News

20 April 2022

Summary: Euro-zone industrial production up 0.7% in February; in line with expectations; annual growth rate speed up to +2.0%; expands in all but one 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 in more-recent months has generally stagnated.

According to the latest figures released by Eurostat, euro-zone industrial production increased by 0.7% in February on a seasonally-adjusted and calendar-adjusted basis. The rise was in line with expectations and in contrast with January’s 0.7% fall after revisions. The calendar-adjusted growth rate on an annual basis sped up from January’s revised rate of -1.5% to +2.0%.

German and French sovereign bond yields fell noticeably on the day. By the close of business, the German 10-year bund yield had shed 6bps to 0.86% while the French 10-year OAT yield finished 7bps lower at 1.33%.

Industrial production expanded in all but one of the euro-zone’s four largest economies. Germany’s production expanded by 0.4% while the growth figures for France, Spain and Italy were -0.9%, 0.9% and 4.0% respectively.

13 April 2022

Summary: Household sentiment deteriorates in April; interest rates, inflation, weather unnerve consumers; three of five sub-indices lower; respondents less concerned by prospects of unemployment.

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 readings 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, recent readings have deteriorated significantly, unlike readings from the business sector.

According to the latest Westpac-Melbourne Institute survey conducted in the first week of April, household sentiment has again deteriorated. Their Consumer Sentiment Index eased from March’s reading of 96.6 to 95.8 in April. The latest figure is noticeably lower than the long-term average reading of just over 101.

“There is further evidence that interest rates, inflation and weather continued to unnerve consumers in the current survey,” 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.

Domestic Treasury bond yields fell with the exception of those at the ultra-long end on the day, generally following the lead of US Treasury yields in overnight trading. By the close of business, the 3-year ACGB yield had shed 7bps to 2.69%, the 10-year had slipped 1bp to 3.13% while the 20-year yield finished 3bps higher at 3.44%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.06%, eased a touch. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until May and then rise to 0.89% by August. February 2023 contracts implied a cash rate of 2.215%.

Three of the five sub-indices registered lower readings, with the “Time to buy a major household item” sub-index posting the largest monthly percentage loss. The reading of the “Family finances versus a year ago” sub-index also deteriorated noticeably.

The report contained some positives. “Optimism on the outlook though remains, with unemployment expectations falling to their second lowest level since the mid-1990s…” said NAB senior economist Tapas Strickland.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, declined from 101.8 to 99.2. Lower readings result from fewer respondents expecting a higher unemployment rate in the year ahead.

13 April 2022

Summary: US producer price index (PPI) up 1.4% in March, larger than expected; annual rate rises from 10.4% to 11.2%; “core” PPI up 1.0%; “pipeline inflationary pressures remain elevated”; US Treasury yields lower, rate-rise expectations ease; factors behind figures unlikely to be resolved in short-term.

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 recent months’ annual rates have been well above the long-term average.

The latest figures published by the Bureau of Labor Statistics indicate producer prices rose by 1.4% after seasonal adjustments in March. The increase was larger than the consensus expectation of 1.2% as well as February’s revised figure of 0.9%. On a 12-month basis, the rate of producer price inflation after seasonal adjustments accelerated from February’s revised rate of 10.4% to 11.2%.

Producer prices excluding foods and energy, or “core” PPI, rose by 1.0% after seasonal adjustments. The increase was double the 0.5% which had been generally expected and substantially greater than February’s revised figure of 0.4%. The annual rate increased from February’s revised rate of 8.8% to 9.2%.

“This suggests that, while yesterday’s core CPI inflation was a touch below expectations, pipeline inflationary pressures remain elevated,” said ANZ senior economist Catherine Birch.

US Treasury bond yields generally fell on the day, although ultra-long yields remained steady. By the close of business, 2-year and 10-year Treasury yields had both shed 4bps to 2.37% and 2.69% respectively while the 30-year yield finished unchanged at 2.81%.

In terms of US Fed policy, expectations for a higher federal funds rate over the next 12 months eased slightly. By the close of business, May contracts implied an effective federal funds rate of 0.75%, 42bps higher than the current spot rate. June contracts implied 1.035% while March 2023 futures contracts implied an effective federal funds rate of 2.63%, 230bps above the spot rate.

Birch said the likely factors behind the figures, a tight US jobs market, war in Ukraine and supply-chain bottlenecks, will probably not be resolved in the short-term. “That will keep pushing input costs higher, feeding CPI inflation and pressuring the Fed.”      

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.

12 April 2022

Summary: US CPI up 1.2% in March, in line with expectations; “core” rate up 0.3%; unlikely to change Fed’s near-term thinking; Treasury yields down, rate rise expectations ease slightly; “base effects” to put downward pressure on annual figure from next month; energy prices main driver of headline rise.

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 has risen significantly since then.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices jumped by 1.2% on average in March. The result was in line with expectations but higher than February’s 0.8%. On a 12-month basis, the inflation rate accelerated from February’s reading of 7.9% to 8.6%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. Core inflation, a measure of inflation which strips out the more variable food and energy components of the index, increased by 0.3% on a seasonally-adjusted basis for the month. The rise was less than the 0.5% expected as well as February’s 0.5% increase. The annual growth rate remained unchanged at 6.4%.

“Used car prices declined but housing costs lifted and inflation in the services sector continues to rise. Overall, this data is unlikely to change the Federal Reserve’s near term thinking about the need to hike,” said ANZ senior economist Adelaide Timbrell.

US Treasury bond yields fell on the day, especially at the short end of the yield curve. By the close of business, the 2-year Treasury yield had shed 10bps to 2.41%, the 10-year yield had lost 6bps to 2.73% while the 30-year yield finished 2bps lower at 2.81%.

In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months eased a little. At the close of business, May contracts implied an effective federal funds rate of 0.75%, 42bps higher than the current spot rate. June contracts implied 0.85% while May 2023 futures contracts implied an effective federal funds rate of 2.87%, 254bps above the spot rate.

NAB economist Taylor Nugent thought there may be reason to expect some easing of US inflation rates in the short-term. “Base effects begin to put downward pressure on the year-ended reads from next month, suggesting the peak in the CPI numbers may be in, but the strength of inflation in the persistent rents series and tight labour markets suggest the fall-back is unlikely to be precipitous.”

The largest influence on headline results is often the change in fuel prices. “Energy commodities”, the segment which contains vehicle fuels, increased by 18.1%, adding 0.76 percentage points. However, prices of non-energy services, the segment which includes actual and implied rents, also had a noticeable effect, adding 0.34 percentage points after they increased by 0.6% on average.

12 April 2022

Summary: Business conditions improve markedly in March; confidence also improves; conditions index largely driven by retail; further escalation of cost pressures, including labour costs; businesses no longer absorbing cost increases; capacity utilisation rate up, 7 of 8 sectors of economy at/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. More normal readings have been present since.

According to NAB’s latest monthly business survey of over 400 firms conducted over the last week and a half of March, business conditions have improved markedly. NAB’s conditions index registered 18, up from February’s reading of 9.

NAB senior economist Brody Viney said the rise in the index “was largely driven” by retail businesses while the recreation and personal services, finance, business and property sectors also contributed.

Business confidence also improved. NAB’s confidence index rose from February’s reading of 13 to 16, well above the long-term average. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences have appeared in the past from time to time.

Commonwealth Government bond yields increased moderately on the day. By the close of business, the 3-year ACGB yield had added 4bps to 2.76%, the 10-year yield had gained 7bps to 3.14% while the 20-year yield finished 8bps higher at 3.41%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.06%, eased slightly. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until May and then rise to 0.81% by August. February 2023 contracts implied a cash rate of 2.245%.                                         

“The Australian economy improved further in March, with both business conditions and business confidence up. The downside is that this is associated with a further escalation of cost and price pressures, including labour costs,” said Westpac senior economist Andrew Hanlan.

Cost pressures featured prominently in the NAB report. “Cost growth escalated further in the month, with labour-cost growth hitting 2.7% in quarterly terms and purchase-cost growth up to 4.2%, both tracking at considerably higher rates than at any other point in the history of the survey.”

Those pressures have begun to flow through to customers and ANZ senior economist Catherine Birch attributed this to two factors. “Firstly, some businesses have reached the point where they can no longer absorb cost increases. Secondly, with households expecting higher inflation and more businesses prepared to lift their prices, there is less risk of an individual business losing customers or market share due to a price rise.”

NAB’s measure of national capacity utilisation continued to recover from December’s drop and it rose from February’s revised figure of 82.6% to 83.1%. Seven of the eight sectors of the economy were reported to be operating at or above their respective long-run averages. The Recreation/Personal Services sector was the exception.

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

04 April 2022

Summary: Melbourne Institute Inflation Gauge index up 0.8% in March; up 4.0% on annual basis; “consistent with an acceleration in underlying inflation”; bond yields barely change on day; cash futures imply no rate rise until after May.

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 inflation increased by 0.8% in March. The rise follows a 0.5% increase in February and a 0.4% increase in January. On an annual basis, the index rose by 4.0%, up from February’s 3.5%.

“While the monthly MI series does not map neatly on the official quarterly CPI data, it is consistent with an acceleration in underlying inflation and further reinforces the risks to the RBA’s February inflation forecasts are firmly to the upside,” said NAB senior economist Tapas Strickland.

The figures were released at roughly the same time as ANZ’s latest Job Ads report but both reports had little impact and Commonwealth Government bond yields hardly moved. By the close of business, 3-year and 10-year ACGB yields were both unchanged at 2.60% and 2.89% respectively while the 20-year yield finished 1bp lower at 3.19%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.06%, softened a touch. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until May and then rise to 0.75% by August. February 2023 contracts implied a cash rate of 1.945%.

Given the Inflation Gauge’s tendency to overestimate, the latest figures imply an official CPI reading of 0.8% (seasonally adjusted) for the March quarter and 3.9% in annual terms. However, it is worth noting the annual CPI rate to the end of December was 3.7% while the Inflation Gauge had implied a 2.8% annual rate at the time.

04 April 2022

Summary:  Job ads up 0.4% in March; 32.5% higher than same month in 2021; labour demand “elevated”, continues to grow; ads-to-workforce ratio at 1.8%.

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 0.4% in March on a seasonally-adjusted basis. The rise followed a 10.9% jump in February and a 1.1% decline in January after revisions. On a 12-month basis, total job advertisements were 32.5% higher than in March 2021, down from February’s revised figure of 39.6%.

“Labour demand is elevated and continuing to grow, confirmed by ABS job vacancies data which showed a rise of 6.9% quarter-on-quarter in February to a new record high,” said ANZ senior economist Catherine Birch.

The figures were released at roughly the same time as the Melbourne Institute’s latest Inflation Gauge reading but Commonwealth Government bond yields hardly moved on the day. By the close of business, 3-year and 10-year ACGB yields were both unchanged at 2.60% and 2.89% respectively while the 20-year yield finished 1bp lower at 3.19%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.06%, softened a touch. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until May and then rise to 0.75% by August. February 2023 contracts implied a cash rate of 1.945%.

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.

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.

01 April 2022

Summary: ISM PMI down from 58.6% to 57.1% in March; below consensus expectation; progress on labour shortages made “at all tiers“ of supply chain, “increasing rates of price expansion”, suppliers not waiting to pass on higher prices; latest reading implies 4.1% 12-month US GDP growth rate in August.

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 elevated levels despite recent declines.

According to the ISM’s March survey, its PMI recorded a reading of 57.1%, below the generally expected figure of 59.0% and a lower than February’s 58.6%. 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.

“In March, progress was made to solve the labour shortage problems at all tiers of the supply chain, which will result in improved factory throughput and supplier deliveries,” said Timothy Fiore, Chair of the ISM’s Manufacturing Business Survey Committee. He noted “increasing rates of price expansion, due primarily to instability in global energy markets” and further said suppliers were not waiting for their costs to rise before negotiating higher prices with their customers.

The report was released on the same day as the latest non-farm payrolls report and US Treasury yields rose with the exception of ultra-long yields. By the close of business, the 2-year Treasury bond yield had gained 12bps to 2.46%, the 10-year yield had added 4bps to 2.38% while the 30-year yield finished 1bps lower at 2.44%.

In terms of US Fed policy, expectations of a higher federal funds rate over the next 12 months hardened. At the close of business, May contracts implied an effective federal funds rate of 0.725%, 40bps higher than the current spot rate. August contracts implied a rate of 1.61% and March 2023 futures contracts implied 2.755%, 243bps 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. According to the ISM’s latest announcement, a reading “above 48.7%, over a period of time, generally indicates an expansion of the overall economy.”

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, March’s PMI corresponds to an annualised growth rate of 2.9%, or 0.7% over a quarter. Regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 4.1% 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 March flash manufacturing PMI registered 58.5%, 1.2 percentage points higher than February’s final figure.

31 March 2022

Summary: US Fed’sfavoured inflation measure up 0.4% in February; below expectations; annual rate accelerates from 5.2% to 5.4%; 2-year Treasury yield up, longer-term yields down; expectations of Fed rate rises soften.

One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising back to around 1.5% in the September quarter of that year. It has since ran up well above the Fed’s target.

The latest figures have now been published by the Bureau of Economic Analysis as part of the February personal income and expenditures report. Core PCE prices rose by 0.4% over the month, less than the 0.6% which had been generally expected and January’s 0.5% increase. On a 12-month basis, the core PCE inflation rate accelerated from January’s 5.2% to 5.4%.

US Treasury bond yields rose at the short end but rose elsewhere along the curve on the day. By the close of business, the 2-year Treasury bond yield had gained 3bps to 2.34%, the 10-year yield had slipped 1bp to 2.34% while the 30-year yield finished 3bps lower at 2.45%.

In terms of US Fed policy, expectations of a higher federal funds rate over the next 12 months softened a little. At the close of business, May contracts implied an effective federal funds rate of 0.725%, 40bps higher than the current spot rate. August contracts implied a rate of 1.555% and March 2023 futures contracts implied 2.605%, 238bps above the spot rate.

The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It is not the only measure of inflation used by the Fed; the Fed also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.

31 March 2022

Summary: Private sector credit up 0.6% in February; in line with expectations; annual growth rate up from 7.6% to 7.9%; fastest annual pace since November 2008; evidence of confidence in economic outlook, future earnings; business loans account for about 45% of net growth, owner-occupiers loans 40%.

The pace of lending to 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 the same year and now annual growth rates are above the peak rate seen in the previous decade.

According to the latest RBA figures, private sector credit growth increased by 0.6% in February. The result was in line with expectations as well as January’s increase. On an annual basis, the growth rate increased from 7.6% to 7.9%.

“Strikingly, credit growth strengthened materially over the past year. Annual growth accelerated from 1.7% at the end of 2020 to be at 7.9% currently. That is the fastest annual pace for credit growth since November 2008, although it is still well below the December 2007 peak of 16.5%,” said ANZ senior economist Andrew Hanlan

Commonwealth Government bond yields declined at the short end but rose farther out along the curve on the day. By the close of business, the 3-year ACGB yield had lost 2bps to 2.56%, the 10-year yield had gained 4bps to 2.90% while the 20-year yield finished 6bps higher at 3.22%.

Expectations of official rate rises over the next fifteen months also softened a little. At the end of the day, contract prices in the cash futures market implied the cash rate would not exceed the RBA’s 0.10% target rate until May but then rise to 0.755% by August. February 2023 contracts implied a cash rate of 1.945%.

“Households and businesses alike are borrowing more, responding to substantial policy stimulus,” Hanlan added. “It is evidence of confidence in the economic outlook and prospects for future earnings. Record low interest rates and generous tax incentives for business investment provided a strong tail wind for the Australian economy.”

Business loans accounted for about 45% of the net growth over the month, while owner-occupier loans and investor loans accounted for a little over 40% and 10% respectively. Total personal debt was unchanged.

The traditional driver of loan growth rates, the owner-occupier segment, grew by 0.7% over the month, slightly lower than January’s 0.8% increase. The sector’s 12-month growth rate accelerated from 9.8% to 9.9%.

Total lending in the business sector also grew by 0.8%, slightly above the long-term monthly average and more than the 0.6% increase recorded in January. The segment’s annual growth rate increased from 9.0% to 9.8%.

Monthly growth in the investor-lending segment slowed to a halt in early 2018. Shortly into the 2019/20 financial year, monthly growth rates slipped into the red before posting a series of flat or near-flat results until mid-2020. In February, net lending grew by 0.4%, the same rate as in January. The 12-month growth rate accelerated from 3.7% to 3.9%.                               

Total personal loans remained unchanged, up from January’s -0.5%, taking the annual contraction rate from 3.8% to 3.0%. This category of debt includes fixed-term loans for large personal expenditures, credit cards and other revolving credit facilities.