Growth concerns returned this week to hit equity markets in a repeat of the episode from August. A lacklustre nonfarm payrolls in the US has left the door open for a frontloaded start to the cutting cycle from the Federal Reserve, driving a bear steeping of the Treasury curve on a sharp move lower in the 2-year benchmark yield. Rate cuts are the order of the day for global central banks, with the Bank of Canada easing by a further 25bps and the ECB expected to follow suit next week. By contrast, the RBA continues to remain hawkish.
August payrolls fail to resolve the 25 or 50bps debate...
Markets remain divided over whether the Fed will commence its easing cycle with a 25 or 50bps cut at the upcoming meeting on 17-18 September. The keenly awaited August report showed nonfarm payrolls increased by 142k, coming in light relative to the expected figure of 165k while revisions deducted a net 86k from employment over June and July. Although this raised unease that slowing employment reflects weakening growth, the unemployment rate fell back to 4.2% from 4.3% in the prior month as the participation rate remained at an unchanged 62.7%. Speaking post the payrolls release, Fed officials including Governor Waller and NY Fed President Williams endorsed the need to start cutting rates but gave no clear signs that a frontloaded 50bps cut was on the cards.
.... while the ECB prepares to cut again
The ECB goes into next week's meeting with markets priced for a 25bps rate cut to be delivered by the Governing Council. Last week's inflation data provided the green light for the ECB to continue winding back restrictive policy following the initial cut in June, with headline inflation slowing to a 3-year low at 2.2%yr in August and the core rate easing to a slightly more elevated 2.8%yr pace. New forecasts to be published at next week's meeting will give the ECB the chance to update markets on its outlook for inflation and how it sees the path for rates evolving.
No pivot from the RBA despite slow growth
RBA Governor Bullock continued to push back against prospects for rate cuts in the near term as the effects of restrictive monetary policy saw Australian growth slow further in Q2. Real GDP growth came in at 0.2% in the June quarter, easing growth through the year to 1% - its slowest pace outside the pandemic period since the aftermath of the early 1990s downturn. The higher cost of living and increased mortgage repayments saw households reducing consumption in the quarter (-0.2%), most notably in discretionary categories (-1.1%).
With finances squeezed, the household saving ratio remained at 0.6%, implying that over the first half of the year, households had been spending nearly all of their disposable income to meet their expenses. In addition to the decline in household consumption, weak outcomes for residential construction (0.1%q/q) and business investment (0.1%q/q) indicated that higher interest rates were weighing on the economy more broadly. Continued strength in public demand (0.8%q/q, 3.4%Y/Y) is playing a key role in providing countercyclical support to growth as private demand has slowed materially (0%q/q, 0.8%Y/Y). For more on Australia's Q2 GDP growth outcome, please see my In review feature article here with in-depth analysis and charts from the national accounts release.
Speaking this week, Governor Bullock outlined that while the Board is still aiming to steer the economy along the narrow path - gradually returning inflation to the 2-3% target range while preserving the labour market - its focus remains on the inflation side of its mandate. Accordingly, Governor Bullock reaffirmed that the Board does not see the case to cut rates by year-end as is currently priced into markets. Until the RBA is confident that inflation is on track to return to target on a sustainable basis, Governor Bullock said that restrictive policy will be maintained. In other local developments this week, dwelling approvals rose by 10.4% in July (see here); housing finance accelerated by 3.9% (see here); and the trade surplus widened to $6bn (see here).