News

30 March 2022

Summary: ADP payrolls up 455,000 in March; greater than consensus expectations; February rise revised up by 11,000; suggests high inflation, Russia-Ukraine war, haven’t dented employment growth yet; positions up in businesses of all sizes; little over 80% of gains in services sector, led by leisure/hospitality sector.

The ADP National Employment Report is a monthly report which provides an estimate of US non-farm employment in the private sector. Since publishing of the report began in 2006, its employment figures have exhibited a high correlation with official non-farm payroll figures, although a large difference can arise in any individual month.

The latest ADP report indicated private sector employment increased by 455,000 in March, greater than the 413,000 increase which had been generally expected. February’s rise was revised up by 11,000.

“Jobs growth is broad-based across goods and services industries and it suggests that high inflation and the Russia-Ukraine war haven’t dented employment growth yet,” said ANZ economist John Bromhead.

Treasury bond yields fell on the day. At the close of business, the 2-year Treasury bond yield had shed 6bps to 2.31%, the 10-year yield had lost 5bps to 2.35% while the 30-year yield finished 2bps lower at 2.48%.

In terms of US Fed policy, expectations for higher federal funds rates over the next 12 months firmed considerably. At the close of business, May contracts implied an effective federal funds rate of 0.72%, 39bps higher than the current spot rate. July contracts implied 1.235% and March 2023 futures contracts implied an effective federal funds rate of 2.65%, 232bps above the spot rate.

Employment numbers in net terms increased across businesses of all sizes. Firms with less than 50 employees gained a net 90,000 positions, mid-sized firms (50-499 employees) added 188,000 positions while large businesses (500 or more employees) accounted for 177,000 more employees.

Employment at service providers accounted for a little over 88% of the total net increase, or 377,000 positions. The “Leisure & Hospitality” sector was the largest single source of gains, with 161,000 more positions. The “Education & Health” and “Professional & Business” sectors were also significant sources, each adding 72,000 positions and 61,000 positions respectively. Total jobs among goods producers increased by a net 79,000 positions.

Prior to the ADP report, the consensus estimate of the change in March’s official non-farm employment figure was +450,000. The non-farm payroll report will be released by the Bureau of Labor Statistics this coming Friday night (AEST), 1 April.

30 March 2022

Summary: Euro-zone composite sentiment index falls from 114.0 to 108.5 in March; below expectations; readings down all sectors with the exception of services; down in all four of largest economies; sovereign bond yields modestly higher on day; index implies GDP growth of 3.3%.

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

The ESI posted a reading of 108.5 in March, below the market’s expected figure of 110.0 as well as February’s reading of 114.0. The average reading since 1985 has been a touch over 100 and the latest reading is still substantially above it.

German and French 10-year bond yields finished the day modestly higher. By the close of business, the German bund yield had crept up 1bp to 0.65% the French 10-year OAT yield had added 2bps to 1.08%.

Confidence deteriorated in all sectors with the exception of services. On a geographical basis, the ESI fell in all of the euro-zone’s four largest economies.

End-of-quarter ESI readings and annual euro-zone GDP growth rates are highly correlated. This latest reading corresponds to a year-to-March GDP growth rate of 3.3%, down from February’s 4.6%.

29 March 2022

Summary: Conference Board Consumer Confidence Index improves in March; reading essentially in line with consensus expectations; view of present conditions improve, short-term outlook deteriorate again; Present Situation Index suggests US economic growth should continue in March quarter; confidence bolstered by “strong employment growth”, holding up “remarkably well” despite Ukraine war, higher inflation expectations.

After the GFC in 2008/09, US consumer confidence clawed its way back to neutral over a number of years and then went from strength to strength until late 2018. Measures of consumer confidence then oscillated within a fairly 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 reached elevated levels.

The latest Conference Board survey held during the first three weeks of March indicated US consumer confidence has improved a little. February’s Consumer Confidence Index registered 107.2 on a preliminary basis, a reading which was essentially in line with the median consensus figure of 107.8 but slightly above February’s final figure of 105.7.

As in February’s survey, consumers’ views of present conditions improved while their outlook for the near-future deteriorated. The Present Situation Index rose from February’ revised figure of 143.0 to 153.0 while the Expectations Index declined from a revised figure of 80.8 to 76.6.

Lynn Franco, a senior director at The Conference Board said the rise in the Present Situation Index suggests US economic growth should continue in the March quarter. However, he also noted how respondents had cited rising prices and the Ukraine war as factors behind their less optimistic outlook.

Short-term US Treasury yields moved higher while longer-term yields fell. By the close of business, the 2-year Treasury bond yield had gained 4bps to 2.37%, the 10-year yield had shed 6bps to 2.40% while the 30-year yield finished 5bps lower at 2.50%.

In terms of US Fed policy, expectations for a higher federal funds rate over the next 12 months softened. At the close of business, May contracts implied an effective federal funds rate of 0.725%, 40bps higher than the current spot rate. July contracts implied 1.25% and March 2023 futures contracts implied an effective federal funds rate of 2.66%, 233bps above the spot rate.

Franco suggested household confidence has been bolstered by “strong employment growth and thus has been holding up remarkably well” despite the war in Ukraine and higher inflation expectations.

The Consumer Confidence Survey is one of two monthly US consumer sentiment surveys which result in the construction of an index. 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 also includes some longer-term questions.

29 March 2022

Summary: US quit rate up in February; quits up, job openings down, separations up; openings remain at high level, “labour market should remain strong”.

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 before trending higher through 2021.

Figures released as part of the most recent Job Openings and Labor Turnover Survey (JOLTS) report show the quit rate ticked up in February. 2.9% of the non-farm workforce left their jobs voluntarily, up from January’s figure of 2.8%. There were 94,000 more quits during the month and an additional 548,000 people employed in the non-farm sector.

Short-term US Treasury yields moved higher while longer-term yields fell. By the close of business, the 2-year Treasury bond yield had gained 4bps to 2.37%, the 10-year yield had shed 6bps to 2.40% while the 30-year yield finished 5bps lower at 2.50%.

In terms of US Fed policy, expectations for a higher federal funds rate over the next 12 months softened. At the close of business, May contracts implied an effective federal funds rate of 0.725%, 40bps higher than the current spot rate. July contracts implied 1.25% and March 2023 futures contracts implied an effective federal funds rate of 2.66%, 233bps above the spot rate.

The rise in total quits was led by 74,000 more resignations in the “Retail” sector. The “Finance and insurance” sector experienced the single largest fall, declining by 30,000. Overall, the total number of quits for the month rose from January’s revised figure of 4.258 million to 4.352 million.

Total vacancies at the end of February decreased by 17,000, or 0.2%, from January’s revised figure of 11.283 million to 11.266 million. The fall was driven by a 63,000 decrease in the “Finance and insurance” sector and a 61,000 decrease in the “Other services” sector. The “Health care and social assistance” sector experienced the single largest increase, rising by 54,000. Overall, 9 out of 18 sectors experienced fewer job openings than in the previous month.

In contrast, total separations increased by 48,000, or 0.8%, from January’s revised figure of 6.044 million to 6.092 million. The rise was led by the “Retail trade” sector where there were 85,000 more separations than in January. Separations increased in 7 out of 18 sectors.

“US job openings decreased marginally in February but remain at a high level indicating the labour market should remain strong,” said ANZ senior economist Catherine Birch.

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.

28 March 2022

Summary: Retail sales up 1.8% in February; greater than 0.9% expected; up 9.1% on annual basis; increase led by spending on discretionary items; some gains “likely due to higher prices”; largest influence on month from restaurants, cafes.

Growth figures of domestic retail sales spent most of the 2010s at levels below the post-1992 average. While economic conditions had been generally favourable, wage growth and inflation rates were low. Expenditures on goods then jumped in the early stages of 2020 as government restrictions severely altered households’ spending habits. Households reverted back to their usual patterns as restrictions eased in the latter part of 2020 and throughout 2021, although not for all categories.

According to the latest ABS figures, total retail sales increased by 1.8% in February on a seasonally-adjusted basis. The gain was greater than the 0.9% increase as well as January’s 1.6% rise. On an annual basis, retail sales increased by 9.1%, up from January’s comparable figure of 6.3%.

“The strong monthly result was driven by social spending, which recovered as Omicron caution dissipated in most states,” said ANZ senior economist Adelaide Timbrell. “Strong discretionary spending in February is a good sign of household financial wellbeing ahead of intensifying inflation.”

Commonwealth bond yields moved in manner similar to that of their US counterparts, rising at the short end but declining farther out along the curve. By the end of the day, the 3-year ACGB yield had gained 7bps to 2.71%, the 10-year rate had slipped 1bp to 2.96% while the 20-year yield finished 2bps lower at 3.23%.

Retail sales are typically segmented into six categories (see below), with the “food” segment accounting for nearly 45% of total sales. However, the largest influence on the total during the month came from the “Cafes and restaurants” segment which increased by 9.7% over the month and thus contributed 1.2 percentage points of the 1.8% increase. Food sales fell by 2.6% over the month and deducted 1.0 percentage point.

“Consumers are clearly seizing the opportunity to return back to shopping and spending in person after last year’s extended delta lockdowns. That said, some of the most recent gains are likely due to higher retail prices rather than volumes,” said Westpac senior economist Matthew Hassan.

25 March 2022

Summary: ifo business climate index down in March, below expected figure; expectations, current conditions indices both down; sentiment in German economy “collapses”, companies “expecting tough times”; expectations index implies euro-zone GDP contraction in year to June 2022.

Following a recession 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. The rebound which began in May of that year was almost as sharp but it was also characterised by a period of below-average readings. Readings through much of 2021 generally fluctuated around the long-term average.

According to the latest report released by ifo, German business sentiment has deteriorated substantially. March’s Business Climate Index recorded a reading of 90.8, below the expected reading of 93.9 as well as February’s final reading of 98.5. The average reading since January 2005 is just above 97.

“Sentiment in the German economy has collapsed,” said Clemens Fuest, President of the ifo Institute. “Companies in Germany are expecting tough times,” he added.

German firms’ views of current conditions and the outlook both took a turn for the worse. The expectations index declined from February’s revised figure of 98.6 to 97.0 while the current situation index dropped from 98.4 to 85.1.

German and French long-term bond yields both increased on the day. By the close of business, the German 10-year bund rate had gained 7bps to 0.59% while the French 10-year OAT yield finished 3bps higher at 1.01%.

The ifo Institute’s business climate index is a composite index which combines German companies’ views of current conditions with their outlook for the next six months. It has similarities to consumer sentiment indices in the US such as the ones produced by The Conference Board and the University of Michigan.

It also displays a solid correlation with euro-zone GDP growth rates. However, the expectations index is a better predictor as it has a higher correlation when lagged by one quarter. March’s expectations index implies a 5.2% year-on-year contraction in GDP to the end of June 2022.

23 March 2022

Summary: Euro-zone households less optimistic in March; Consumer Confidence Indicator down 9.9 points to -18.7; below long-term average, under lower bound of normal readings; euro-zone sovereign bond yields lower.

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 in March 2021. However, more recent readings have fallen substantially.

Consumer confidence deteriorated further in March according to the latest survey conducted by the European Commission. Its Consumer Confidence Indicator recorded a reading of -18.7, lower than the -12.9 which had been generally expected and well down on February’s figure of -8.8. The current reading is now well below the long-term average of -11.6 and it is also outside the range in which “normal” readings usually occur.

Sovereign bond yields fell in major euro-zone bond markets on the day. By the end of it, German and French 10-year bond yields had both shed 5bps to 0.45% and 0.92% respectively.

17 March 2022

Summary: US industrial output up 0.5% in February; in line with expectations; up 7.5% over past 12 months; utility output slows, non-auto manufacturing strong, auto manufacturing falls for third straight month; capacity utilisation rate up 0.3ppt to 77.6%; still short of 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 expanded by 0.5% on a seasonally adjusted basis in February. The result was in line with expectations but noticeably less than January’s 1.4% expansion. On an annual basis, the expansion rate picked up from January’s revised figure of 3.6% to 7.5%.

“Weakness in utility output, related to natural gas supplies, offset strong non-auto manufacturing. Auto manufacturing fell for a third straight month, possibly reflecting a shortage of semiconductors,” said ANZ Head of Australian Economics David Plank.

US Treasury bond yields generally moved lower on the day. By the close of business, the 2-year Treasury yield had shed 3bps to 1.92%, the 10-year yield had lost 2bps to 2.17% while the 30-year yield finished unchanged at 2.46%.

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%. February’s reading jumped from January’s revised reading of 77.3% to 77.6%, which is above February 2020’s reading of 76.3% but still short of 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.

16 March 2022

Summary:  US retail sales up 0.3 in February; rise a touch lower than 0.4% gain expected; January revision outweighs weaker-than-expected result; consumer confidence “weakness” suggests sales may slow in coming months; rises in six of twelve retail categories; “non-store” segment” the largest single influence, falls 3.7%.

US retail sales had been trending up since late 2015 but, commencing in late 2018, a series of weak or negative monthly results led to a drop-off in the annual growth rate below 2.0%. Growth rates then increased in trend terms through 2019 and into early 2020 until pandemic restrictions sent it into negative territory. A “v-shaped” recovery then took place which was followed by some short-term spikes as federal stimulus payments hit US households in the first and second quarters of 2021.

According to the latest “advance” numbers released by the US Census Bureau, total retail sales increased by 0.3% in February. The rise was a touch lower than the 0.4% gain which had been generally expected and considerably less than January’s 4.9% after it was revised up from 3.8%. However, on an annual basis, the growth rate still accelerated from January’s revised figure of 14.0% to 17.6%.

“Upward revisions to the January readings…more than outweigh the weaker-than-expected monthly growth figures,” said NAB economist Taylor Nugent.

The figures were released on the same day as the FOMC meeting and US Treasury bond yields moved higher on the day with the exception of those at the ultra-long end. By the close of business, the 2-year Treasury yield had gained 9bps to 1.95%, the 10-year yield had added 4bps to 2.19% while the 30-year yield finished 2bps lower at 2.46%.

ANZ economist John Bromhead expects consumer spending to face some headwinds in the short-term. “The recent weakness in consumer confidence suggests that sales may weaken further in coming months, while the COVID lockdown in Shenzhen and restrictions in other parts of China may affect availability of some consumer goods in the US.”

Six of the twelve categories recorded higher sales over the month. The “Non-store retailers” segment, again provided the largest single influence on the overall result, this time falling by 3.7% for the month but rising by 13.8% for the year to February. “Gas station” sales increased by 5.3% over the month and by 36.4% over the year.

The non-store segment includes vending machine sales, door-to-door sales and mail-order sales but nowadays this segment has become dominated by online sales. It now accounts for nearly 15% of all US retail sales and it is the second- largest segment after vehicles and parts.