News

Summary: Payrolls and wages both rise in the week to 25 July; economists likely to raise employment forecasts in July, August; payrolls and wages still both down by around 5% since start of restrictions; Victoria the obvious laggard.

The ABS has released its latest payroll report containing new statistics on jobs and wages based on Single Touch Payroll data provided by the ATO. Job losses do not directly translate into additional unemployment; some people hold more than one job and the report’s figures are not seasonally adjusted.

Payroll numbers fluctuated in the second half of July, continuing the pattern of the first half. Total payrolls for the week to 25 July rose by 0.3% but only following a 0.4% decline in the previous week.

“This is a more positive update and has implications for both our July and August employment forecasts in the Labour Force Survey. For July, with revisions, payrolls are up 0.6% the first two weeks in the month on the first two weeks in June,” said Westpac senior economist Justin Smirk.

The picture for wages appears to be less rosy. Total wages for the week to 25 July increased by just 0.1%. The decline followed a 0.9% fall in the previous week and a 2.5% drop in the week before that.

Between the week ending 14 March 2020 and the week ending 25 July 2020, the total number of Australian jobs contracted by 4.5%. Total wages fell by 4.8% over the same 19 week period.

12 out of the 19 sectors experienced gains for the week, with the “Transport, postal & warehousing” sector experiencing the largest rise in percentage terms. Payrolls in the “Electricity, gas, water & waste services” sector experienced a 1.0% decline over the week.

Summary: Business conditions up; business confidence down after three months; confidence decline led by east coast states; capacity usage continues recovery but still at low level; economists “suggest recent gains may be reversed” especially in Victoria, NSW.

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 continued trending lower. In March 2020, vastly lower readings began to reflect coronavirus containment measures.

According to NAB’s latest monthly business survey of over 400 firms conducted in the last week of July, business conditions improved for a third consecutive month. NAB’s conditions index registered 0, up from June’s revised reading of -8.

Business confidence deteriorated after improving over the past three months. NAB’s confidence index fell from June’s revised reading of 0 to -14. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences appear from time to time.

“This survey was conducted prior to the escalation to stage 4 restrictions in Victoria. Prior to that, the survey suggested that business conditions saw a further improvement in July which was broad-based across states,” said NAB chief economist Alan Oster. He noted “a significant deterioration” in confidence “across all industries and in each state, except South Australia and Western Australia, with the most pronounced falls “in New South Wales and Victoria where concerns around the spread of the virus were escalating.” The figures came out on the same day as ABS Weekly payroll figures and Commonwealth bond yields remained stable except at the ultra-long end. By the end of the day, 3-year and 10-year ACGB yields remained steady at 0.30% and 0.89% while the 20-year yield finished 2bps higher at 1.45%.

Summary: US quit rate increases for second consecutive month; job openings also up; total separations up; accommodation & food sales sector largely responsible for increases in all categories; report “dated” according to some economists; number of openings “all the worse” in light of total jobless figure.

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. Quit rates plummeted as alternative employment opportunities rapidly dried up.

Figures released as part of the most recent JOLTS report show the quit rate has continued to stage a recovery. 1.9% of the non-farm workforce left their jobs voluntarily in June, a rise from May’s comparable figure of 1.6%. The largest source of additional quits arose from the “Health care and social assistance”, “Accommodation & food services” and “Retail trade” sectors while the “State and local government”, “Finance and insurance” and “Federal” sectors were the only sectors to experience falls. Overall, the total number of quits for the month increased from May’s figure of 2.067 million to 2.598 million in June.

April’s non-farm payroll report indicated average hourly pay had spiked, 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 4.8% in July.

Total vacancies at the end of June increased by 518,000, or 9.6%, from May’s revised figure of 5.371 million to 5.889 million, driven by large increases in the “Accommodation and food services” and, to a lesser extent, the “Health care and social assistance” sectors. Reduced openings in the construction and state and local government sectors provided the only drags. Overall, 16 out of 18 sectors experienced more job openings than in the previous month.

Total separations during the same period increased by 522,000 from May’s revised figure of 4.236 million to 4.758 million. The change was again led by the “Accommodation and food services” sector, where there were 175,000 more separations than in May. Separations decreased in 5 of the 18 sectors, with the state and local government sector experiencing the largest drop.

Summary: July non-farm payrolls increase lower than June gain; jobless rate down, participation rate down; report viewed as “dated” given weekly initial jobless claim figures; underemployment rate lower, still in mid-teens.

The US economy ceased producing jobs in net terms as infection controls began to be implemented in March. The unemployment rate had been around 3.5% but that changed as job losses began to surge through March and April. May’s non-farm employment report represented a turning point as the US economy began to re-open and the unemployment rate began to fall.

According to the US Bureau of Labor Statistics, the US economy created an additional 1.763 million jobs in the non-farm sector in July. The increase was above the 1.635 million which had been expected but less than the 4.8 million jobs which had been added in June after revisions. Employment figures for May and June were revised up by a total of 17,000.

The unemployment rate dropped from June’s rate of 11.1% to 10.2%. The total number of unemployed decreased by 1.412 million to 16.338 million while the total number of people who are either employed or looking for work decreased by 62,000 to 159.87 million. The fall in the number of people in the labour force lowered the participation rate from June’s rate of 61.5% to 61.4%.

“The data…is seen as dated given the deterioration seen in the high-frequency data to date,” said NAB economist Tapas Strickland.

US Treasury yields increased on the day. By the close of business, the US Treasury 2-year bond yield had crept up 1bp to 0.13%, the 10-year yield had gained 2bps to 0.56% while the 30-year yield finished 3bps higher at 1.23%.

One figure which is indicative of the “spare capacity” of the US employment market is the employment-to-population ratio. This ratio is simply the number of people in work divided by the total US population. It hit a cyclical-low of 58.2 in October 2010 before slowly recovering to just above 61% in late-2019. July’s reading increased for a third consecutive month from 54.6% in June to 55.1%.

Summary: ADP payroll numbers show a relatively small gain in July; much less than expected; June numbers revised up, double previous estimate of gain; employment figures up in small and large firms, down in mid-sized firms; services sector accounts for almost all gains; wide range of estimates in upcoming official non-farm payroll report.

The ADP National Employment Report is a monthly report which provides an estimate of US non-farm employment in the private sector. Since the report began to be published in 2006, its employment figures have exhibited a high correlation with official non-farm payroll figures, although a large difference can arise in any individual month

The ADP July report indicated private sector employment increased by just 0.167 million, much less than the 1.635 million which had been expected. However, June’s increase was also more than doubled from 2.369 million to 4.8 million rise after revisions.

NAB currency strategist Rodrigo Catril noted “this indicator severely undershot the more closely watched non-farm payrolls indicator over the past couple of months, by some 5.9 million in May and 2.4 million in June.”

US Treasury yields rose moderately. By the close of business, the 2-year Treasury bond yield had gained 3bps to 0.12% while 10-year and 30-year yields each finished 4bps higher at 0.55% and 1.23% respectively.

Employment numbers in net terms were up except in mid-sized businesses. Firms with less than 50 employees filled a net 63,000 positions, mid-sized firms (50-499 employees) lost 25,000 positions while large businesses (500 or more employees) accounted for 129,000 additional employees.

Employment at service providers accounted for almost all of the total net increase. In the services sector, 166,000 positions filled in net terms. The “Professional & Business” sector was the largest single source of gains, with 58,000 additional positions filled while the “Education & Health” and “Trade, Transportation & Utilities” sectors accounted for 46,000 and 41,000 positions respectively. Total jobs among goods producers increased by only a net 1,000, with modest gains in the manufacturing sector offset by losses in construction, mining and natural resources firms.

Summary: Home loan approvals rise in number and value in June; gain larger than expected; COVID shock “milder and briefer”; owner-occupier, investor loans both rise in dollar terms; average loan size for owner-occupiers up by 15%; income, job disruptions likely to maintain downward pressure on borrowing capacity of home buyers.

A very clear downtrend was evident in the monthly figures of both the number and value of home loan commitments through late-2017 to mid-2019. Then the RBA reduced its cash rate target in a series of cuts and both the number and value of mortgage approvals began to noticeably increase. Figures from February provided an indication the trend may have finished but the confirmation only really came through with May’s figures.

June’s housing finance figures have now been released and the total number of loan commitments (excluding refinancing loans) to owner-occupiers increased by 7.1%. The gain came after a 7.6% fall in May and, on an annual basis, the rate of contraction slowed from May’s figure of -8.0% to -2.3%.

“For financing, the shock from COVID has been milder and briefer than expected,” said Westpac senior economist Matthew Hassan.

Local Treasury bond yields barely moved on the day despite lower yields of their US Treasury counterparts in overnight trading. By the end of the day, the 3-year ACGB yield remained unchanged at 0.28% while 10-year and 20-year yields each finished 1bp lower at 0.84% and 1.43% respectively.

In dollar terms, total loan approvals excluding refinancing increased by 6.2% over the month. The rise was greater than the 2.5% which had been generally expected and a turnaround from May’s revised figure of -11.6%. On a year-on-year basis, total approvals excluding refinancing increased by 4.5%, an acceleration from the previous month’s comparable figure of +1.8%.

“The rebound in housing finance of 6.2% in June reflects improved economic conditions and more auctions after the low in April,” said ANZ economist Adelaide Timbrell.

Summary: ISM purchasing managers index moves further above 50; result exceeds expectations; manufacturing back into the expansionary territory; implies the US economy again growing at solid rate; employment still contracting.

US purchasing managers’ indices (PMIs) 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 which deepened through April and May before recovering in June.

According to the latest Institute of Supply Management (ISM) survey, its Purchasing Managers Index recorded a reading of 54.2% in July. The result was above the expected figure of 53.6% and higher than June’s final reading of 52.6%. The average reading since 1948 is 52.9% and any reading above 50% implies an expansion in the manufacturing sector. A reading “above 42.8%, over a period of time, generally indicates an expansion of the overall economy,” according to the ISM.

ANZ economist Adelaide Timbrell noted the index was at highest since March 2019. However, “employment is contracting, with that sub-gauge still below 50.0 at 44.3.”

The report was released on the same day as the ADP June report and long-term US Treasury yields rose moderately. By the close of business, the 2-year Treasury bond yield remained unchanged at 0.11% while 10-year and 30-year yields had each increased by 3bps to 0.56% and 1.23% respectively.

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. They are particularly useful as a leading indicator.

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 significantly in July; gains slowed in second half of month; “other worrying signs”; “10% of businesses to close, 13% to reduce workforce” once government programmes cease.

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. April’s numbers set a record of the worst type but subsequent reports have produced a partial recovery.

According to the latest ANZ figures, total advertisements increased by 16.7% in July on a seasonally-adjusted basis. The rise followed a 41.4% jump in June and a 0.1% fall in May after revisions. On a 12-month basis, total job advertisements were 34.0% lower than in July of last year, up from June’s comparable figure of -44.6%.ANZ senior economist Catherine Birch noted “the pace of gains slowed, particularly in the second half of the month” which she attributed to the re-introduction of Stage 3 restrictions in Victoria.

The ANZ report came out on the same day as the Melbourne Institute’s June Inflation Gauge report and long-term Commonwealth bond yields moved higher, ignoring lower US Treasury movements in overnight trading. By the end of the day, the 3-year ACGB yield remained unchanged at 0.30% while 10-year and 20-year yields both finished 5bps higher at 0.88% and 1.46% respectively.

“There have been other worrying signs,” according to Birch. She pointed to a downturn in payrolls in early July and speculated “some industries that were less affected earlier in the pandemic, such as construction and professional services, may now be suffering lagged impacts.”  Birch quoted an ABS survey in mid-July in which “10% of businesses reported they would close and 13% would reduce their workforce” once government programmes ceased.

Summary: Melbourne Institute inflation index jumps; second consecutive month of strong rises following plunge in May; annual rate increases, back above 1%.

 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 and the “coronavirus recession” crushed it.

The Melbourne Institute’s latest Inflation Gauge index jumped by 0.9% through July. The increase follows a 0.7% increase in June and a 1.2% drop in May. On an annual basis, the index increased by 1.3%, a significant acceleration from May’s comparable rate of 0.7%.

Long-term Commonwealth bond yields moved noticeably higher, ignoring lower US Treasury yields in overnight trading. By the end of the day, 10-year and 20-year ACGB yield both finished 5bps higher at 0.88% and 1.46% respectively. The 3-year yield remained unchanged at 0.30%, 5bps above the RBA’s target.

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 obsession among central bankers to increase inflation.

Summary: US Fed’s favoured inflation measure rises 0.2%; in line with market expectations; previous month revised up; annual rate eases; long-term Treasury bond yields lower.

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 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 in April 2020.

The latest figures have now been published by the Bureau of Economic Analysis as part of the June personal income and expenditures report. Core PCE prices increased by 0.2% for the month, in line with consensus expectations and the same result as May’s increase after it was revised up from 0.1%. On a 12-month basis, the core PCE inflation rate slowed from 1.0% in May to 0.9%.

Longer-term US Treasury yields finished modestly lower. By the end of the day, the 10-year yield had lost 3bps to 0.53% while the 30-year yield finished 1bp lower at 1.20%. The 2-year yield remained unchanged at 0.11%.

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.