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Summary: ISM purchasing managers index (PMI) down; below consensus expectation; economists focus on higher “prices paid” component; reading implies US economy still growing at solid pace.

US purchasing managers’ index (PMI) readings reached a cyclical peak in September 2017 before they started a downtrend which stabilised in late 2019 after a truce of sorts was made with the Chinese regarding trade. March’s report signalled a contraction in US manufacturing activity had begun and it stayed in this state until June. Subsequent month’s readings have implied a return to expansion for US manufacturing.

According to the latest Institute of Supply Management (ISM) survey, its Purchasing Managers Index recorded a reading of 58.7% in January. The result was less than the generally expected figure of 60.0 and lower than December’s reading of 60.5%. The average reading since 1948 is 52.9% and any reading above 50% implies an expansion in the US manufacturing sector relative to the previous month.

Westpac economist Lochlan Halloway focussed on a “sharp lift” in prices paid. ANZ senior economist Felicity Emmett picked up on the same issue, noting the prices paid index was at its “the highest reading since 2011”, something she attributed to strong commodity prices.

Longer-term US Treasury bond yields increased moderately on the day. By the close of business, the 10-year Treasury bond yield had added 2bps to 1.08% and the 30-year yield had gained 3bps higher at 1.86%. The 2-year yield remained unchanged at 0.11%.

Purchasing Managers’ Indices (PMIs) are economic indicators derived from monthly surveys of executives in private-sector companies. They are diffusion indices, which means a reading of 50% represents no change from the previous period, while a reading under 50% implies respondents reported a deterioration on average. According to the ISM, a reading “above 42.8%, over a period of time, generally indicates an expansion of the overall economy,”

Manufacturing PMI figures appear to lead US GDP by several months despite a considerable error in any given month. The chart below shows US GDP on a “year on year” basis (and not the BEA annualised basis) against US GDP implied by monthly PMI figures.

Summary:  Job ads increase modestly in January; 5.3% higher than in January 2020; Victorian reopening sparks acceleration; jobs rebound “could continue into early-2021 at least”.

From mid-2017 onwards, year-on-year growth rates in the total number of Australian job advertisements consistently exceeded 10%. That was until mid-2018 when the annual growth rate fell back markedly. 2019 was notable for its reduced employment advertising and this trend continued into the first quarter of 2020. Figures plunged in April as pandemic restrictions took effect but subsequent reports have provided evidence a recovery is taking place.

According to the latest ANZ figures, total advertisements increased by 2.3% in January on a seasonally-adjusted basis. The rise followed an 8.6% increase in December and a 14.3% gain in November after revisions. On a 12-month basis, total job advertisements were 5.3% higher than in January 2020, up from December’s comparable figure of 4.8%.

“While the pace of growth slowed to 2.3%, we do not think this is cause for concern,” said ANZ senior economist Catherine Birch.

The figures were released on the same day as ANZ’s January Job Ads report and long-term Commonwealth bond yields increased modestly on the day, broadly in line with higher US Treasury yields at the close of trading on Friday night. By the close of business, 10-year and 20-year ACGB yields had each gained 2bps to 1.16% and 1.87% respectively. The 3-year yield remained unchanged at 0.18%.

Birch referred to other labour market indicators as “also looking positive”. She said, “Overall, the indicators suggest solid employment gains should continue into [the first half of] 2021”, although she noted the end of the JobKeeper programme in March would place some doubt on further gains “if that support is not replaced by more targeted assistance.”

The inverse relationship between job advertisements and the unemployment rate has been quite strong (see below chart), although ANZ themselves called the relationship between the two series into question in early 2019.  A rising number of job advertisements as a proportion of the labour force is suggestive of lower unemployment rates in the near-future. A falling ratio suggests higher unemployment rates will follow.

Summary: Melbourne Institute inflation index up modestly in January; annual rate remains unchanged.

Despite the RBA’s desire for a higher inflation rate, ostensibly to combat recessions, attempts to accelerate inflation through record-low interest rates have failed to date. The RBA’s stated objective is to achieve an inflation rate of between 2% and 3%, “on average, over time.” Since the GFC, Australia’s inflation rate has been trending lower and lower; the “coronavirus recession” then crushed it in the June quarter of 2020.

The Melbourne Institute’s latest reading of its Inflation Gauge index increased by a modest 0.2% in January. The rise follows increases of 0.5% and 0.3% in December and November respectively. On an annual basis, the index rose by 1.5%, the same rate as in December.

The figures were released on the same day as ANZ’s January Job Ads report and long-term Commonwealth bond yields increased modestly on the day, broadly in line with higher US Treasury yields at the close of trading on Friday night. By the close of business, 10-year and 20-year ACGB yields had each gained 2bps to 1.16% and 1.87% respectively. The 3-year yield remained unchanged at 0.18%.

The Melbourne Institute’s Inflation Gauge is an attempt to replicate the ABS consumer price index (CPI) on a monthly basis. It has turned out to be a reliable leading indicator of the CPI, although there are periods in which the Inflation Gauge and the CPI have diverged for as long as twelve months. On average, the Inflation Gauge’s annual rate tends to overestimate the ABS headline rate by an average of a little under 0.1%.

Central bankers desire a certain level of inflation which is “sufficiently low that it does not materially distort economic decisions in the community” but high enough so it does not constrain “a central bank’s ability to combat recessions.” Hence the recent obsession among central banks, including the RBA, to increase inflation.

Summary: US Fed’s favoured inflation measure up by 0.3% in December; above market expectations; annual rate back to 1.5%; little movement from Treasury bond yields.

One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising in the June and September quarters.

The latest figures have now been published by the Bureau of Economic Analysis as part of the December personal income and expenditures report. Core PCE prices rose by 0.3% over the month, more than the 0.1% which had been generally expected and above the flat results in November and October. On a 12-month basis, the core PCE inflation rate ticked up from November’s revised rate of 1.4% to 1.5%.

Short-term US Treasury bond yields slipped a touch while longer-term yields moved modestly higher. By the close of business, the 2-year Treasury bond yield had lost 1bp to 0.11%, the 10-year yield had crept up 1bp to 1.06% while the 30-year yield finished 2bps higher at 1.83%.

The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It’s not the only measure of inflation used by the Fed; it also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.

Summary: Private sector credit increases modestly in December; just above expectations; housing responding to “cheap credit”, first-home buyers; continued steady growth in owner-occupier segment, assisted by rise in business loans; downturn “unlikely” to be as deep as past recessions.

The pace of lending to the non-bank private sector by financial institutions in Australia has been trending down since late-2015. Private sector credit growth appeared to have stabilised in the September quarter of 2018 but the annual growth rate then continued to deteriorate through to the end of 2019. The early months of 2020 provided some positive signs but they disappeared in April and they have not re-emerged as yet.

According to the latest RBA figures, private sector credit increased modestly in December, rising by 0.3%. The result was higher than the generally expected figure of 0.2% and November’s 0.1%. The annual growth rate recovered slightly to 1.8% from November’s comparable rate of 1.7%.

“Housing is clearly responding and responding strongly to cheap credit, as well as home builder programs encouraging a bring-forward of demand by first-home buyers,” said senior Westpac senior economist Andrew Hanlan.

Owner-occupier loans continued to grow steadily while business loans grew at a sluggish rate and personal debt fell again. Growth in the investor lending segment remained just above zero.

Long-term Commonwealth bond yields rose noticeably on the day, slightly outpacing higher US Treasury yields at the close of trading on Friday morning. At the close of business, 10-year and 20-year ACGB yields each finished 5bps higher at 1.14% and 1.85% respectively. The 3-year yield remained unchanged at 0.18%,

The traditional driver of loan growth rates, the owner-occupier segment, grew by 0.6% over the month, slightly faster than November’s 0.5%. The sector’s 12-month growth rate accelerated from 5.4% to 5.6%.

Growth rates in the business sector remained sluggish as business credit expanded by 0.2%, almost offsetting November 0.2% fall. The segment’s annual growth rate ticked up from November’s revised rate of 0.9% to 1.0%.

Summary: US leading index increases in line with expectations in December; improvements “broad-based”; Conference Board forecasts for March quarter “to exceed” 2% annualised.

The Conference Board Leading Economic Index (LEI) is a composite index composed of ten sub-indices which are thought to be sensitive to changes in the US economy. The Conference Board describes it as an index which attempts to signal growth peaks and troughs; turning points in the index have historically occurred prior to changes in aggregate economic activity. Readings from March and April signalled “a deep US recession”; more recent readings indicated the US recovery is still underway, albeit at a slowing pace.

The latest reading of the LEI indicates it rose by 0.3% in December. The result was in line with expectations but markedly less than November’s 0.7%. On an annual basis, the LEI growth rate increased from -2.4% to -1.8%.

“The US LEI’s slowing pace of increase in December suggests that US economic growth continues to moderate in the first quarter of 2021,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. He noted Improvements in the index “were very broad-based among the leading indicators, except for rising initial claims for unemployment insurance and a mixed consumer outlook on business and economic conditions,”

Changes over time can be large but once they are standardised, a clearer relationship with GDP emerges. The latest reading implies a zero year-on-year growth rate in March, up from the -0.3% implied for February after revisions. The Conference Board forecasts an annualised growth rate for the March quarter “to exceed 2.0%”, or about 0.5% over the quarter. A 0.5% increase in the March quarter would lead to a year-on-year rate of about 0.1%.

Summary: Inflation rate higher than expected in December quarter; RBA preferred measure in line with market expectations; tobacco tax increases main driver of result, childcare costs also features again; economists focus on subdued underlying result.

In the early 1990s, entrenched inflation in Australia was broken by the “recession we had to have” as it became known. Since then, core consumer price inflation has averaged around 2.3%, a little below the midpoint of the RBA’s target range of 2%-3%. Following the GFC, various measures of consumer inflation have been in a down-trend despite attempts by the RBA to increase them through historically low cash rates.

Consumer price indices for the December quarter have now been released by the ABS and both the headline and seasonally-adjusted figures were higher than the 0.7% expected. The headline inflation rate came in at 0.9% for the quarter, less than the September quarter’s 1.6%. The seasonally-adjusted inflation rate also slowed in comparison to the previous quarter, from a revised rate of 1.4% to 0.8%. On a 12-month basis, the headline rate registered +0.9%, as did the seasonally-adjusted rate. In the September quarter, their respective rates were both 0.7% after revisions.

The RBA’s preferred measure of underlying inflation, the “trimmed mean”, was pretty much as expected. The trimmed mean inflation rate for the December quarter was +0.4%, in line with the market’s expected figure and slightly higher than the September quarter’s 0.3%. The 12-month growth rate remained unchanged at 1.2%.

Longer-term Commonwealth Government bond yields moved inconsistently on the day. By the end of the day, the 10-year ACGB yield had gained 3bps to 1.10% while the 20-year yield lost 3bps to 1.82%. The 3-year yield remained unchanged at 0.18%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, remained fairly stable. At the end of the day, contract prices implied the cash rate would inch up slowly to around 0.06% by mid-2022.

The main driver of the headline inflation figure in the quarter was a 4.2% rise in alcohol and tobacco prices, contributing 0.4% of the 0.9% increase over the quarter. The Furnishings, household equipment and services segment had the next largest influence on the quarter; it increased by 3.4% and contributed 0.3% to the quarterly total. This segment includes childcare, which accounted for much of the segments increase.

Summary:  US GDP up 1.0% in December quarter; consumers “still suffering”; GDP price deflator annual rate slightly higher.

US GDP growth slowed in the second quarter of 2019 before stabilising at about 0.5% per quarter.  At the same time, US bond yields suggested future growth rates would be below trend. The US Fed agreed and it reduced its federal funds range three times in the second half of 2019. Pandemic restrictions in the June quarter sent parts of the US economy into hibernation; the lifting of those same restrictions sparked a rapid recovery. Growth rates now appear to be reverting to more normal levels.

The US Bureau of Economic Analysis has now released December quarter “advance” GDP estimates and they indicate the US economy expanded by 1.0% or at an annualised growth rate of 4.0%. The figure was broadly in line +1.0% (+4.1% annualised) which had been generally expected but substantially lower than the September quarter’s 7.5% expansion.

“Overall, the data show consumers are still suffering from the pandemic. Restrictions, a weakening jobs market and the end of the Cares Act were the driving factors,” said ANZ economist Adelaide Timbrell.

US GDP numbers are published in a manner which is different to most other countries; quarterly figures are compounded to give an annualised figure. In countries such as Australia and the UK, an annual figure is calculated by taking the latest number and comparing it with the figure from the same period in the previous year. The diagram above shows US GDP once it has been expressed in the normal manner, as well as the annualised figure.

Summary:  Leading index falls back in December; follows four consecutive rises; signals “healthy above-trend growth”; reading implies annual GDP growth to rise to +7.00% during first half of 2021; November SoMP GDP forecasts lower than private sector forecasts.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth over the next three to six months. After reaching a peak in early 2018, the index trended lower through 2018, 2019 and the early months of 2020 before plunging to recessionary levels in the second quarter. Readings from the third and fourth quarters were markedly higher.

The latest reading of the six month annualised growth rate of the indicator fell in December after four consecutive increases, from November’s revised figure of +4.94% to +4.18%

“While we may have seen the peak in the growth rate of the Index it is still signalling healthy above-trend growth for the Australian economy in the first half of 2021,” said Westpac Chief Economist Bill Evans.

Index figures represent rates relative to trend-GDP growth, which is generally thought to be around 2.75% per annum. The index is said to lead GDP by three to six months, so theoretically the current reading represents an annualised GDP growth rate of around 7.0% in the first or second quarters of 2021.

Summary: Business conditions improve but confidence falls in December; suggests “strong momentum”; Sydney outbreak “likely” driver of confidence fall; capacity usage rate increases again; “upside risk” to ANZ’s forecasts; RBA expected to maintain stimulatory policy settings.

NAB’s business survey indicated Australian business conditions were robust in the first half of 2018, with a cyclical-peak reached in April of that year. Readings from NAB’s indices then began to slip, declining to below-average levels by the end of 2018. Forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 and the indices trended lower, hitting a nadir in April 2020 as pandemic restrictions were introduced. Conditions have improved markedly since then.

According to NAB’s latest monthly business survey of over 550 firms conducted around the middle of January, business conditions improved for a fourth consecutive month. NAB’s conditions index registered 14, up from December’s revised reading of 7.

“Business conditions are now well above average, suggesting there is strong momentum in Australia’s economic recovery,” said NAB chief economist Alan Oster.

In contrast, business confidence deteriorated. NAB’s confidence index declined from November’s revised reading of +13 to +4. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences have appeared in the past from time to time.

Oster suggested “this likely reflects the impact of the Sydney COVID-19 outbreak through December” although he also noted confidence levels had fallen in Victoria and Queensland as well.

Longer-term Commonwealth Government bond yields moved inconsistently on the day. By the end of the day, the 10-year ACGB yield had gained 3bps to 1.10% while the 20-year yield lost 3bps to 1.82%. The 3-year yield remained unchanged at 0.18%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, remained fairly stable. At the end of the day, contract prices implied the cash rate would inch up slowly to around 0.06% by mid-2022.