Macro (Re)view (4/10) | US labour market shows renewed strength

It was another volatile week across asset classes with renewed geopolitical risk from the Middle East, a hawkish repricing of the Fed's easing cycle and concerns around fiscal deficits in Europe all in the mix. China continued to rally on the back of last week's stimulus announcements prior to closing for the golden holiday period. Rate differentials are seemingly back in favour of the US dollar; strong labour market data and comments Fed Chair Powell support a more gradual pace of rate cuts in the US, contrasting with ECB officials expressing concerns over headwinds to growth and Governor Bailey at the BoE hinting at hiking more aggressively. 

Renewed strength in the US labour market has reduced the risk of a hard landing in the near term, driving a hawkish repricing of the Fed curve. The expectation is that the Fed will now downshift to 25bps rate cuts following the initial 50bps move, while the extent of rate cuts priced through the cycle has pulled back by around 50bps from a week ago. After job openings surprised to the upside at 8mn in August early in the week, payrolls data came in hot leading into Friday's US session. 

Nonfarm payrolls surged by 254k in September, well above the 150k figure expected as revisions added back 72k to payrolls over the prior two months, reversing the trend of negative revisions. Arguably, the greater surprise came via the fall in the headline unemployment rate from 4.2% to 4.1% (vs 4.2%), a low since June, with the broader underemployment rate also declining from 7.9% to 7.7%. This retightening of the labour market came with participation holding at an unchanged 62.7% for the 3rd month in succession. An uptick in average hourly earnings growth to 4%yr (from 3.9%) rounded out the report. 

In the euro area, markets anticipate a more dovish ECB going forward as inflation continues to cool and concerns over the growth outlook are rising. Headline inflation slowed to 1.8%yr in September, down from 2.2% and the core rate eased from 2.8% to 2.7%yr, both outcomes in line with expectations. ECB President Lagarde told the EU Parliament this week that disinflation was accelerating while the economic recovery in the bloc was facing headwinds. Similarly, the ECB's Schnabel said a sustainable return to 2% inflation was 'becoming more likely' and that it could not ignore risks to economic growth.     

Upbeat Australian retail sales data combined with robust housing market conditions suggest the RBA will continue to hold off the start of its easing cycle. A solid 0.7% rise in national retail sales in August exceeded expectations and lifted annual growth to 3.1%, its fastest pace since May 2023 (reviewed here). A warm finish to the winter and spending in the lead-up to Father's Day underpinned an uplift in discretionary sales (0.8%) that drove the headline increase. The Stage 3 tax cuts, effective from July 1, may also have provided some support. 

With the effects of rapid population growth continuing to be felt in housing markets across Australia, CoreLogic clocked the national median housing price at $807k in September, a gain of 1% for the quarter and 6.7% over the year. Alongside rising housing prices, lending commitments extended their upswing with a further 1% gain coming through in August (reviewed here). At $30.4bn, commitments stand 31.5% above their cycle low in early 2023. Meanwhile, housing credit growth in August was running at a 5% annual pace. Staying with the housing theme, volatility in the higher-density segment saw dwelling approvals pulling back in August (-6.1%) from a sizeable gain in July (reviewed here). Lastly, the nation's trade surplus printed at $5.6bn in August (reviewed here), unchanged from the prior month around offsetting movements in exports (-0.2%) and imports (-0.2%). 

Australian housing finance extends in August

Australian housing finance commitments have continued to rise seeing a 1% gain in August (in line with consensus) to be up for the 7th month in succession. Lending to both major segments advanced: owner-occupiers 0.7% and investors 1.4%. Supply-demand dynamics are pushing up housing prices - higher interest rates notwithstanding - as a significant volume of homes remains tied up in the construction pipeline. This is driving increased lending and the associated credit growth.  

  

The suite of indicators released this week have underscored the strength of housing markets across the nation, despite the effects of higher interest rates. CoreLogic reported a 1% rise in the national median housing price over the most recent quarter to $807k, up 6.7% on a year ago. Housing credit growth has expanded alongside this at a 5%yr pace to August according to the RBA. Today's data from the ABS showed a further 1% rise in lending commitments to $30.4bn in August. Commitments are now 31.5% above the cycle low in January 2023, up 23% over the past 12 months.  

Commitments to owner-occupiers saw a 0.7% rise ($18.7bn) in the latest month. Although lending to upgraders (existing home buyers) increased (0.5%), underlying loan volumes declined (-1.1%) - pointing to the impact of rising housing prices. Meanwhile, construction-related lending was down 0.6% month-on-month, with loan volumes also soft (-0.5%). The first home buyer segment saw lending drop 0.4% on the prior month on a 1.5% decline in the number of loans written. 

Investor lending is pressing record highs following a 1.4% rise in August to $11.7bn, now only a touch below the previous peak ($11.8bn) in January 2022. Lending to the segment troughed early last year ($7.8bn) but has since surged as rising rents amid very low vacancy rates and increasing housing prices have encouraged investors.  

Australia's trade surplus steady at $5.6bn in August

Broadly offsetting movements in exports and imports held Australia's monthly trade surplus at $5.6bn in August, essentially in line with expectations ($5.5bn). The lower surpluses seen in recent months reflect exports retracing due to lower commodity prices and import spending remaining resilient.  

The trade surplus in August ($5.6bn) was unchanged from the prior month after July's surplus was revised down from $6bn in today's report. Although off its recent lows, the monthly surplus has seen significant compression over the past 18 months on lower commodity prices and elevated import spending. 

Exports declined for the first time since April softening by 0.2% in August to $43.2bn, down 7.4% over the year. Falls in rural goods (-3.9%) and non-monetary gold (-3.4%) weighed on exports; however, that was largely offset by a lift in non-rural goods (0.8%) on the back of higher coal exports (7.3%). Other major commodities were soft: iron ore -0.5% and LNG -1.8%.   

Imports declined for the third month running with a 0.2% fall coming through in August. However, imports remain elevated ($37.6bn) and are up on 12 months ago (3.4%). The decline in the latest month was driven entirely by consumption goods (-4.2%) led by a fall in vehicle imports (-7.5%). By contrast, capital goods (1.6%) and intermediate goods (1.8%) advanced in August, the latter driven by higher fuel prices.   

Australian dwelling approvals retrace in August

Australian dwelling approvals fell more than expected in August (-6.1%), retracing from a large rise in the prior month (11%). The volatility remains in the higher-density segment while detached approvals continued to lift posting their 7th consecutive monthly gain. Overall, higher interest rates and headwinds in the construction sector continue to weigh on dwelling approvals. 

August's 5.5% fall saw national dwelling approvals come in just below 14k, down from July's total of 14.9k - the highest level since May last year. Approvals have bounced around in recent months on volatility in the higher-density (or unit) segment, the August result continuing a sequence of sharp swings: May +5.9%, June -6.3% and July +11%. Smoothing the volatility, approvals for the 3 months to August averaged 14.1k, remaining in the low range of the past couple of years as higher interest rates and capacity pressures have impacted the home building sector. 

In the higher-density segment, approvals fell by 17.5% in August after a 34.6% surge in July. 3-month approvals to August averaged 4.7k, only slightly above cycle lows. Weakness continues to be most evident in high-rise units.  

 

Detached approvals climbed to their highest level in almost 2 years (9.5k) on the back of a further 0.6% rise in August, the 7th consecutive increase to be up 8.1% across the past 12 months. However, approvals in August are still down by a little more than a third on their earlier cycle peak in 2021.   

Alteration approvals - in value terms - continue to trend higher rising 1.4% to $1.1bn in August. Higher construction costs and robust demand have seen these approvals increase by almost 10% over the past year.