Macro (Re)view (17/11) | US CPI signals Fed peak

Markets rallied this week as the latest US inflation data was seen as confirming the peak in the Fed's tightening cycle. Although the activity data remains solid for now, warning signals about a possible US recession have increased pricing for rate cuts in 2024. Accordingly, US yields declined sharply over the week, giving a boost to most currencies against the US dollar. Rate cut pricing supported equities to broad-based gains.   

A softer-than-expected US CPI report for October saw markets pricing out any further Fed rate hikes this cycle, with expectations for rate cuts increasing to around 100bps over the next 12 months. Headline CPI printed flat (0%) month-on-month (vs 0.1%), driving a deceleration from 3.7% to 3.2%yr (vs 3.3%); meanwhile, a 0.2%m/m outturn (vs 0.3%) eased the core rate to a 2-year low of 4% (vs 4.1%) from 4.1% previously. While remaining a significant contributor to inflation, shelter costs slowed notably from 7.1% to 6.7%yr, a 13-month low. Excluding housing, core services inflation was unchanged at 3.8%yr. Year-on-year core goods inflation remained flat. With inflation cooling and the labour market remaining in robust shape, consumer spending is holding up. The control group element of retail sales posted a 0.2%m/m rise in October, matching expectations. 

Strong updates on the Australian labour market have not changed near-term pricing for RBA rates. The Wage Price Index accelerated by a record high 1.3% in Q3, lifting annual wages growth from 3.6% to 4%, its fastest since 2009 (reviewed here). The quarterly rise was expected and largely reflected the recent increases determined by the Fair Work Commission to the national minimum wage (8.6%) and awards (5.75%). But these increases are unlikely to be repeated with inflation declining and the labour market now off peak levels of tightness. The RBA recently pencilled in 4% as its expected peak for wages growth, so this week's update is in line with that forecast. 

Coming off a soft report in September, this week's Labour Force Survey for October provided a more upbeat read on conditions (reviewed here). This was headlined by a 55k rise in employment, printing well above the expected 24k increase; combined with upward revisions to prior months, the 3-month average for employment elevated to 44.4k, its highest since May. The employment outcome was backed up by a 0.5% lift in monthly hours, partially reversing recent weakness. Labour demand is showing resilience while the boost to the supply side associated with rapid post-pandemic growth in the working age population is leading to the sort of rebalancing the RBA is looking for. The unemployment shifted from 3.6% to 3.7% and while it remains low, this compares with its 3.4% cycle low 12 months ago. Meanwhile, labour force participation rebounded to record highs at 67% in October, up from 66.8% in September and 66.6% a year earlier.  

Over in Europe, the Autumn outlook published by the European Commission lowered its GDP forecasts for this year (0.6% from 0.8%) while also expecting a slower rebound of 1.2% in 2024, followed by growth of 1.6% in 2025. The downward path for inflation expected by the Commission from 5.6% in 2023 to 2.2% by 2025 was altered to incorporate an upward revision in 2024 (3.2% from 2.9%) on the back of higher energy prices. UK news was headlined by declines in October's inflation readings. 12-month headline CPI fell from 6.7% to 4.6%, a 2-year low as base effects from surges in energy prices last year fell out of the calculation. This was backed up by a softening in the core rate 6.1% to 5.7%, a low to January. Goods prices have seen substantial disinflation falling to a 2.9% on a 12-month basis from a peak that was pressing 15% a year ago. Importantly, services inflation is also softening easing to 6.6% from 6.9% previously and down from the recent high of 7.4% around the middle of the year.   

Australian employment 55k in October; unemployment rate 3.7%

Australian employment increased by 55k in October, well above expectations to headline a more upbeat read on the labour market than in the prior month. Although there was a shift up in the national unemployment rate to 3.7%, this came alongside the labour force participation rate returning to record highs (67%). Hours worked (0.5%) saw their strongest rise in several months.     

October by the numbers...

• Employment increased by a net 55k in October (FT +17k/PT +37.9k), well above the expected outcome (+24k) and up sharply on September's modest outturn of +7.8k (revised from +6.7k).  
• Headline unemployment shifted from 3.6% to 3.7%, as expected. With the underemployment rate holding at 6.3%, the underutilisation rate ticked up 0.1ppt to 10.0%. 

• Labour force participation returned to record highs at 67%, reversing September's fall to 66.8%. The employment to population ratio also rebounded, rising to 64.5% from 64.4%. 

• Hours worked advanced 0.5% month-on-month (1.7%yr), its strongest outurn since April.

The details...

Employment increased by 55k in October, sharply above expectations while backward revisions boosted employment by 8.1k over August (70.3k) and September (7.8k). A rotation from full time to part time work was evident during the third quarter - a sign of adjustment in the labour market to slower growth - but both segments increased in October. Full time employment lifted by 17k, its strongest rise since June. Part time employment advanced by 37.9k, likely boosted by temporary hiring associated with the Voice Referendum; however, this was also comfortably below the gains of 59.0k in August and 44.3k in September.  

Incorporating October's rise in employment with the upwardly revised outcomes from August and September, the 3-month average change in employment lifted to 44.4k, a high since May. Over the past 3 months, employment growth annualises at around 3.8%, a historically solid pace that indicates labour demand remains resilient.  

Backing up the stronger employment outcome, hours worked lifted by 0.5% month-on-month. This was the strongest outcome for monthly hours since April and goes some way to reversing the 0.9% decline in hours during the third quarter. Gains were posted in both full time (0.4%) and part time hours (0.7%) for the first time since April. 

Despite the strength in employment and hours worked, the unemployment rate lifted from 3.6% to 3.7%. While the labour market remains strong, conditions have become less tight; the unemployment rate is up from its cycle low of 3.4% from 12 months ago; underemployment is 6.3% compared to its 5.8% low in February, while the total underutisation rate at 10% is 0.7ppt higher than at its trough in October last year. 

Contributing to the easing in labour market tighteness has been the substantial addition to the supply side, supported by rapid post-pandemic population growth. The labour force particpation rate reversed a decline in September to return to record highs at 67% in October, the level up from 66.6% a year earlier. Meanwhile, the employment to population ratio (share of working age Australians in work) also stands at a record high (64.5%) and has risen sharply from its level in October 2022 (64.4%). 

In summary...

Overall, today's report is consistent with the Australian labour market remaining in robust shape amid the backdrop of slowing economic growth, both domestically and offshore. Conditions have eased from peak levels of tightness, with the surge in population growth coming out of the pandemic a factor. But I remain of the view that the additional boost this has provided to demand can continue to keep employment supported and prevent the labour market from loosening too severely. The RBA appears to have come around to this view, lowering its unemployment rate forecasts in its recent Statement on Monetary Policy. 

Preview: Labour Force Survey — October

Australia's Labour Force Survey for October is due at 11:30am (AEDT) this morning. The September survey showed signs of softening in the labour market as employment disappointed expectations and hours worked declined; however, the unemployment rate fell to 3.6% as the participation rate eased. In today's report, while a stronger employment outcome of 24.5k is forecast, this is expected to be insufficient to prevent a rise in the unemployment rate to 3.7%.

A recap: Labour market activity showed signs of softening in September 

After a 63.3k surge in August, employment slowed to a 6.7k increase in September - well below the expected 20k rise. This was driven by the part-time segment (46.5k) with full-time employment declining (-39.9k), part of a broader rotation that became evident in Q3 as part-time increased by 122.4k and full-time fell by 53.2k. 

Despite the modest rise in employment, the unemployment rate declined from 3.7% to 3.6% - with underemployment (6.4%) and underutilisation (9.9%) also falling - as the participation rate eased to 66.7% from a record high in September (67%). This was the first time the participation rate had declined on the prior month since April. 

Rounding out what was a soft report, hours worked declined by 0.4% month-on-month and by 0.9% quarter-on-quarter in Q3. All in all, rising employment indicates that labour demand continues to remain resilient to the broader economic slowdown; however, there does appear to be a margin of adjustment playing out through a reduction in hours. This may be driving the rotation to part-time employment, with more people falling below the 35 hours or more per week threshold the ABS considers to be full-time employment.   

Stronger employment is expected in October...   

Markets anticipate employment will pick up to a 24.5k rise in October, although the band of estimates is very wide ranging from 45k on the high side to -8.7k on the low side. Directionally, the ABS's payrolls series supports the consensus expectation for a stronger employment outcome. The payrolls index lifted by 0.2% for the month through mid-October, with the ABS highlighting the effect of temporary hiring associated with the Voice Referendum. The market expects a shift in the unemployment rate to 3.7%, despite anticipating a better month for employment. This likely reflects an expectation for the participation rate to increase following its decline in September.    

... with the composition in focus

Given the recent trends, the composition of employment growth will be closely watched, as will hours worked. These appear to be the areas of the labour market that are adjusting to the slowdown in economic growth. Although a rise is expected in October, 3.7% unemployment would still be a historically low level in Australia.

Australian Q3 Wage Price Index 1.3%; 4%yr

Australia's Wage Price Index posted its fastest quarterly rise (1.3%) in the September quarter as recent decisions from the Fair Work Commission and wage review processes lifted pay rates across the labour market. Wages growth elevated to a 4% pace in annual terms to be running at its fastest pace in 14 years. 

  

• Headline wages growth was 1.3% in the September quarter - the strongest quarterly growth rate in the history of the series - printing in line with expectations and up from a 0.8% rise in Q2. Year-ended wages growth firmed from 3.6% to 4%, its fastest pace since 2009.  
• Private sector wages advanced 1.4%q/q (prior: 0.9%) and 4.2% through the year (from 3.9%) - its fastest annual pace since Q4 2008. 
• Public sector wages posted a 0.9% rise in Q3 (prior: 0.8%), elevating the annual pace from 3.1% to 3.5%, a high dating back to Q2 2011.  

Quarterly wages growth accelerated to 1.3% in the September quarter as annual wage reviews took place and the Fair Work Commission's increases to the national minimum wage (8.6%) and award rates (5.75%) flowed through. There was also a separate decision from the FWC boosting pay to jobs in the aged care sector by 15% that came into effect. These factors combined with the underpinnings of a strong labour market to drive wages growth. 

In the private sector, base wages rose 1.4% in the quarter (or 2% if bonuses are included) lifting the annual pace through 4% for the first time since late 2008. 

The ABS's analysis found that 49% of private sector jobs received a pay increase in Q3, exceeding the previous high water mark seen 12 months ago (46%). This increase reflected new enterprise agreements coming into effect, annual wage reviews for jobs covered by individual agreements and the reset of award rates, including in the aged care sector. The average pay increase amongst these jobs was 5.8%, well up from a 4.3% increase this time last year.   

Public sector wages growth has lagged through the cycle reflecting wage caps that were in place at the federal level and implemented by state governments. As these policies have expired, new negotiations have taken into account the rise in the cost of living, lifting wages growth to jobs in the public sector. This contributed to a 0.9% quarter-on-quarter rise, lifting the pace of growth in base wages to 3.5% through the year, a 12-year high. However, a much smaller share of jobs in the sector saw a pay increase in the quarter (34%) than in the private sector (49%). Meanwhile, the average pay increase was 3.3%, well below the acceleration in the private sector (5.8%). 

Looking at wages growth across broad sectors of the labour market, household services saw the sharpest acceleration, which I aggregate to be running at a 4.4% pace. This sector includes the health care and social assistance industry where wages growth surged by 3.1% in the quarter, reflecting the boost to wages in aged care. Accomodation and food services (3.2%q/q) was also a notable contributor on the back of the increases to awards. The goods sector saw a much more modest rise to 4.2%; wages growth lifted in some of the related industries, such as construction (4.3%), retail (4.5%) and transport (4.4%) but softened in wholesaling (3.7%) and held flat in utilities (3.9%). Business services eased slightly to a 3.7% pace, with wages growth in professional services (3.8%) and finance and insurance (3.1%) down from their recent highs of 4%.   

Preview: Wage Price Index Q3

Australia's Wage Price Index for the September quarter is due at 11:30am (AEDT) this morning. The pace of wages growth is expected to accelerate in the quarter on the back of increases to the national minimum wage and award rates. But even with this boost, annual wages growth is expected to firm to 3.9%, a relatively modest pace compared to headline inflation in Australia (5.4%) and to wages growth in other advanced economies.  The RBA will be closely watching today's report, but after hiking rates to 4.35% last week it should be more of an informative data point than anything else. 

A recap: Wages growth remained around decade highs in the June quarter  

The WPI lifted by 0.8% for the third quarter in succession in Q2. The year-ended pace of wages growth eased from 3.7% to 3.6% but remained around decade highs. A historically strong labour market, high inflation and a recalibration of awards and pay settings have all contributed to wages growth rising sharply from the record lows seen during the depths of the pandemic.  

Wages growth in the private sector (0.8%q/q, 3.8%Y/Y) continued to outpace the public sector (0.7%q/q, 3.1%Y/Y). The year-ended pace of wages growth is at least at 10-year highs in both sectors. 

In a global context, however, Australian wages growth is at the more moderate end of the scale. A key reason touted for this is the nature of the wage-setting process in Australia, with annual minimum wage reviews, years-long enterprise bargaining agreements and public sector wage caps all playing a role. 

Source: RBA Statement on Monetary Policy, November 

Minimum wage and award increases will boost wages growth in Q3

Markets expect wages growth to accelerate to a 1.3% quarter-on-quarter rise (range: 1.2% to 1.5%), lifting the year-ended pace to 3.9%. This reflects the flow-through of the increases announced by the Fair Work Commission to the minimum wage (8.6%) and award rates (5.75%), which came into effect at the start of the quarter. Accordingly, the share of jobs that received a pay increase in Q3 will spike and likely exceed the previous high from 12 months ago (46%). 

An upside surprise for quarterly wages growth is possible if the higher minimum wage and award rates have provided a signalling effect for enterprise bargaining and individual agreements to rise; however, the RBA's analysis suggests this has not been evident in any meaningful way. In fact, the Bank's business liaison has indicated that there have been declines in wages growth in some of the industries where it was rising fastest last year.  

Macro (Re)view (10/11) | RBA resumes tightening

Markets drifted through the week in the absence of any new catalysts and limited data. US equities continued to outperform while a rebound in US Treasury yields offered support to the US dollar. Domestically, the RBA ended a 4-month pause with a 25bps rate hike in response to recent upside surprises in Australia's inflation readings. Highlights on next week's calendar include US CPI and retail sales, China activity data, UK CPI and wage and labour market reports in Australia.  

The RBA Board's decision this week to resume its tightening cycle with a 25bps hike to 4.35% came on the back of increased risks to the inflation outlook (reviewed here). While policy will continue to key off the incoming data, prospects for future hikes seemed to be cast in a slightly different light as the Board's guidance that "Some further tightening of monetary policy may be required..." was tweaked to "Whether further tightening of monetary policy is required...". Post the meeting, the quarterly Statement on Monetary Policy provided deeper insights into the RBA's thinking. Since the previous forecast round in August, the Australian economy has been more resilient than the RBA had anticipated and inflation has not slowed as quickly as expected. 

The November forecasts were adjusted to reflect these developments; the trajectory for growth is now higher in 2023 (1.5% from 1%) and 2024 (2% from 1.75%), resulting in a lower peak in the unemployment at 4.25% by the end of next year, down from 4.5% previously. The downside is that an improved economic outlook has contributed to a deterioration in the inflation forecasts, particularly in the near term. Inflation is now seen ending 2023 at 4.5% on a headline basis (from 4.25%) and 4.5% on the core rate (from 4%), with a slower decline then occurring through 2024 to 3.5% headline (from 3.25%) and 3.25% core (from 3%). Late 2025 still remains the timeframe the RBA anticipates it will take for inflation to be back within its 2-3% target, albeit the latest forecasts at that horizon (2.9% headline and core) are sitting near the top of the target band.

Federal Reserve Chair Jerome Powell delivered markets a warning that rate hikes were not off the table and that a long road was still to be travelled to get inflation down to its 2% target. Although markets price the next move from the Fed to be rate cuts in 2024, Chair Powell said the FOMC wasn't yet convinced that rates were high enough at their current 5.25-5.5% range. But the cumulative effects of its earlier hikes are acknowledged by the FOMC as still being in the pipeline and for this reason, it has communicated it will proceed carefully. Some of these effects were evident in the Senior Loan Officer Opinion Survey for October, which reported a broad-based tightening of lending standards and weakening in loan demand over Q3.     

Speaking after an address in Dublin, Bank of England Governor Andrew Bailey said that restrictive monetary policy would be needed "for an extended period" and that rate cuts were not on the radar. Markets are sceptical and have rate cuts priced for the second half next year - something BoE Chief Economist Huw Pill said "doesn't seem totally unreasonable". UK GDP growth stalled in Q3 - after weak first-half growth of 0.5% - only validating market pricing. ECB President Christine Lagarde told an FT event that rates at their current setting - if maintained for long enough - could return inflation to the 2% target. President Lagarde said that long enough meant no prospect of rate cuts for the "next couple of quarters". 

RBA hikes cash rate to 4.35%

The RBA resumed its tightening cycle at today's meeting hiking the cash rate by 25bps to 4.35% (and the Exchange Settlement rate to 4.25%). Rates had been left unchanged at 4.1% since June, but with the recent data and updated forecasts indicating the risks to the inflation outlook had increased, the Board was compelled to move. However, a tweak in the Board's policy guidance hints at a reluctant to hike further unless it has to.   

This was the second time in this cycle that the RBA has hiked after a pause, as it did back in May. In today's statement, Governor Michele Bullock framed this rate hike in terms of increasing assurance around returning inflation to the 2-3% target band "within a reasonable timeframe", repeating a similar justification to that which accompanied the May rate hike. While the Board had been content to maintain a steady hand over recent months, today the governor said that the inflation data had been stronger than previously expected in the August forecasts while economic activity and the labour market had been more resilient. Housing prices had also risen further, bolstering household wealth. 

Reflecting these developments, the RBA's updated forecasts (to be published in full in Friday's quarterly statement) have revised up the outlook for inflation modestly in 2024 (3.25% to 3.5%) and 2025 (2.75% to 3%) and lowered the profile for the unemployment rate to a peak of 4.25% (from 4.5% previously). The outlook for wages growth is unclear based on today's statement, but the view was that the current pace remained consistent with the inflation target (assuming productivity growth rebounds). 

The key consideration moving forward for the Board is balancing the effects of the tightening in the pipeline (which was added to today) amid significant uncertainty over the outlook for growth and inflation. In this situation, the Board remains data dependent, but a subtle tweak was made to its guidance on rates. Whereas previously the Board communicated that "Some further tightening of monetary policy may be required..." it has shifted to "Whether further tightening of monetary policy is required...", seemingly conveying more caution around taking the cash rate higher.  

Preview: RBA November meeting

The RBA Board is likely to raise its cash rate by 25bps to 4.35% at today's meeting. Rates have been left on hold at each of the past 4 meetings, but the RBA has sounded more hawkish lately and with inflation not declining as fast as expected, the Board appears set to act upon its tightening bias. 

Earlier in this cycle, the RBA hiked rates after pausing and this may repeat at today's meeting. After holding rates unchanged in April, the Board returned to hiking in May (and then again in June) following inflation data for Q1. The cash rate has subsequently been on hold at 4.1%, but the Board has maintained that "some further tightening of monetary policy may be required", depending on the incoming data. 

Essentially, the key issue the Board will consider is whether it has tightened monetary policy sufficiently in light of recent data, with new forecasts for the economy and inflation (to be published in Friday's quarterly statement) to also factor into its decision. At the October meeting, it was communicated that the Board had a "low tolerance" for inflation taking longer to return to target than the late 2025 timeframe it currently expects. 

Since then, headline inflation in Q3 printed at 5.4% and 5.2% for the core (or trimmed mean) rate; while these outcomes were down from 6% and 5.9% respectively in Q2, inflation doesn't look to be falling as quickly as the RBA's forecasts for end 2024 (4.25% headline and 4% core) imply. Additionally, despite some cooling in conditions, the activity and labour market data have remained resilient, indicating the Board will be able to construct a broad case for a rate hike. 

At the May meeting, the Board cited its commitment to returning inflation to target "within a reasonable timeframe" as warranting a tightening response. If the Board does hike today, a similar justification may again be called upon, particularly if the near-term inflation outlook is revised upwards. However, I am doubtful that the timing for the eventual return to the 2-3% target band will be pushed back from late 2025. In a similar manner to the Fed, ECB and BoE, the RBA in today's statement could emphasise that maintaining rates around current levels will be needed to return inflation to target. 

Macro (Re)view (3/11) | Rates reappraisal sparks rally

Sentiment in markets turned positive this week amid indications hiking cycles across the major economies have peaked, putting rate cuts back on the radar in 2024. A cooling in the US labour market accelerated declines in Treasury yields, notably the 10-year benchmark (4.57%) is now well off the recent highs around 5%. In response, US equities rallied to their strongest weekly gains in 12 months, providing the backdrop for the Australian dollar to rise sharply. Earlier in the week, the Bank of Japan made tweaks to yield curve control, now referring to 1% as a 'reference rate' for 10-year bonds rather than a hard cap.   

The Fed maintained a steady hand this week, leaving rates in the 5.25-5.5% range as Chair Jerome Powell said the FOMC would proceed carefully. Chair Powell said the decision reflected the key judgments that monetary policy was already at a restrictive setting for growth and inflation and that the full effects from its earlier rate hikes remained in the pipeline. Referencing the acceleration in US GDP in Q3, the FOMC's assessment of economic growth was upgraded from ''solid" to "strong"; however, Chair Powell noted that inflation had continued to decline and that supply-demand imbalances in the labour market had eased. Speaking to this, October's nonfarm payrolls data came in soft relative to expectations. Employment slowed to a 150k rise (vs 180k exp) and downward revisions cut 101k from payrolls over August and September. The unemployment rate ticked up to 3.9% from 3.8% - and the underemployment rate lifted from 7% to 7.2% - as the participation rate softened by 0.1ppt to 62.7%. Summarising the cooling in conditions, average hourly earnings growth slowed from 4.3% to 4.1%yr, its slowest since June 2021.     

      

Markets lean towards the RBA hiking rates at next week's meeting, an outcome that would end a 4-meeting stretch of unchanged rates in Australia. Data through the week was generally viewed as reinforcing this expectation. Retail sales posted a 0.9% rise in September - its strongest rise since January - with discretionary categories a key contributor (see here). Quarterly sales lifted by 0.8%, but that reflected only a marginal increase in underlying volumes (0.2%) that was underpinned by rapid population growth. 

This also remains a key factor in the housing market, with housing prices rising a further 0.9% nationwide in October, to now be almost 8% above the January low, as strong demand continues to run up against tight supply, particularly in the capital cities. Although there is a sizeable pipeline of houses under construction, dwelling approvals were sitting near decade lows in September (see here). Strength on the demand side was reflected in another rise in housing finance commitments (0.6%), now up 9.5% on the cycle low in February (see here). In other news, Australia's trade surplus contracted sharply to $6.8bn in September, driven by an acceleration in import orders (see here).  

In the UK, the Bank of England kept rates at 5.25% in a 6-3 decision by the MPC. Although the MPC is not ruling out further hikes, it communicated that it was now in a holding pattern with the statement noting that: "Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target...". Over recent months, market pricing for the peak BoE rate has declined materially and the curve now implies that the next move from the MPC is expected to be a rate cut early in the second half of next year. This was something Governor Andrew Bailey and other officials pushed back against at the post-meeting press conference. 

However, given the weak outlook published in the November Monetary Policy Report, a case could be made for a lower bank rate down the line. The UK growth outlook was cut to 0.6% this year (from 0.9%), 0% in 2024 (from 0.1%) and 0.4% in 2025 (from 0.5%), resulting in a higher path for the unemployment rate to 5% (from 4.8%) over the next couple of years. Governor Bailey, however, said that there remained upside risks to the inflation outlook - including from energy and services prices - that it needed to guard against. Factoring in these risks, as well as the lower pricing for the peak BoE rate, the 'mean' forecast is for inflation to still be slightly above target in late 2025 (2.2%), which is clearly keeping the MPC cautious. 

Euro area inflation declined substantially from 4.3% to 2.9%yr in October - a 27-month low - to be well down from the 10.6% peak 12 months ago. While this includes a sizeable base effect as a surge in energy prices fell out of the 12-month calculation, the core rate also declined to a 15-month low, from 4.5% to 4.2%, indicating the broader inflationary pulse is easing. And a weak outturn of -0.1% for Q3 GDP points to this continuing. However, the ECB's Isabel Schnabel said in a speech this week that the easy-won gains in lowering inflation had already been achieved and that the 'last mile' in returning to 2% inflation would likely be difficult. This is consistent with the Governing Council's higher-for-longer messaging on rates at last week's meeting.    

Australia's trade surplus narrows to $6.8bn in September

Australia's trade surplus narrowed sharply from $10.2bn in August to $6.8bn in September. This was the lowest monthly surplus since March 2021. Driving the narrowing was a softening in exports (-1.4%) and an acceleration in imports (7.5%). Regrettably, the series now only measures goods trade with the ABS discontinuing its estimates of services trade, a major component of the Australian economy. 

The surplus on goods trade contracted by around $3.3bn during September as export earnings declined by $0.7bn (to $45.6bn) and spending on imports increased by $2.7bn (to $38.8bn). This left the surplus in September at $6.8bn - a low back to March 2021 - and saw the 3-month average figure fall by $0.9bn to $8.3bn. 

The 1.4% decline in export earnings was the third fall in the past 4 months; exports remain elevated but declined to an average of $45.3bn in Q3 from $50.8bn 12 months earlier. September's fall was driven mainly by the volatile non-monetary gold (-39.2%). By contrast, rural goods advanced 5%m/m - supported by meat, wool and rural products - and non-rural goods lifted 1.7%m/m as iron ore (4.7%) and coal (3.5%) exports bounced. LNG exports slid 2.3%m/m.  

Spending on imports increased 7.5% in September, its largest month-on-month rise since May 2022. On average, imports were $37.1bn in Q3, down slightly on the same period 12 months ago ($37.9bn). September's rise was driven by a 23.3% surge in capital goods orders, with industrial transport equipment increasing by 73.3% (or by around $1.1bn) and machinery and industrial equipment lifting 10.2% (or $0.3bn). 

Intermediate goods were 3.4% higher following a 7% lift in August. This has largely reflected higher global oil prices, with the value of fuel imports rising 22.2% over the past two months. Meanwhile, consumption goods firmed by 0.3%m/m, with clothing and footwear and leisure goods than main contributors. 

Australian housing finance rises 0.6% in September

Australian housing finance commitments lifted by a modest 0.6% for the month in September as investor lending saw its fastest rise (2%) since May. Commitments have risen to be 9.5% above their cycle low in February, coming alongside a rebound in housing prices. Refinancing continued to moderate after reaching record highs in response to the RBA's rate hiking cycle.  

September's 0.6% rise in commitments followed a 2.4% lift in August. This month, investor lending picked up to rise by 2%m/m (from 1.7%), while the owner-occupier segment consolidated (-0.1%m/m) after rising strongly in August (2.8%). The level of commitments in September ($25bn) was 9.5% above the February low. By comparison, housing prices nationwide have rebounded by 7.6% from their recent low (in Jan-23), based on CoreLogic's latest report.   

Commitments rose by 1.5% through the quarter to September. This extended the rebound from Q2 (4.7%) that came after four consecutive quarterly declines. Investor lending was the driving impulse rising by 4.8%, with owner-occupier commitments fading slightly (-0.3%) due to weakness from first home buyers (-3.6%) and in the construction-related area (-1.6%), reflecting the effect of higher rates. Back in the June quarter, owner-occupiers and investors contributed in broadly equal measure to the rise in commitments. 

Loan volumes to owner-occupiers declined across the board during the September quarter: upgraders -0.9%, first home buyers -3.9% and construction-related -4.1%, indicative of higher interest rates weighing on demand. 

Weakness in refinancing activity was notable in today's report. In the month, the value of refinancing declined by 7.8% ($18.5bn), with falls coming through for both owner-occupiers (-8.4%) and investors (-6.4%). Refinancing declined by 6.9% in August. The volume of refinancing commitments to owner-occupiers was down 10.8% in September, declining by 3.4% in Q3. After climbing to record highs, refinancing activity is moderating, with a pause in RBA rate hikes over its recent meetings likely also a factor.