Macro (Re)view (24/1) | Markets given reason for caution

Global events were the key focus for markets this week as policymakers and business leaders made their annual trip to Davos in the Swiss Alps for the World Economic Forum where trade agreements and responses to climate change headlined discussions. This came as the International Monetary Fund (IMF) saw tentative signs of stabilisation in the global economy from its slowdown over much of the past couple of years, with the downside risks to the outlook assessed to be receding somewhat following the broad-based easing by central banks in 2019, the US-China phase one trade agreement and a reduced likelihood of a hard Brexit. However, the IMF's revised forecasts for global growth of 2.9% in 2019 (down from 3.0%) and 3.3% in 2020 (down from 3.4%) is consistent with an outlook that is subdued and relatively precarious given the potential for trade and geopolitical tensions to re-emerge, and for unforeseen events, such as this week's outbreak of the coronavirus in China that forced authorities to lock down at least three cities and cancel Lunar New Year celebrations in Beijing, to weigh on activity and unsettle sentiment in markets. 

As it was an unusually quiet week for data in the US, attention turned to Davos as discussions regarding a US-Europe trade agreement began to ramp up. US President Trump met with European Commission President Ursula von der Leyen, with the US wanting to reduce barriers to entry and increase access for domestic-based firms to markets on the continent. In media appearances, President Trump warned that in the absence of a new agreement, previously-threatened auto tariffs (of potentially as high as 25%) would be implemented. Meanwhile, discussions between the US and France over the latter's planned introduction of a digital tax, which Washington believes unfairly targets US-based firms, found a more conciliatory tone following talks between President Trump and President Macron. To that end, France suspended the implementation of the digital tax that was due to start in April, while the US will hold off threatened tariffs on French champagne and other consumer goods for now. The main US data point was January's flash Markit PMI readings, with the composite index firming slightly from 52.7 to 53.1 to indicate economic activity was expanding a moderate pace early in 2020. Conditions in the services sector improved from 52.8 to 53.2, though there was an unexpected slowing in the manufacturing sector from 52.4 to 51.7.

On the policy front this week, the European Central Bank's meeting went by largely as expected, with the Governing Council keeping its monetary policy stance on hold. In the post-meeting press conference, ECB President Christine Lagarde outlined that the recent data flow had been in line with the Bank's expectation for a stabilisation of the euro area economy at a moderate pace of growth, with weakness in manufacturing continuing to drag on activity. Friday's flash Markit Eurozone PMI readings were broadly consistent with that assessment, with the composite index unchanged at 50.9, while the services sector was expanding modestly at 52.2 and manufacturing was still in contraction at 47.8 but conditions had improved to a 9-month high. There was a subtle change in the ECB's assessment of economic conditions relating to inflation, where it noted "there are some signs of a moderate increase in underlying inflation", whereas at its previous meeting in December it described the increase as "mild". Of most significance at this meeting, the ECB's strategic review was officially announced, which will examine how the Bank uses its monetary policy toolkit to achieve its inflation mandate, though it will also take into account broader considerations in terms of how it may affect financial stability, employment, and environmental sustainability. The review is expected to be concluded by the end of the year, with President Lagarde in media interviews at Davos pushing back against the notion widely touted in markets that the presence of the review made changes in the ECB's current monetary policy stance less likely. 

Then to Asia, the Bank of Japan (BoJ) held its latest meeting where it kept its monetary policy settings unchanged, as expected. The BoJ has become slightly more constructive in its view of the outlook, due to a stabilisation of the slowdown in the global economy, fiscal support and accommodative financial conditions, with its GDP growth forecasts upgraded for 2019 (from 0.6% to 0.8%), 2020 (from 0.7% to 0.9%) and 2021 (from 1.0% to 1.1%). However, its inflation forecasts were trimmed by 0.1ppt in each of 2019 (0.6%), 2020 (1.0%) and 2021 (1.4%), and with the risks to its growth and inflation prospects still assessed as being to the downside, the Bank maintained its guidance that "it will not hesitate to take additional easing measures" if required.  

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Developments in Australia this week significantly altered the near-term outlook for monetary policy, with market pricing for a Reserve Bank of Australia rate cut in February falling from a near 60% chance to around 20%, while several forecasters, including three from the major banks (Westpac, CBA and ANZ), have now delayed the timing of their calls for the next cut. This came after December's employment data (released on Thursday) was much stronger than expected (full review here), just as was the case in November. On net, employment increased by 28.9k in December; well clear of the 10.0k rise anticipated by markets, extending the strength from November where employment accelerated by 38.5k (revised from 39.9k). However, the compositional split was uneven, with part-time employment accounting for all of the increase (29.2k) as the full-time segment fell (-0.3k), while employment growth in Q4 at 43.4k was the softest quarterly outcome since Q1 2018. Instead, as our chart of the week (below) highlights, the focus turned to the national unemployment rate that fell unexpectedly from 5.2% to  5.1% — its lowest level in 9 months — following on from a 0.1ppt decline in November. While this will be welcomed by the RBA, it remains elevated relative to its estimate of full employment (around 4.5%), while underemployment, unchanged at 8.3% in December, continues to point to a labour market with considerable spare capacity thus restraining wages growth and inflation pressures.  

Chart of the week

Meanwhile, the Westpac Melbourne Institute's Index of Consumer Sentiment fell by 1.8% in January to a reading of 93.4, with Westpac's Chief Economist Bill Evans reporting that the nation's bushfire crisis had weighed further on already weak confidence. The economic outlook remains a headwind for consumers, with January's readings for both the "next 12 months" (-5.4%) and "next 5 years" (-3.7%) declining sharply this month. Weak confidence and concerns around the outlook appear to be weighing on spending intentions, which remain at well below-average levels, with the index for "time to buy a major household item" declining by 1.8% in January to be down by 4.1% through the year. Assessments of family finances on a year ago (+0.7%) and for the next 12 months (+0.9%) improved slightly in January, likely supported by the strong gains recorded by Australia's equity market early in the new year. In the housing market, consumers remain confident that the recent upswing in prices will continue at pace with the "House Price Expectations" index lifting by 8.1% in January to be up by 58% on a year earlier. The "time to buy a dwelling" index increased by 5.7% in the month to 118.8, though this remains slightly below average (120) and Westpac Economics' expectation was that this component had likely reached its top in this cycle given that buying intentions had slipped by 6.4% since August coming after house prices troughed in June.  

Australian employment +28.9k in December; unemployment rate 5.1%

As was the case in November, Australia's labour market outperformed expectations in December, with employment rising by 28.9k and the unemployment rate falling unexpectedly to a 9-month low at 5.1%. Financial markets reacted by scaling back expectations for a near-term RBA rate cut.    

Labour Force Survey — December | By the numbers

• Employment (on net) increased by 28.9k in seasonally adjusted terms in December to outperform the consensus forecast for a rise of 10.0k. November's initially reported 39.9k gain was trimmed to 38.5k.   

• The national unemployment rate fell from 5.2% to 5.1%, where the market had expected it to remain at 5.2%, and is now at its lowest since March 2019.  
• Underutilisation eased from 13.5% to 13.4% to a 6-month low, though underemployment was unchanged at 8.3%. 

• The workforce participation rate held steady at 66.0%, as expected.

• Aggregate hours worked posted a 0.5% rise in December to 1.79bn hours (prior +0.2%), with the annual pace increasing from 1.7% to 2.3% driven by a base effect.  

Labour Force Survey — December | The details

For the second consecutive month, employment surprised to the upside of expectations rising by 28.9k in December  (expected 10.0k) following November's gain of 38.5k. With the labour force rising by 16.0k in the month, the total of unemployed declined by 12.9k, which resulted in the unemployment rate falling from 5.17% to 5.07% to be at its lowest level in 9 months.   

Breaking December's employment outcome down, the 28.9k rise came entirely from the part-time segment (29.2k) as full-time declined slightly (-0.3k). For the year as a whole, employment increased by 262.5k, with the pace lifting a touch from 2.0% in November to 2.1%. In 2019, full-time led (152.7k), though the pace slowed notably over the last few months of the year to 1.8%. However, some moderation came through from part-time employment, which lifted by 109.0k in 2019 (2.7%yr) and was concentrated over the second half of the year (92.8k).

Highlighting the slowdown that occurred towards the end of the year, employment growth was 43.4k (full-time -8.0k and part-time 51.5k) in Q4 and was well down from the previous quarters; 81.4k in Q3, 73.9k in Q2 and 63.9k in Q1. 

At the same time, the quarterly profile for unemployment improved gently towards the end of 2019; 5.1% in Q1, 5.3% in Q2, 5.2% in Q3 and 5.1% in Q4, which occurred as the rise in participation unsurprisingly slowed after running up to record-high levels. 

While part-time work accounted for all of the increase in employment in December, total hours worked posted their strongest monthly rise (0.5%) since last July. In annual terms, the pace accelerated from 1.7% to 2.3% to its fastest since March 2019, though this is likely overstated by a base effect as a -0.1% fall from December 2018 fell out of the calculation. Adjusting for the rise in employment, average hours worked per employee lifted from 137.6 hours to 138.0 hours in December to maintain its gradual uptrend from recent months. 

Turning to the state detail, unemployment rates fell for most states in December; New South Wales -0.1ppt to 4.5%, Queensland -0.6ppt to 5.7%, South Australia -0.1ppt to 6.2%, Western Australia -0.3ppt to 5.4% and Tasmania -0.5ppt to 5.5%. Victoria went against the trend, rising from 4.6% to 4.9%. 

The next chart shows employment growth in December was driven by New South Wales (+20.6k) and Victoria (+10.3k), with Tasmania rising modestly (+1.5k). However, declines came in Queensland (-3.6k), South Australia (-3.0k) and Western Australia (-5.3k). For Q4, strength in employment was concentrated in Victoria (26.6k), while New South Wales was next highest at 7.6k. Together, New South Wales (95.0k) and Victoria (90.3k) accounted for around 71% of national employment growth in 2019. 

Labour Force Survey — December | Insights

Markets responded to the stronger-than-expected detail in today's report by scaling back pricing for a February RBA rate cut from around 60% pre-release to around 30%, assessing that the near-term risks for further easing have reduced notably. However, next week's CPI report for Q4 remains crucial in deliberations. As far as today's details go, the outperformance in employment when taken with the upside surprise in November's report paints a constructive picture, and while employment growth is still relatively robust (2.1%yr) it clearly slowed over the second half of 2019. The RBA will be encouraged by a gradual downtrend emerging in the unemployment rate but it remains some way above its estimate of full employment at around 4.5% and spare capacity more broadly is still elevated.

  

Preview: Labour Force Survey — December

Australia's all-important Labour Force Survey is due to be released by the ABS at 11:30am (AEDT) today, which will cover the month of December. Markets assess the chance of a February RBA rate cut as slightly better than a 50/50 prospect, and today's report could be influential in lifting expectations further. 

As it stands | Labour Force Survey 

Employment contracted by 24.8k in October (revised from -19.0k) but recovered in November to post a much stronger-than-expected 39.9k increase against the consensus forecast for a gain of 15.0k. This ensured the annual pace of employment growth was little changed at around 2.0%, though this is near its softest pace since early to mid 2017. With the participation rate holding at 66.0%, the strong employment outcome comfortably outpaced growth in the labour force (23.1k) in the month and as a result, the unemployment rate unwound October's increase falling from 5.3% to 5.2%. Similarly, underutilisation (13.8% to 13.5%) and underemployment (8.5% to 8.3%) also fell to cancel out increases in October. Hours worked lifted by a modest 0.2% in November, with the annual pace firming from 1.4% to 1.7%. 

For a full review of November's report see here   

Market expectations | Labour Force Survey

The consensus call from Bloomberg's survey of economists is for employment to rise by a modest 12.0k in December, with estimates ranging from -10.0k to 20.0k. No change in the unemployment rate is expected from its current level of 5.2%, though this is on the low side of estimates that range up to 5.4%, while the rate participation is forecast to remain at 66.0% (range: 66.0% to 66.1%). 

What to watch | Labour Force Survey

The employment number is key in today's release. In the past 3 months, the outcomes have been; 13.3k in September, -24.8k in October and 39.9k in November, averaging 9.5k per month. This is well down from the 3-month average to September of 27.9k, in which employment increased by a total of 83.7k in the quarter. Employment clearly looks to be weaker in Q4, though the extent of the slowdown has been difficult to gauge given recent volatility with December's outcome to provide greater clarity here.  

 

Macro (Re)view (17/1) | Phase one deal finalised; risk rallies further

The long-awaited signing of the phase one trade deal between the US and China occurred in Washington this week, with the full text of the terms made public for the first time (see here). On the US side, the finalisation of the agreement ensures the 15% tariff applied on a $120bn tranche of consumer-related goods imported from China will be reduced to 7.5%, while a planned tariff that was to levied on a separate $160 list of Chinese-produced goods, including electronics and clothing, from December 15 remains suspended, though the 25% duty remains on a $250bn tranche of imports, with US Treasury Secretary Steve Mnuchin indicating this could form the basis of negotiations towards a phase two deal. In return, China has agreed to expand its purchase of US goods and services by at least $200bn above the level from 2017 over the next two years, with $76.7bn of this to come in year one followed by the remaining $123.3bn in year two. This is headlined by a requirement for China to increase its purchase and import of US agricultural products by at least $40bn per year for the next two years. In addition, China has granted concessions around intellectual property, forced technology transfers, allowing greater access to its domestic market for financial services firms and refraining from competitive devaluations of its currency. The agreement contains an overarching enforcement mechanism, whereby tariffs or other penalties can be implemented if disputes are unable to be resolved through bilateral consultation.

In the US this week, any immediate concerns of an impending softening in the household sector following last Friday's employment report were ameliorated by a solid outturn from retail sales that advanced by a stronger-than-expected 0.3% in December that accelerated the annual pace from 3.3% to a 16-month high of 5.8%, while core sales also outperformed rising by 0.5% in the month and by 5.7% through the year to its fastest pace since July 2018. Completing the set, the retail control group (more closely aligned with consumer spending in GDP calculations) lifted by 0.5% in December against an expected 0.4% rise, rebounding from a weak outcome in November (-0.1%). With inflation data during the week indicating a contained profile at 2.3%Y/Y to December on both headline and core basis, the US Federal Reserve can maintain its accommodative stance in 2020, particularly if the household sector were to show any sign of weakening, while according to reporting from Fox Business, the Trump administration is considering a fiscal stimulus package to take to the upcoming election.

Over in the continent this week, the Account of the European Central Bank's policy meeting in December conveyed the message that the Governing Council was reasonably constructive in the circumstances, noting they had seen signs of stabilisation in the data flow, and while the risks to the outlook were still "tilted to the downside" they were now assessed as being "somewhat less pronounced" due to an easing in the intensity of headwinds from offshore. In the near term, the Governing Council sees the outlook as being "muted" but is anticipating a "moderate recovery" to occur "later on". As such, and with new President Christine Lagarde focused on establishing a more unified Governing Council, the Account noted the current monetary policy stance "appeared fully appropriate, lending substantial support to growth and inflation developments", indicating that its wait-and-see approach is likely to remain the way forward. Developments in the UK appear to have reached a more nuanced juncture, with prospects for a Bank of England rate cut strengthening this week. On the data front, GDP growth contracted by 0.3% in the month of November to be tracking at just a 0.6% annual pace; inflation was weaker than expected sliding to a 3-year low in December on both headline (1.3%Y/Y) and core (1.4%Y/Y) measures (see chart of the week, below) and is well below the Bank's 2% target; and retail sales fell by 0.6% in December. This came after a speech from Monetary Policy Committee member Saunders in which he outlined his reasoning in voting for a rate cut at the previous two policy meetings.  

Chart of the week

Late in the week, the latest round of data from China was released and was constructive overall, suggesting that activity in the world's second-largest economy was showing signs of stabilising. GDP growth was 1.5% in Q4, which maintained the annual pace at 6.0%, while growth in 2019 came in at 6.1% — its slowest pace of expansion since 1990 — and was at the lower end of the 6.0-6.5% range targeted by authorities in Beijing. The highlight was a robust outperformance from industrial production rising by 6.9% through the year where the consensus was for growth of 5.9%, while retail sales at 8.0%Y/Y and fixed asset investment at 5.4%ytd printed slightly above forecasts.

In a light week in Australia, the strong performance of the nation's benchmark S&P/ASX200 equity index in the early days of the new year came into focus as it surpassed the 7,000 level for the first time and closed out the week at a record high. The main data point from the week was November's housing finance update where the upswing in commitments from mid-2019's trough remained intact rising by a further 1.8% in the month and by 5.9% over the year — its fastest pace in more than two years (reviewed here). The owner-occupier segment continues to lead the way, with the value of commitments expanding for a 6th straight month to be up by 10.0% through the year, while the investor segment saw a 2.2% rise in November but remained in contraction in annual terms at -3.2%. Overall, the report was consistent with improving established housing market conditions, driven by the combination of the passage of the federal election, RBA rate cuts and an easing in credit assessment criteria. In the week ahead, Australia's labour force data for December are due to be released on Thursday, with the median forecasts looking for employment to rise by 12.0k and the unemployment rate to hold at 5.2%. 

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Australian housing finance commitments up 1.8% in November

Australian housing finance commitments remain in their upswing from mid-2019's trough, rising by a stronger-than-expected 1.8% in November to be expanding at the fastest annual pace in more than 2 years at 5.9%. The owner-occupier segment continues to lead this upswing, with investors still lagging.  

Housing Finance — November | By the numbers

• The total value of housing finance commitments (excluding refinancing) lifted by 1.8% in November to $18.594bn, exceeding the median estimate for a 1.4% rise but softer than the 2.1% increase (revised from 2.0%) recorded in October. In annual terms, commitments expanded from 0.7% to 5.9% — its fastest pace since September 2017.  
• Owner-occupier housing finance commitments posted their 6th consecutive monthly rise with a 1.6% increase in November to $13.352bn (prior rev: 2.3%) as the annual pace strengthened from 5.5% to a 2-year high at 10.0%. 
• Commitments to the investor segment increased by 2.2% to $5.242bn (prior rev: 1.5%), though the annual pace still remains in contraction at -3.2% but is well down from -9.7% in the previous month. 

Housing Finance — November | The details 

As highlighted in October's housing finance review, this series is currently in transition as ABS shifts to a new methodology and to that end, the availability of estimates is somewhat limited at this stage. Nevertheless, the upswing in housing finance commitments from the troughs of mid last year remained intact in November rising by a further 1.8% in the month ($320m) to $18.594bn. The annual pace at 5.9% is now at its fastest since September 2017 and compares to its most recent trough of -22.0% in May 2019. The passage of the federal election held in May last year, 3 RBA rate cuts and an easing in guidance from the banking regulator APRA around credit assessment criteria appear to be the key factors driving the turnaround. 

The upswing has been led by the owner-occupier segment, with commitments up by another 1.6% in the month ($206m) to $13.352bn. At this level, commitments have risen by 10.0% on a year earlier to be expanding at their fastest pace in 2 years. At their most recent weakest point, owner-occupier commitments were contracting by 19.3% in the year to May 2019.

In the investor segment, commitments firmed by 2.2% in November ($115m) to $5.242bn to be down by 3.2% on the level from a year earlier but is well off the trough from February 2019 at -29.5%.   

 

The state-based details were generally constructive in November, most notably for owner-occupiers. For that segment, the outcomes were; New South Wales 2.1% (17.3%yr), Victoria 0.4% (11.0%yr), Queensland 3.4% (6.7%yr), South Australia 4.3% (6.2%yr), Western Australia 1.7% (-1.2%yr) and Tasmania -1.9% (-0.2%yr).

For the investor segment the details were; New South Wales 3.1% (-9.3%yr), Victoria 1.4% (4.5%yr), Queensland -0.2% (1.7%yr), South Australia 1.1% (-3.1%yr), Western Australia 5.9% (-4.1%yr) and Tasmania -1.4% (6.6%yr).

At this stage, the full suite of seasonally adjusted estimates for the number of housing finance approvals is not yet available, however; the Bureau reports the following details relating to the owner-occupier segment on a national basis;

• Approvals to purchase existing dwellings lifted by 0.1% in the month to 19,866 (-4.1%yr)
• Approvals to purchase newly erected dwellings increased by 2.2% in November to 3,441 (1.4%yr)
• Approvals for the construction of new dwellings fell by 8.4% in the month to 3,028 (-10.3%yr) 

Housing Finance — November | Insights

Today's report remained broadly consistent with the theme of improving sentiment in the established housing market conveyed by recent price data and capital city auction clearance rates. Much of that improvement in the established housing market has been centered in Sydney and Melbourne and the owner-occupier details in today's update are consistent with that. With further easing by the RBA remaining on the radar, strength in housing finance commitments appears to have further to run, with growth in housing credit (currently at a record low pace) likely to pick up in 2020 as a result. 

Macro (Re)view (10/1) | Markets fade latest bout of uncertainty

It is just a matter of days since the turn of the year and already markets have brushed with the sort of complex uncertainty that has presided over the past 18 months, albeit only fleeting in this instance, as geopolitical tensions between the US and Iran appeared to be escalating before a calmer state of affairs seemed to have ensued by the end of the week. Meanwhile, China's Commerce Ministry announced that Vice Premier Liu will visit Washington next week to formally sign the phase one trade agreement with the US.   

In Australia, the focus remains on the devasting welfare and ecological impacts on communities across the nation caused by the unfolding bushfire crisis. In response, the Federal government announced this week the establishment of a new agency tasked with coordinating rebuilding efforts with state and local authorities and will be funded with an initial contribution of $2bn over the next 2 years. The scale and length of the disaster are likely to mean the economic impacts will be much greater than this and as a result, GDP growth faces a hit across the December and March quarters. Following drought conditions over the past couple of years, the bushfires are likely to accentuate weakness in farm output, while tourism, which is a key industry within many of the impacted locations across the nation, will also be impacted with spillover effects for local commerce. Activity may have also been affected by health concerns relating to outdoor air quality due to smoke haze in the major capital cities. At a time of national suffering, consumer confidence has unsurprisingly taken a hit in early in the new year as conveyed by a 1.7% slump in this week's ANZ-Roy Morgan survey. With the consumer sector already fragile, a further weakening of confidence could potentially add to the downside risks to the outlook for household consumption spending.

The local data flow this week surprised to the upside of expectations, though covering the month of November it was too early to have captured any bushfire-related impacts. Dwelling approvals accelerated by 11.8% in November — their strongest rise in 9 months — coming in well above the consensus estimate of 2.0%, which more than made up for a weak October where approvals fell by 7.9% (see our review here). The result was driven by a surge in high-rise unit approvals in Sydney, though it was notable that house approvals nationally posted their sharpest monthly increase in nearly 4 years, potentially signalling the start of a stabilisation in dwelling approvals that have been in sharp decline for much of the past 18 months. 

In a result that went against the recent trend as commodity prices correct from highly elevated levels, the nation's trade surplus lifted to $5.8bn in November to come in sharply above the $4.1bn level expected (reviewed here). Export earnings increased by 1.8% in the month (5.5%yr) supported in the main by iron ore, with the underlying detail indicating this was driven by rising shipments as prices softened. In line with soft domestic demand conditions, import spending declined by 2.8% in November to be down by 3.1% through the year. Weakness over the past year is centred on capital imports (-3.9%m/m, -9.1%yr), while a weaker Australian dollar appears to be weighing on consumption spending more recently (-6.6%m/m, -2.9%yr). 

Rounding out the week, retail sales increased at their fastest pace in 2 years, advancing by 0.9% in November (see chart of the week, below) against an anticipated rise of 0.4%, with annual growth improving to an 8-month high of 3.2% (reviewed here). The result was boosted by Black Friday sales promotions, with online spending surging by 14.5% in the month, but may also be a sign that consumers were willing to part with some of their windfall from recent RBA rate cuts and tax relief. However, there is a risk this reflects a bringing forward of spending ahead of Christmas, while the bushfires may have also impacted spending in December. 

Chart of the week

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Shifting offshore, US events were highlighted by December's employment report, with non-farm payrolls rising by 145k in the month to slightly miss expectations for 160k, while revisions from the previous two months saw a net reduction of 14k. With the participation rate remaining unchanged at 63.2%, the unemployment rate matched the consensus forecast by holding at 3.5%. However, the broader measure of underemployment (U-6) fell to a new record low of 6.7%, indicating the labour market is yet to fully test its capacity constraints. The main surprise in the report was a slide in average hourly earnings growth from 3.1% to 2.9%Y/Y (vs 3.1% expected) to its slowest pace since July 2018. Overall, while employment growth appears to be slowing in line with a moderating economy, labour market conditions remain robust and wage pressures are contained. From a policy perspective, this appears unlikely to alter the view of the Federal Reserve, with the Vice Chair Richard Clarida in a speech this week describing the current monetary policy stance as being "in a good place" and "likely to remain appropriate" while the data flow is consistent with the Committee's baseline economic outlook. Vice Chair Clarida outlined that the action taken by the Committee to cut rates three times in 2019 had been "well timed" in providing insurance to the economy from headwinds offshore and disinflationary pressures. 

In other US news, this week's ISM non-manufacturing survey reported that conditions for firms in the services sector had strengthened in December, with the headline index increasing from 53.9 to 55.0. Driving this gain was a sharp 5.6ppt rise in business activity levels, though both the new orders (-2.2ppt) and employment (-0.3ppt) components softened. Overall, the picture for firms in the services sector remains in contrast to those in the manufacturing industry, with last week's ISM manufacturing survey showing a deterioration in conditions from 48.1 to 47.2 to indicate that activity had contracted at a faster pace in December. Notably, production slumped by 5.9ppt in the month, though there were at least signs that sentiment levels had improved from Q3.         

Over to Europe where events throughout the week conveyed a stabilisation of conditions in the bloc. According to the European Commission's economic sentiment indicator, confidence was broadly stable at a reading of 101.5 in December, which is around its long-run average level. The survey offered a somewhat mixed assessment of conditions, with confidence rising in the services (+2.2pts), construction (+2.2pts) and retail sectors (+1.0pts), only to be largely offset by weakness in the industrial sector (-0.2pts), consistent with ongoing weakness in manufacturing activity surveys in response to trade tensions and soft external demand, and from consumers (-0.9pts) on concerns around household finances. Notwithstanding, retail sales volumes lifted by 1.0% in November, though this followed declines of 0.3% in each of the two preceding months and the annual pace is moderate at 2.2%. Labour market conditions appear to remain solid, with the euro area's unemployment rate remaining at 7.5% in November to be at its equal lowest since July 2008. Inflation pressures, though remaining well contained, lifted in December as the flash CPI reading touched a 6-month high rising from 1.0% to 1.3% in annual terms.

In the UK, outgoing Bank of England Governor Mark Carney made notably dovish comments in a speech this week, indicating that if weakness in the domestic economy were to persist, the Bank had ample scope between conventional and unconventional measures to ease its policy stance further. Governor Carney's term concludes in mid-March where he will be succeeded by Andrew Bailey, the current chief executive of the UK's Financial Conduct Authority. 

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Black Friday drives an Australian retail spending splurge

Australian retail spending surged by its most in 2 years as Black Friday promotions and recent stimulatory measures from RBA rate cuts and Federal government tax relief to low-and middle-income earners combined to drive a 0.9% increase in November that was well above the consensus estimate of 0.4%. Whether this reflects a bringing forward of spending in the lead up to Christmas remains to be seen, with the data from recent years providing mixed evidence of this pattern.  

Retail Sales — November | By the numbers

• National turnover on a seasonally adjusted basis lifted by 0.9% in November to $A27.908bn; well above the 0.4% increase expected. Turnover growth in October was revised to show a 0.1% rise from the flat outcome initially reported by the ABS. 

• Annual turnover growth (seasonally adjusted) lifted to an 8-month high, advancing from 2.3% (revised from 2.1%) to 3.2% in November.
• In trend terms, turnover lifted by 0.3% in the month, with annual growth firming from 2.7% to 2.9%. 

Retail Sales — November | The details

Total retail spending surged by $251.7m in November (0.9%), which for context was more than the aggregate rise in turnover from the previous 4 months and was the single largest monthly increase since November 2017. Consistent with Black Friday promotions, this increase was driven by the discretionary areas; using sales ex-food as a proxy indicator for this, spending lifted by 1.2% in November or $191.7m in nominal terms making this its strongest monthly gain in 2 years, while the annual pace lifted to 3.0% to its fastest since October 2018. Increases in spending in the month were broad-based across clothing and footwear 3.1% (+$67m), household goods 1.2% (+$54.3m), department stores (+$54.1m) and cafes and restaurants 0.9% (+$37.1m), though 'other retailing' slipped by 0.5% (-$20.8m). Food sales increased by a moderate 0.5% ($60.0m). 

     

While traditional bricks and mortar retailers also participate in Black Friday promotions, its genesis was in the online space and the ABS's latest estimates were a clear reflection of this. The Bureau reports that online spending surged by 14.5% in November — its strongest monthly increase since last year's Black Friday sales — to account for an estimated 7.1% of all retail spending in the month, lifting to a new record high level (see chart, below).  

   

Switching to the state detail, turnover lifted across the nation in the month. In percentage terms, the gains were led by South Australia 1.4% (3.0%yr), followed by Queensland 1.2% (5.4%yr), Victoria 1.1% (2.9%yr), New South Wales 0.7% (2.1%yr), Western Australia 0.5% (3.1%yr) and Tasmania 0.4% (5.3%yr). 

For the two largest states, New South Wales and Victoria, accounting for a little under 60% of national turnover, their annual rates of growth appear to be moving off recent lows and is probably helped by the turnaround occurring in their respective established housing markets.

Across the other states, annual growth rates lifted in Queensland, South Australia and Tasmania but held steady in Western Australia. In general, these states were less impacted by the national decline in property prices between mid-2017 and mid-2019, though Western Australia is the notable exception here.   

Retail Sales — November | Insights  

The month of November provided a much-needed boost for the nation's retailers that have been mired in very weak trading conditions over recent times, with consumer confidence weakening in response to concerns over the economic outlook and slow wages growth weighing on discretionary consumption. Widespread promotions around Black Friday discounts, which were not confined to online platforms, appear to have had the desired effect in encouraging consumers to part with some of their recent windfall that flowed in the September quarter from RBA rate cuts and the Federal government's tax relief measures that were target at low and middle incomes. Key now is whether the strength in spending continued into December in the lead up to Christmas, or if Black Friday promotions brought forward spending leading to a subsequent drop off in the final month of 2019. The most obvious example of this was back in 2017 when turnover jumped by 1.1% in November only to then fade away in December (-0.1%), though the similar impacts are harder to find in recent years. A further complication is that the nation's devastating bushfire crisis worsened over the Christmas and new year holiday period and this may have impacted spending in December.      

Australia trade surplus lifts to $5.8bn in November

Australia's trade surplus increased for the first time in 5 months, rising by $1.7bn to a well above consensus figure of $5.8bn in November. The result was driven by strength in commodities exports and weakness in import spending, the latter being broadly reflective of soft domestic demand conditions and a lower Australian dollar. 

International Trade — November | By the numbers

• Australia's trade surplus lifted by $1.725bn to $A5.8bn in November and comfortably exceeded the market forecast of $4.1bn. October's trade surplus was revised down to $4.075bn from the $4.502bn figure reported initially by the ABS.
• Export earnings recovered modestly in November rising by 1.8% ($706m) to $40.893bn after slumping by 4.6% (-$1.952bn) in October. In annual terms, growth in export earnings lifted from 4.9% to 5.5%. 
• Import spending fell by 2.8% (-$1.02bn) in November to $35.093bn following a broadly flat (0.3%) outcome in the month prior. On this result, growth through the year fell from +1.2% to -3.1%. 

International Trade — November | The details

On the export side, total earnings were up by 1.8% or $706m in the month to $40.893bn as annual growth firmed from 4.9% to 5.5%. This was a modest improvement and is within the context of a broader slowdown since mid-year reflecting the correction in commodity prices from highly elevated levels. Breaking this result down further, goods credits lifted by a net $607m, with non-rural goods leading the way ($718m) supported by metal ores and minerals ($372m), other mineral fuels (inc LNG) ($184m) and coal ($52m). Rural goods were little changed overall, rising by a net $9m. Non-monetary gold slipped by $120m in the month. At a time of soft domestic demand, services exports remain a key support for the economy adding a further $99m in November to lift annual growth from 8.0% to 8.9%, with inbound tourism accounting for the bulk this month's increase ($62m). 

 

Turning to the import side, weakness was renewed in November as expenditure contracted by 2.8%, or by $1.02bn, to $35.093bn, with the overall level down by 3.1% on a year earlier. The major headwinds for import spending are soft domestic demand conditions, most notably in the private sector, and a weaker Australian dollar making purchases offshore more expensive. Goods imports fell by $961m in November on broad-based weakness from consumption goods (-$610m), capital goods (-$259m) and intermediate goods (-$102m). In percentage terms, capital goods have slumped by 9.1% over the past year, while intermediate goods (-3.8%) and consumption goods (-2.9%) have recorded more moderate declines. Services imports softened by $58m as overseas tourism weakened (-$45m). 

International Trade — November | Insights 

A stronger than expected result today, with November's trade surplus a robust $1.7bn above the consensus estimate. However, the 3-month average has pulled back to a little above $5.3bn to be tracking at its lowest level since May 2019. This slowdown has been prompted by commodity prices, notably iron ore, moving down from highly elevated levels induced by the offshore supply shock relating to the tailings dam disaster in Brazil. Meanwhile, softness in imports is consistent with prevailing domestic economic conditions as the impact of a lower Australian dollar flows through to spending decisions of businesses and consumers.  

Australian dwelling approvals accelerate in November

Australian dwelling approvals accelerated by 11.8% in November to post their strongest gain in 9 months. This result was led by a surge in the high-rise segment in Sydney, while national house approvals recorded their fastest month-to-month rise in nearly 4 years.  

Building Approvals — November | By the numbers

• Dwelling approvals (including the private and public sectors) on a seasonally adjusted basis increased by 11.8% in November to 14,675 where the market consensus has been for a 2.0% rise. This followed a fall of 7.9% in October (revised from -8.1%). 
• In annual terms, the decline in dwelling approvals was cut to -3.8% from -22.9% a month earlier to be contracting at its slowest pace in 17 months.  
• House approvals more than overturned a weak result in the month prior (-5.8%) with a 6.2% rise in November to 8,561; its strongest monthly gain since December 2015, while the annual decline slowed from -18.0% to a 10-month low at -9.7%. 

• Unit approvals were coming off an 11.1% fall in October but lifted by their most in 9 months with a 20.8% surge in November to 6,114. As a result, in annual terms, unit approvals swung from -29.5% to +6.0% to move into positive territory for the first time since June 2018. 

Building Approvals — November | The details 

November's 11.8% rise in dwelling approvals equated to an overall increase of 1,550 to 14,675. Unit approvals provided the bulk of the increase (1,054), while house approvals lifted more modestly (497). The underlying detail indicated the strength in unit approvals was concentrated in the high-rise segment, though there was also moderate support from the low-rise segment.

      

The state-based outcomes (shown below) were highlighted by the surge in approvals from New South Wales in November, most notably from units. In the capital city of Sydney, the ABS estimated unit approvals lifted to their highest level since mid-2018. Through the year, approvals in New South Wales lifted by 7.1% to be tracking at their fastest pace in 18 months. Elsewhere, strength in house approvals in Victoria and Queensland was notable, while approvals in South Australia continued their recent uptrend from mid-year. Both Western Australia and Tasmania were the clear underperformers. 

The value of alteration work approved to existing residential properties nationwide declined by 5.3% to $664.8m (-6.9%yr), while non-residential approvals by value contracted by 20.7% in November to $3.2bn (-20.0%yr), noting the latter can be highly volatile from month to month.

Building Approvals — November | Insights 

November's update was in contrast to the weak report in October and was skewed by volatility from the high-rise segment, particularly in Sydney. Whether this streghth continues on into 2020 following improving conditions in the established housing market remains to be seen. The result for house approvals was encouraging and, given they tend to be much less volatile than unit approvals, may indicate that a stabilisation is on the horizon following the downtrend over much of the past couple of years, but again it is only early days. As such, residential construction activity is likely to continue to weigh on economic activity throughout at least the first half of 2020.