News

Summary: Home approval numbers increase noticeably; rise considerably more than expected figure; up 8.8% compared to September 2019; no discernible impact from Victoria; “suggests confidence in housing market recovering strongly, despite weak fundamentals”; house, apartment approvals both up; underlying momentum “in reasonably good shape.”

Approvals for dwellings, that is apartments and houses, had been heading south since mid-2018. As an indicator of investor confidence, falling approvals had presented a worrying signal, not just for the building sector but for the overall economy. However, approval figures from late-2019 and the early months of 2020 painted a picture of a recovery taking place, even as late as April. Recent months’ figures have been volatile. 

The Australian Bureau of Statistics has released the latest figures from September and total residential approvals increased by 15.4% on a seasonally-adjusted basis. The large rise over the month was considerably more than the 1.5% increase which had been generally expected and in contrast with August’s 2.3% fall after revisions. Total approvals increased by 8.8% on an annual basis, an acceleration from August’s revised figure of 0.7%. Monthly growth rates are often volatile.

“Dwelling approvals came in well above expectations in September with no discernible impact from Victoria’s second wave lockdown and the detail suggesting a strong boost from the Federal Government’s HomeBuilder scheme,” said Westpac senior economist Matthew Hassan.

The figures came out on the same day as the latest Westpac-Melbourne Institute Inflation Gauge, ANZ’s October Job Ads survey and the September home finance approvals report. Commonwealth bond yields moved lower, ignoring higher US Treasury yields at the close of trading on Friday night. By the end of the day, the 3-year ACGB yield had lost 2bps to 0.15%, the 10-year yield had shed 5bps to 0.78% while the 20-year yield finished 4bps lower at 1.40%.

“Building and lending indicators suggest confidence in the housing market is recovering strongly, despite weak fundamentals including lower population growth and higher unemployment in 2021,” said ANZ economist Adelaide Timbrell. UBS economist George Tharenou raised his 2020 forecast for dwelling commencements from 160,000 to 170,000 after the report.

Summary: US Fed’s favoured inflation measure rises 0.2% in September; in line with market expectations; annual rate up for fifth consecutive month; Treasury bond yields higher.

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 September personal income and expenditures report. Core PCE prices increased by 0.2% over the month, in line with expectations but lower than August’s 0.3% increase. On a 12-month basis, the core PCE inflation rate accelerated for a fifth consecutive month, from August’s revised rate of 1.4% to 1.5%.

Summary: Private sector credit barely grows in September; “weakest for private sector credit since GFC”; steady growth in owner-occupier segment again offset by falls in business loans, personal debt.

The pace of lending to the non-bank private sector by financial institutions in Australia has been trending down since October 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.

According to the latest RBA figures, private sector credit grew by 0.1% in September, the first increase since March. The result was in line with expectations and above August’s flat result. However, the annual growth rate slowed to 2.0% from August’s comparable rate of 2.2%.

“These results are the weakest for private sector credit since the GFC. In that cycle, annual growth slowed to a low of 0.8% in November 2009, including a 7.5% decline for business. The low in the early 1990s recession period was -1.8% in April 1992,” said Westpac senior economist Andrew Hanlan.

Owner-occupier loans continued to grow steadily but their growth was again largely offset by falls in business loans and personal debt.

Long-term Commonwealth bond yields moved a little higher. By the end of the day, the 10-year ACGB yield had inched up 1bp to 0.83% and the 20-year yield had gained 2bps to 1.44%. The 3-year yield finished unchanged at 0.17%.

The traditional driver of loan growth rates, the owner-occupier segment, grew by 0.5% over the month, up from August’s 0.4%. The sector’s 12-month growth rate remained at 5.4%.

Growth rates in the business sector resumed their downtrend in May and it has continued through to September as business credit contracted by 0.3%, a slightly slower rate of contraction than the 0.4% fall in August. The segment’s annual growth rate slowed from August’s rate of 2.9% to 2.0%.

Summary:  US GDP up 7.4% in September quarter; still 3.5% below pre-pandemic levels; large degree of spare capacity; personal consumption leads rebound; higher frequency data suggestive of slowing growth in recent months; GDP deflator up, back above zero.

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.

The US Commerce Department has now released September quarter “advance” GDP estimates and they indicate the US economy expanded by 7.4% or at an annualised growth rate of 33.1%. The figure was a little higher than the +7.2% (+32.0% annualised) which had been expected and in marked contrast with the June quarter’s 9.0% contraction.

“Even with the sharp rebound seen in Q3, the level of GDP remains 3.5% below pre-pandemic levels with a large degree of spare capacity remaining,” said NAB economist Tapas Strickland.

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.

Long-term US Treasury bond yields rose noticeably. By the end of the day, the 10-year Treasury bond yield had gained 6bps to 0.83% and the 30-year yield had increased by 5bps to 1.61%. The 2-year yield finished unchanged at 0.15%.

“Personal consumption led the rebound, up 40.7% in annualised terms. The growth numbers look impressive, and will in most countries that experienced massive COVID-related activity disruptions in Q2,” said ANZ economist Adelaide Timbrell. She expected the US recovery to be “much less clear from here, especially as the number of virus cases grows and there are near-term impediments to a fiscal deal.”

Summary: Euro-zone composite sentiment index unchanged; above expectations; results from major euro-zone economies mixed; sovereign bond yields lower; index still implies GDP contraction.

The European Commission’s Economic Sentiment Indicator (ESI) is a composite index comprised of five differently-weighted sectoral confidence indicators.  It is heavily weighted towards confidence surveys from the business sector; the consumer confidence sub-index only accounts for 20% of the ESI. However, it has a good relationship with euro-zone GDP, although not as a leading indicator.

The ESI produced a reading of 90.9 in October, above the market’s expected figure of 89.6 but the same as September’s revised reading. The average reading since 1985 has been just under 100.

Confidence improved in industry, retail trade and construction while services and consumer confidence deteriorated. On a geographical basis, the ESI rose in Germany and Italy while it fell France and Spain.

German and French 10-year bond yields fell. By the end of the day, the German bund yield had slipped 1bp to -0.64% and the French OAT yield had shed 3bps to -0.36%.

End-of-quarter ESI and annual euro-zone GDP growth rates are strongly correlated. This latest reading corresponds to a year-to-October growth rate of -0.40%, unchanged from September’s revised rate.

Summary: Inflation restarts in September quarter after deflation hits June quarter; RBA preferred measure also back in positive territory; childcare main driver of result; result generally expected by economists, seen as “one-off”.

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 September quarter have now been released by the ABS and both the headline and seasonally-adjusted figures were roughly in line with market expectations. The headline inflation rate came in at +1.6% for the quarter, in marked contrast to the June quarter’s -1.9%. The seasonally-adjusted inflation rate also accelerated significantly, from a revised rate of -1.8% to +1.5%. On a 12-month basis, the headline rate registered +0.7%, as did the seasonally-adjusted rate. In the June quarter, their respective rates were -0.3% and -0.4% after revisions.

The RBA’s preferred measure of underlying inflation, the “trimmed mean”, also reverted to positive territory. The trimmed mean inflation rate for the September quarter was +0.4%, slightly below the market’s expected figure of +0.5% but a turnaround from June’s -0.1%. The 12-month growth rate remained unchanged at 1.2%.

Commonwealth Government bond yields generally moved a touch lower, although not as much as their US counterparts had in overnight trading. By the end of the day, the 3-year ACGB yield had ticked up 1bp to 0.17%, the 10-year yield remained unchanged at 0.79% while the 20-year yield finished 1bp lower at 1.39%.

Expectations of the path of the actual cash rate remained largely unchanged. By the end of the day, contracts implied the cash rate would fall below 0.10% in November, then decline a little further in December and 2021.

The main driver of the headline inflation figure in the quarter was a 12% rise in furnishings, household equipment and services. This segment includes childcare, which added just under 1 point, or 0.8%, to the index over the quarter.

Summary: US consumer confidence slightly lower; view of present conditions improves but offset by view of future conditions; little evidence US consumers expect economy to gain momentum.

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.

The latest Conference Board survey held during the first half of October indicated US consumer confidence was slightly lower than in the previous month. October’s Consumer Confidence Index registered 100.9, below the median consensus figure of 102 and slightly less than September’s final figure of 101.3. Consumers’ views of present conditions improved but their views regarding future conditions deteriorated compared to those held at the time of the September survey.

“There is little to suggest that consumers foresee the economy gaining momentum in the final months of 2020, especially with COVID-19 cases on the rise and unemployment still high,” said Lynn Franco, a senior director at The Conference Board.

Longer-term US Treasury bond yields fell. By the end of the day, the 10-year Treasury bond yield had shed 3bps to 0.77% and the 30-year yield had lost 5bps to 1.55%. The 2-year yield ticked up 1bps to 0.15%.

In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months retained a slight easing bias. OIS contracts for November implied an effective federal funds rate of 0.086%, just under the current spot rate.

The Consumer Confidence Survey is one of two monthly US consumer sentiment surveys which result in the construction of an index. The Conference Board’s index is based on perceptions of current business and employment conditions, as well as respondents’ expectations of conditions six months in the future. The other survey, conducted by the University of Michigan, is similar and it is used to produce an Index of Consumer Sentiment. That survey differs in that it also includes some longer-term questions.

Summary: ifo business climate index slips in October; follows five consecutive months of rises; a little under expectations; German businesses “becoming increasingly worried”.

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.

According to the latest figures released by the Institute, its business climate index slipped back to 92.7 in October after five months of consecutive increases. The reading was a little below the expected reading of 93.0 and 0.5 points below September’s final reading of 93.2. The average reading since January 2005 is just above 97.

The expectations index also lost ground, falling from September’s figure of 97.4 to 95.0 in October, also below the expected figure of 96.5. However, the current situation index rose from 89.2 to 90.3.

“Companies are considerably more sceptical regarding developments over the coming months. In contrast, they gave a slightly more positive assessment of their current situation than last month. In view of rising infection numbers, German business is becoming increasingly worried,” said Clemens Fuest, the president of the ifo Institute.

German and French 10-year bond yields remained stable on the day. By the close of business, German and French 10-year bond yields finished unchanged at -0.58% and -0.30% respectively.

The ifo Institute’s business climate index is a composite index which combines German companies’ views of current conditions with their outlook for the next six months. It has similarities to consumer sentiment indices in the US such as the ones produced by The Conference Board and the University of Michigan.

It also displays a solid correlation with euro-zone GDP.

Summary: Euro-zone households slightly more pessimistic in October; below consensus expectation; still below long-term average; German confidence down for eighth consecutive month; major euro-zone bond yields up slightly.

EU consumer confidence plunged during the GFC and again in 2011/12 during the European debt crisis. It fell back significantly in late 2018 but only to a level which corresponds to significant optimism among households. After a plunge took place in April 2020, a recovery of sorts took place through May and June. More recent readings have generally stagnated.

The October survey conducted by the European Commission indicated its Consumer Confidence index decreased to -15.5. The reading was slightly below the -15.0 which had been expected and lower than September’s figure of -13.9. The average reading since the beginning of 1985 has been -11.7.

“Confidence within Germany has now fallen for eight months in a row, with the recent COVID-19 outbreaks not helping the situation,” said ANZ economist Kishti Sen.

The report had a modest effect on major European bond markets. By the end of the day, German and French 10-year sovereign bond yields had each gained 2bps to -0.57% and -0.29% respectively.

Summary: US leading index increases; increase slightly less than expected; August increase revised up; change driven by declining jobless claims, rising housing permits; Conference Board forecasts 0.4% growth in December quarter; slowing index growth rate “suggests US economy could be losing momentum”.

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” but more recent readings indicate a recovery is underway, albeit at a slowing pace.

The latest reading of the LEI indicates it rose by 0.7% in September. The result was slightly less than the 0.8% increase which had been generally expected and less than August’s 1.4% after it was revised up from 1.2%. On an annual basis, the LEI growth rate increased from August’s revised figure of -5.1% to -4.2%.

“The US LEI increased in September, driven primarily by declining unemployment claims and rising housing permits,” 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 -1.0% in December, up from the -1.3% implied for November. The Conference Board forecasts an annualised growth rate of 1.5% for the December quarter, or about 0.4% over one quarter.