News

Annual credit growth hits two-year low in October

30 November 2023

Private sector credit up 0.3% in October, below expectations; annual growth rate slows to 4.8%; Westpac: fresh two-year low, slowest annual pace since August 2021; ACGB yields up moderately; rate-rise expectations firm slightly; owner-occupier segment accounts for around 55% of net growth.

The pace of lending growth in the non-bank private sector by financial institutions in Australia followed a steady-but-gradual downtrend from late 2015 through to early 2020 before hitting what appears to be a nadir in March 2021. That downtrend ended later in that same year and annual growth rates shot up through 2022, peaking in September/October before easing through 2023.

According to the latest RBA figures, private sector credit increased by 0.3% in October. The result was less than the 0.4% rise which had been generally expected as well as September’s 0.5% increase. On an annual basis, the growth rate slowed from September’s revised figure of 5.0% to 4.8%.

“Annual growth slowed to 4.8%, from an upwardly revised 5.0% for September,” said Westpac senior economist Andrew Hanlan. “That is a fresh two-year low, the slowest annual pace since August 2021.”

Longer-term Commonwealth Government bond yields rose moderately on the day, ignoring downward movements of US Treasury yields overnight. By the close of business, the 3-year ACGB yield had returned to its starting point at 4.02% while 10-year and 20-year yields both finished 5bps higher at 4.42% and 4.70% respectively.

In the cash futures market, expectations regarding further rate rises firmed slightly.  At the end of the day, contracts implied the cash rate would remain close to the current rate of 4.32% and average 4.325% through December and January but then average 4.385% in February. May 2024 contracts implied a 4.405% average cash rate while August 2024 contracts implied 4.34%, 2bps more than the current rate.

Owner-occupier lending accounted for around 55% of the net growth over the month, while business lending accounted for around 25%. Investor lending accounted for almost all of the balance.       

The traditional driver of overall loan growth, the owner-occupier segment, grew by 0.4% over the month, in line with the previous month. The sector’s 12-month growth rate slowed again, this time from 4.9% to 4.8%.

Total lending in the non-financial business sector increased by 0.3%, down from 0.8% in the previous month after revisions. Growth on an annual basis slowed from 6.8% to 6.4%.

Monthly growth in the investor-lending segment slowed to a near-halt in early 2018 and essentially stayed that way until mid-2021. In October, net lending rose by 0.3%, in line with the growth rates in September, August and July, maintaining the 12-month growth rate at 2.9%.

Total personal loans rose by 0.2%, down from September’s revised figure of 0.5%, maintaining the annual growth rate at 2.4%. This category of debt includes fixed-term loans for large personal expenditures, credit cards and other revolving credit facilities.

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Slight improvement for latest euro-zone composite sentiment index

29 November 2023

Summary: Euro-zone composite sentiment indicator up slightly in November, in line with expectations; readings up in four of five sectors; up in only one of four largest euro-zone economies; German, French 10-year yields noticeably lower; index implies annual GDP growth rate of 0.1%.

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

The ESI posted a reading of 93.8 in November, in line with expectations but up modestly from October’s revised reading of 93.5. The average reading since 1985 is just under 100.

German and French 10-year bond yields finished the day noticeably lower. By the close of business, the German 10-year bund yield had lost 7bps to 2.42%, as had the French 10-year OAT yield which finished at 2.99%.

Confidence improved in four of the five sectors of the economy. On a geographical basis, the ESI increased in only one of the euro-zone’s four largest economies, Spain, but deteriorated in Germany, France and Italy.

End-of-quarter ESI readings and annual euro-zone GDP growth rates are highly correlated. This latest reading corresponds to a year-to-November GDP growth rate of 0.2%, up from October’s implied growth rate of 0.1% after revisions.

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September quarter construction data shows “burst” continues

29 November 2023

Summary: Construction spending up 1.3%, more than expected; Westpac: post mid-2022 activity burst continuing; Westpac: pace of growth set to fade in 2024; residential sector up 1.3%, non-residential building down -1.6%, engineering up 2.6%.

Construction expenditure increased substantially in Australia in the early part of last decade following a more-steady expansion through the 2000s. A large portion of the increase came from the commissioning of new projects and the expansion of existing ones to exploit a tripling in price of Australia’s mining exports in the previous decade.

According to the latest construction figures published by the ABS, total construction in the September quarter increased by 1.3% on a seasonally adjusted basis. The result was  greater than the 0.5% increase which had been generally expected as well as the June quarter’s 2.0% increase after it was revised up. On an annual basis, the growth rate slowed from 11.0% to 8.5%.

“The Australian construction sector has experienced a burst of activity since mid-2022, supported by a strong pipeline of work and facilitated by an easing of supply headwinds and fewer disruptions,” said Westpac senior economist Andrew Hanlan. “As anticipated, that theme extended into the September quarter.”

The figures came out on the same day as the latest monthly inflation figures and Commonwealth Government bond yields fell significantly. By the close of business, the 3-year ACGB yield had shed 15bps to 4.02%, the 10-year yield had lost 14bps to 4.37% while the 20-year yield finished 12bps lower at 4.65%.

In the cash futures market, expectations regarding further rate rises softened considerably.  At the end of the day, contracts implied the cash rate would remain close to the current rate of 4.32% and average 4.325% through December and January but then average 4.385% in February. May 2024 contracts implied a 4.415% average cash rate while August 2024 contracts implied 4.35%, 3bps more than the current rate.

“Looking ahead, the pace of growth is set to ease,” Hanlan added. “Notably, the level of construction work is now at or above the trend level of commencements across a number of segments. A sizeable work pipeline will sustain a high level of work but the pace of growth is set to fade moving into 2024.”

Residential building construction expenditures increased by 1.3%, less than the 1.8% rise in the September quarter after revisions. On an annual basis, expenditure in this segment was 4.4% higher than the September 2022 quarter, down from the June quarter’s comparable figure of 4.6%.             

Non-residential building spending decreased by 1.6%, in contrast with from the previous quarter’s 1.3% increase. On an annual basis, expenditures were 1.9% higher than the September 2022 quarter, whereas the June quarter’s comparable figure was 7.6% after revisions.

Engineering construction increased by 2.6% in the quarter, a slightly larger increase than the 2.5% rise in the June quarter. On an annual basis, spending in this segment was 14.9% higher than the September 2022 quarter, down from the June quarter’s comparable figure of 17.8% after revisions.

Quarterly construction data compiled and released by the ABS are not considered to be of a “primary” nature, unlike unemployment (Labour Force) and inflation (CPI) figures. However, the figures are viewed by economists and analysts with interest as they directly feed into quarterly GDP figures.

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US consumer confidence holds in November

28 November 2023

Summary: Conference Board Consumer Confidence Index rises slightly in November, reading more than expected; improvement mostly from respondents aged 55+; Treasury yields fall; Fed rate-cut expectations for 2024 harden; view of present conditions deteriorate, short-term outlook improves; Citi: consumption to grow, albeit at more modest pace.

US consumer confidence clawed its way back to neutral over the five years after the GFC in 2008/2009 and then went from strength to strength until late 2018. Measures of consumer confidence then oscillated within a relatively narrow band at historically high levels until they plunged in early 2020. Subsequent readings then fluctuated around the long-term average until March 2021 when they returned to elevated levels. However, a noticeable gap has since emerged between the two most-widely followed surveys.

The latest Conference Board survey held during the first half of November indicated US consumer confidence has improved slightly after deteriorating for the previous three months. November’s Consumer Confidence Index registered 102.0 on a preliminary basis, above the generally-expected figure of 101.0 as well as October’s final figure of 99.1.

“November’s increase in consumer confidence was concentrated primarily among householders aged 55 and up; by contrast, confidence among householders aged 35-54 declined slightly,” said Dana Peterson, Chief Economist at The Conference Board. “General improvements were seen across the spectrum of income groups surveyed in November.”

US Treasury yields finished the day lower, especially at the short end. By the close of business, the 2-year Treasury bond yield had shed 15bps to 4.74%, the 10-year yield had lost 5bps to 4.33 while the 30-year yield finished 2bps lower at 4.51%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months hardened. At the close of business, contracts implied the effective federal funds rate would average 5.335% in December, in line with the current spot rate, 5.335% in January and 5.31% in March. November 2024 contracts implied 4.50%, 83bps less than the current rate.

Consumers’ views of present conditions deteriorated slightly while views of the near-future improved. The Present Situation Index declined from October’s revised figure of 138.6 to 138.2 while the Expectations Index moved up from 72.7 to 77.8.

“Despite somewhat lower confidence numbers over the summer, consumption growth increased at a rapid pace in the third quarter, and we expect consumption will continue to grow into the end of the year, albeit at a more modest pace,” said Citi analyst Gisela Hoxha.

The Consumer Confidence Survey is one of two widely followed monthly US consumer sentiment surveys which produce sentiment indices. 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 does not ask respondents explicitly about their views of the labour market and it also includes some longer-term questions.

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Retail sales down in October; “implies large real, per capita decline”

28 November 2023

Summary: Retail sales down 0.2% in October, contrasts with expected gain; up 1.2% on 12-month basis; ANZ: softest result since August 2021; ACGB yields fall; rate-rise expectations generally soften; Westpac: implies large real, per capita decline in 4.5-5% range; largest influence on result again from food sales.

Growth figures of domestic retail sales spent most of the 2010s at levels below the post-1992 average. While economic conditions had been generally favourable, wage growth and inflation rates were low. Expenditures on goods then jumped in the early stages of 2020 as government restrictions severely altered households’ spending habits. Households mostly reverted to their usual patterns as restrictions eased in the latter part of 2020 and throughout 2021.

According to the latest ABS figures, total retail sales declined by 0.2% on a seasonally adjusted basis in October. The fall contrasted with the 0.2% increase which had been generally expected as well as September’s 0.9% gain. Sales increased by 1.2% on an annual basis, down from September’s comparable figure of 2.0%.

“At 1.2%, annual growth recorded its softest result since August 2021,” said ANZ economist Madeline Dunk. “That is despite elevated inflation and high population growth.”

Long-term Commonwealth Government bond yields moved lower on the day. By the close of business, the 3-year ACGB yield had lost 6bps to 4.17% while 10-year and 20-year yields both finished 7bps lower at 4.51% and 4.77% respectively.

In the cash futures market, expectations regarding further rate rises mostly softened.  At the end of the day, contracts implied the cash rate would remain close to the current rate of 4.32% and average 4.34% through December and January but then average 4.425% in February. May 2024 contracts implied a 4.50% average cash rate while August 2024 contracts implied 4.47%, 15bps more than the current rate.

“With population growth running at around 2.4% and retail price inflation running at 3.6% in the September quarter, the result implies a large real, per capita decline in the 4.5-5% range,” said Westpac senior economist Matthew Hassan.

Retail sales are typically segmented into six categories (see below), with the “Food” segment accounting for 40% of total sales. The largest influences on the month’s total again came from this segment where sales rose by 0.5% over the month. However, this was outweighed by lower sales in all of the other categories.

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German economy “stabilising”; ifo index up for third consecutive month

24 November 2023

ifo business climate index rises in November, slightly below expected figure; German economy stabilising; current conditions index up, expectations index up; German, French 10-year yields slightly higher; expectations index implies euro-zone GDP contraction of 2.0% in year to February.

Following recessions in euro-zone economies in 2009/2010, the ifo Institute’s Business Climate Index largely ignored the European debt-crisis of 2010-2012, mostly posting average-to-elevated readings through to early-2020. However, the index was quick to react in the March 2020 survey, falling precipitously before recovering quickly in subsequent months. Readings through much of 2021 generally fluctuated around the long-term average before dropping away in 2022.

According to the latest report released by ifo, German business sentiment has improved for a third consecutive month. November’s Business Climate Index recorded a reading of 87.3, slightly below the generally expected figure of 87.5 but up from October’s final reading of 86.9. The average reading since January 2005 is 96.4.

“The German economy is stabilising, albeit at a low level,” said Clemens Fuest, President of the ifo Institute.

German firms’ views of current conditions and their collective outlook both improved. The current situation index crept up from October’s revised figure of 89.2 to 89.4 while the expectations index increased from 84.8 after revisions to 85.2.

German and French long-term bond yields finished a touch higher on the day. By the close of business, the German 10-year yield had added 2bps to 2.64% while the French 10-year OAT yield finished 1bp higher at 3.20%.

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 growth rates. However, the expectations index is a better predictor as it has a higher correlation when lagged by one quarter. November’s expectations index implies a 2.% year-on-year GDP contraction to the end of February.  

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Stuck in “low-growth rut”; October Westpac-MI leading index

22 November 2023

Summary: Leading index growth rate down a touch in October; activity set to remain in “low-growth rut”; reading implies annual GDP growth of around 2.15%; ACGB yields barely move; rate-rise expectations firm; Westpac expects GDP growth in 1%-2% range in 2023, 2024.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth in the short-term. After reaching a peak in early 2018, the index trended lower through 2018 and 2019 before plunging to recessionary levels in the second quarter of 2020. Subsequent readings spiked towards the end of 2020 but then trended lower through 2021, 2022 before flattening out in first half of 2023.

The October reading of the six month annualised growth rate of the indicator registered -0.40%, down a touch from September’s revised figure of -0.38%.

“The Leading Index shows little change in the Australian economy’s sub-par performance,” said Westpac senior economist Matthew Hassan. “October marks the fifteenth successive sub-zero read on the Index growth rate, signalling that the activity is set to remain in the ‘low-growth rut’ that has prevailed throughout 2023 well into 2024.”

Index figures represent rates relative to “trend” GDP growth, which is generally thought to be around 2.75% per annum in Australia. The index is said to lead GDP by “three to nine months into the future” but the highest correlation between the index and actual GDP figures occurs with a three-month lead. The current reading is thus indicative of an annual GDP growth rate of around 2.15% in the next quarter.

Domestic Treasury bond yields barely moved on the day, ignoring moderate declines of US Treasury bonds yields overnight. By the close of business, the 3-year ACGB yield had slipped 1bp to 4.09% while 10-year and 20-year yields both finished unchanged at 4.46% and 4.74% respectively.

In the cash futures market, expectations regarding further rate rises firmed. At the end of the day, contracts implied the cash rate would remain close to the current rate of 4.32% and average 4.325% through December and 4.385% in February. May 2024 contracts implied a 4.415% average cash rate while August 2024 contracts implied 4.375%, 6bps more than the current rate.

“With Australia’s population currently growing at around 2.4%, our ‘trend’ GDP growth rate is well above 3% even under very conservative productivity assumptions,” Hassan added. “Both Westpac and the RBA expect actual growth to be in the 1%-2% range both this year and next, tracking well behind any reasonable estimates of trend.”

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Conference Board leading index: signals “very short” US recession

20 November 2023

Summary: Conference Board leading index down 0.8% in October, lower than expected; business conditions, new orders, falling equities, tighter credit conditions drives decline; short-term US Treasury yields rise, long-term yields fall; rate-cut expectations soften; LEI signals “very short recession” in near term; regression analysis implies 1.5% contraction in year to January.

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 of 2020 signalled “a deep US recession” while subsequent readings indicated the US economy would recover rapidly. More recent readings have implied US GDP growth rates will turn negative sometime in the second half of 2023 or the first half of 2024.

The latest reading of the LEI indicates it decreased by 0.8% in October. The fall was a larger one than the 0.6% decrease which had been generally expected as well as September’s figure of -0.7%.

“Among the leading indicators, deteriorating consumers’ expectations for business conditions, lower ISM Index of New Orders, falling equities and tighter credit conditions drove the index’s most recent decline,” said Justyna Zabinska-La Monica of The Conference Board.  

Short-term US Treasury bond yields rose on the day while longer-term yields declined. By the close of business, the 2-year Treasury yield had gained 3bps to 4.92%, the 10-year yield had lost 2bps to 4.42% while the 30-year yield finished 1bp lower at 4.58%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened a touch.  At the close of business, contracts implied the effective federal funds rate would average 5.335% in December, in line with the current spot rate, 5.335% in January and 5.315% in March. November 2024 contracts implied 4.62%, 71bps less than the current rate.

“After a pause in September, the LEI resumed signalling recession in the near term,” added Zabinska-La Monica. “The Conference Board expects elevated inflation, high interest rates and contracting consumer spending, due to depleting pandemic saving and mandatory student loan repayments, to tip the US economy into a very short recession. We forecast that real GDP will expand by just 0.8% in 2024.”

The Conference Board had previously forecast a “shallow” recession in the first half of 2024. Regression analysis suggests the latest reading implies a -1.4% year-on-year growth rate in January, up from the -1.5% implied for the year to December by the previous month’s LEI.

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Vehicle production drags US ind. output lower in October

16 November 2023

US industrial output down 0.6% in October, below expectations; down 0.7% over past 12 months; NAB: UAW strike over, output likely will recover in November; US Treasury yields fall; rate-cut expectations harden; capacity utilisation rate down 0.6ppts to 78.9%, below long-term average.

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. US production collapsed through March and April of 2020 before recovering the ground lost over the fifteen months to July 2021.

According to the Federal Reserve, US industrial production contracted by 0.6% on a seasonally adjusted basis in October. The result was worse than the 0.4% contraction which had been generally expected and in contrast with September’s 0.1% increase after it was revised down from 0.3%. On an annual basis the contraction rate increased from September’s revised figure of 0.2% to 0.7%.

“Importantly though the UAW strike drove a 10% plunge in motor vehicle production and the strike came to an end on 30 October…so output likely will recover in November,” said NAB Head of Market Economics Tapas Strickland.

US Treasury yields fell substantially on the day. By the close of business, the 2-year Treasury yield had lost 8bps to 4.84%, the 10-year yield had shed 10bps to 4.44% while the 30-year yield finished 8bps lower at 4.62%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months hardened.  At the close of business, contracts implied the effective federal funds rate would average 5.33% in December, in line with the current spot rate, 5.33% in January and 5.295% in March. November 2024 contracts implied 4.54%, 79bps less than the current rate.

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 2020’s multi-decade low of 64.2%. October’s reading decreased from September’s downwardly-revised figure of 79.5% to 78.9%, below the long-term average of 80.1%.

While the US utilisation rate’s correlation with the US jobless rate is solid, it is not as high as the comparable correlation in Australia.

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0.1% slip in US October retail sales; still suggests positive consumption growth

15 November 2023

Summary: US retail sales down 0.1% in October, fall smaller than expected; annual growth rate slows to 2.5%; NAB: suggestive of still-positive consumption growth heading into holiday season; US Treasury yields up noticeably; 2024 rate-cut expectations soften; lower sales in seven of thirteen categories; motor vehicle & parts dealer sales largest single influence on month’s result.

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%. 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 then took place which was followed by some short-term spikes as federal stimulus payments hit US households in the first and second quarters of 2021.

According to the latest “advance” numbers released by the US Census Bureau, total retail sales declined by 0.1% in October. The fall was not a large as the 0.3% decrease which had been generally expected but it contrasted with September’s 0.9% rise after it was revised up from 0.6%. However, on an annual basis, the growth rate slowed from September’s revised rate of 4.1% to 2.5%.

“The control group, which feeds more directly into consumption data, was in line with expectations at +0.2%, and there were small upward revisions to the September data,” said NAB senior economist Taylor Nugent. “Strength in real consumption through the third quarter always looked unsustainable but this is suggestive of still-positive consumption growth heading into the holiday season.”

The figures were released at the same time as the latest producer prices index report and US Treasury bond yields rose noticeably on the day. By the close of business, the 2-year Treasury yield had added 8bps to 4.92%, the 10-year yield had gained 9bps to 4.54% while the 30-year yield finished 7bps higher at 4.70%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened.  At the close of business, contracts implied the effective federal funds rate would average 5.33% in December, in line with the current spot rate, 5.33% in January and 5.31% in March. November 2024 contracts implied 4.615%, 71bps less than the current rate..  

Seven of the thirteen categories recorded lower sales over the month. The “Motor vehicle & parts dealers” segment provided the largest single influence on the overall result, falling by 1.0% over the month and subtracting 0.18 percentage points from the total.  

The non-store segment includes vending machine sales, door-to-door sales and mail-order sales but nowadays this segment has become dominated by online sales. It now accounts for nearly 17% of all US retail sales and it is the second-largest segment after vehicles and parts.

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