News

Conf. Board sentiment index reverses September drop

29 October 2024

Summary: Conference Board Consumer Confidence Index up noticeably in September, above expectations; strongest monthly gain since March 2021; US Treasury yields fall; expectations of Fed rate cuts firm, at least four more cuts priced in; views of present conditions, short-term outlook both improve; increase in confidence broad-based, across all age groups, most income groups.

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 completed in late October indicates its measure of US consumer confidence has improved markedly to a level which is well above average. The latest reading of the Consumer Confidence Index registered 108.7 on a preliminary basis, noticeably above the generally-expected figure of 98.8 as well as September’s final figure of 99.2.

“Consumer confidence recorded the strongest monthly gain since March 2021, but still did not break free of the narrow range that has prevailed over the past two years,” said Dana Peterson, Chief Economist at The Conference Board.

The report came out at the same time as the latest JOLTS survey and US Treasury bond yields declined almost-uniformly across the curve. By the close of business, the 2-year Treasury bond yield had lost 3bps to 4.10%, the 10-year yield had shed 2bps to 4.26% while the 30-year yield finished 3bps lower at 4.50%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed slightly, with at least another four 25bp cuts factored in. At the close of business, contracts implied the effective federal funds rate would average 4.64% in November, 4.50% in December and 4.22% in February. September 2025 contracts implied 3.645%, 118bps less than the current rate.

Consumers’ views of present conditions and the near-future both improved. The Present Situation Index increased from September’s revised figure of 123.8 to 124.3 while the Expectations Index rose from 82.8 to 89.1.

“October’s increase in confidence was broad-based across all age groups and most income groups,” Peterson added. “In terms of age, confidence rose sharpest for consumers aged 35 to 54. On a six-month moving average basis, householders aged under 35 and those earning over $100,000 remained the most confident.”

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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US job openings plunge; southern states take hit from Helene

29 October 2024

Summary: US quit rate ticks down to 1.9% in September; Westpac: figures neither a concern for inflation nor activity growth; US Treasury yields fall; expectations of Fed rate cuts firm, at least four more cuts priced in; fewer quits, fewer openings, more separations; ANZ: Hurricane Helene likely had impact on openings.

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 2020. The quit rate then plummeted as alternative employment opportunities rapidly dried up. Following the easing of US pandemic restrictions, it proceeded to recover back to its pre-pandemic rate in the third quarter of 2020 and trended higher through 2021 before easing through 2022, 2023 and the first half of 2024.

Figures released as part of the latest Job Openings and Labor Turnover Survey (JOLTS) report show the quit rate ticked lower in September after revisions. 1.9% of the non-farm workforce left their jobs voluntarily, down from August’s upwardly-revised rate of 2.0%. Quits in the month decreased by 107,000 while an additional 254,000 people were employed in non-farm sectors.

“The survey remains consistent with a labour market that is neither a concern for inflation nor activity growth,” said Westpac economist Jameson Coombs.

The report came out at the same time as the latest Conference Board consumer sentiment survey and US Treasury bond yields declined almost-uniformly across the curve on the day. By the close of business, the 2-year Treasury bond yield had lost 3bps to 4.10%, the 10-year yield had shed 2bps to 4.26% while the 30-year yield finished 3bps lower at 4.50%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed slightly, with at least another four 25bp cuts factored in. At the close of business, contracts implied the effective federal funds rate would average 4.64% in November, 4.50% in December and 4.22% in February. September 2025 contracts implied 3.645%, 118bps less than the current rate.

The fall in total quits was led by 94,000 fewer resignations in the “Professional and business services” sector while the “Retail trade” sector experienced the largest increase, 41,000. Overall, the total number of quits for the month decreased from August’s revised figure of 3.178 million to 3.071 million.               

Total vacancies at the end of September plunged by 418,000, or 5.3%, from August’s revised figure of 7.867 million to 7.443 million. The fall was driven by 178,000 fewer open positions in the “Health care and social assistance” sector while the “Finance and insurance” sector experienced 85,000 more offerings, the single largest increase. Overall, 10 out of 18 sectors experienced fewer job openings than in the previous month.  

“The decline was led by a 325,000 drop in openings in the South, where it is likely that Hurricane Helene would have had an impact,” said ANZ economist Madeline Dunk. “The job openings to unemployed ratio continued its gradual descent and stood at 1.09 in September.”

Total separations increased by 28,000, or 0.5%, from August’s revised figure of 5.168 million to 5.196 million. The rise was led by the “Retail trade” sector where there were 29,000 more separations while the “Professional and business services” sector experienced 66,000 fewer separations. Separations increased in 10 of the 18 sectors.

The “quit” rate time series produced by the JOLTS report is a leading indicator of US hourly pay. As wages account for around 55% of a product’s or service’s price in the US, wage inflation and overall inflation rates tend to be closely related. Former Federal Reserve chief and current Treasury Secretary Janet Yellen was known to pay close attention to it.

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German companies’ expectations brighten in October; scepticism remains

25 October 2024

Summary: ifo business climate index up in October, slightly above expectations; outlook improves but marred by scepticism; current conditions, expectations indices both improve; German, French yields rise; expectations index implies euro-zone GDP contraction of 0.7% in year to January.

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 and stagnating through 2023 and 2024.

According to the latest report released by ifo, German business sentiment has improved for the first time in five months. October’s Business Climate Index posted a reading of 86.5, slightly above the generally expected figure of 86.0 as well as September’s final reading of 85.4. The average reading since January 2005 is just over 96.

“Expectations were brighter but marked by scepticism,” said Clemens Fuest, President of the ifo Institute. “The German economy stopped the decline for the time being.”

German firms’ views of current conditions and the outlook both improved. The current situation index increased from 84.4 to 85.7 while the expectations index increased from 86.4 after revisions to 87.3.

German and French long-term bond yields both increased on the day. By the close of business, the German 10-year bond yield had added 3bps to 2.30% while the French 10-year yield finished 7bps higher at 3.06%.

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 three months. October’s expectations index implies a 0.7% year-on-year GDP contraction to the end of January 2025.                                    

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Euro-zone household sentiment normalising; index up again in October

23 October 2024

Summary: Euro-zone consumer sentiment improves again in October, below expectations; consumer confidence index still below long-term average; euro-zone bond yields barely move.

EU consumer confidence plunged during the GFC and again in 2011/12 during the European debt crisis. After bouncing back through 2013 and 2014, it fell back significantly in late 2018 but only to a level which corresponds to significant optimism among households. Following the plunge which took place in April 2020, a recovery began a month later, with household confidence returning to above-average levels from March 2021. However, readings subsequent to early 2022 were extremely low by historical standards until recently.

Consumer confidence has improved again, according to the latest survey conducted by the European Commission over the first three weeks of October. Its Consumer Confidence Indicator recorded a reading of -12.5, below the generally expected figure of -12.0 but up from September’s reading of -12.9. This latest reading is still below the long-term average of -10.5 but it is now well above the lower bound of the range in which “normal” readings usually occur.

Sovereign bond yields in major euro-zone bond markets barely moved on the day. By the close of business, German and French 10-year yields had both returned to their respective starting points at 2.31% and 3.04%.

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CB expects moderate US growth even as leading index continues decline

21 October 2024

Summary: Conference Board leading index down 0.5% in September, fall larger than expected; CB: weak factory new orders continuing as major drag on index; US Treasury yields jump; rate-cut expectations soften; CB: expects moderate growth into early 2025.

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. Post-2022 readings implied US GDP growth rates would turn negative but that has not been the case so far.

The latest reading of the LEI indicates it decreased by 0.5% in September. The fall was a larger one than the 0.3% decline which had been generally expected as well as August’s downwardly-revised 0.3% decrease.

“Weakness in factory new orders continued to be a major drag on the US LEI in September as the global manufacturing slump persists,” said Justyna Zabinska-La Monica of The Conference Board.

US Treasury bond yields jumped on the day. By the close of business, the 2-year Treasury yield had gained 8bps to 4.03%, the 10-year yield had added 12bps to 4.20% while the 30-year yield finished 10bps higher at 4.50%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened, although another five 25bp cuts are still factored in. At the close of business, contracts implied the effective federal funds rate would average 4.66% in November, 4.535% in December and 4.255% in February. September 2025 contracts implied 3.58%, 125bps less than the current rate.

“Additionally, the yield curve remained inverted, building permits declined and consumers’ outlook for future business conditions was tepid,” Zabinska-La Monica added. “Overall, the LEI continued to signal uncertainty for economic activity ahead and is consistent with The Conference Board expectation for moderate growth at the close of 2024 and into early 2025.“

The Conference Board stated in August it expected annualised growth rates of 0.6% and 1.0% in the respective third and fourth quarters of 2024. Regression analysis suggests the latest reading implies a zero year-on-year growth rate in December, up from the 0.1% year-to-November contraction rate after revisions.

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US consumers more resilient than expected; retail sales up 0.4% in September

17 October 2024

Summary: US retail sales up 0.4% in September, more than expected; annual growth rate slows to 1.7%; Westpac: US consumers more resilient than previously expected; US Treasury yields up; rate-cut expectations soften; Westpac: control group sales up 0.7%; higher sales in ten of thirteen categories; food services & drinking places 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 them 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 2021. However, growth rates have slowed significantly since mid-2022.

According to the latest “advance” numbers released by the US Census Bureau, total retail sales increased by 0.4% in September. The result was greater than the 0.2% increase which had been generally expected as well as August’s 0.1% rise after revisions. However, on an annual basis, the growth rate slowed from August’s revised rate of 2.2% to 1.7%.

“Retail sales came in above market expectations, suggesting the consumer is more resilient than previously expected,” said Westpac economist Pat Bustamante.

The figures came out on the same morning as August’s industrial production figures and US Treasury bond yields rose across a steeper curve. By the close of business, the 2-year Treasury yield had gained 4bps to 3.98%, the 10-year had increased by 8bps to 4.10% while the 30-year yield finished 6bps higher at 4.36%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened, although at least another five 25bp cuts priced in. At the close of business, contracts implied the effective federal funds rate would average 4.655% in November, 18bps less the current rate, 4.515% in December and 4.22% in February. September 2025 contracts implied 3.515%, 131bps less than the current rate.

“Headline retail sales were up by 0.4%, but well above the average pace in 2024 so far of 0.2% per month,” added Bustamante. “Excluding auto and gas, retail sales were up 0.7%, a reading at the top of the recent range. Control group sales, a guide of the overall consumer spending, was also up by 0.7%, to leave the three-month growth in this category at 1.6%, double the pace seen in Q2 and the highest since Q1 2023.”

Ten of the thirteen categories recorded higher sales over the month. The “Food services & Drinking places” segment had the largest single influence on the overall result as it rose by 1.0% over the month and contributed 0.14 percentage points to 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 accounts for around 17% of all US retail sales and it is the second-largest segment after vehicles and parts.

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Strike, hurricanes hit US industrial output in September

17 October 2024

Summary: US industrial output down 0.3% in September, fall greater than expected; down 0.6% over past 12 months; Citi: fall expected as aerospace strike, hurricanes hit; US Treasury yields up; rate-cut expectations soften; capacity utilisation rate falls to 77.5%, 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. However, production levels has largely stagnated since early 2022.

According to the Federal Reserve, US industrial production decreased by 0.3% on a seasonally adjusted basis in September. The fall was a larger one than the 0.1% contraction which had been generally expected and a reversal of August’s downwardly-revised 0.3% expansion. The annual contraction rate accelerated from August’s downwardly revised figure of 0.2% to 0.6%.

“The decline in industrial production was well expected given disruptions caused by a strike in the aerospace industry and by hurricanes,” said Citi analyst Alice Zheng. “The Fed estimates IP would have grown 0.3% without these events, which is somewhat surprising given weaker survey data and other manufacturing data like hours worked.”

The figures came out on the same morning as the latest retail sales numbers and US Treasury bond yields rose across a steeper curve. By the close of business, the 2-year Treasury yield had gained 4bps to 3.98%, the 10-year had increased by 8bps to 4.10% while the 30-year yield finished 6bps higher at 4.36%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened, although at least another five 25bp cuts priced in. At the close of business, contracts implied the effective federal funds rate would average 4.655% in November, 18bps less the current rate, 4.515% in December and 4.22% in February. September 2025 contracts implied 3.515%, 131bps less than the current rate.

The same report includes capacity utilisation figures which are generally accepted as an indicator of future investment expenditure and/or inflationary pressures. Capacity usage 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%. September’s reading declined by 0.3 percentage points after revisions to 77.5%, 2.6 percentage points below the long-term average.

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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Westpac-MI leading index rises in September; “middling” run continues

16 October 2024

Summary: Leading index growth rate rises in September; Westpac: slightly negative for best part of a year; reading implies annual GDP growth of around 2.35%-2.60%; ACGB yields fall; rate-cut expectations firm; Westpac: forecasts 1.5% GDP growth in calendar 2024, 2.4% in calendar 2025.

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 and 2022 before flattening out in 2023 and 2024.

September’s reading has now been released and the six month annualised growth rate of the indicator registered -0.15%, up from August’s revised figure of -0.26%. The index reading represents a rate relative to “trend” GDP growth, which is generally thought to be around 2.50% to 2.75% per annum in Australia.

“The Leading Index growth rate has been slightly negative for the best part of a year now,” said Westpac senior economist Matthew Hassan. “That in itself is fairly rare; this is one of the longest periods of ‘middling’ reads in the history of the measure with the more typical pattern one of more-pronounced swings between strong and weak.”

Westpac states the index leads GDP growth 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 may therefore be considered to be indicative of an annual GDP growth rate of around 2.35% to 2.60% in the next quarter.

Domestic Treasury bond yields fell moderately across a slightly steeper curve on the day. By the close of business, the 3-year ACGB yield had lost 4bps to 3.72%, the 10-year yield had shed 5bps to 4.21% while the 20-year finished 6bps lower at 4.60%.

Expectations regarding rate cuts in the next twelve months firmed, with a February 2025 rate priced in as an 80% probability. Cash futures contracts implied an average of 4.315% in November, 4.25% in December and 4.175% in February 2025. September 2025 contracts implied 3.67%, 67bps less than the current cash rate.

The RBA’s August Statement on Monetary Policy GD?P growth forecasts are slightly higher than Westpac’s latest numbers, which are 1.5% for calendar 2024 and 2.4% for calendar 2025.  The RBA forecasts GDP growth for the years ending December 2024 and December 2025 to be 1.7% and 2.6% respectively.

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Europe’s industrial production jumps in August; still negative over last 3 months

15 October 2024

Summary: Euro-zone industrial production up 1.8% in August, in line with expectations; up 0.1% on annual basis; Westpac: capital goods production drives increase; German, French 10-year yields fall; Westpac: output growth still negative on 3-month basis; expansion in three of four largest 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 since early 2023 have generally declined.

According to the latest figures released by Eurostat, euro-zone industrial production increased by 1.8% in August on a seasonally-adjusted and calendar-adjusted basis. The rise was in line with expectations and in contrast with July’s 0.5% contraction after revisions. On an annual basis, the contraction rate reversed course from July’s revised rate of -2.1% to 0.1%.

“Details revealed that production of capital goods led the way, while consumer goods and energy production were also higher compared to the prior month,” said Westpac economist Pat Bustamante.

Long-term German and French sovereign bond yields finished lower on the day. By the close of business, the German 10-year bond yield had shed 5bps to 2.22% while the French 10-year yield finished 6bps lower at 2.96%.

“However, it is worth highlighting that the increase in August followed a 0.5% drop in the total production in July, and on a three-month basis, output growth remained negative at -0.2%,” Bustamante added.

Industrial production expanded in three of the euro-zone’s four largest economies. Germany’s production increased by 3.3% over the month while the comparable figures for France, Spain and Italy were 1.4%, -0.4% and 0.1% respectively

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Prices still weighing on US household sentiment; UoM index slides in Oct

11 October 2024

Summary: University of Michigan consumer confidence index slips in October, less than expected; views of present conditions, future conditions both deteriorate; consumers’ frustration over high prices continues; longer-term US Treasury yields rise; rate-cut expectations firm slightly; inflation expectations mixed – short-term up, long-term down.

US consumer confidence started 2020 at an elevated level but, after a few months, surveys began to reflect a growing unease with the global spread of COVID-19 and its reach into the US. Household confidence plunged in April 2020 and then recovered in a haphazard fashion, generally fluctuating at below-average levels according to the University of Michigan. The University’s measure of confidence had recovered back to the long-term average by April 2021 but then it plunged again in the September quarter and remained at historically low levels through 2022 and 2023.

The latest survey conducted by the University indicates confidence among US households has deteriorated slightly in October. The preliminary reading of the Index of Consumer Sentiment registered 68.9, a little less than the 70.0 which had been generally expected as well as September’s final figure of 70.1.

Consumers’ views of current conditions and their views of future conditions both deteriorated relative to those held at the time of the September survey. The Current Economic Conditions Index decreased from 63.3 to 62.7 while the Index of Consumer Expectations Index increased from 74.4 to 72.9.

“Sentiment is currently 8% stronger than a year ago and almost 40% above the trough reached in June 2022,” said the University’s Surveys of Consumers Director Joanne Hsu. “While inflation expectations have eased substantially since then, consumers continue to express frustration over high prices.”

Short-term US Treasury bond yields hardly moved while longer-term yields rose moderately on the day. By the close of business, the 2-year Treasury yield had returned to its starting point at 3.96%, the 10-year yield had gained 4bps to 4.10% while the 30-year yield finished 5bps higher at 4.41%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed a touch, with at least another five 25bp cuts priced in. At the close of business, contracts implied the effective federal funds rate would average 4.655% in November, 18bps less the current rate, 4.51% in December and 4.18% in February. September 2025 contracts implied 3.475%, 136bps less than the current rate.

US consumer inflation expectations increased in the short-term while longer-term expectations eased. Year-ahead expectations increased from 2.7% to 2.9% but long-term expectations slowed from 3.1% to 3.0%.

It was once thought less-confident households are generally inclined to spend less and save more; some decline in household spending could be expected to follow. However, recent research suggests the correlation between household confidence and retail spending is quite weak.

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