News

Summary: US consumer confidence lower; Conference Board index falls, less than expected; views of present conditions, future conditions both deteriorate; consumers do not expect economy, labour market gaining strength; reading likely result from COVID-19 resurgence, Republican voter disappointment; survey taken before vaccine news.

After the GFC in 2008/09, US consumer confidence clawed its way back to neutral over a number of years and then went from strength to strength until late 2018. Measures of consumer confidence then oscillated within a fairly narrow band at historically high levels until they plunged earlier this year. Subsequent readings have oscillated around the long-term average.

The latest Conference Board survey held during the first half of November indicated US consumer confidence was lower than in the previous month. November’s Consumer Confidence Index registered 96.1, below the median consensus figure of 98.0 and less than October’s final figure of 101.4. Consumers’ views of present conditions declined slightly but their views regarding future conditions deteriorated more noticeably compared to those held at the time of the October survey.

“Heading into 2021, consumers do not foresee the economy, nor the labour market, gaining strength. In addition, the resurgence of COVID-19 is further increasing uncertainty and exacerbating concerns about the outlook,” said Lynn Franco, a senior director at The Conference Board.

Longer-term US Treasury bond yields rose. By the end of the day, the 10-year Treasury bond yield had gained 3bps to 0.88% and the 30-year yield had increased by 6bps to 1.61%. The 2-year yield finished unchanged at 0.16%.

In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months maintained a neutral bias. Federal funds futures contracts for December 2021 implied an effective federal funds rate of 0.07%, just under the current spot rate.

NAB currency strategist Rodrigo Catril put the lower index down “to the resurgence in Covid-19 in the country and disappointment among Republican voters around the election outcome, the mirror image of the post-2016 surge in confidence.” ANZ senior economist Catherine Birch noted the index “fell more than expected in November but the survey was conducted before the vaccine news came out.”

Summary: ifo business climate index down again in November; less than expected figure; ifo president says second wave has interrupted German recovery; vaccine news “hasn’t altered outlook for most businesses.”

Following a recession in 2009/2010, the ifo Institute’s business climate index largely ignored the European debt-crisis of 2010-2012, remaining at average-to-elevated levels through to early-2020. However, the index was quick to react in the March survey, falling precipitously. The rebound which began in May was almost as sharp but recent readings have not continued that trend.

According to the latest figures released by the Institute, its business climate index fell to 90.7 in November, its second consecutive month of declines. The reading was just below the expected reading of 90.9 and 1.8 points below October’s final reading of 92.5. The average reading since January 2005 is just above 97.

The expectations index also lost ground, falling from October’s revised figure of 94.7 to 91.5 in November, also below the expected figure of 93.5. The current situation index declined from 90.4 to 90.0.

“The second wave of coronavirus has interrupted Germany’s economic recovery,” said Clemens Fuest, the president of the ifo Institute.

German and French 10-year bond yields increased modestly on the day. By the close of business, the German 10-year bund yield had gained 2bp to -0.56% while the French 10-year OAT yield finished 1bp higher at -0.33%.

ANZ senior economist Catherine Birch said the fall in the expectations index indicates “the vaccine news hasn’t altered the outlook for most businesses.”

Summary: Euro-zone households more pessimistic in November; slightly above consensus expectation; still below long-term average; major euro-zone bond yields barely changed.

EU consumer confidence plunged during the GFC and again in 2011/12 during the European debt crisis. After bouncing back through 2013 and 2014, it fell back significantly in late 2018 but only to a level which corresponds to significant optimism among households. Following the plunge which took place in April 2020, a recovery of sorts began in May. More recent readings have generally stagnated at below-average levels.

The November survey conducted by the European Commission indicated its Consumer Confidence index decreased to -17.6. The reading was slightly more the -18.0 which had been expected but lower than October’s figure of -15.5. The average reading since the beginning of 1985 has been -11.7.

The report had little effect on major European bond markets. By the end of the day, the German 10-year bund yield remained unchanged at -0.58% while the French 10-year OAT bond yields had slipped 1bp to -0.35%.

Summary: US leading index increases in line with expectations in October; widespread improvements despite some weakness; Conference Board forecasts for December quarter “unlikely to exceed” 2.2% annualised; suggests growth will “moderate significantly” in final months of 2020.

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 0.7% in October. The result was in line with expectations and the same as September’s reading. On an annual basis, the LEI growth rate increased from September’s revised figure of -4.0% to -3.2%.

“The US LEI rose again in October, with widespread improvements despite weakness from housing permits and consumers’ outlook on economic conditions,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board.

Changes over time can be large but once they are standardised, a clearer relationship with GDP emerges. The latest reading implies a year-on-year growth rate of -0.5% in January, up from the -1.2% implied for December after revisions. The Conference Board forecasts an annualised growth rate for the December quarter which “is unlikely to exceed 2.2%”, or about 0.5% over one quarter.

US Treasury bond yields fell along the curve. By the end of the day, the 2-year yield had slipped 1bp to 16bps, the 10-year Treasury yields had decreased by 4bps to 0.83% while the 30-year yield finished 5bps lower at 1.55%.

A month ago, Ozyildirim had noted “the decelerating pace of improvement” of the index. Again, he pointed to the index’s slowing rate of gain, saying it “suggests growth will moderate significantly in the final months of 2020, slowing down from the unusually rapid pace in Q3.”

Summary:  Leading index increases strongly for third consecutive month in October; first above-trend result since November 2018; index reading implies annual GDP growth to rise to around +6.00% early next year; RBA forecast implies 3.5% growth in second half of 2020.

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.

The latest reading of the six month annualised growth rate of the indicator increased strongly for a third consecutive month, from September’s revised figure of –0.45% to +3.25% in October.

“This is the first positive, above trend, growth rate since November 2018. It is also the strongest seen since the early 1980s,” 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 6.0% in the first or second quarters of 2021.

The report was released on the same day as the September quarter’s wage indices and long-term Commonwealth Government bond yields fell more than their US counterparts had overnight. By the end of the day, 10-year and 20-year ACGB yields had each lost 7bps to 0.89% and 1.51% respectively. The 3-year yield slipped 1bp to 0.17%.

Summary: US output resumes expanding; rise just above expected figure; capacity utilisation rate increases following September decline.

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 1.1% on a seasonally adjusted basis in October, more than making up for September’s decline. The result was a little over the 1.0% expansion which had been generally expected and in contrast to September’s 0.4% fall. On an annual basis, the contraction rate slowed from September’s revised figure of -6.7% to -5.3%.

The report was released on the same day as October retail sales figures and longer-term US Treasury bond yields fell moderately. By the end of the day, the 10-year Treasury yield had lost 4bps to 0.86% while the 30-year yield finished 6bps lower at 1.61%. The 2-year yield remained unchanged at 0.18%.

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%. October’s reading increased to 72.8% from September’s revised figure of 72.0%.

Summary:  US retail sales increase for sixth consecutive month; rise less than expected figure; increase “disappointing” given time of year; Dec quarter sales likely to be “distorted” by rising COVID cases, restrictions, lack of fiscal package; results across the various retail categories were patchy; “non-store retailers” the largest influence on total.

US retail sales had been trending up since late 2015 but, commencing in late 2018, a series of weak or negative monthly results led to a drop-off in the annual growth rate below 2.0% by the end of that year. Growth rates then increased in trend terms through 2019 and into early 2020 until pandemic restrictions sent it into negative territory. A “v-shaped” recovery has since taken place.

According to the latest “advance” sales numbers released by the US Census Bureau, total retail sales increased by 0.3% in October. The gain was lower than the 0.5% increase which had been generally expected and considerably less than the 1.6% rise after revisions in September. On an annual basis, the growth rate slipped from September’s revised rate of 5.9% to 5.7%.

“The pullback to the slowest pace of growth in six months is disappointing, especially in the run up to the holiday/festive season,” said senior economist Elliot Clarke.

The report was released on the same day as October industrial output figures and longer-term US Treasury bond yields fell moderately. By the end of the day, the 10-year Treasury yield had lost 4bps to 0.86% while the 30-year yield finished 6bps lower at 1.61%. The 2-year yield remained unchanged at 0.18%.

Clarke said December quarter sales would likely “be distorted” as rising COVID cases, continued government restrictions and a lack of renewed fiscal packages hinder spending.

Results across the various retail categories were patchy, with sales in a majority of segments falling over the month. The “Non-store retailers” segment provided the largest influence on the overall result. Sales in this segment increased by 3.1% over the month and by 29.1% on an annual basis.

Summary: Prices received by producers rise by 0.3% on average in October; increase higher than expected; annual “core” PPI rate slips; long-term US bond yields up a touch; PPI rise 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 prices received by producers 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 0.3% after seasonal adjustments in October. The increase was above the 0.2% rise which had been generally expected but a little lower than September’s 0.4% rise. On a 12-month basis, the rate of producer price inflation after seasonal adjustments remained at 0.5%.

“US October PPI data disappointed again, with underlying inflation pressures still extremely subdued…There is no evidence of inflation accelerating at the moment,” said ANZ economist Hayden Dimes.

PPI inflation excluding foods and energy rose by 0.1% in October after recording increases of 0.4% in August and September. The annual rate slipped from September’s 1.2% to 1.1%.

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 slightly higher across the curve. By the end of the day, 2-year, 10-year and 30-year Treasury yields all finished 1bp higher at 0.18%, 0.89% and 1.65% respectively.

Summary: US consumer confidence down in November; University of Michigan index lower than expected; future economic prospects viewed less favourably; decline due to election outcome, resurgence in COVID infections and deaths.

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 deteriorated in November, maintaining its somewhat-erratic trend. The University’s preliminary reading from its Index of Consumer Sentiment registered 77.0, noticeably less than the generally expected figure of 82.0 and lower than October’s final figure of 81.8.

“Consumer sentiment fell in early November as consumers judged future economic prospects less favourably, while their assessments of current economic conditions remained largely unchanged,” said the University’s Surveys of Consumers chief economist, Richard Curtin.

The report was released on the same day as October producer price indices and US Treasury bond yields moved slightly higher across the curve. By the end of the day, 2-year, 10-year and 30-year Treasury yields all finished 1bp higher at 0.18%, 0.89% and 1.65% respectively.

Curtin attributed the decline to the “outcome of the presidential election as well as the resurgence in COVID infections and deaths”. Republican supporters recorded “a substantial negative shift” in their future economic prospects.

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: October US CPI less than expected; headline and core figures flat; “at a standstill”, “well below Fed’s 2% inflation target”; implied rents, airfares up, vehicle insurance, clothing down; fell by 2.3% and 1.2% New York Fed measure unchanged at 1.3%.

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 for both measures were reported from March to May but subsequent reports indicated consumer inflation has largely returned to pre-pandemic levels. “Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices were unchanged on average in October. The result was less than the 0.2% increase which had been generally expected and less than September’s 0.2% rise. On a 12-month basis, the inflation rate slowed from September’s rate of 1.4% to 1.2%.

Core inflation, a measure of inflation which strips out the volatile food and energy components of the index, also remained unchanged on a seasonally-adjusted basis for the month. The result was less than the 0.2% rise which had been expected and lower than September’s comparable figure of 0.2%. The seasonally adjusted annual rate slipped from 1.7% to 1.6%.

ANZ economist Adelaide Timbrell said inflation was “at a standstill” in the US and noted core inflation was “well below the Fed’s 2% inflation target.”

Long-term US Treasury bond yields fell significantly on the day, aided by new highs in daily US infection rates. By the end of the day, the US 2-year yield had slipped 1bp to 0.17% while 10-year and 30-year yields each finished 10bps lower at 0.88% and 1.64% respectively.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months remained fairly soft. December futures contracts implied an effective federal funds rate of 0.085%, just under the spot rate of 0.09%.