News

Summary: Private sector credit contracts for second consecutive month in June; business lending drops noticeably; owner-occupier lending growth slows; investor lending flat; figures consistent with “past recessions and sharp downturns.”

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; these disappeared in April.

According to the latest RBA figures, private sector credit contracted by 0.2% in June. The result was less than the -0.1% which had been generally expected and less than May’s -0.1%. The annual growth rate slowed to 2.9% from May’s comparable rate of 3.2% after revisions.

“This is the first back-to-back fall since the start of 2009…The cumulative decline of 0.3% is the sharpest drop over a two month period since 1992, during the previous recession,” said Westpac senior economist Andrew Hanlan.

The result was largely driven by a large fall in business loans, with personal debt and investor housing loans also contracting. Owner-occupier loans continued to grow steadily.

Long-term Commonwealth Government bond yields fell harder than their US counterparts had in overnight trading. By the end of the day, the 10-year yield had fallen by 5bps to 0.83% while the 20-year yield finished 6bps lower at 1.41%. The 3-year ACGB yield remained unchanged at 0.30%, 5bps above the RBA’s target yield.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.13%, continued to remain low. By the end of the day, contracts implied the cash rate would remain in a range of 0.125% to 0.135% through to the latter part of 2021.

The traditional driver of loan growth rates, the owner-occupier segment, grew by 0.3% over the month, lower than May’s revised 0.4%. The sector’s 12-month growth rate remained at 5.4%.

Summary:  US GDP down by 9.5% in June quarter; “terrible” but better than expected; “sharply lower” consumer spending; COVID-19 infections likely to slow recovery rate; GDP deflator drops.

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 as a form of insurance against a softening economy. By the time pandemic restrictions were put in place in March, there was little left in the Fed’ armoury to soften the blow and fiscal measures were the only real option left.

The US Commerce Department has just released June quarter “advance” GDP estimates and they indicate the US economy contracted by 9.5% for the quarter or at an annualised growth rate of 32.9%. The figure was slightly higher than the -9.9% (-34.0% annualised) which had been expected and it represented a marked deterioration from the March quarter’s final figure of 1.3%.

NAB Head of FX Strategy (FICC division) Ray Attrill described the result as “terrible, but not quite as bad as expected.”

“Unsurprisingly, the decline primarily occurred due to sharply lower consumer spending, particularly services which fell 13% (not annualised),” said Westpac senior economist Elliott Clarke.

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.

US Treasury bond yields fell by progressively larger amounts along the curve. By the end of the day, the 2-year Treasury bond yield had slipped 1bp to 0.12%, the 10-year yield had shed 2bps to 0.55% while the 30-year yield finished 3bps lower at 1.21%.

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 September implied an effective federal funds rate of 0.062%, about 4bps below the current spot rate.

Summary: Home approval numbers fall again; fall a little worse than expected; house and apartment approvals both down moderately; some data indicative of housing recovery; non-residential approvals up after four months of falls but “further retracement ahead”.

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.

The Australian Bureau of Statistics has released the latest figures from June and total residential approvals fell by 4.9% on a seasonally-adjusted basis. The fall over the month was a greater one than the 2% decline which had been generally expected but it was not as large as May’s revised 15.8% drop. Total approvals decreased by 15.8% on an annual basis, another marked monthly deterioration from May’s comparable figure of -10.9% after it was revised up from -11.6%.

“The pandemic has taken its toll. Building approvals dropped for the fourth month in a row in June, the first four-month decline since the GFC related downturn” said ANZ economist Adelaide Timbrell.Commonwealth bond yields declined a little. By the end of the day, 3-year and 10-year Treasury yields had each slipped 1bp to 0.30% and 0.88% respectively while the 20-year yield finished 2bps lower at 1.47%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.13%, continued to remain low. By the end of the day, contracts implied the cash rate would remain in a range of 0.125% to 0.135% through to the latter part of 2021.

“Note that approvals will likely understate weakness in building as work on many existing projects will likely be delayed and some approved projects will be shelved or slower to commence,” said Westpac senior economist Matthew Hassan. However, he noted some positives. “Also bear in mind…coming months will see some additional support coming from the Government’s HomeBuilder scheme,”

Approvals for new houses decreased by 5.8% over the month, a worse result than May’s revised figure of -3.8%. On a 12-month basis, house approvals were 6.4% lower than they were in June 2019.

Summary: Deflation hits in June quarter; RBA preferred measure slows significantly; household services, childcare, fuel main deflationary sources; economist expect rebound in September quarter for headline rate but not for underlying.

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 2.5%, which is coincidentally 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 from the June 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 -1.9% for the quarter, a record fall for one quarter and drastically lower than the March quarter’s +0.3%. The seasonally-adjusted inflation rate dropped by a similar amount, from a revised rate of +0.5% to -2.0%. On a 12-month basis, the headline rate registered -0.3% while the seasonally-adjusted rate registered -0.5%. In the March quarter, their respective rates were 2.2% and 2.3% after revisions.

The RBA’s preferred measure of underlying inflation, the “trimmed mean”, also went into reverse. The trimmed mean inflation rate for the June quarter was -0.1%, in line with the market’s expected figure but a sharp turnaround from March’s +0.5%. The 12-month growth rate slowed from 1.8% to 1.2%.

Long-term Commonwealth Government bond yields fell a little harder than their US counterparts had in overnight trading. By the end of the day, the 10-year yield had fallen by 5bps to 0.89% while the 20-year yield finished 6bps lower at 1.49%. The 3-year ACGB yield remained unchanged at 0.31%, 6bps above the RBA’s target yield.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.13%, continued to remain low. By the end of the day, contracts implied the cash rate would remain in a range of 0.125% to 0.135% through to the latter part of 2021.

Summary: US consumer confidence retreats; view of present conditions improve but future conditions worsen; states with high infection rates experience large declines; “does not bode well” for recovery.

 US consumer confidence collapsed in late 2007 as the US housing bubble burst and the US economy went into recession. By 2016, it had clawed its way back to neutral 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 collapsed earlier this year.

The latest Conference Board survey held during the first half of July indicated US consumer confidence has retreated after staging a modest recovery through May and June back to the long-term average. July’s Consumer Confidence Index registered 92.6, below the median consensus figure of 94.8 and a noticeable drop from June’s final figure of 98.3. Consumers’ views of present conditions improved but their view of future conditions deteriorated considerably from those held at the time of the June survey.

“Large declines were experienced in Michigan, Florida, Texas and California, no doubt a result of the resurgence of COVID-19,” said Lynn Franco, a senior director at the Conference Board. “Such uncertainty about the short-term future does not bode well for the recovery, nor for consumer spending,”

US Treasury bond yields fell. By the end of the day, the yield on 2-year Treasury bonds had slipped 1bp to 0.14%, the 10-year yield had lost 3bps to 0.58% while the 20-year yield finished 5bps to 1.22%.

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 September implied an effective federal funds rate of 0.058%, about 4bps below the current spot rate.

Summary: Payrolls and wages both decline in the week to 11 July; July employment growth unlikely to repeat June performance; payrolls and wages both down by around 5% in relation to start of pandemic restrictions; declines widespread and not limited to Victoria;  layoffs likely as work projects end in coming months.

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.

The rate of weekly job losses remained at roughly the same pace through the first two weeks of July. Total payrolls decreased by 0.6%, the same rate as that of the previous week but they signalled a deterioration from the 0.2% decline at the end of June.

The total for wages for the week fell by 1.9%. The fall followed a 1.0% rise in the previous week and a 0.9% fall in the week before that.

Overall, the data suggest the strong employment rebound in the June labour force survey is very unlikely to be repeated,” said Westpac senior economist Justin Smirk.

Between the week ending 14 March 2020 and the week ending 11 July 2020, the total number of positions in Australia contracted by 5.6%. Total wages fell by 4.8% over the same 17 week period.

Long-term Commonwealth Government bond yields moved moderately higher, following US Treasury bond movements to some degree. By the end of the day, the 10-year yield had increased by 3bps to 0.94% while the 20-year yield finished 4bps higher at 1.55%. The 3-year ACGB yield remained unchanged at 0.31%, 6bps above the RBA’s target yield.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.13%, continued to remain low. By the end of the day, contracts implied the cash rate would remain in a range of 0.125% to 0.135% through to the latter part of 2021.

Summary: ifo business climate index increases for third consecutive month; expectations index on par with late-2018; German economy recovering “step by step”; bond yields fall after disappointing household credit growth figure.

Following a recession in 2009/2010, 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.

According to the latest figures released by the Institute, its business climate index increased for a third consecutive month to 90.5 in July. The reading was above the expected reading of 89.3 and 4.2 points above June’s final reading of 86.3. The average reading since January 2005 is just above 97.

Its expectations index similarly increased, registering a result comparable with those from late-2018. It increased from June’s final figure of 91.6 to 97.0 in July, above the expected figure of 93.4.

“Companies were notably more satisfied with their current business situation. They are also carefully optimistic about the coming months,” said Clemens Fuest, President of the ifo Institute. “The German economy is recovering step by step.”

French and German 10-year bond yields fell on the day after EU household credit growth figures did not meet expectations. By the close of business, 10-year German and French bond yields had both lost 4bps to -0.49% and -0.19% 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.

Summary: US leading index increases for second consecutive month; increase less than expected; economic outlook still weak; in recession in “near term.”

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 figures indicate the worst has probably passed.

The latest reading of the LEI indicates it rose by 2.0% in June. The result was less than the 2.4% increase which had been generally expected and less than May’s figure of 3.2% after it was revised up from 2.8%. On an annual basis, the LEI growth rate increased from May’s revised figure of -10.7% to -8.9%.

“The June increase in the LEI reflects improvements brought about by the incremental reopening of the economy, with labour market conditions and stock prices in particular contributing positively,” 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 around -1.5% in the December quarter.

US Treasury bond yields at the long end finished lower, especially at the ultra-long end. By the end of the day, 2-year and 10-year bond yields had each shed 2bps to 0.14% and 0.58% respectively while the 30-year yield finished 7bps lower at 1.23%.

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 July implied an effective federal funds rate of 0.082%, about 1bp below the current spot rate.

Summary: European Union households slightly more pessimistic in July; confidence index lower than in June, below consensus expectation; significantly below long-term average; euro-zone bond yields a touch higher.

EU consumer confidence plunged during the GFC and again in 2011/12 during the European debt crisis. Since early 2014, it has been at average or above-average levels, rising to a cyclical peak at the beginning of 2018.  Even after it dropped back significantly in late 2018, the index remained at a level which corresponds to significant optimism among households until a substantial drop took place in April 2020. The latest reading indicates households remained somewhat pessimistic.

The July survey conducted by the European Commission indicated its Consumer Confidence index had slipped back to -15.0 after making a recovery through May and June. The figure was below the -12.3 which had been expected and less than June’s final figure of -14.7. The average reading since the beginning of 1985 has been -11.6.

The report had a minor effect on major European bond markets. By the end of the day, German and French 10-year bonds had each ticked up 1bp to -0.48% and -0.18% respectively.

Summary:  Leading index improves in June; May index revised below April reading; implies annual GDP growth to fall to ~-1.75% later this year; still consistent with recession; “upside risk” to Westpac forecast of 7% contraction in June quarter; expects 3.5% growth in second half 2020.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic activity 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.

The latest reading of the six month annualised growth rate of the indicator increased from May’s revised figure of –5.29% to -4.44% in June.

After the previous month’s index was published, Westpac chief economist Bill Evans had described the Index’s growth rate as “consistent with an economic recession.” He repeated that statement in this latest release while noting the rise in hours worked in the June Labour Force figures, describing it as “particularly encouraging”.

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 -1.75% in the latter part of 2020.

Long-term Commonwealth Government bond yields moved moderately higher. By the end of the day, the 3-year ACGB yield remained unchanged at 0.31%, the 10-year yield had increased by 3bps to 0.91% while the 20-year yield finished 2bps higher at 1.53%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.13%, continued to remain low. By the end of the day, contracts implied the cash rate would remain in a range of 0.13% to 0.14% through to the latter part of 2021.