Macro (Re)view (16/8) | Markets under pressure from weak outlook

A weak economic outlook continued to drive the shift to risk aversion as markets doubled down on their efforts from last week. That was despite some rare and seemingly good news on the US-China trade front, with US President Trump announcing that around half of the $300bn tranche of consumer-related goods produced in China due to face an import tariff of 10% starting on September 1 would now be delayed until December 15 to ameliorate concerns of price increases dampening household spending in the lead up to Christmas. Household spending is an area of the US economy currently running at a robust pace and led GDP growth in Q2, reiterated this week by a stronger-than-expected result from retail sales in July rising by 0.7% and 3.5% over the year. 

However, US-China tensions remain fractious with China again vowing to retaliate against this latest tariff and called on the US to meet it "halfway" in finding a resolution, though comments from President Trump were less concilliatory in saying that any deal needed to be "on our terms". Adding to concerns this week were political uncertainties emanating from Italy and Argentina, escalating protests in Hong Kong,  as well as unequivocally poor data from China and Europe pointing to a further deterioration in the outlook for the global economy.  

In China, growth in retail sales (7.6% vs consensus 8.6%) and industrial production (4.8% vs 6.0%) over the year to July was much weaker than expected, while fixed asset investment just missed to the downside at 5.7% (vs 5.8%) on a year-to-date basis. The outturn for industrial production was the lowest since 2002 and highlights the pressures being faced by the manufacturing sector from a slowing global economy and weakness in exports prompted by trade tensions. The weakness from these reads together recent softness in credit data has increased expectations in markets that new stimulus measures will be required to ensure output growth does not falter below the 6-6.5% range targeted by authorities.

The second estimate of Q2 GDP growth in the euro area was unchanged at 0.2% quarter-on-quarter and 1.1% year-on-year. Most notably, growth in Germany -- the largest economy in the bloc -- contracted by 0.1% in Q2 and flatlined over the year, with the nation's sizeable export sector (more than 40% of GDP) struggling from the uncertainties abroad and from earlier structural adjustments working through the automotive industry. Initial signs from the German government were that it was reluctant to come forward with additional fiscal stimulus measures, though by week's end there were reports indicating more willingness to consider pulling away from their balanced budget rule imposed back in 2014 as a counter-cyclical response to support activity. Weighed by weakness in Germany, total industrial production for the euro area fell by 1.6% in June and by 2.6% over the year indicating the downturn in the manufacturing sector across the bloc is intensifying. Support will be forthcoming from the European Central Bank, with Governing Council member Olli Rehn saying on Thursday during an interview with the Wall Street Journal "it's important that we come up with a significant and impactful policy package in September".

Underlining concerns within markets regarding the global economic outlook and that the policy stance of the US Federal Reserve is too tight, the 10-year US Treasury yield traded below that for the 2-year Treasury on Wednesday for the first time since 2007. Inversion of the 2/10 yield curve was a psychological event for markets given it has portended each of the past 5 US recessions with an average lead time of a little more than 18 months, though the spread had turned positive again by the end of the week. While the Federal Reserve has already begun lowering rates, the rationale used at its last meeting to justify its 25 basis point cut of a "mid-cycle adjustment" is clearly misaligned with what markets deem necessary. However, there are also genuine concerns in markets that monetary policy will not be sufficient to remedy the current slowdown, with much more support needed from fiscal policy and structural reforms. 

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The labour market was the key focus of developments in Australia this week, with updates received on employment for the month of July and wages growth in the June quarter. Both data points continued to indicate that conditions within the labour market are running well below capacity, with subdued wages growth likely to keep inflation pressures contained thus pointing to further easing from the Reserve Bank of Australia by year's end.

The domestic economy added a net 41,100 jobs in July -- well clear of the consensus expectation for a gain of 14,000 -- and rebounded from a decline of 2,300 in June (revised from +500) that was its first monthly fall since September 2016 (see our full review here). Employment growth over the year strengthened from its already robust pace of 2.4% to 2.6% and has been predominantly driven by the full-time segment (3.0%Y/Y). However, with the participation rate rising to a new record high for the third time in the past 4 months reaching 66.1%, the unemployment rate was unchanged at 5.2%. Spare capacity remains prevalent with the key measures retracing some of the improvements achieved in the previous month as the underutilisation rate lifted to 13.6% and the underemployment rate increased to 8.4%.

Persistent and elevated spare capacity remains a headwind to wages growth, as confirmed by the Q2's subdued update of the Wage Price Index (reviewed here). While the quarterly outcome of 0.6% surprised to the upside of expectations (0.5%), that was boosted by a 0.8% rise from the public sector -- its fastest quarter-on-quarter gain in 5 years -- and was due largely to a 1.5% rise in Victoria reflective of a state government initiative to recalibrate wages to match the other states. Growth in the Wage Price Index through the year remained contained at around 2.3%, with the private sector just shy of that pace and trailing the public sector at 2.6%, which is shown as our chart of the week, below. With the underlying detail confirming broad-based softness across the industries and states, there was little to suggest inflation pressures will move materially higher. Furthermore, subdued wages growth continues to pose risks for the outlook for household consumption, which was again highlighted as the key uncertainty facing the domestic economy in a speech by RBA Deputy Governor Guy Debelle during the week.   

Chart of the week

Also of note this week, Westpac-Melbourne Institute's Index of Consumer Sentiment rebounded by 3.6% in August to a 'neutral' reading of 100.0, which turned over most of the 4.1% fall from the previous month in which confidence fell to an outright pessimistic level of 96.5. Supporting the turnaround was a 9.6% rise for the sub-index measuring consumers' expectations for the economic outlook over the next 12 months, likely influenced by the RBA's June and July rate cuts. However, though overall views towards spending lifted, the gains were less constructive suggesting that the federal government's tax cuts and an improving housing market are yet to fully take hold. Views towards the housing market continue to strengthen, with the indexes for both purchasing (+3.0%) and price expectations (+5.1%) rising solidly in August, which is broadly consistent with the recent indicators from auction clearances, notably in the major markets of Sydney and Melbourne, and CoreLogic's price data. 

In the business sector, NAB's Business Survey for July reported that confidence improved in the month (from +2 to +4) but remains at a below-average level and, matching with the weakness evident in the sector across the globe, is lowest for manufacturing firms. Overall business conditions eased from +4 to +2 and also remain below their long-run average level. Here, weakness was again notable in manufacturing together with the retail and wholesale sectors, while conditions are most buoyant in the mining sector supported by elevated commodity prices and a lower domestic currency. The survey's forward-looking indicators pointed to employment tracking at a modest +15,000 pace per month over the second half of the year, though note the employment data have largely run well above expectations so far in 2019. Meanwhile, forward orders remain very weak at a reading of -3 suggesting that business conditions will remain soft over the coming months, though capacity utilisation has improved to be around its average level.  

Australian employment rebounds in July

Australian employment increased a stronger-than-expected net 41,100 in July rebounding from a 2,300 decline in the previous month. The participation rate showed no sign of slowing in rising to a new record high of 66.1%, which held the unemployment rate steady at 5.2%. 

Labour Force Survey — July | By the numbers

• Employment increased by a net 41,100 in seasonally adjusted terms, which was well in excess of the median forecast for +14,000. June's initially reported increase of 500 was revised to show a decline of 2,300. 

• The national unemployment rate was unchanged at 5.2% matching the consensus forecast.
• The underutilisation rate lifted from 13.4% to 13.6% and the underemployment rate deteriorated from 8.2% to 8.4%. 

• The participation rate lifted by 0.1ppt to a new record-high 66.1% (exp: 66.0%).

• Aggregate hours worked increased by 0.5% in the month (prior 0.0%) to 1.78bn hours to drive the annual pace up to 2.0% from 1.5%.

Labour Force Survey — July | The details 

Taken at 2 decimal places, the nation's unemployment was 5.23% in July and virtually unchanged from the previous month at 5.24%. The unemployment rate has been drifting higher this year after ending 2018 at 4.98%. In trend terms, the unemployment rate lifted from 5.22% to 5.26% in July (rounded to 5.3% for reporting purposes). 

The participation rate remains on the rise, lifting from 65.96% to 66.06% (seasonally adjusted) and from 66.04% to 66.11% (trend). Thus, July saw a new record level for the participation rate of 66.1% for both the seasonally adjusted and trend series moving past the previous highs of 66.0% set in May. In absolute terms, workforce participation increased by 41,900 in July and with employment increasing by 41,100, the number of unemployed was little changed in lifting by 800 to 712,900. 

The net increase in employment of 41,100 in the month was split between the full-time segment rising by 34,500 and the part-time space adding the remaining 6,700 jobs. Employment growth through the year lifted from 2.35% to 2.64%, with full-time outperforming at 2.97% (from 2.88% in June) and part-time noticeably softer at 1.93% (but up from 1.24% in the previous month). 

Monthly hours worked stabilised in June after back-to-back declines and then bounced by 0.5% in today's report to 1.78bn hours. That saw growth over the year tracking at 2.0% compared to 1.5% in June. Adjusting for the increase in employment, average hours worked per employee in the month lifted by 0.2% to 137.9 hours, though that is 0.6% lower than the level from a year earlier.  

Looking at the state detail, there were some volatile changes in the unemployment rates with the moves mixed overall; New South Wales -0.2ppt to 4.4%, Victoria steady at 4.8%, Queensland -0.1ppt to 6.4%, South Australia +0.9ppt to 6.9%, Western Australia +0.2ppt to 5.9% and Tasmania -0.8ppt to 6.0%. 

   

Employment outcomes in July were; New South Wales +13,000, Victoria +3,600, Queensland +19,900, South Australia -1,700, Western Australia -4,200 and Tasmania +1,600. It very much continues to be a two-tiered labour market in Australia, with New South Wales and Victoria leading the way with a considerable gap to the rest.

Labour Force Survey — July | Insights

Not a great deal changes out of today's report. It was encouraging to see employment growth rebounding strongly in the month considering June's weak result and the overall pace remains robust anyway you look at it (2.6% 3-month annualised, 2.4% 6-month annualised and 2.6% year-on-year) continuing to defy expectations for a slowdown. However, with participation in the workforce continuing to move higher spare capacity persists. The underemployment rate (workers who are employed but want more hours) moved up from 8.2% to 8.4% and the underutilisation rate (combining the unemployed and underemployed) increased from 13.4% to 13.6%, while the unemployment rate at 5.2% is well above the RBA's 4.5% estimate for full employment. The chart (below) highlights that limited progress is being made in lowering spare capacity, with each of these key measures essentially tracking sideways and is consistent with yesterday's subdued update for wages growth in Q2 (see here).  

Preview: Labour Force Survey -- July

Australia's latest employment report is due for release by the ABS at 11:30am (AEST) today covering the month of July. The Reserve Bank of Australia announced back-to-back rate cuts in June and July as progress in reducing spare capacity faltered and inflation pressures remained soft. Last week, RBA Governor Philip Lowe noted that "the Board is prepared to ease monetary policy further" with the key consideration being the state of the labour market. Market pricing implies the next rate cut is expected to come in October, giving the RBA time to receive today's labour force report as well as the update for August (out 19/9) and Q2's National Accounts (out 4/9).   


As it stands | Labour Force Survey 

Employment growth remained constructive throughout the first half of 2019, though it finished on a disappointing note with the net addition of just 500 jobs in June, which fell well short of the 9,000 increase expected. That was the weakest outturn in 11 months and the first downside miss on the consensus figure since February earlier this year. From a month earlier, the pace of employment growth through the year retraced from 2.9% to 2.4%. 

With the workforce participation rate holding at its record high level of 66.0% initially achieved in May, the unemployment rate was unchanged at 5.2%. However, the broader measures of underutilisation saw some improvement in June with the underutilisation rate falling from 13.7% to 13.4% and the underemployment rate coming down from 8.6% to 8.2% -- effectively a reversal of the rises from the preceding two months. Following back-to-back monthly declines, aggregate hours worked held flat in June at 1.77bn hours to be 1.6% higher over the year but down from the 2.1% pace in May. To read our full review of June's report see here

Market expectations | Labour Force Survey 

A stronger outcome for employment growth is expected today, with the median forecast compiled by Bloomberg pointing to a net 14,000 jobs being added to the economy in July between a wide range of estimates from -10,000 to +37,000. For the fourth straight month, the unemployment rate is expected to print at 5.2% situated between estimates from 5.1% to 5.3%. The participation rate is anticipated to keep up its record level of 66.0%, which is on the high side of the range of estimates with 65.8% being the lowest.

What to watch | Labour Force Survey

Today's employment number (expected: +14,000) will be important, with markets likely to be unsettled by another weak outcome following on from June's net increase of just 500 that would be indicative of a notable deterioration in conditions. The unemployment rate is also key, which at two deimal places lifted from 5.19% in May to 5.24% in June. If, as expected, the participation rate remains at 66.0% the risk in today's report is that the unemployment rate misses the consensus forecast and prints at 5.3%, which would take it to its highest since August 2018 and further away from the 4.5% level the RBA estimates to be consistent with the nation's level of full employment.  

Australian Q2 Wage Price Index; 0.6%q/q, 2.3%Y/Y

Growth in Australia's Wage Price Index (WPI) lifted by a stronger-than-expected 0.6% in the June quarter, though the annual pace remained subdued at 2.3% consistent with a labour market operating with a considerable level of spare capacity. Growth in public sector wages in Q2 and over the past year outpaced the private sector, boosted by a strong increase in Victoria. 

Wage Price Index — Q2 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) increased by 0.61% in Q2 to outpace the median forecast for +0.5%. Q1's initially reported increase of 0.54% was revised lower to 0.46% in today's report. 
• In annual terms, growth in the WPI lifted from 2.26% (revised from 2.34% in Q1) to 2.33%  

Wage Price Index — Q2 | The details 

The ABS's Wage Price Index (WPI) is a measure of the change in price of wages and salaries paid by all employer types for a fixed group of jobs unadjusted for compositional characteristics of employees (role responsibilities, experience, qualification levels, hours worked etc). Thus the WPI reflects underlying factors driving wages growth and can be influenced by changes in individual and enterprise bargaining agreements and in minimum wage settings and awards. 

The headline WPI increased by 0.61% over the 3-month period ending June, which saw the pace over the past 12 months rise gently from 2.26% to 2.33%. Breaking these results down, the WPI for the public sector increased by 0.82% in Q2 -- its fastest quarterly rise in more than 5 years going back to Q1 2014 -- with the annual pace rising from 2.37% to 2.58%. The private sector WPI posted a 0.54% rise in Q2 to match the outcome in Q1, though the pace through the year eased from 2.35% to 2.26%. 

Adjusting for inflation as measured by the Consumer Price Index, real growth in the WPI over the year slowed from 0.96% to 0.73%, though if adjusted by the trimmed mean measure of inflation, real growth picked up from 0.66% to 0.73%. Either way, real wages growth remains very subdued -- though it is at least on an improving trajectory. 

The WPI inclusive of bonuses (not seasonally adjusted) softened in the June quarter rising by 0.38% compared to 0.46% in Q1, while the annual pace slowed from 2.64% to 2.47%. There were contrasting moves across the sectors with the private sector slowing to 0.38%q/q and 2.41%Y/Y (prior: 0.46%q/q, 2.66%Y/Y) as the public sector lifted to 0.6%q/q and 2.51%Y/Y (prior: 0.45%q/q, 2.37%Y/Y). 

On an industry basis, the healthcare sector led the way over the past year rising by 3.7% to match strong employment growth. An additional 6 industries recorded wages growth above the national average of 2.33%, including utilities (2.84%), arts and recreation (2.79%), public administration (2.54%), other services (2.44%), education (2.41%) and professional services (2.36%). The transport industry (2.33%) was in line with the national average. 

That meant wages growth lagged in 10 industries; accommodation and food services (2.31%), finance and insurance (2.3%), real estate (2.3%), mining (2.16%), administration (2.02%), manufacturing (2.01%), retail (1.92%), construction (1.86%), telecommunications (1.83%) and wholesale trade (1.71%).      

The chart (below) shows the quarterly outcomes for WPI growth in each state and sector. Growth in Victorian public sector wages was the clear standout here rising by 1.48%. 

  

The next chart shows the state and sector outcomes over the past year, which was also led by the Victorian public sector at 3.7%. Private sector wages growth in New South Wales was noticeably soft at 2.19%, which lagged the national average for the sector (2.26%) and the headline WPI (2.33%). Conditions are comparatively stronger in the Victorian private sector (2.64%). Softness remains notable in the private sectors in Queensland (2.11%) and Western Australia (1.65%). Surprisingly, given the employment data, the strongest market for private sector wages growth was Tasmania (3.18%). 

From an overall perspective, while most states languish Victoria pulled further away over Q2 to 2.9% in annual terms in response to an underutilisation rate that has fallen by around 2ppts over the past 2 years.  

Wage Price Index — Q2 | Insights 

Australian wages growth remains subdued at around a 2.3% pace in annual terms. As the chart (below) highlights, an elevated level of spare capacity is a strong headwind to wages growth, though there are also other structural influences at play, such as low growth in productivity, a more globally mobile workforce and the increased use of technology. The detail in today's report showed subdued wage pressures continue to be broad-based across most industries and states. There is little to suggest a near-term acceleration in national wages growth is likely, though Victoria offers some optimism where momentum continues to build with its annual pace lifting to a near 6-year high at 2.9%.  

Preview: Wage Price Index -- Q2

Australia's Wage Price Index (WPI) for the June quarter is due to be released by the ABS at 11:30am (AEST) today. The WPI measures the change in price of wages and salaries paid by employers of all types for a fixed group of jobs keeping constant all compositional factors, such as responsibilities, experience, qualifications and hours worked. Wages growth has a key influence on growth in household disposable income, which in turn drives the outlook for household consumption; the largest component of the domestic economy and the area currently identified by the Reserve Bank of Australia as posing the most uncertainty for its outlook.     


As it stands | Wage Price Index

The pace of wages growth remains subdued after the headline WPI increased by a softer-than-expected 0.5% in the March quarter to keep the annual pace at around 2.3%. Both outcomes were unchanged from Q4 in 2018. At the sector level, private sector wages growth came in at 0.5% to lift the annual pace from 2.3% to 2.4%, and while the quarterly pace in the public sector was also 0.5% growth through the year eased from 2.5% to 2.4%. 

Including bonuses, growth in the headline index posted a 0.5% rise in Q1 slowing the annual pace from 2.8% to 2.6%. For the private sector, growth in Q1 at 0.5% was noticeably softer than in the previous quarter, which resulted in the through-the-year pace falling from 2.8% to 2.6%. In the public sector, Q1's outcome of 0.5% saw the annual pace slow to 2.4% from 2.5%. 

To read our full review of Q1's report see here

  

Market expectations | Wage Price Index

Today's report is expected to show the WPI made little progress over the June quarter. According to Bloomberg, the median forecast is for the index to rise by 0.5% in Q1 between a tight range of estimates from 0.5% to 0.6%. The annual pace is expected to remain at 2.3%, though individual estimates vary between 2.1% and 2.4%. 

The economy added a net 87,700 jobs in Q2 -- a decent increase from Q1's total of 67,400 -- with the annual pace of employment growth remaining the same as it was at the end of the March quarter at a robust 2.4%. However, workforce participation continued to rise over the quarter reaching its highest level on record at 66.0% in June. As a result, the unemployment rate drifted up from 5.1% at the end of March to 5.2%, while over that time the underemployment rate remained at 8.2% and the underutilisation rate lifted from 13.3% to 13.4%. Aside from spare capacity in the labour market, the pace of wages growth has also likely been restricted by structural factors, such as subdued productivity growth and the increased digitalisation and globalisation of the workforce. The recent decision from the Fair Work Commission to raise the national minimum wage by 3.0% takes effect from the start of Q3 so will not be reflected in today's report.


What to watch | Wage Price Index

The state-level data are always worth watching in this release. Labour market conditions vary considerably across the nation, with the two most populous states of New South Wales and Victoria leading the way over the past year or so in terms of employment growth and progress in reducing their unemployment rates, though that has failed to rev up wages growth. More recently, the unemployment rates in those states have lifted and noticeably so in New South Wales. In the other states, labour market conditions have been on the improve in Western Australia but have weakened in Queensland, South Australia, and Tasmania. Given these dynamics, it is difficult to see an acceleration in national wages growth for the foreseeable future, as highlighted by last Friday's Statement on Monetary Policy from RBA which forecasts growth in the WPI remaining at 2.3% in 2019 and 2020, rising only to 2.4% in 2021 (see here). 

Macro (Re)view (9/8) | Trade tensions continue to concern markets; RBA downgrades outlook

Another escalation in US-China trade tensions saw volatility and risk aversion sweep across markets this week. Following last Friday's announcement from US President Trump that a $300bn tranche of consumer-related imports from China would face a tariff of 10% (with the potential to rise to 25% or higher) effective from September 1, the People's Bank of China on Monday announced a much weaker-than-expected fix for the Yuan against the US dollar linking the decision to "trade protectionism measures and the imposition of tariff increases". With the Yuan subsequently weakening to an 11-year low against the US dollar, fears were sparked that currency devaluation was a sign of things to come from China in its retaliation, while there were also reports that state-owned enterprises had been directed to curb purchases of agricultural products from the US. Tensions elevated further when the US Treasury Department labeled China as a currency manipulator for the first time since 1994, while President Trump expressed his grievances via Twitter.

Suffice it to say risk appetite, notably for equities, evaporated sending government bond yields to even lower levels. Germany, an economy at notable risk from a further downturn in global trade, saw its 10-year yield tumble to a new record low of -0.58% accentuated by data that showed industrial output fell by 5.2% over the year to June -- its worst outturn since 2009. Whereas in recent times falling bond yields had driven equity prices higher, sentiment appeared to be turning to the view that it was now a clear signal for a worsening economic outlook across the globe in which the actions of central banks (or perceived lack thereof in the case of the US Federal Reserve) might only have limited impact.

In that context of increasing trade tensions, fears of currency devaluations and a deteriorating global outlook, no fewer than 4 central banks in the Asian region, including India, Thailand, Philippines and New Zealand delivered interest rate cuts. Across the Tasman, the Reserve Bank of New Zealand cut its Offical Cash Rate by 50 basis points to 1.0%, which was deeper than the 25 basis point cut the markets had anticipated. The accompanying statement outlined that the Bank's policy-setting committee debated the relative merits of a 25 or 50-basis point cut and ultimately reached the determination that the latter was necessary "to continue to meet its employment and inflation objectives". The decision was made particularly notable by the latest employment data that showed the nation's unemployment rate defied expectations for a rise to 4.3% by instead falling from 4.2% to an 11-year low of 3.9% in Q2.

Also helping to improve market sentiment, China trade data for July came in stronger than anticipated on Thursday. Exports swung from -1.3% to +3.3% through the year, perhaps reflective of a bringing forward in demand ahead of the introduction of new tariffs, while imports contracted by 5.6% against expectations for a much more sizeable decline of 9.0%. However, risk aversion came back on Friday as President Trump said he could cancel trade talks with China that are due to take place in September sending equities lower to lock in losses for the week.  

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Domestically events this week were heavily focused on the Reserve Bank Australia. As expected, the Board held the cash rate steady at 1.0% on Tuesday (reviewed here). In his decision statement, Governor Philip Lowe highlighted that "increased uncertainty" surrounding trade tensions kept the risks to the global economic outlook "titled to the downside", while downgrades to the domestic outlook were signaled thus resulting in the Board firming its easing bias by noting a preparedness to "ease monetary policy further if needed" to support its inflation-targeting objective. 

On Friday, the RBA published its Statement on Monetary Policy for August in which its updated set of forecasts confirmed a deterioration in the Bank's outlook for the domestic economy. For 2019, GDP growth was lowered to a below-trend pace of 2.5% from 2.75%, though it is still expected to return to trend (2.75%) in 2020 before lifting again to 3.0% in 2021. Little progress is expected to be made in reducing the spare capacity in the labour market that the Board has been discussing over recent months with the unemployment rate remaining around its current 5.2% level out to the end of next year, whereas in May its forecast was for a decline to 5.0%. With the unemployment rate now not expected to fall to 5.0% until mid-2021, headline inflation is not seen hitting 2.0% before then, with the outlook for 2019 and 2020 lowered by 0.25ppts to 1.75%. The forecast for the Bank's preferred inflation measure (trimmed mean)  in 2019 was lowered from 1.75% to 1.5% and was downgraded from 2.0% to 1.75% in 2020, meaning that it is not expected to reach to the lower band of the target range before mid-2021. It is important to highlight that these downgrades come despite incorporating an additional two 25 basis point rate cuts (cash rate of 0.5%) as implied by market pricing (the first by November 2019 and the second by February 2020) and a lower Australian dollar in both trade-weighted and US dollar terms. 

Also on Friday, Governor Lowe, his deputy and assistant governors appeared before the House of Representatives' Standing Committee on Economics for the Bank's semi-annual testimony. In his opening statement, the governor highlighted while the Board was now in wait-and-see mode given it cut the cash rate in June and July, the downgrades in August's quarterly statement meant that "the possibility of lower interest rates will remain on the table". To that end, when questioned, the governor said that while unlikely "it's possible that we end up at the zero lower bound" before going on to say "we are prepared to do unconventional things if the circumstances warranted it". Discussions within the RBA on what form those measures could potentially take appear to be only at a very early stage, though the governor outlined that the unconventional measures taken by other central banks across the world had been examined to try and identify what actions could work within an Australian context. 

In terms of data this week, Australia's trade surplus surged past $8.0bn in June to a new record high (shown as our chart of the week, below) driven by the tailwind from an escalation in iron ore prices (note prices retraced sharply over the past week) and weakness in imports (reviewed here). Meanwhile, there were early signs that the recent pick up in sentiment in the housing market following May's federal election is flowing through to demand for housing finance with lending commitments the owner-occupier and investor segments rising together in June for the first time since May 2018 (reviewed here). 

Chart of the week

Australian housing finance and approvals rise in June

Australian housing finance approvals to owner-occupiers lifted for the first time in 4 months in June, while the total value of lending committed across the segments increased at its strongest month pace since February earlier this year. The activity indicators have highlighted that sentiment in the housing market has clearly picked up since May's federal election result, supported also by the Reserve Bank of Australia announcing consecutive cash rate cuts in June and July and by an easing in credit assessment criteria signaled by the banking regulator, APRA. 

Housing Finance — June | By the numbers

• Housing finance approvals to owner-occupiers (excluding refinancing) posted a 0.4% month-to-month rise in June to 30,894, though that was softer than the 0.5% lift expected by markets (prior rev: -0.3%). The decline in approvals over the year moderated to -13.6% from -15.0%.

• The total value of housing finance commitments (excluding refinancing) increased by 1.9% in the month to $A16.82bn (prior rev: -2.7% from -2.4%) to be 17.6% lower than a year earlier (prior rev: -20.9%). 

Housing Finance — June | The details 

For the first time since May 2018, lending to both the owner-occupier and investor segments posted monthly increases. Excluding refinancing, commitments to owner-occupiers lifted by 2.4% -- its strongest rise since February 2019 -- to $12.4bn, easing the annual decline from -18.2% to -14.8%. Commitments to investors excluding refinancing increased by 0.5% in June -- its first monthly gain since July 2018 -- to $4.4bn, which slowed the decline over the year from -27.7% to -24.8%. 

The total value of refinancing commitments fell by 1.9% in June and by 7.5% through the year to $8.1bn. Within that result, refinancing from owner-occupiers declined by 2.9% in the month to $5.6bn (-7.8%Y/Y), while it lifted by 0.4% in the investor segment to $2.4bn (-6.7%Y/Y). Lending to the owner-occupier segment for renovation work increased by 2.7% to $278m, with the annual decline slowing to -8.8% from a low of nearly -34% last September. 

Over Q2, lending to owner-occupiers fell by 1.7% and by 4.8% to investors, though as the chart (below) shows, the pace of the declines is reducing. 

In terms of loan approvals to owner-occupiers, there was a 1.2% rise for approvals to purchase established properties (-13.7%Y/Y), which is in contrast to a 2% fall for construction-related approvals (-13.2%Y/Y), with loans for construction -2.3% (-8.7%Y/Y) and newly constructed dwellings -1.2% (-23.0%Y/Y). 

   

The state detail for owner-occupier approvals was largely positive in June but still weak for Q2 overall; New South Wales +0.7% (-1.7% qtr), Victoria -0.6% (-1.7%), Queensland +0.3% (-3.7%), South Australia +2.0% (-4.4%), Western Australia +1.1% (-2.9%) and Tasmania +2.1% (-8.4%). 

   

Approvals details are not produced for the investor segment, though the ABS does provide value estimates. Here, lending in New South Wales increased by 2.4% in June -- its first monthly rise since April of last year -- while Victoria (+0.6%) also posted its first month-to-month rise since February 2019. Investment lending fell for the other states in June. 

The summary table, below, shows the full breakdown of results across the segments on a state-by-state basis in June and over the past year. 

One area worth highlighting is a pick up in activity from first home buyers in New South Wales and Victoria that has occurred over recent months (see chart, below), likely reflecting some improvement in affordability conditions.

Housing Finance — June | Insights

There were early signs in today's report that the recent improvement in the activity indicators, such as auction clearance rates and prices, are starting to flow into the hard data. Consecutive interest rate cuts from the RBA as well as indications for an extended period of low or even lower rates (see here) and less onerous credit assessment criteria are likely to support further improvement in demand for housing finance in the months ahead. 

RBA on hold at 1.0% in August

The Reserve Bank of Australia (RBA) Board kept the cash rate unchanged at 1.0% at its August meeting in Sydney today, in line with expectations of economists and markets. The cash rate was cut by 25 basis points at each of the Board's past two meetings in June and July.

In today's decision statement, Governor Philip Lowe started by acknowledging that the global trade tensions that are rattling markets at the moment had "increased uncertainty" and meant that the risks for the global economy "remain tilted to the downside". Against that negativity, labour market conditions abroad are strong referencing low unemployment rates and rising wages growth, though notably "inflation remains low". Due to concerns around the global economic outlook and low inflation, the governor highlighted the recent easing in policy from other central banks and noted that "further monetary easing is widely expected". In recent appearances, Governor Lowe has stated that exchange rate depreciation is the primary mechanism by which the recent rate cuts are expected to support the Australian economy. 

Focusing domestically, the governor conceded that economic growth through the first half of 2019 was lower than had been anticipated, due to slowing growth in household consumption in response to low income growth and declining property prices. Ahead of this Friday's quarterly Statement on Monetary Policy, the governor stated that the Bank's GDP growth forecast for 2019 would be lowered from 2.75% to 2.5%, though it still expected it to return to a trend pace of 2.75% in 2020 supported by its cuts to the cash rate, tax cuts, infrastructure investment, a stabilisation in the housing market and a more optimistic resources sector. 

Despite the recent lift in the unemployment rate to 5.2%, the Bank will continue to forecast a decline over the next couple of years to 5.0%. Spare capacity remains persistent highlighted in today's statement by the line that "wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply".

Turning to inflation, the governor noted that Q2's Consumer Price Index data (see here) were broadly in line with what the Bank had expected and confirmed that "inflation pressures remain subdued across much of the economy". However, the Bank will downgrade its inflation forecasts from those it published in May, which had inflation rising to the 2% lower band by mid-2020. It now expects both headline and underlying inflation "to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021".

In concluding, the governor stated very clearly that policy will be lower for longer to support its objectives in reducing spare capacity in the labour market and lifting inflation back to its 2-3% target range. Given that the Bank's updated forecasts on Friday will show some deterioration in growth and inflation relative to what was anticipated in May's quarterly statement, an easing bias was made explicit with the closing line that "The Board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time" (our emphasis).