m/m (the same as in January), suggesting this was a more broad-based lift in prices, and the annual pace slowed by less than expected from 3.9% to 3.8%yr (vs 3.7% exp). The main concern for the FOMC is the disparity between goods (0.3%yr) and services inflation (5%yr; there is uncertainty that the former has scope to decline much further while the latter continues to run at a pace too hot to be consistent with a sustainable return to the 2% inflation target. 

A slight softening in UK wages data (6.2% to 6.1%yr) and a fall in job vacancies (to 908k) provided signs of easing labour market conditions. Inflation data for February is due out next Wednesday, but the implications for the BoE meeting the following day appear to be limited. Markets aren't expecting the BoE to cut rates until the second half of the year, with policymakers signalling that restrictive monetary policy will be required "for an extended period". The ECB's operational review appeared not to contain any major surprises as far as markets were concerned. The review looked into the tools and strategies the ECB will call upon to implement monetary policy going forward. In the short term, there are few implications by all reports, mainly because the deposit facility rate was reaffirmed as the main policy rate of the ECB's 3 interest rates, while banks' minimum reserve requirements are to remain at 1%. 

After a lull this week, local events ramp up again next week with an RBA meeting (Tue) and labour market data (Thu) awaiting. With recent data coming in broadly consistent with RBA forecasts, there seems little need for the Board to shift its messaging, reaffirming that it remains attentive to inflation risks while signalling that it is not ruling anything in or out from a policy perspective. Meanwhile, coming off a seasonally weak period either side of the new year, February's labour force survey is anticipated to report a rebound in employment (40k), easing the unemployment rate back to 4% from 4.1%. 

Macro (Re)view (8/3) | Payrolls weaken US dollar

US equities declined and the dollar lost ground this week. Just as markets had begun to ponder a scenario of no Fed rate cuts in 2024 (and potentially a hike), Fed Chair Powell told Congress that the FOMC is not far from having the confidence to lower rates, while back revisions to US employment data indicated the labour market is not as hot as previously thought. The Australian dollar and Sterling saw their strongest weekly gains against the USD this year, while the Japanese yen rose by its most since July amid signs that the BoJ is moving towards hiking rates. The euro also advanced despite the ECB giving strong indications that it will cut rates in June. Next week's highlight events include US CPI (Tue) and retail sales (Thu).  

Fed Chair Powell's Congressional testimony reaffirmed that rate cuts remain on the cards despite an uptick in recent inflation readings and strength in the labour market. Assessments around the latter, however, have shifted somewhat following Friday's employment report. Nonfarm payrolls increased by 275k in February, stronger than the 200k consensus but sizeable downward revisions saw reductions to the employment gains in December (333k to 290k) and January (353k to 229k). The unemployment rate lifted from 3.7% to 3.9% and the broader underemployment rate rose from 7.2% to 7.3%, both touching highs since late 2021/early 2022, as labour force participation remained unchanged (62.5%). Further signs of softening in the labour market were seen in average hourly earnings growth easing from 4.5% to 4.3%yr. 

The Australian economy posted subdued growth of just 0.2% in the December quarter and 1.5% through the year. This confirmed a notable slowing of momentum through the back half of the year (0.5%), as household consumption (0.1%q/q, 0.1%Y/Y) became increasingly constrained by cost-of-living pressures and higher interest rates. Alongside a moderation in business investment and renewed weakness in residential construction, the composition of growth rebalanced further away from private demand to public demand. In light of this, the RBA's assessment of excess demand in the economy is looking harder to sustain. For in-depth analysis of the Q4 National Accounts please see my In Review feature article here. Other key developments from the week are also covered, including a substantial widening in the current account surplus to $11.8bn (see here), with the monthly trade surplus coming in at $11bn in January (see here); while dwelling approvals (-1%) and housing finance (-3.9%) opened 2024 on the back foot. 

The ECB is inching closer to cutting rates but is awaiting more data to confirm that inflation is on track to return to target. Markets are betting on the first rate cut coming in June. With the Governing Council leaving all monetary policy settings unchanged, the focus was on the ECB's messaging as a new set of economic forecasts was published. The new forecasts cut the growth outlook this year to 0.6% from 0.8% and lowered the inflation outlook across the projection horizon, anticipating headline and core inflation to slip below the 2% target in Q3 next year. Given this outlook, a case could have been made to cut rates at this meeting, but President Lagarde said this was not discussed. Instead, the main point coming out of the press conference was that the Governing Council wants to see more data - particularly on wages - to give it confidence that it can start to dial back restrictive monetary policy. President Lagarde said the Governing Council will know "a little more in April" and "a lot more by June", giving soft validation to market pricing. 

In the UK, the Spring Budget capitalised on an outlook for lower inflation and interest rates, using the windfall to increase fiscal support to the economy. The OBR calculates that new measures announced in the budget will increase spending by around £40bn over the next 5 years, delivering stimulus of 0.3% of GDP on average per year. The major announcement was tax relief for households, a 2ppt cut to National Insurance Contributions coming at a cost of £10bn per year. However, this will be partly offset by new taxes, expected to raise £7bn through 2028/29. Following the budget, planned Gilt sales in 2024/25 have been announced at £265bn, this was above expectations (£258bn) but market reaction was limited. 

Australian housing finance -3.9% in January

The value of Australian housing finance commitments fell by 3.9% in January to $25.1bn. This follows a sizeable fall in December (-4.1%). These declines may be driven by seasonality, abruptly halting an uptrend in commitments through 2023. That said, renewed concerns around housing affordability and a further RBA rate rise in November - increasingly looking to be the last for the cycle - could also be relevant factors.  

Housing finance commitments fell by 7.9% over December-January, retracing to their lowest level ($25.1bn) since August 2023. Heightened volatility across a range of economic data sets around the turn of the year has suggested that there may be some issues with the ABS's seasonal adjustment processes, by extension a potential factor in this series as well. In January, commitments fell to owner-occupiers (-4.6%) and investors (-2.6%), both segments posting back-to-back declines following contractions of 5.6% and 1.6% respectively in December. 

The fall in owner-occupier lending in January was broad based: upgraders -5.2% (on a 2.3% fall in loan volumes), construction-related -2.4% (-4.2%) and first home buyers -6% (-6.9%); alterations went against the trend rising modestly by 0.7%. 

Lending to the investor segment declined by 4.1% over December-January but at $9.2bn was still 18.5% above its level a year ago. The state figures show the fastest growth through the past 12 months has come in Western Australia (63.1%) and South Australia (41.7%).  

 

In the refinancing segment, activity slowed further in January. Total refinancing fell by 5% in the month to $16.1bn, posting its 6th consecutive decline. Refinancing declined by 7.4% for owner-occupiers ($10.3bn) and 0.5% for investors ($5.8bn). The slide over recent months is an unwind from an earlier surge in activity alongside the RBA's tightening cycle. 

Australia's trade surplus $11bn in January

Australia's goods trade surplus was moderately wider at $11bn in January from a revised $10.7bn in December, the outcome printing below the $11.5bn consensus forecast. Exports opened 2024 with a 1.6% rise, its 4th month-on-month increase in succession, outpacing a 1.3% lift in import spending. Both exports and imports have fallen by around 5% over the past year.    

The goods trade surplus widened a little further to $11bn in January. This is consistent with the trend over recent months. On a 3-month average basis, the goods surplus reached a recent trough of around $8bn in September-October; subsequently, it has widened to an average of $11.1bn for the 3 months to January. Export income has been on a rising trajectory - underpinning the acceleration in the current account surplus reported earlier this week - as import spending has softened, reflecting weakening domestic demand conditions.   

In January, exports saw a 1.6% rise to $47.5bn, the level down 5.2% on a year ago. The key movements came in non-monetary gold (18.2%) and rural goods (7.6%). Rural goods advanced as the value of meat (17.7%) and grain exports (26.6%) accelerated. Non-rural goods declined overall, down 0.5% as a 1% rise in iron ore exports was offset by falls in coal (-0.7%), LNG (-0.9%) and metals (-6.7%).

Imports ($36.5bn) posted a 1.3% rise following a 4% lift in December. Prior to that, imports were down notably through October (-3.2%) and November (-8.2%). For January, consumption goods increased by 5.2%, driven almost exclusively by imports of new vehicles (17.2%). Capital goods saw a 5.9% rise on the back of telecommunications equipment (30.3%) and industrial transport equipment (13.1%). By contrast, intermediate goods declined 5.1%, dragged lower by declines in fuel imports (-5.6%) and parts for vehicles (-27.6%).