News

US industrial output outlook “fragile, mixed”; falls 0.2% in May

15 June 2023

Summary: US industrial output down 0.2% in May, below expectations; up 0.2% over past 12 months; ANZ: sector outlook fragile, mixed; Treasury yields fall, rate-cut expectations firm; capacity utilisation rate down 0.2ppts to 79.6%, not far 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 decreased by 0.2% on a seasonally adjusted basis in May. The result contrasted with the 0.1% rise which had been generally expected as well as April’s figure of 0.5%. On an annual basis the growth rate slowed from April’s revised figure of 0.4% to 0.2%.

“Strong gains were recorded for aerospace but motor vehicle manufacturing increased by just 0.2%,” said ANZ economist Jack Chambers. “The outlook for the manufacturing sector is fragile and mixed.”

The figures came out the same morning as the latest retail sales figures and US Treasury bond yields fell on the day. By the close of business, the 2-year Treasury yield had lost 6bps to 4.65%, the 10-year yield had shed 7bps to 3.72% while the 30-year yield finished 6bps lower at 3.84%.

In terms of US Fed policy, expectations of a lower federal funds rate in 2024 firmed.  At the close of business, contracts implied the effective federal funds rate would average 5.11% in July, 3bps more than the current spot rate, and then increase to an average of 5.245% in August. December futures contracts implied a 5.22% average effective federal funds rate while June 2024 contracts implied 4.575%, 50bps 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%. May’s reading decreased from April’s revised figure of 79.8% to 79.6%, not far 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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“Building disinflationary forces”; US PPI falls in May

14 June 2023

Summary: US producer price index (PPI) down 0.3% in May, less than expected; annual rate slows to 1.2%; “core” PPI up 0.2%; NAB: further evidence of building disinflationary forces; short-term Treasury yields up, longer-term yields down; 2024 rate-cut expectations soften; goods prices down 1.6%, services prices up 0.2%.

Around the end of 2018, the annual inflation rate of the US producer price index (PPI) began a downtrend which continued through 2019. Months in which producer prices increased suggested the trend may have been coming to an end, only for it to continue, culminating in a plunge in April 2020. Figures returned to “normal” towards the end of that year but annual rates through 2021 and 2022 were well above the long-term average.

The latest figures published by the Bureau of Labor Statistics indicate producer prices decreased by 0.3% after seasonal adjustments in May. The result was less than the 0.1% fall which had been generally expected and in contrast with April’s 0.2% rise. On a 12-month basis, the rate of producer price inflation after seasonal adjustments and revisions slowed from 2.3% in April to 1.2%.

Producer prices excluding foods and energy, or “core” PPI, increased by 0.2% after seasonal adjustments. The result was in line with the expectations as well as April’s increase and the annual rate slowed from April’s figure of 3.2% to 2.8%.

NAB’s Head of FX Strategy within its FICC division described the figures as “further evidence of building disinflationary forces.” He also noted “core PPI has fallen in twelve of the last thirteen months, from a peak of 9.7% last March to 2.8% in May.”

Shorter-term US Treasury bond yields rose moderately on the day while longer-term yields fell. By the close of business, the 2-year Treasury yield had added 3bps to 4.71%, the 10-year yield had lost 4bps to 3.79% while the 30-year yield finished 3bps lower at 3.90%.

In terms of US Fed policy, expectations of a lower federal funds rate in 2024 softened.  At the close of business, contracts implied the effective federal funds rate would average 5.11% in July, 3bps more than the current spot rate, and then increase to an average of 5.24% in August. September futures contracts implied a 5.255% average effective federal funds rate while June 2024 contracts implied 4.625%, 46bps less than the current rate.

The BLS stated higher prices for final demand goods fell by 1.6% on average. Prices of final demand services increased by 0.2%.

The producer price index is a measure of prices received by producers for domestically produced goods, services and construction. It is put together in a fashion similar to the consumer price index (CPI) except it measures prices received from the producer’s perspective rather than from the perspective of a retailer or a consumer. It is another one of the various measures of inflation tracked by the US Fed, along with core personal consumption expenditure (PCE) price data. 

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April euro-zone industrial production up 1.0%

14 June 2023

Summary: Euro-zone industrial production up 1.0% in April, less than expected; annual growth rate increases from -1.4% to +0.2%; German, French 10-year yields move modestly higher; output expands in only one of four largest euro economies.

Following a recession in 2009/2010 and the debt-crisis which flowed from it, euro-zone industrial production recovered and then reached a peak four years later in 2016. Growth rates then fluctuated for two years before beginning a steady and persistent slowdown from the start of 2018. That decline was transformed into a plunge in March and April of 2020 which then took over a year to claw back. Production levels in recent quarters have generally stagnated in trend terms.

According to the latest figures released by Eurostat, euro-zone industrial production expanded by 1.0% in April on a seasonally-adjusted and calendar-adjusted basis. The result was less than the 1.2% expansion which had been generally expected but it contrasted with March’s 3.8% contraction. The calendar-adjusted growth rate on an annual basis increased from March’s rate of -1.4% to 0.2%.

German and French sovereign bond yields moved modestly higher on the day. By the close of business, German and French 10-year yields had both added 2bps to 2.47% and 2.98% respectively.

Industrial production expanded in just one of the euro-zone’s four largest economies. Germany’s production remained steady over the month while the comparable figures for France, Spain and Italy were +0.8%, -1.8% and -1.9% respectively.

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US CPI inflation up 0.1% in May; room for optimism in “other” core measures

13 June 2023

Summary: US CPI up 0.1% in May, less than expected; “core” rate up 0.4% again; NAB: core inflation stubborn, other core measures provide more room for optimism; Treasury yields rise; rate-cut expectations soften; ANZ: shelter inflation will start to moderate, “heady” second-hand vehicle prices to moderate; non-energy services prices again main driver, adds 0.23 ppts.

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 were reported from March 2020 to May 2020 and they remained below 2% until March 2021. Rates have since risen significantly, although they have been declining since mid-2022.

The latest US CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased by just 0.1% on average in May. The result was less than the 0.2% increase which had been generally expected as well as April’s 0.4% rise. On a 12-month basis, the inflation rate slowed from 5.0% to 4.1%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. The core prices index, the index which excludes the more variable food and energy components, increased by 0.4% on a seasonally-adjusted basis over the month. The rise was in line with expectations as well as April’s increase and the annual growth rate slowed from 5.5% to 5.3%.

“While core inflation has been stubborn, tracking sideways at around 5.0% in 3-month annualised terms through 2023, other core measures provided more room for optimism,” said NAB economist Taylor Nugent. “A narrower core excluding shelter and used cars rose just 0.1% and 2.3% 3-month annualised, its lowest since March 2021.”

US Treasury bond yields rose on the day, especially at the short end of the curve. By the close of business, the 2-year Treasury yield had gained 10bps to 4.68%, the 10-year yield had added 9bps to 3.83% while the 30-year yield finished 5bps higher at 3.95%.

In terms of US Fed policy, expectations of a lower federal funds rate in 2024 softened considerably.  At the close of business, contracts implied the effective federal funds rate would average 5.13% in July, 5bps more than the current spot rate, and then increase to an average of 5.255% in August. September futures contracts implied a 5.265% average effective federal funds rate while June 2024 contracts implied 4.59%, 49bps less than the current rate.

“We know that new rental contracts have been falling since the middle of last year, so in coming months we expect that shelter inflation will start to moderate,” said ANZ senior economist Adelaide Timbrell. ”We also do not expect the heady second-hand vehicle prices to continue. There may be grounds for optimism, therefore, that the FOMC is getting on top of the inflation problem although a key focus will remain on core services prices ex-shelter.”

The largest influence on headline results is often the change in fuel prices. Prices of “Energy commodities”, the segment which contains vehicle fuels, decreased by 5.6% and subtracted 0.20 percentage points from the total. However, prices of non-energy services, the segment which includes actual and implied rents, again had the largest effect on the total, adding 0.23 percentage points after increasing by 0.4% on average.  

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June rate-rise drags Westpac-MI sentiment index back

13 June 2023

Summary: Household sentiment improves slightly in June; big rate-rise impact; confidence had improved prior to rate decision, tumbled afterwards; inflation, economic conditions, Federal Budget, taxation also weigh; two of five sub-indices higher; more respondents expecting higher jobless rate.

After a lengthy divergence between measures of consumer sentiment and business confidence in Australia which began in 2014, confidence readings of the two sectors converged again in mid-July 2018. Both measures then deteriorated gradually in trend terms, with consumer confidence leading the way. Household sentiment fell off a cliff in April 2020 but, after a few months of to-ing and fro-ing, it then staged a full recovery. However, consumer sentiment has deteriorated significantly over the past two years, while business sentiment has been more robust.

According to the latest Westpac-Melbourne Institute survey conducted in the week before Easter, household sentiment has improved but only to a level which is still very depressed.  Their Consumer Sentiment Index increased from May’s reading of 79.0 to 79.2, a reading which is well below the “normal” range and significantly lower than the long-term average reading of just over 101.

“While the full survey showed little net change in sentiment, responses within the survey week show a big rate-rise impact,” said Westpac Chief Economist Bill Evans.

Any reading of the Consumer Sentiment Index below 100 indicates the number of consumers who are pessimistic is greater than the number of consumers who are optimistic.

The report was released on the same day as the latest NAB business survey and Commonwealth Government bond yields declined on the day. By the close of business, the 3-year ACGB yield had lost 2bps to 3.83%, the 10-year yield had slipped 1bp to 3.94% while the 20-year yield finished 3bps lower at 4.23%.

In the cash futures market, expectations regarding further rate rises in 2023 softened slightly while expectations regarding rises in the first half of 2024 firmed a little. At the end of the day, contracts implied the cash rate would rise from the current rate of 4.07% to average 4.145% in July and then to 4.285% in August. February 2024 contracts implied a 4.425% average cash rate while May 2024 contracts implied 4.28%, 21bps more than the current rate.

“Prior to the announcement of the rate-hike decision confidence had lifted sharply from 79.0 in May to 89.0. But following the announcement it tumbled to an extremely low 72.6,” Evans added.

However, Evans also noted 62% of respondents of follow-up questions recalled news items regarding inflation while around 40% of respondents referred to economic conditions in general, the Federal Budget and taxation.

Only two of the five sub-indices registered higher readings, with the “Economic conditions – next 5 years” sub-index posting the largest monthly percentage gain.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, rose from 123.2 to 131.3. Higher readings result from more respondents expecting a higher unemployment rate in the year ahead.

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Decline “strengthening”; NAB business indices fall in May

13 June 2023

Summary: Business conditions deteriorate in May; decline appears to be strengthening; business less confident, well below average; Westpac: likely confidence will move further into pessimistic territory; capacity utilisation rate slips, remains elevated.

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 index then began to slip and forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 as the index trended lower. It hit a nadir in April 2020 as pandemic restrictions were introduced but then conditions improved markedly over the next twelve months. Subsequent readings were generally in a historically-normal range until the second half of 2022.

According to NAB’s latest monthly business survey of around 500 firms conducted in last two weeks of May, business conditions have deteriorated for a fourth consecutive month to a level which is slightly above average. NAB’s conditions index registered 8 points, down 8 points from April’s revised reading.

NAB Chief Economist Alan Oster said the decline in business conditions “through early 2023 appears to be strengthening” but added “conditions remain above average reflecting just how strong the economy was through 2022.”

Business confidence also deteriorated.  NAB’s confidence index fell from April’s revised reading of zero to -4 points, well  below the long-term average.  Typically, NAB’s confidence index leads the conditions index by one month, although some divergences have appeared from time to time.

The report was released on the same day as the latest Westpac-Melbourne Institute consumer sentiment survey and Commonwealth Government bond yields declined on the day. By the close of business, the 3-year ACGB yield had lost 2bps to 3.83%, the 10-year yield had slipped 1bp to 3.94% while the 20-year yield finished 3bps lower at 4.23%.

In the cash futures market, expectations regarding further rate rises in 2023 softened slightly while expectations regarding rises in the first half of 2024 firmed a little. At the end of the day, contracts implied the cash rate would rise from the current rate of 4.07% to average 4.145% in July and then to 4.285% in August. February 2024 contracts implied a 4.425% average cash rate while May 2024 contracts implied 4.28%, 21bps more than the current rate.

“This is the third occasion confidence has slipped to around these levels, with a reading of -3 last November and -4 in February,” observed Westpac senior economist Andrew Hanlan. “With the economic downturn to deepen, the likelihood is that business confidence will move further into pessimistic territory and that businesses will respond by paring back hiring plans and cut investment spending, particularly on equipment.”

NAB’s measure of national capacity utilisation eased back from April’s revised reading of 85.0% to 84.7%, remaining at a historically-elevated level. All eight sectors of the economy were reported to be operating above their respective long-run averages.

Capacity utilisation is generally accepted as an indicator of future investment expenditure and it also has a strong inverse relationship with Australia’s unemployment rate.

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“Strong demand for workers”; job ads index inches higher in May

05 June 2023

Summary: Job ads up 0.1% in May; 6.1% lower than May 2022; signals strong demand for workers; ACGB yields up significantly; rate-cut expectations deferred until second half of 2024; ad index-to-workforce ratio steady at 1.01.

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. Advertising plunged in April and May of 2020 as pandemic restrictions took effect but then recovered quite quickly to historically-high levels.

According to the latest ANZ-Indeed figures, total advertisements inched up by 0.1% in May on a seasonally adjusted basis. The result followed losses of 0.7% and 2.7% in April and March respectively. On a 12-month basis, total job advertisements were 6.1% lower than in May 2022, unchanged from April’s revised figure.

“While Job Ads are 8.0% lower than the September peak, the level remains very high, signalling strong demand for workers,” said ANZ economist Madeline Dunk.

The figures came out on the same day as the Melbourne Institute’s latest reading of its Inflation Gauge and Commonwealth Government bond yields increased significantly on the day, generally outpacing upward movements of US Treasury yields on Friday night. By the close of business, 3-year, 10-year and 20-year ACGB yield had all increased by 14bps to 3.57%, 3.79%  and 4.18% respectively.

In the cash futures market, expectations regarding rate cuts in 2024 have been deferred until the second half of the year. At the end of the day, contracts implied the cash rate would rise from the current rate of 3.82% to average 3.915% in June and then to 4.025% in July. February 2024 contracts implied a 4.115% average cash rate while May 2024 contracts implied 3.975%, 16bps more than the current rate.

The inverse relationship between job advertisements and the unemployment rate has been quite strong (see below chart), although ANZ themselves called the relationship between the two series into question in early 2019.  A lower job advertisement index as a proportion of the labour force is suggestive of higher unemployment rates in the near future while a rising ratio suggests lower unemployment rates will follow. May’s ad index-to-workforce ratio remained unchanged at 1.01 after revisions.

In 2008/2009, advertisements plummeted and Australia’s unemployment rate jumped from 4% to nearly 6% over a period of 15 months. When a more dramatic fall in advertisements took place in April 2020, the unemployment rate responded much more quickly.

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Inflation “remain sticky”; Melbourne Institute gauge up 0.9% in May

05 June 2023

Summary: Melbourne Institute Inflation Gauge index up 0.9% in May; up 5.9% on annual basis; Citi: inflation remains sticky; ACGB yields up significantly; rate cut expectations deferred until second half of 2024.

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 rate by around 0.1%, at least until recently.

The Melbourne Institute’s latest reading of its Inflation Gauge index indicates consumer prices increased by 0.9% in May, following increases of 0.2% and 0.3% in April and March respectively. The index rose by 5.9% on an annual basis, down from April’s figure of 6.1%.

“On balance, inflation remains sticky and, on our mapping, the May Inflation Gauge corresponds with a 1.4% increase in ABS Q2 CPI,” said Citi economist Josh Williamson. “This would produce 6.6% year-on-year growth, higher than the RBA’s 6.3% forecast.”

The figures came out on the same day as ANZ’s latest Job Ads report and Commonwealth Government bond yields increased significantly on the day, generally outpacing upward movements of US Treasury yields on Friday night. By the close of business, 3-year, 10-year and 20-year ACGB yield had all increased by 14bps to 3.57%, 3.79%  and 4.18% respectively.

In the cash futures market, expectations regarding rate cuts in 2024 have been deferred until the second half of the year. At the end of the day, contracts implied the cash rate would rise from the current rate of 3.82% to average 3.915% in June and then to 4.025% in July. February 2024 contracts implied a 4.115% average cash rate while May 2024 contracts implied 3.975%, 16bps more than the current rate.

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.”

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May non-farms figures surprise again; US job market in “rude health”

02 June 2023

Summary: Non-farm payrolls up 339,000 in May, greater than expected; previous two months’ figures revised up by 93,000; jobless rate up from 3.4% to 3.7%, participation rate steady; NAB: labour market remains in “rude health”; employed-to-population ratio slips; underutilisation rate up; annual hourly pay growth slows to 4.3%.

The US economy ceased producing jobs in net terms as infection controls began to be implemented in March 2020. The unemployment rate had been around 3.5% but that changed as job losses began to surge through March and April of 2020. The May 2020 non-farm employment report represented a turning point and subsequent months provided substantial employment gains. Changes in recent months have been generally more modest but still above the average of the last decade.

According to the US Bureau of Labor Statistics, the US economy created an additional 339,000 jobs in the non-farm sector in May. The increase was nearly double the 180,000 which had been generally expected and greater than the 294,000 jobs which had been added in April after revisions. Employment figures for March and April were revised up by a total of 93,000.

The total number of unemployed increased by 440,000 to 6.097 million while the total number of people who were either employed or looking for work increased by 130,000 to 166.818 million. These changes led to the US unemployment rate rising from April’s figure of 3.4% to 3.7% as the participation rate remained steady at 62.6%. “The better-than-expected payrolls number…plus 90,000 of upwards revisions to the previous two months suggests the US labour market remains in rude health,” said NAB senior FX strategist Rodrigo Catril.

US Treasury yields rose noticeably on the day, especially at the front of the yield curve. By the close of business, the 2-year yield had jumped 17bps to 4.51%, the 10-year yield had added 9bps to 3.70% while the 30-year yield finished 5bps higher at 3.88%.

In terms of US Fed policy, expectations of lower federal funds rates in 2024 softened.  At the close of business, contracts implied the effective federal funds rate would average 5.125% in June, 5bps higher than the current spot rate, and then move up to average 5.18% in July. September futures contracts implied a 5.285% average effective federal funds rate while May 2024 contracts implied 4.385%, 69bps less than the current rate.

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. May’s reading declined from 60.4% to 60.3%, some way from the April 2000 peak reading of 64.7%.

Apart from the unemployment rate, another measure of tightness in the labour market is the underutilisation rate and the latest reading of it registered 6.7%, up from 6.6% in April. Wage inflation and the underutilisation rate usually have an inverse relationship and hourly pay growth in the year to May slowed from 4.4% to 4.3%.

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Loan approvals down in April

02 June 2023

Summary: Value of loan commitments down 2.9% in April; 24.3% lower than April 2022; Westpac: disruptions from Easter period; value of owner-occupier loan approvals down 3.8%; investor approvals down 0.9%; number of home loan approvals down 0.1%.

The number and value of home-loan approvals began to noticeably increase after the RBA reduced its cash rate target in a series of cuts beginning in mid-2019, potentially ending the downtrend which had been in place since mid-2017. Figures from February through to May of 2020 provided an indication the downtrend was still intact but subsequent figures then pushed both back to elevated levels in 2021. However, there has been a considerable pullback since then.

April’s housing finance figures have now been released and total loan approvals excluding refinancing decreased by 2.9% In dollar terms over the month, in contrast with the 2.0% increase which had been generally expected as well as March’s 5.0% rise. On a year-on-year basis, total approvals excluding refinancing fell by 24.3%, up from the previous month’s comparable figure of -24.6%.

“Overall, the update is hard to assess given likely disruptions from the Easter holiday period,” said Westpac senior economist Matthew Hassan. “At the margin, it’s a little more consistent with the view that markets are stabilising rather than lifting but we will clearly need the May update to clarify the situation.”

Commonwealth Government bond yields increased on the day. By the close of business, the 3-year ACGB yield had gained 5bps to 3.43%, the 10-year yield had added 3bps to 3.65% while the 20-year yield finished 2bps higher at 4.04%.

In the cash futures market, expectations regarding rate cuts in 2024 have been deferred until the second half of the year. At the end of the day, contracts implied the cash rate would rise from the current rate of 3.82% to average 3.925% in June and then to 4.045% in July. February 2024 contracts implied a 4.015% average cash rate while May 2024 contracts implied 3.87%, 5bps more than the current rate.

The total value of owner-occupier loan commitments excluding refinancing decreased by 3.8%, a turnaround from March’s 6.3% rise. On an annual basis, owner-occupier loan commitments were 24.3% lower than in April 2022, slightly above March’s comparable figure of -24.6%.

The total value of investor commitments excluding refinancing arrangements declined by 0.9%. The fall followed a 3.4% rise in March, slowing the contraction rate over the previous 12 months from 29.3% after revisions to 28.6%.

The total number of loan commitments to owner-occupiers excluding refinancing slipped by 0.1% to 24,847 on a seasonally adjusted basis. The fall contrasted with March’s 6.3% rise and the annual contraction rate slowed from 22.5% to 20.3%.

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