Australian housing finance softens in May

Australian housing finance softened in May, both in terms of approvals to owner-occupiers and lending commitments. Today's data largely pre-dated the Coalition government being retained in the recent federal election and the consecutive interest rate cuts announced by the Reserve Bank of Australia in June and July. 

Housing Finance — May | By the numbers

• Housing finance approvals to owner-occupiers (excluding refinancing) eased by 0.1% to 30,820 -- an upside surprise relative to the median expectation for a 1.0% fall (prior rev: -0.9% from -1.1%). Approvals declined by 15.0% year-on-year, accelerating from a 13.5% fall over the year to April.

• The total value of housing finance commitments (excluding refinancing) fell by 2.4% in the month to $A16.5bn (prior rev: 0.0% from +0.2%), with the annual decline steepening to -20.9% from -17.6%. 

Housing Finance — May | The details 

Lending commitments declined by 2.4% in aggregate excluding refinancing in May to $16.5bn, with the owner-occupier segment falling by 2.7% to $12.2bn (-18.1%Y/Y) and investor lending sliding by 1.7% to $4.3bn (-27.8%Y/Y). Refinancing commitments lifted by 0.5% in the month (-8.4%Y/Y), with increases for both owner-occupiers (+0.5%m/m, -7.0%Y/Y) and investors (+0.4%m/m, -11.6%Y/Y). Lending for alterations to existing properties in the owner-occupier segment declined by 1.6% for the month to $269.6m, which saw the annual pace slow from -11.8% to -14.6%. 

Total loan approvals to owner-occupiers were almost flat in May (-0.1%), though the decline over the year extended to -15.0% from -13.5%. Approvals to purchase existing dwellings pulled back by 0.8% (-16.0%Y/Y). Construction-related approvals were up by 2.3% in the month (-11.7%Y/Y), which was centred around a 3.5% rise for loans to fund new construction (-4.6%Y/Y), as approvals to purchase newly constructed dwellings eased by 0.6% (-25.8%Y/Y). The ABS does not produce approval estimates for the investor segment. 

The state details across all borrower types in May are broken down in the table, below. 

Despite mixed results in May, the chart (below) confirms that approvals across the nation remain on a downward trajectory, driven largely by New South Wales, Victoria, and Queensland.  

Moreover, the downturn in investor activity showed no sign of slowing in May's release. 

Housing Finance — May | Insights 

This series remains pre-dated by the recent federal election outcome, the RBA's June and July rate cuts, as well as the decision by regulator APRA to ease its guidance around lending criteria applied by the banks. More timely indicators in the form of price and auction clearance data suggest some early signs of stabilisation in the Sydney and Melbourne markets, though volumes remain low.

Macro (Re)view (5/7) | RBA cuts to 1.0%; markets call for easier policy

As anticipated, the Reserve Bank of Australia (RBA) cut the cash rate by 25 basis points to a new record low of 1.0% at its July Board meeting this week. The decision followed up June's 25 basis point cut and was again based on supporting employment growth to bolster confidence in inflation returning back to the target range. Lowering spare capacity in the labour market is the Board's key focus given the national unemployment rate at 5.2% is sitting well above the 4.5% level it now considers to be consistent with 'full employment' (see our review of July's meeting here). 

During a speech following the rate cut decision, Governor Lowe left open the possibility for further rate cuts by noting "the Board is prepared to adjust interest rates again if needed", though he once again called for additional support from fiscal stimulus and structural policies. To that end, news from Canberra this week would have come as a welcome development, with the federal government's income tax relief package passing through both houses. The three-stage plan commences immediately, highlighted by a doubling of the low and-middle-income tax offset to $1,080 for incomes between $48,000 to $90,000 applied to the previous financial year. Stages 2 (occurring in mid-2022) and 3 (in mid-2024) will have a lagged introduction, ultimately working towards flattening the nation's tax system so that an estimated 94% of taxpayers will face a top marginal rate no higher than 30%.

The RBA's rate cuts and the immediate tax relief measures look to be well-timed given that retail sales data for May showed that spending lifted by just 0.1% in the month following a 0.1% decline in April, while the annual pace slowed to its lowest since the start of 2018 at 2.4% (see our review here). Another positive is that surging iron ore prices are continuing to generate a strong tailwind for the government's tax receipts, with the nation's trade surplus hitting a new record high in May at $5.75bn thus providing the scope for further fiscal stimulus to be announced (see here).

In the housing market, data from CoreLogic showed that price declines continue to slow, with the national median easing by just 0.2% in June to be down by 6.9% over the year (see here). Notably, prices in Sydney (+0.1%) and Melbourne (+0.2%) posted their first monthly increases since peaking in July and November of 2017 respectively, though there were declines for most other capitals. Overall, conditions in the nation's housing market remain soft, though sentiment appears to have improved somewhat following the federal election outcome and the RBA's rate cuts. The announcement from banking regulator on Friday that it will remove its guidance for banks to apply a minimum interest rate of 7.0% (most had used 7.25%) within loan serviceability assessments, now allowing a buffer of at least 2.5% over the prevailing interest rate to be used also shapes as a key development (see here). Notwithstanding, the outlook for residential construction activity continues to remain weak with dwelling approvals down by around 20% over the year to May (see here). 

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Developments from offshore this week were highlighted by the G20 Summit in Osaka, where US President Trump and China's President Xi called a truce to their recent escalation in trade and technology tensions. In a best-case outcome for markets, the US and China agreed to re-start negotiations that had stalled since May, while President Trump pledged to suspend implementing a new tariff on a $300bn tranche of Chinese imports as well as scaling back restrictions placed on tech firm Huawei. These outcomes helped to set up a strong week for risk assets, though plunging yields were arguably a more significant factor as markets continued to price in aggressive policy easing from central banks across the globe over the next 12 months in response to growth and inflationary concerns, as shown in our chart of the week, below.

Chart of the week

In the US, Federal Reserve rate cut expectations were tempered somewhat by Friday's employment data for June, which showed that non-farm payrolls lifted by a stronger-than-expected 224,000 in the month compared to the median forecast for a rise of 160,000. Meanwhile, the unemployment rate lifted against expectations from 3.6% to 3.7%, though that was accompanied by a rise in workforce participation from 62.8% to 62.9%. Growth in average hourly earnings on a through-the-year basis remained at 3.1%, which disappointed expectations for a rise to 3.2%. Overall, the report was strong enough to see markets dial back expectations for a 50 basis point rate cut by the FOMC on July 31, though they remain priced for a 25 basis point cut on the view that easier policy is required given the headwinds to the growth outlook from trade uncertainty and slowing business investment.

Over in Europe, the main development was that a meeting of the European Council nominated IMF Managing Director Christine Lagarde to replace outgoing European Central Bank (ECB) President Mario Draghi when his term expires on 31 October, though is subject to approval from the European Parliament. The markets interpreted this as a dovish move considering that the alternative, Bundesbank President Jens Weidmann, has been a noted hawk on the ECB's Governing Council. In the UK, Bank of England Governor Carney highlighted in a speech that while the labour market conditions are tight and inflation is at target, risks from global trade tensions and a no-deal Brexit were increasing.   

Australian retail sales rise 0.1% in May

Australian retail spending ticked a fraction higher in May to reverse a decline in the previous month. Sales growth in annual terms continues to slow after printing at its weakest pace since the start of 2018. 

Retail Sales — May | By the numbers

• Turnover growth increased by 0.1% in May to $A27.343bn, which underwhelmed expectations for a 0.2% lift. Spending declined by 0.1% in April.

• The annual pace of retail sales slowed to 2.4% from 2.8% over the year to April. 

Retail Sales — May | The details

May's report showed contrasting detail. Turnover in food retail (around 40% of total retail spending) declined by 0.3% in the month and was the main weight on the headline growth figure of 0.1%. Removing the impact of the food category, retail spending lifted by 0.4% in the month. In through the year terms, total turnover growth at 2.4% continues to outpace sales ex-food at 1.8%.

Taking a closer look at the discretionary categories; household goods lifted by 0.5% (-0.8%Y/Y), 'other' retail (sporting goods, pharmaceuticals and newspapers etc) gained 0.6% (+4.4%Y/Y) and cafes and restaurants increased by 0.7% (+4.2%Y/Y). These rises were moderated by declines from clothing and footwear -0.2% (+1.1%Y/Y) and department stores -0.4% (-1.4%Y/Y). 

On a state basis, the clear standout is the weakening that has occurred in New South Wales -- spending in the nation's most populous state declined by 0.1% in May and the annual pace has fallen to its lowest since early 2012 at 0.5%. Conditions have also slowed in Victoria over the past 6-9 months but are holding up overall. May's increase of 0.6% more than offset last month's 0.4% decline, while the annual pace lifted from 3.7% to a still modest 4.2%.

The outturns from the other states were mostly weak with declines in Queensland -0.3% (+4.7%Y/Y), Western Australia -0.2% (+0.4%Y/Y) and Tasmania -0.4% (+0.6%Y/Y). However, South Australia posted a rise of 0.5% in May to be up by 2.9% over the year. 

The chart, below, highlights that national retail sales growth over the past year has been held up by Victoria, Queensland and South Australia, with those states cumulatively accounting for around 53% of nationwide spending. However, the slowing in New South Wales (around 32% on national sales) has been a strong headwind for the sector. 

Sales through online channels on a national basis lifted by 10.7% in May according to the ABS' latest estimates following a 2.1% fall in April. As a percentage of total retail spending, the online space accounted for 6.2% of May's turnover compared with 5.6% from a year earlier. 

Retail Sales — May | Insights 

Conditions in Australia's retail sector continue to slow, driven largely by a weakening in New South Wales in response to the downturn in the state's residential property market and ongoing low wages growth. Furthermore, weakness persists for retailers in household goods and department stores indicating the impact from lower transaction volumes in the housing market. So far in Q2, nominal spending growth is little more than flat. The impact of the RBA's June and July rate cuts and the federal government's increases to the low and-middle-income tax offsets are positives for the consumer spending outlook for the second half.

Australian dwelling approvals rise by 0.7% in May

Australian dwelling approvals lifted unexpectedly in May posting their first monthly gain since February. Compared to a year earlier, approvals remain down by around 20% amid a notable slowdown in the residential construction cycle.  

Building Approvals — May | By the numbers

• Total dwelling approvals (private and public sectors) lifted by 0.7% in May to 14,436 (seasonally adjusted) compared to the median forecast for a flat outcome (0.0%). Approvals in April were revised to show a 3.4% decline compared to the initially reported 4.7% fall. 

• Through the year, dwelling approvals are down by 19.6% (prior rev: -23.4%)

• Unit approvals increased by 2.1% in the month to 5,885 to be down by 27.6% over the year (prior rev: -5.8%m/m, -26.2%Y/Y)  

• House approvals eased by 0.2% to 8,551 to slow the annual decline to -13.0% (prior rev: -1.7%m/m,  -21.3%Y/Y) 

• On a trend basis, total dwelling approvals declined by 0.5% in May and by 20.9% over the year. House approvals fell by 1.4%m/m and -17.0%Y/Y, though unit approvals lifted by 0.7%m/m to be down by 25.6%Y/Y.  

Building Approvals — May | The details 

May's update showed mixed detail with softness in house approvals and an increase from units. Taking a broader view, the granular detail (not seasonally adjusted) suggests that momentum for house and townhouse approvals continues to ease, though there may be some tentative signs of stabilisation emerging from the high-rise segment.

The state-level data was volatile in May but mostly weak. Approvals remain heavily lower over the year across the nation as shown in the table, below. 

The value of approvals for the alteration of existing residential property lifted by 1.0% in the month to $712.1m but is down by 3.0% over the year. Non-residential approvals slipped by 6.7% to $3.78bn, which slowed growth through the year from 17.5% to 5.3%. 

    

Building Approvals — May | Insights 

May's report was stronger than anticipated, though this series is typically volatile from month to month. There may be some early indications of stabilisation in unit approvals, but house approvals continue to lose momentum. Markets will have noted the recent improvement in the timely housing market data from auction clearances and prices, though it will take much more that than to have any impact on the residential construction outlook. In that sense, the RBA's June and July rate cuts are a clear positive as is the removal of uncertainty around changes to tax policy following the recent federal election outcome.  

Australia's trade surplus reaches a record high in May

Australia's monthly trade surplus outpaced market expectations by lifting to a new record high in May, reflecting the tailwind from surging export commodity prices. As noted by Reserve Bank of Australia Governor Philip Lowe during a speech on Tuesday night (see here), a rising terms of trade and an expected lift in resources sector investment are factors supporting the domestic economic outlook.

International Trade — May | By the numbers

• The trade surplus accelerated by $925m in May to a new record high of $A5.745bn, which easily surpassed the median forecast for a $5.3bn surplus. April's trade surplus was revised down from $4.871bn to $4.82bn.   
• Export earnings incresed by 3.6% in the month (+$1.442bn) to $A41.585bn to be 16.4% higher over the year (prior rev: +1.6%m/m, +16.4%Y/Y) 
• Spending on imports lifted by 1.5% in May (+$515m) to $A35.839bn, though the annual pace slowed to 2.5% (prior rev: +2.3%m/m, +4.6%Y/Y)

International Trade — May | The details 

Export earnings were up by a robust 3.6% in May (or $1.442bn in AUD terms) to stand 16.4% higher than a year earlier. The key factor has been surging commodity prices, in particular for iron ore, with the tailwind persisting into the second half of the year. In May, earnings from non-rural goods exported lifted by 5.0% in the month (+$1.316bn). That was predominantly due to a 13.0% increase ($1.304bn) from metal ores and minerals (iron ore), with strength in both prices and volumes according to ABS estimates. Coal exports lifted by 3.0% (or $175m) in the month. Earnings growth from the other export categories was contained in May; rural goods +1.1% ($46m), non-monetary gold +1.3% ($22m), while services lifted by 0.7% ($58m).   

   

On the imports side, expenditure increased by 1.5% ($515m) in May, which followed a 2.3% rise in the previous month. Annual growth, however, moderated from 4.6% to 2.5%. Underpinning the aggregate increase, capital goods expenditure lifted by another 5.3% ($348m) following a rise of a similar magnitude in April. Intermediate goods increased by 0.6% ($66m), while consumption goods declined by 0.8% (-$73m). Services imports lifted by 1.3% ($107m) driven by transport and maintenance services.

International Trade — May | Insights

Surging commodity prices will continue to bolster the nation's terms of trade in Q2, following a 3.1% rise in the March quarter. The boost to national income will help to support the domestic economy through an expected increase in resources sector investment over the 2019/20 financial year, and potentially expanded fiscal stimulus and infrastructure investment from the federal government. 

RBA cuts the cash rate by 25bps to 1.0%

The Reserve Bank of Australia Board followed up June's rate cut with a further cut of 25 basis points at its July meeting held in Darwin today lowering the official cash rate to a new record low 1.0%. This decision had largely been discounted in market pricing and was the consensus expectation of economists according to official surveys.

As was the case at June's meeting, today's statement from Governor Lowe outlined that the decision to cut "will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target" (see here). During a speech on June 20 (see here), the Governor discussed the factors that had led the Bank to conclude that the labour market was operating with spare capacity and could sustain faster employment growth and a lower unemployment rate. 

In today's statement, the Governor noted that "employment growth has continued to be strong" and also that "labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas". Notwithstanding those remarks, there had "been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2%". In addition, while acknowledging a recent uptick, the pace of wages growth "remains low". The overall assessment, therefore, was that "these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment".

Commentary on inflation was broadly unchanged, with pricing pressures subdued but anticipated to lift in the near term due to higher petrol prices. Core inflation is forecast to return to the 2% lower bound in 2020, though that will clearly be dependent on labour market developments and in particular the extent to which spare capacity can be reduced. 

The Governor highlighted that the economic outlook remains reasonably constructive with output growth anticipated to return to trend, though the key risk domestically pertains to household consumption given it has been constrained "by a protracted period of low income growth and declining housing prices". Notably, developments in the global economy were also in focus by highlighting that "persistent downside risks" and "subdued inflation" had prompted markets to price in expectations for major central banks (US, Europe and Japan) to ease policy rates. 

In the concluding paragraph, the Governor highlighted the importance of a lower cash in helping to bring about faster progress in reducing spare capacity and shoring up the inflation outlook. The possibility of further easing was left open with the line that "the Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time". 

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Following today's meeting, Governor Lowe provided further insights in a speech on Tuesday night (see here). The comments reiterated the message that the rate cuts from June and July were as a response to lowering spare capacity in the labour market, rather than a deterioration in the economic outlook. 

In fact, the Governor highlighted that the Bank's domestic outlook was bolstered by very low interest rates, a rising terms of trade, an exchange rate that has depreciated over the past 2 years and an expected lift in household income growth. However, developments from abroad following the recent escalation in US-China trade tensions and subsequent expectations for easing from other major central banks have clearly been noted by the RBA, with the Governor noting that "this is quite a different world from the one we were facing earlier in the year".

There was a sense from the Governor's speech that with the Board having cut rates by a total of 50 basis points in June and July it will now wait for incoming data to assess the impact of those decisions. Once again, the Governor pressed the case for additional support from government through fiscal policy and structural reform. In concluding, given the uncertainties both domestically and from abroad, Governor Lowe highlighted that "the Board is prepared to adjust interest rates again if needed to get us closer to full employment and achieve the inflation target".   

Preview: RBA July meeting

The Reserve Bank of Australia (RBA) Board visits Darwin — the nation's northernmost capital — for its July policy meeting today. Financial markets and economists are, on balance, anticipating Governor Lowe to announce a follow-up to June's rate cut with an additional 25 basis points of easing at 2:30PM (AEST) lowering the cash rate to 1.0%. 

The Board's decision to cut by 25 basis points to 1.25% in June was taken "to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target". The key shift from the Bank is that it now views 'full employment' to be consistent with an unemployment rate of 4.5% compared to its historical estimate of 5.0%. This was highlighted in speeches from Governor Lowe and Assistant Governor Ellis. Recall that the Bank has a mandate to target inflation between 2-3% and full employment.

In the period since June's meeting, the minutes showed that the Board retains a firm easing bias by noting "members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead". This was extended upon by Governor Lowe during his speech on June 20 The Labour Market and Spare Capacity by noting: "It is not unrealistic to expect a further reduction in the cash rate as the Board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target". 

Perhaps adding support for the case to cut today, the Governor outlined early last week at the ANU's Crawford Australian Leadership Forum (link here) that in the global context where central banks in the US, Europe and Japan are expected to ease policy rates over the next 12 months in response to growth and inflationary concerns, the stimulatory impact from further cash rate cuts through exchange rate depreciation would be constrained. Certainly, the outlook for global growth remains a key risk for the RBA given that the weekend's G20 Summit was unable to provide any clear resolution in US-China trade tensions.   

From a domestic standpoint, key data over the past month have been soft. GDP growth slowed to a 1.8% annual pace in Q1 to be around 1ppt below trend (see here), while the national unemployment rate held at 5.2% in May (see here). It is therefore likely that the Bank will downgrade its growth and inflation forecasts in next month's quarterly Statement on Monetary Policy. Given its existing forecasts are based on a cash rate at 1.0%, there seems little justification in waiting until August to cut, particularly considering the Governor's comments around exchange rate depreciation from last week. Note also that at 7:30PM (AEST) the Governor is scheduled to deliver a speech where further explanation could be provided in the event that a cut is announced. This was the approach used by the RBA following June's rate cut decision.  

All considered, expect to see the cash rate cut by 25 basis points to 1.0% today. For reference, markets are around 70% priced for a rate cut, which is also the call from 18 of 26 economists surveyed by Bloomberg Australia.

Macro (Re)view (28/6) | Markets focused on G20 developments

Attention in financial markets over recent sessions was focused on the weekend's G20 Summit in Osaka following confirmation that US President Trump and China's President Xi will meet on Saturday morning local time. Conflicting news reports have conditioned low expectations for substantive progress to be made in easing the tensions that have escalated since May. As it stands, China has called for compromise and the removal of existing tariffs, though US President Trump vowed again this week to tariff the remaining tranche of some $325bn of Chinese produced goods if sufficient progress is not made. A best-case scenario would appear to be an agreement to re-commence the negotiations that stalled in May, and potentially a truce on imposing new tariffs.

Also dampening sentiment this week, US Federal Reserve Chair Jerome Powell appeared to push back against some of the more aggressive expectations for policy easing during a speech in New York. While highlighting that the cross-currents relating to trade tensions and global economic growth have re-emerged, Chair Powell went on to say that the central issue for the Committee "is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation". Markets had discounted more than one rate cut occurring at the next meeting in July, so it was significant that Committee member and noted dove James Bullard said during a Bloomberg interview that a rate cut of 50 basis points "would be overdone" but was supportive of a 25 basis point cut. 

Notwithstanding the downside risks to the outlook, Chair Powell noted that "the economy has performed reasonably well" in 2019, as highlighted by Q1 GDP growth being confirmed at an annualised pace of 3.1% during the week. However, as our chart of the week (below) shows, output growth in the March quarter was underpinned by the typically volatile components of inventories and net exports and can thus be expected to reverse. Consumer demand also softened, and while business investment remained solid that pre-dates the latest escalation in trade tensions.  

Chart of the week

In Europe, while the data flow was limited this week, the tone was in line with last week's comments from European Central Bank (ECB) President Mario Draghi that additional stimulus measures will likely be required. The European Commission's Economic Sentiment Indicator fell to a near 3-year low in June at a reading of 103.3 reflecting weakness from industry, services, and consumers. Meanwhile, inflation on a headline (1.1%Y/Y) and core (1.2%Y/Y) was essentially as expected in June, though it remains well short of the ECB's target of below but close to 2%.          

The other notable development from abroad this week was the Reserve Bank of New Zealand's latest policy meeting in which the cash rate was left on hold at 1.5% (see here). Having cut interest rates in May, the Bank's Monetary Policy Committee retains a firm easing bias on the basis that the economic outlook, both domestically and abroad, had softened and thus presented downside risks to its employment and inflation objectives. As such, it was the assessment of the Committee "that more support from monetary policy was likely to be necessary". 

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Economic developments and data in Australia were light this week, while domestic markets were contained. Of note, Reserve Bank of Australia (RBA) Governor Philip Lowe featured in an ANU-hosted panel discussion (link here), outlining that in the current environment of global policy easing, the stimulatory impact of further reductions in the cash rate on the domestic economy is likely to limited due to a lesser depreciation in the exchange rate, while the benefit to the other transmission mechanisms (investment, wealth and cash flow) was described as "weaker at the moment". To that end, Governor Lowe reiterated the case for increased stimulus in the form of fiscal and structural reforms. Ahead of next Tuesday's RBA policy meeting, financial markets are around 75% priced for a 25 basis point rate cut, which is also the consensus call from economists according to Reuters. 

The main data point out this week was May's private sector credit growth figures (see here). The pace of credit growth slowed from 3.7% from 3.6% in through-the-year terms to a 5½-year low. For the 4th consecutive month, housing credit growth slowed to the lowest pace on record going back to the late 1970s at 3.7%Y/Y. Growth to the owner-occupier segment eased to 2015 levels at 5.3%Y/Y, while investor growth hit another record low of just 0.5%. Business credit growth remained unchanged at 4.5%Y/Y. 

    

Macro (Re)view (21/6) | Doves take control

A broad-based preparedness from central banks across the globe to move to more accommodative structures is now on earnest in response to growth and inflationary concerns. The expectation that lower interest rates will be forthcoming compressed bond yields across respective countries' curves to multi-year lows and buoyed equity markets to strong gains this week. Given the recent intensification in US-China trade tensions, developments stemming from negotiations between President Trump and President Xi at next week's G20 Summit in Osaka will be closely followed by markets and policymakers alike. 

The US Federal Reserve's (Fed) latest meeting headlined developments this week by marking a notably dovish shift in tone (see here). While still retaining a constructive baseline view for the US economic outlook, "increased uncertainties and muted inflationary pressures" prompted the Committee to remove its "patient" guidance used throughout 2019 to a stance where it will now "act as appropriate to sustain the (economic) expansion, with a strong labour market and inflation near its symmetric 2 percent objective". 

Underlining this shift, 8 of 19 Committee members expected rates to be cut this year, with 7 of those projecting 50 basis points of easing and the remaining voter seeing one rate cut. In sum, that was one shy from seeing the median projection for 2019 lowered from the present 2.25-2.5% setting (shown as our chart of the week, below), though the risks are to the downside with Fed Chair Powell saying in the post-meeting press conference that "a number of others see the case (for rate cuts) is strengthened". For 2020, the median projection implies the Committee will ease -- a complete reversal from just 3 months ago when the signal was for a rate hike.  

Chart of the week

  

There is now also an increased willingness from policymakers to support the euro area economy as outlined by European Central Bank (ECB) President Draghi during an address at its annual forum in Sintra. The message from the ECB's meeting 2 weeks ago was that the Governing Council was "determined to act in case of adverse contingencies", though in a surprise to markets that outlook was strengthened by President Draghi on Tuesday, highlighting that "additional stimulus will be required" unless they observe an improvement in the data flow. As President Draghi outlined, all stimulus options are under firm consideration including restarting net asset purchases and interest rate cuts. 

The Bank of England has yet to join the dovish shift, with the decision statement from its latest meeting this week continuing with its expectation for "gradual" and "limited" tightening in monetary policy. The Bank's assessment is that in response to tight labour market conditions and strength in wages growth, inflationary pressures will begin to emerge. However, that view remains conditioned on an orderly Brexit transition, which in itself is far from certain.

Rounding out the week from abroad, the Bank of Japan maintained its policy stance but is clearly alert to the downside risks posed to the domestic economy -- most notably in its export sector -- by the escalation in global trade tensions (and by further strengthening in the Yen). Governor Kuroda said the Bank's Policy Board would "consider expanding stimulus without hesitation", which could include expanded asset purchases and lower interest rates.

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In keeping with the global theme, it was the Reserve Bank of Australia (RBA) that gained most of the focus domestically this week. June's meeting minutes conveyed that the Board's outlook for the Australian economy "remained reasonable" supported by an expected lift in household income, public investment and resources exports. The minutes also highlighted that the decision to cut the cash rate by 25 basis points earlier this month was prompted by a revised assessment of the labour market, now seeing that a much lower unemployment rate of around 4.5% can be sustained without generating inflationary concerns. Given that the unemployment rate lifted to 5.2% in April (and remained unchanged in May) members concluded that "it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead".

That could occur as early as the next meeting, with markets increasing the probability for a rate cut on July 2 to around 75% from around 50% following a speech from RBA Governor Lowe in Adelaide on Thursday. Therein, more insight was provided on the various perspectives taken by the Bank to assess the extent of spare capacity in the labour market. Notable insights were that the labour supply in Australia is highly flexible to increases in demand, while wages growth is running well below a pace consistent with inflation returning to the Bank's 2-3% target range.

With the RBA now setting its sights on driving the unemployment rate lower, Governor Lowe signaled a clear preparedness for additional easing by noting that it would be "unrealistic to expect that lowering interest rates by ¼ of a percentage point will materially shift the path we look to be on". Strengthening that view, the Governor saw no sign from May's labour market data or Q1's national accounts that progress on reducing excess capacity was being made and thus "the possibility of lower interest rates remains on the table". Current expectations between financial markets and economists are for the cash rate to fall to 0.75% by year's end. 

Australian property prices down by 3% in the March quarter

Conditions in Australia's residential property market cooled further since the turn of the year according to the latest ABS Residential Property Price Index data. Prices fell in every capital city in the March quarter, while the national weighted average declined by 3.0% in Q1 to be down by 7.4% through the year.    

The detail across the capital cities in Q1 was;

• Sydney -3.9% (-10.3% in year-on-year terms)
• Melbourne -3.8% (-9.4%)
• Brisbane -1.5% (-1.3%)
• Adelaide -0.2% (+0.8%)
• Perth -1.1% (-2.7%)
• Hobart -0.4% (+4.6%)
• Darwin -1.8% (-4.2%)
• Canberra -0.9% (0.0%)

• Weighted-average of capitals -3.0% (-7.4%) 

The table, below, shows the price movements in each capital city for houses and units.

The next chart shows the price index for each capital over the history of the series. 

On an average weighted basis, Australian property prices have been declining for 5 consecutive quarters since the most recent peak in Q4 2017. That has largely been driven by Sydney and Melbourne, though that weakness now extends to the other capital cities where prices are also declining.

Accordingly, the ABS estimates that the total value of residential housing fell by 2.6% in the March quarter to $A6.6 trillion and has declined by 5.6% across the year.  

The ABS' indexes are released quarterly and are compiled using data provided by CoreLogic. In that sense, this series is seen very much as a lagging indicator given that more timely updates are provided monthly by CoreLogic. May's update showed that the national median price fell by 0.4% in the month and by 7.3% across the year (see here). Furthermore, there have been a number of key recent developments that are not reflected in the ABS' indexes, which include; the Reserve Bank of Australia's June rate cut, banking regulator APRA's proposal to ease loan serviceability assessment criteria and the federal election outcome removing uncertainty around changes to tax policy. Recent auction clearance rates have also improved in Sydney and Melbourne, though off lower volumes.