News

Euro-zone production slumps; down 2.3% in July

14 September 2022

Summary: Euro-zone industrial production down 2.3% in July, fall greater than expected; annual growth rate swings from +2.2% to -2.4%; German, French 10-year yields decline modestly; contracts in three of euro-zone’s 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 in more-recent months has generally stagnated.

According to the latest figures released by Eurostat, euro-zone industrial production contracted by 2.3% in July on a seasonally-adjusted and calendar-adjusted basis. The fall was greater than the 1.1% decrease which had been generally expected and in contrast with June’s 1.1% increase after revisions. The calendar-adjusted growth rate on an annual basis swung from June’s revised rate of +2.2% to -2.4%.

German and French sovereign bond yields declined modestly on the day. By the close of business, the German 10-year bund yield had lost 2 bps to 1.70% while the French 10-year OAT yield finished 1bp lower at 2.27%.

Industrial production contracted in three of the euro-zone’s four largest economies. Germany’s production shrank by 2.0% over the month while the growth figures for France, Spain and Italy were -7.3%, +5.7% and -0.4% respectively.

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US core inflation double expected figure in August

13 September 2022

Summary: US CPI up 0.1% in August, more than expected; “core” rate up 0.6%; core inflation strength led by services; long-term Treasury yields up, rate rise harden considerably; energy prices main driver, subtracts 0.5 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.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices inched up by 0.1% on average in August. The result was above the generally expected figure of -0.1% as well as July’s flat result. On a 12-month basis, the inflation rate slowed from July’s reading of 8.5% to 8.2%.

“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 0.6% on a seasonally-adjusted basis for the month. The rise was double the 0.3% expected as well as July’s increase and the annual growth rate increased from 5.9% to 6.3%.

“What is perhaps most disconcerting in all this is that the strength in core inflation is very much service-sector led, items such as vehicle repairs, dental and hospital services, categories which are primarily driven by wage inflation,” said NAB’s Head of FX Strategy within its FICC division Ray Attrill.

Long term US Treasury bond yields moved higher on the day. By the close of business, the 10-year Treasury yield had added 2bps to 3.32% and the 30-year yield had gained 4bps to 3.48%. The 2-year yield finished 1bp lower at 3.53%.

In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months hardened considerably. At the close of business, October contracts implied an effective federal funds rate of 3.16%, 83bps higher than the current spot rate. November contracts implied 3.755% while September 2023 futures contracts implied an effective federal funds rate of 4.11%, 178bps above the spot rate.

The largest influence on headline results is often the change in fuel prices. “Energy commodities”, the segment which contains vehicle fuels, dropped by 10.1% and subtracted 0.52 percentage points. Prices of non-energy services, the segment which includes actual and implied rents, added 0.34 percentage points after they increased by 0.6% on average.

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Surprising improvement of consumer sentiment in September

13 September 2022

Summary: Household sentiment improves after nine months of deteriorating; surprising improvement given cost of living, RBA decisions; four of five sub-indices higher; fewer 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 year, while business sentiment has been more robust.

According to the latest Westpac-Melbourne Institute survey conducted in early September, household sentiment has improved after deteriorating for nine consecutive months. Their Consumer Sentiment Index increased from August’s reading of 81.2 to 84.4, a reading which is still well below the range of “normal” readings and significantly lower than the long-term average reading of just over 101.

“The improvement is a little surprising, especially given continued sharp rises in the cost of living and the RBA’s decision during the survey week to make another 50bp increase in the official cash rate,” 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.

Commonwealth Government bond yields moved lower on the day. By the close of business, the 3-year ACGB yield had lost 4bps to 3.20%, the 10-year yield had shed 6bps to 3.58% while the 20-year yield finished 3bps lower at 3.90%.

In the cash futures market, expectations of higher rates firmed a touch. At the end of the day, contracts implied the cash rate would rise from the current rate of 2.31% to 2.59% in October and then increase to 2.92% by November. May 2023 contracts implied a 3.545% cash rate and August 2023 contracts implied 3.555%.

Four of the five sub-indices registered higher readings, with the “Economic conditions – next 12 months” sub-index posting the largest monthly percentage gain. The reading of the “Family finances – next 12 months” sub-index was the only one to decline.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, fell from 109.8 to 103.4. Lower readings result from fewer respondents expecting a higher unemployment rate in the year ahead.

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Demand remains strong according to latest NAB survey

13 September 2022

Summary: Business conditions improve in August, at elevated level; confidence also improves, modestly above long-term average; strong conditions across most industries, more positive outlook prevailing despite rate rises; capacity utilisation rate declines, all 8 sectors of economy still above respective long-run averages.

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. Readings have been generally in a historically-normal range since then.

According to NAB’s latest monthly business survey of over 500 firms conducted over the last week of August, business conditions have improved a touch, maintaining an elevated reading. NAB’s conditions index registered 20, up from July’s revised reading of 19.

Business confidence also improved. NAB’s confidence index rose from July’s revised reading of 8 to 10, a reading which is modestly above 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.

“Overall, the survey indicates that demand remained strong through August,” said NAB Chief Economist Alan Oster.

Commonwealth Government bond yields moved lower on the day. By the close of business, the 3-year ACGB yield had lost 4bps to 3.20%, the 10-year yield had shed 6bps to 3.58% while the 20-year yield finished 3bps lower at 3.90%.

In the cash futures market, expectations of higher rates firmed a touch. At the end of the day, contracts implied the cash rate would rise from the current rate of 2.31% to 2.59% in October and then increase to 2.92% by November. May 2023 contracts implied a 3.545% cash rate and August 2023 contracts implied 3.555%.

Oster noted strong conditions across most industries with the exception of the construction sector “where profitability remains a challenge.” He also said the dampening effect of interest rate rises on confidence had “eased and a more positive outlook is prevailing, at least for the time being.”

NAB’s measure of national capacity utilisation remained at an historically-elevated level even as it declined from July’s figure of 86.7% to 86.3%. However, all eight sectors of the economy were still 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 the unemployment rate.

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Inflation Gauge reverses course in August

05 September 2022

Summary: Melbourne Institute Inflation Gauge index down 0.5% in August; up 4.9% on annual basis.

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%.

The Melbourne Institute’s latest reading of its Inflation Gauge index indicates consumer prices decreased by 0.5% in August. The fall follows increases of 1.2% and 0.3% in July and June respectively. On an annual basis, the index rose by 4.9%, down from 5.4% in July.

“The results suggest ongoing, broad-based inflationary pressure with higher prices observed for a wide range of goods and services, including utilities, rents, housing construction, food and insurance,” said the Melbourne Institute’s Associate Professor Sam Tsiaplias.

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

The figures were released on the same day as ANZ’s latest job advertisement report and Commonwealth Government bond yields were largely unchanged except at the ultra-long end. By the close of business, the 3-year ACGB yield had slipped 1bp to 3.31%, the 10-year yield had returned to its starting point 3.66% while the 20-year yield finished 4bps higher at 3.98%.

In the cash futures market, expectations of higher rates softened slightly. At the end of the day, contracts implied the cash rate would rise from the current rate of 1.81% to 2.18% in September, increase to 2.59% in October and then to 2.965% in November. May 2023 contracts implied a 3.775% cash rate and August 2023 contracts implied 3.84%.

Central bankers desire a certain level of inflation which is “sufficiently low that it does not materially distort economic decisions in the community” but high enough so it does not constrain “a central bank’s ability to combat recessions.” Hence the recent obsession among central banks, including the RBA, to bring inflation back to their various targets.

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Not past peak; job ads exceed March high in August

05 September 2022

Summary:  Job ads up 2.0% in August; 20.2% higher than August 2021; exceeds March high; July job, participation falls “temporary reversions after rapid improvements” to fall; ads-to-workforce ratio steady at 1.7%.

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.

According to the latest ANZ figures, total advertisements increased by 2.0% in August on a seasonally adjusted basis. The rise followed a 1.0% decline in July and a 0.7% increase in June after revisions. On a 12-month basis, total job advertisements were 20.2% higher than in August 2021, up from July’s revised figure of 15.3%.

“Last month, we hypothesised that ANZ Job Ads had passed its peak, but we have been proven wrong, as it increased 2.0% in August, exceeding the March high,” said ANZ senior economist Catherine Birch.

Job ads up 2.0% in August; 20.2% higher than August 2021; exceeds March high; July job, participation falls “temporary reversions after rapid improvements” to fall; ads-to-workforce ratio steady at 1.7%.

The figures were released on the same day as the Melbourne Institute’s latest reading of its Inflation Gauge and Commonwealth Government bond yields were largely unchanged except at the ultra-long end. By the close of business, the 3-year ACGB yield had slipped 1bp to 3.31%, the 10-year yield had returned to its starting point at 3.66% while the 20-year yield finished 4bps higher at 3.98%.

In the cash futures market, expectations of higher rates softened slightly. At the end of the day, contracts implied the cash rate would rise from the current rate of 1.81% to 2.18% in September, increase to 2.59% in October and then to 2.965% in November. May 2023 contracts implied a 3.775% cash rate and May 2023 contracts implied 3.84%.

“We think the falls in employment and participation in July’s labour force survey were temporary reversions after rapid improvements over recent months,” added Birch. “We continue to expect solid employment growth over the remainder of the year, underpinned by the significant volume of unfilled labour demand.”

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 rising number of job advertisements as a proportion of the labour force is suggestive of lower unemployment rates in the near future while a falling ratio suggests higher unemployment rates will follow. August’s ads-to-workforce ratio remained unchanged at 1.7%.

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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US jobless rate rises in August; may be “tentative sign”

02 September 2022

Summary: Non-farm payrolls up 315,000 in August, slightly more than expected; previous two months’ figures revised down by 107,000; jobless rate rises to 3.7%, participation rate rises to 62.4%; may be tentative sign of easing labour market tightness; jobs-to-population ratio ticks up to 60.1%; underutilisation rate rises to 7.0%; annual hourly pay growth steady at 5.2%.

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 also well above the long-term monthly average.

According to the US Bureau of Labor Statistics, the US economy created an additional 315,000 jobs in the non-farm sector in August. The increase slightly more than the 300,000 which had been generally expected but considerably less than the 526,000 jobs which had been added in July after revisions. Employment figures for June and July were revised down by a total of 107,000.

The total number of unemployed increased by 344,000 to 6.014 million while the total number of people who are either employed or looking for work increased by 786,000 to 164.746 million. These changes led to the US unemployment rate rising from 3.5% to 3.7% as the participation rate increased from July’s rate of 62.1% to 62.4%.

“The increase in the participation rate and a softening in average hourly earnings may be a tentative sign that intense labour market tightness is starting to ease slightly, and [it] eases some of the fears stemming from other indicators such as job openings,” said NAB senior economist Tapas Strickland.

Non-farm payrolls up 315,000 in August, jobless rate steady rises to 3.7%, participation rate rises to 62.4%; sign of easing labour market

US Treasury yields fell on the day, especially at the short end. By the close of business, the 2-year yield had shed 12bps to 3.39%, the 10-year yield had lost 7bps to 3.19% while the 30-year yield finished just 1bp lower at 3.35%.

In terms of US Fed policy, expectations of a steeper path for the federal funds rate over the next 12 months softened. At the close of business, September contracts implied an effective federal funds rate of 2.53%, 20bps higher than the current spot rate, while November contracts implied 3.405%. September 2023 futures contracts implied an effective federal funds rate of 3.695%, 137bps above the spot 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. August’s reading ticked up from 60.0 to 60.1%, still 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 7.0%, up from 6.7% in July. Wage inflation and the underutilisation rate usually have an inverse relationship and hourly pay growth in the year to August remained unchanged at 5.2%.

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ISM PMI holds up in August; US manufacturing still expanding

01 September 2022

Summary: ISM PMI unchanged in August, slightly above expectations; manufacturing sector still expanding at same rate, new order rates now growing; reading implies 3.1% 12-month growth rate in January.

The Institute of Supply Management (ISM) manufacturing Purchasing Managers Index (PMI) reached a cyclical peak in September 2017. It then started a downtrend which ended in March 2020 with a contraction in US manufacturing which lasted until June 2020. Subsequent month’s readings implied growth had resumed, with the index becoming stronger through to March 2021. Since then, readings have remained at levels associated with solid economic growth despite some recent declines.

According to the ISM’s August survey, its PMI recorded a reading of 52.8%, slightly above the generally expected figure of 52.1% but unchanged from July’s figure. The average reading since 1948 is 53.0% and any reading above 50% implies an expansion in the US manufacturing sector relative to the previous month.

“The US manufacturing sector continues expanding at rates similar to the prior two months,” said Timothy Fiore, Chair of the ISM’s Manufacturing Business Survey Committee. “New order rates returned to expansion levels, supplier deliveries remain at appropriate tension levels and prices softened again, reflecting movement toward supply/demand balance.”

ISM PMI unchanged in August, manufacturing sector still expanding at same rate, new order rates now growing; reading implies 3.1% 12-month growth rate in January

US Treasury yields rose noticeably on the day. By the close of business, the 2-year Treasury bond yield had gained 9bps to 3.51%, the 10-year yield had added 7bps to 3.26% while the 30-year yield finished 6bps higher at 3.36%.

In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months hardened. At the close of business, September contracts implied an effective federal funds rate of 2.54%, 21bps higher than the current spot rate while November contracts implied a rate of 3.47%. July 2023 futures contracts implied 3.915%, 159bps above the spot rate.

Purchasing managers’ indices (PMIs) are economic indicators derived from monthly surveys of executives in private-sector companies. They are diffusion indices, which means a reading of 50% represents no change from the previous period, while a reading under 50% implies respondents reported a deterioration on average.

A reading “above 48.7%, over a period of time, generally indicates an expansion of the overall economy” according to the ISM.              

The ISM’s manufacturing PMI figures appear to lead US GDP by several months despite a considerable error in any given month. The chart below shows US GDP on a “year on year” basis (and not the BEA annualised basis) against US GDP implied by monthly PMI figures. 

According to the ISM and its analysis of past relationships between the PMI and US GDP, August’s PMI corresponds to an annualised growth rate of 1.4%, or 0.4% over a quarter. Regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 3.1% five months after this latest report.

The ISM index is one of two monthly US PMIs, the other being an index published by IHS Markit. IHS Markit also produces a “flash” estimate in the last week of each month which comes out about a week before the ISM index is published. The IHS Markit August flash manufacturing PMI registered 51.3%, 0.9 percentage points lower than July’s final figure.

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Home lending approvals drop in July; “will fall a lot further”

01 September 2022

Summary: Value of loan commitments down 8.5% in July; “lending will fall a lot further”; value of owner-occupier loan approvals down 7.7%, investor approvals down 11.2%; number of home loan approvals down 5.8%.

After the RBA reduced its cash rate target in a series of cuts beginning in mid-2019 the number and value of approvals began to noticeably increase, 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.

July’s housing finance figures have now been released and total loan approvals excluding refinancing decreased by 8.5% In dollar terms over the month, worse than the 3.6% fall which had been generally expected as well as June’s -4.4%. On a year-on-year basis, total approvals excluding refinancing fell by 11.3%, down from the previous month’s comparable figure of -2.0%.

“Total housing lending excluding refinancing is still far above pre-COVID levels and we think lending will fall a lot further,” said ANZ senior economist Adelaide Timbrell.

Value of loan commitments down 8.5% in July; “lending will fall a lot further”;owner-occupier loan approvals down 7.7%, investor approvals

Commonwealth Government bond yields rose noticeably on the day, largely following the rises of US long-term Treasury yields overnight. By the close of business, the 3-year ACGB yield had gained 8bps to 3.36%, the 10-year yield had added 9bps to 3.70% while the 20-year yield finished 8bps higher at 3.96%.

The total value of owner-occupier loan commitments excluding refinancing fell by 7.0% and follows a 3.3% fall in June. On an annual basis, owner-occupier loan commitments were 15.9% lower than in June 2021, down from -9.6% in June.

The total value of investor commitments excluding refinancing arrangements fell by 11.2%. The drop followed a 6.3% decrease in June, taking the growth rate over the previous 12 months to 0.0%, down from 17.3% in June. 

The total number of loan commitments (excluding refinancing loans) to owner-occupiers fell by 5.8% to 29416. The decrease was a larger one than June’s 2.6% fall and the annual contraction rate worsened again, from -19.2% to -21.4%.

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Weather, insolvencies, hit June quarter construction

31 August 2022

Summary: Construction spending down 3.8% in June quarter, contrasts with 2.5% increase expected; supply constraints, bad weather hamper work; construction insolvencies rising; residential sector down 6.8%, non-residential building down 1.1%, engineering down 2.7%.

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. Growth rates began slowing in 2017 and the return to “normal” investment levels may now have taken place.

According to the latest construction figures published by the ABS, total construction in the June quarter decreased by 3.8%. The fall was in contrast with the 2.5% increase which had been expected but it was not as large as the March quarter’s 0.3% decline after it was revised up from -0.9%. On an annual basis, the growth rate reversed course from 2.3% to -4.3%.

“While the pipeline of detached residential and non-residential construction work remains solid, supply constraints and adverse weather conditions on the east coast of Australia have meant that actual building work would have been less than planned,” said Citi Australia economist Josh Williamson.

Construction spending down 3.8% in June quarter, bad weather hamper work; construction insolvencies rising; residential sector down

Commonwealth Government bond yields fell on the day. By the close of business, the 3-year ACGB yield had lost 5bps to 3.28% while 10-year and 20-year yields both finished 1bp lower at 3.61% and 3.88% respectively.

In the cash futures market, expectations regarding future rate rises softened slightly. At the end of the day, contracts implied the cash rate would rise from the current rate of 1.81% to 2.18% in September and then increase to 2.975% by November. May 2023 contracts implied a 3.76% cash rate while August 2023 contracts implied 3.855%.

ANZ senior economist Catherine Birch noted construction insolvencies were rising. “The consequent disruption in the market, especially after a period of very low insolvency numbers during the pandemic, has likely contributed to the weakness in activity.” Residential building construction expenditures fell by 6.8%, in contrast to the March quarter’s 1.4% increase after revisions. On an annual basis, expenditure in this segment was 7.6% lower than the June 2021 quarter, down from the March quarter’s revised figure of -0.1%.

Non-residential building spending decreased by 1.1%, a turnaround from to the previous quarter’s 0.9%. On an annual basis, expenditures were 0.6% higher than the June 2021 quarter, whereas the March quarter’s comparable figure was +5.1% after revisions.

Engineering construction decreased by 2.7% in the quarter, a greater fall than the 2.1% decrease in the March quarter. On an annual basis, spending in this segment was 4.1% lower than the June 2021 quarter, down from the March quarter’s comparable figure of +2.8% 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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