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Summary: Melbourne Institute inflation index up in December; annual rate ticks up to 1.5%; implies large CPI rise in December quarter.

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.

The Melbourne Institute’s latest reading of its Inflation Gauge index increased by 0.5% in December. The rise follows a 0.3% rise in November and a 0.1% decline in October. On an annual basis, the index rose by 1.5%, an acceleration from November’s comparable figure of 1.4%.


Long-term Commonwealth bond yields fell modestly on the day, in contrast to somewhat higher US Treasury yields at the close of trading on Friday night. By the close of business, the 3-year ACGB yield had slipped 1bp to 0.19%, the 10-year yield had lost 2bps to 1.12% and the 20-year yield finished at 1.84%.

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%.

By Ken Atchison, principal, Atchison Consultants

How fiscal and monetary policy is conducted in Australia will be critical for its recovery from recession, which itself was driven by Australia’s response to dealing with the coronavirus. While a health crisis and an economic crisis were almost inevitable, avoidance of a financial crisis was a key policy of the Federal government and the Reserve Bank of Australia (RBA). However, the RBA’s policy thrust has extended well beyond monetary policy.

In part, the Reserve Bank has been trapped into following the Federal Reserve, ECB and other central banks in keeping interest rates very low. If it I did not, the Australian dollar would have appreciated significantly. The notorious “Greenspan/Bernanke put”, the practice of the Federal Reserve cutting interest rates whenever US equity markets quivered, has had wide ramifications for more than two decades, and not just for the US.

Extreme actions have been adopted by the RBA as it imposes alternative policies. Having reached zero bound, lowering interest rates is no longer an effective policy tool. RBA Governor Lowe has stated:

• that the cash rate will stay at the low of 0.1% for at least the next three years.
• that preservation of states’ credit ratings is not particularly important. Creating jobs is much more important.
• that he has no concerns at all about state governments being able to borrow more money at low interest rates.
• that $100 billion of long-term federal and state government bonds will be bought over six months.
• that a $200 billion funding line of credit will be offered to banks to offer cheap money to business.

The RBA’s actions have only had a cushioning effect. Data to October 2020 indicates private sector credit rose only 1.6% in the year. Drastically lower interest rates have resulted in a minor increase in total borrowing for housing. Business credit is still contracting as survival is currently the business sector’s sole focus.

Lower interest rates and liquidity into the financial system has instead flowed into investment markets with housing prices not only stabilising but rising. Australia already has one of the highest levels of household debt-to-income ratios in the world; only four European countries have higher ratios.

Summary:  Leading index increases for fourth consecutive month; strongest growth rate in sixty years; reading implies annual GDP growth to rise to +7.00% in 2021; GDP forecasts raised since November SoMP.

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 quarter were markedly higher and more recent figures have continued to rise.

The latest reading of the six month annualised growth rate of the indicator increased for a fourth consecutive month, from October’s revised figure of +3.77% to +4.38% in November.

“This is the strongest growth rate in the sixty year history of the measure. That said, the gains still largely reflect the severity of the preceding contraction which saw the Index growth rate drop to an extreme low of –5.5% in April,” 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: US output expands; rise just above expected figure; capacity utilisation rate increases.

The Federal Reserve’s industrial production (IP) index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component.

Production began recovering in May and subsequent months after collapsing through March and April.

US industrial production expanded by 0.4% on a seasonally adjusted basis in November. The result was a little over the 0.3% increase which had been generally expected but just under half of October’s 0.9% rise after it was revised down from 1.1%. On an annual basis, the contraction rate increased from October’s revised figure of -5.0% to -5.5%.

US Treasury bond yields did not move decisively any particular direction on the day. By the end of the day, the 2-year Treasury yield had returned to its starting position at 0.12%, the 10-year yield had slipped 1bp to 0.89% while the 30-year yield finished 1bp higher at 1.63%.

The same report includes US capacity utilisation figures which are generally accepted as an indicator of future investment expenditure and/or inflationary pressures. Capacity usage had hit a high for the last business cycle in early 2019 before it began a downtrend which ended with April’s multi-decade low of 64.2%. November’s reading increased to 73.3% from October’s revised figure of 73.0%.

Summary: Euro-zone industrial production jumps in October; monthly figure slightly higher than consensus estimate; annual rate still negative; “manufacturing “outperforming in uneven recovery”; German, French, Spanish, Italian production all expand.

Following a recession in 2009/2010 and the debt-crisis which flowed from it, euro-zone industrial production recovered and then reached a peak four years later in early 2016. Growth rates then fluctuated through 2016/2017 before beginning a steady and persistent slowdown from the start of 2018. That decline was transformed into a plunge in March and April but the months which followed produced an almost-equally steep bounce.

According to the latest figures released by Eurostat, euro-zone industrial production jumped on a seasonally-adjusted basis by 2.1% in October. The rise was slightly higher than the 1.8% increase which had been generally expected and significantly above September’s revised figure of 2.1%. On an annual basis, the seasonally-adjusted growth rate increased from September’s revised rate of -6.2% to -3.6%*.

German and French 10-year sovereign bond yields moved slightly higher on the day. By the close of business, the German 10-year bund yield had gained 2bps to -0.62% while the French 10-year OAT yield had inched up 1bp to -0.37%.

ANZ senior economist Felicity Emmett said the improvement in the annual growth rate “shows manufacturing is outperforming in the uneven recovery.” She also noted “investment demand may be showing some early green shoots” while a 2.1% rise in intermediate goods production implied “an ongoing recovery in trade.”

Industrial production growth expanded in all four of the euro-zone’s largest economies. Germany’s production grew by 3.4% in October while the comparable figures for France, Spain and Italy were 1.7%, 1.3% and 0.6% respectively.

As with other countries’ measures of industrial production, Eurostat’s industrial production index measures the output and activity of industrial sectors in euro-zone countries on aggregate.

* Eurostat’s published annual growth figures are calculated using index figures which are “calendar adjusted”, not “seasonally adjusted”. The published Eurostat figure was -3.8%.

Summary: US consumer confidence up in December; University of Michigan index above consensus figure; Democrats voters more optimistic, Republicans less optimistic; “independents” neutral; economic prospects viewed more favourably overall.

US consumer confidence started 2020 at an elevated level. However, by March, surveys had begun to reflect a growing uneasiness with the global spread of COVID-19 and its reach into the US. After a plunge in April, US household confidence began to recover, albeit in a haphazard fashion.

The latest survey conducted by the University of Michigan indicates the average confidence level of US households recovered from November’s loss, maintaining its somewhat-erratic trend. The University’s preliminary reading from its Index of Consumer Sentiment registered 81.4, above the generally expected figure of 76.3 and higher than November’s final figure of 76.9.

“Consumer sentiment posted a surprising increase in early December due to a partisan shift in economic prospects,” said the University’s Surveys of Consumers chief economist, Richard Curtin. Democrats had become “much more optimistic” while Republicans had become “much more pessimistic”.

The report was released on the same day as November producer price indices and US Treasury bond yields moved a little lower across the curve. By the end of the day, the 2-year Treasury yield had shed 2bps to 0.12%, the 10-year yield had slipped 1bp to 0.90% while the 30-year yield finished 2bps lower at 1.62%.

Curtin noted “self-identified Independents adopted more balanced views, maintaining their economic expectations in December at the same unfavourable levels as when the COVID crisis began nine months ago.” However, he said he was still surprised negative news regarding US infections and deaths “was overwhelmed by partisanship.” An improvement in respondents’ long-term economic outlook was behind the gain in the index.

Less-confident households are generally inclined to spend less and save more; some drop-off in household spending could be expected to follow. As private consumption expenditures account for a majority of GDP in advanced economies, a lower rate of household spending growth would flow through to lower GDP growth if other GDP components did not compensate.

Summary: Prices received by producers rise by 0.1% on average in November; increase in line with expectations; indicates “lack of pipeline inflation pressures”; annual “core” PPI rate rises; US bond yields down a little; PPI rise again driven by higher goods prices.

Around the end of 2018, the annual inflation rate of the US producer price index (PPI) began a downtrend which then continued through 2019. Months in which producer prices increased suggested the trend may have been coming to an end, only for it to continue, culminating in a plunge in April. Figures from subsequent months suggest a return to “normal” may be taking place. 

The latest figures published by the Bureau of Labor Statistics indicate producer prices rose by 0.1% after seasonal adjustments in November. The increase was in line with expectations but lower than October’s 0.3% rise. On a 12-month basis, the rate of producer price inflation after seasonal adjustments increased from 0.5% to 0.7%.

“The data indicate a lack of pipeline inflation pressures and they fit with the broader array of inflation releases to confirm a subdued price environment,” said ANZ economist Hayden Dimes.

PPI inflation excluding foods and energy rose by 0.1% in November after recording increases of 0.1% and 0.4% respectively in October and September. The annual rate accelerated from 1.1% in October to 1.4%.

The report was released on the same day as the University of Michigan’s latest reading of its consumer sentiment index and US Treasury bond yields moved a little lower across the curve. By the end of the day, the 2-year Treasury yield had shed 2bps to 0.12%, the 10-year yield had slipped 1bp to 0.90% while the 30-year yield finished 2bps lower at 1.62%.

The BLS stated higher prices for final demand goods accounted for all the month’s increase after they rose by 0.4% on average. Prices of services remained unchanged on average.

Summary: November US CPI up, more than expected; rise in core rate “broad-based”; “most notable increases” in services sector; transportation, shelter costs up, used vehicles down.

The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March to May but subsequent reports indicated consumer inflation has largely returned to pre-pandemic levels.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices rose by 0.2% on average in November. The result was more than the 0.1% increase which had been generally expected and above October’s flat result. On a 12-month basis, the inflation rate remained unchanged at 1.2%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. Core inflation, a measure of inflation which strips out the volatile food and energy components of the index, also increased by 0.2% on a seasonally-adjusted basis for the month. The result was greater than the 0.1% rise which had been expected and higher than October’s comparable figure of 0.0%. The seasonally adjusted annual rate reverted back to 1.7% after slipping to 1.6% in October.

“The rise in core was broad-based, with the most notable increases being seen in the services sector, including airline fares and lodging,” said NAB economist Tapas Strickland.

US Treasury bond yields fell on the day. By the close of business, the US 2-year yield had slipped 1bp to 0.14%, the 10-year yield had lost 2bps to 0.91% while the 30-year yield finished 4bps lower at 1.64%.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months remained fairly soft. January futures contracts implied an effective federal funds rate of 0.085%, just above the spot rate of 0.08%.

Summary: US quit rate unchanged; job openings up by 2.4%, total separations up 5.4%; job openings rise “an encouraging sign”; non-farm payroll report suggests job creation moderating.

The number of US employees who quit their jobs as a percentage of total employment increased slowly but steadily after the GFC. It peaked in March 2019 and then tracked sideways until virus containment measures were introduced in March 2020. The quit rate plummeted as alternative employment opportunities rapidly dried up but then recovered quite quickly over the next six months.

Figures released as part of the most recent JOLTS report show the quit rate remained unchanged. 2.2% of the non-farm workforce left their jobs voluntarily in October, the same rate as in September. The largest source of additional quits arose from the “Health care and social assistance”, while the “Professional and business services” sector experienced fewer quits. Overall, the total number of quits for the month increased by 18,000 from September’s revised figure of 3.074 million to 3.092 million.

April’s non-farm payroll report indicated average hourly pay had spiked in that month, possibly the result of fewer lower-paid jobs relative to higher paying ones. Subsequent months’ figures then saw falls in average hourly pay, with a corresponding fall in the annual growth rate from 8.0% in April to 4.4% in November.

Total vacancies at the end of October increased by 158,000, or 2.4%, from September’s revised figure of 6.494 million to 6.652 million, driven by a 122,000 rise in the “Health care and social assistance” sector. 34,000 fewer openings in the “Transportation, warehousing, and utilities” sector provided the single largest offset. Overall, 12 out of 18 sectors experienced more job openings than in the previous month.

Total separations during the same period increased by a net 263,000, or 5.4%, from September’s revised figure of 4.844 million to 5.107 million. The rise was led by the “Federal Government” sector, where there were 109,000 more separations than in September. Separations increased in 15 of 18 sectors.

ANZ analyst Rahul Khare said rise in job openings represented “an encouraging sign against the backdrop of rising coronavirus cases, and mirroring the improvement seen in many of the business surveys.” However, he noted the figures are seen as a lagging indicator and November’s non-farm payroll report suggested “job creation is moderating.”

Summary: Household sentiment improves for fourth consecutive month; sentiment “fully recovered” from recession”; index highest since October 2010, substantially above long-term average; all components but one higher; “time to buy a dwelling” index lower.

After a lengthy divergence between measures of consumer sentiment and business confidence in Australia which began in 2014, confidence readings of the two sectors converged again around July 2018. Both readings then deteriorated gradually in trend terms, with consumer confidence leading the way. Household sentiment fell off a cliff in April but, after a few months of to-ing and fro-ing, it then staged a full recovery.

According to the latest Westpac-Melbourne Institute survey conducted in early December, household sentiment has improved to a reasonably optimistic level. The Consumer Sentiment Index rose for a fourth consecutive month, from November’s reading of 107.7 to 112.0.

“After only eight months the evidence seems clear that sentiment has fully recovered from the COVID recession,” said Westpac chief economist Bill Evans.

Treasury bond yields hardly moved on the day. By the close of business, 3-year and 10-year ACGB yields remained unchanged at 0.19% and 1.02% respectively while the 20-year yield finished 1bp lower at 1.66%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.04%, did not change materially. At the end of the day, contract prices implied the cash rate would trade in a range between 0.04% and 0.05% through to the end of 2021.

Any reading below 100 indicates the number of consumers who are pessimistic is greater than the number of consumers who are optimistic. The latest figure is the highest since October 2010, substantially above the long-term average reading of just over 101.