News

US economy “demand-driven, supply chain-constrained” in February: ISM

01 March 2022

Summary: ISM PMI up from 57.6% to 58.6% in February, slightly above consensus expectation; “demand-driven, supply chain-constrained environment”; supply chain pressures “intense”; latest reading implies 4.5% 12-month US GDP growth rate in July.

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 February survey, its PMI recorded a reading of 58.6%, slightly above the generally expected figure of 58.0% and a little higher than January’s 57.6%. 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.

“The US manufacturing sector remains in a demand-driven, supply chain-constrained environment,” said Timothy Fiore, Chair of the ISM’s Manufacturing Business Survey Committee. He noted COVID-19 continued to have a noticeable effect but “there were signs of relief, with recovery expected in March.”

US Treasury yields fell significantly on the day as investors switched to lower-risk assets. By the close of business, the 2-year Treasury bond yield had dropped by 11bps to 1.34%, the 10-year yield had shed 10bps to 1.73% while the 30-year yield finished just 4bps lower at 2.12%.

In terms of US Fed policy, expectations for higher federal funds rates over the next 12 months softened considerably. At the close of business, March contracts implied an effective federal funds rate of 0.21%, 13bps higher than the current spot rate. June contracts implied 0.645% while March 2023 futures contracts implied an effective federal funds rate of 1.395%, 132bps above the spot rate.

“Backlogged orders and supplier delivery times lifted, suggesting supply chain pressures are intense,” said ANZ senior economist Catherine Birch. NAB senior economist Tapas Strickland agreed, stating, “There was no further easing of supply-side pressures in this survey.”


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, February’s PMI corresponds to an annualised growth rate of 3.5%, or 0.9% over a quarter. Regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 4.5% 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 February flash manufacturing PMI registered 57.5%, 2 percentage points higher than January’s final figure.

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Home loan approvals make new high in January, “nearing peak”

01 March 2022

Value of loan commitments up 2.6% in January; owner occupier activity “looks to be nearing peak”; high levels of lending “likely” through first half before cash rate increases; value of owner-occupier loan approvals up 1.0%, investor approvals up 6.1%; number of home loan approvals up 0.2%.

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.

January’s housing finance figures have now been released and total loan approvals excluding refinancing increased by 2.6% In dollar terms over the month, more than the 0.3% rise which had been generally expected but not quite as large as December’s 4.4%. On a year-on-year basis, total approvals excluding refinancing increased by 18.2%, down from the previous month’s 26.5%.

“Overall, while investor activity has retained strong momentum, owner occupier activity, which has driven the cycle to date, looks to be nearing a peak as key segments start to turn lower,” said Westpac senior economist Matthew Hassan.

The figures were released on the same day as the RBA Board’s latest monetary policy announcement and longer-term Commonwealth Government bond yields moved higher. By the close of business, the 10-year ACGB yield had gained 5bps to 2.20% and the 20-year yield had added 6bps to 2.61. The 3-year yield finished unchanged at 1.58%.

ANZ senior economist Adelaide Timbrell made a similar observation to Westpac’s Hassan but tied her view to the RBA’s monetary policy. “We are likely to see high levels of lending maintained through the first half of this year at least, before cash rate increases hit the market.”

The total value of owner-occupier loan commitments excluding refinancing increased by 1.0%, down from December’s 5.3%. On an annual basis, owner-occupier loan commitments were 3.4% higher than in January 2021, whereas December’s annual growth figure was 12.4%.

The total value of investor commitments excluding refinancing arrangements increased by 6.1%. The rise follows a 2.4% increase in December and it is the fifteen month of consecutive gains since the last monthly decline in October 2020. On an annual basis, the value of loan commitments in the month was 67.8% higher than in January 2021, down from 73.9% in December.

The total number of loan commitments (excluding refinancing loans) to owner-occupiers rose by 0.2%. The increase was smaller than December’s 1.5% rise and the annual growth rate went further into the red, from -3.4% in December to -11.7%.

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Credit growth slows in January; business borrowing eases after strong end to 2021

28 February 2022

Summary: Private sector credit up 0.6% in January, below +0.7% expected; annual growth rate rises from 7.2% to 7.6%; business credit “remains very strong”; “underlying strength” in business capex, sector responding to strong household demand, generous tax incentives; owner-occupier loans account for about 45% of net growth, business loans account for 35%; investor lending slows, personal loans down again.

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 January. The result was slightly below the generally expected figure of 0.7% as well as December’s 0.8% increase. On an annual basis, the growth rate increased from 7.2% to 7.6%.

“The slowdown in the aggregate number was on the back of slowing business credit, which fell back to +0.6% after two very strong consecutive months of above-1% growth. Business credit overall remains very strong at 10.9% on a six-month annualised basis,” said NAB economist Taylor Nugent.

Commonwealth Government bond yields fell sharply on the day as investors reassessed central banks’ plans in light of events relating to Ukraine and financial sanctions on Russia. By the close of business, the 3-year ACGB yield had shed 13bps to 1.58%, the 10-year yield had lost 9bps to 2.15% while the 20-year yield finished 11bps lower at 2.55%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.05%, remained fairly soft for the next few months. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until June and then rise to 0.40% by August. February 2023 contracts implied a cash rate of 1.305%.

“As well as businesses accessing lines of credit to ease cash flow pressures during lockdown, there is underlying strength in business spending on equipment investment, some of which is funded by additional borrowing,” said Westpac senior economist Andrew Hanlan.

He said the business sector was responding to strong household demand as well a generous tax incentives and expects demand to remain strong and thus “be supportive of underlying lending for the business sector during 2022.”

Owner-occupier loans accounted for about 45% of the net growth over the month, while business loans and investor loans accounted for around 35% and 20% respectively. Total personal debt shrank again.

The traditional driver of loan growth rates, the owner-occupier segment, grew by 0.8% over the month, in line with increases from August onwards. The sector’s 12-month growth rate accelerated from 9.6% to 9.8%.

Total lending in the business sector grew by 0.6%, slightly below the long-term monthly average but considerably less than the 1.1% increase recorded in December. The segment’s annual growth rate increased from 8.4% to 9.0

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 late 2020. Growth rates then became positive again from December 2020. In January, net lending grew by 0.4%, slightly slower than December’s 0.5%. The 12-month growth rate accelerated from 3.4% to 3.7%.

Total personal loans fell by 0.6% in January, a slightly slower rate of contraction than December’s -0.8%, maintaining the annual contraction rate at 3.8%. This category of debt includes fixed-term loans for large personal expenditures, credit cards and other revolving credit facilities.

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Inflation Gauge hits 3.5% in February

28 February 2022

Summary: Melbourne Institute Inflation Gauge index up 0.5% in February; index up 3.5% on annual basis; bond yields fall sharply on day; cash futures imply no rate rise until after June.

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 0.5% in February. The rise follows a 0.4% increase in January and a 0.2% increase in December. On an annual basis, the index rose by 3.5%, up from January’s 3.0%.

Commonwealth Government bond yields fell sharply on the day as investors reassessed central banks’ plans in light of events relating to Ukraine and financial sanctions on Russia. By the close of business, the 3-year ACGB yield had shed 13bps to 1.58%, the 10-year yield had lost 9bps to 2.15% while the 20-year yield finished 11bps lower at 2.55%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.05%, remained fairly soft for the next few months. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until June and then rise to 0.40% by August. February 2023 contracts implied a cash rate of 1.305%.

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 relatively recent obsession among central banks, including the RBA, to increase inflation.

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January US core PCE inflation tops 5%

25 February 2022

Summary: US Fed’s favoured inflation measure up 0.5% in January; in line with expectations; annual rate accelerates from 4.9% to 5.2%; indicates a “broadening of inflation pressures”, highest core reading since April 1983; Treasury bond yields hardly move, rate rises firm up.

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 3% during 2021.

The latest figures have now been published by the Bureau of Economic Analysis as part of the January personal income and expenditures report. Core PCE prices rose by 0.5% over the month, in line with expectations as well as December’s increase. On a 12-month basis, the core PCE inflation rate accelerated from December’s 4.9% to 5.2%.

ANZ Head of Australian Economics David Plank said the report indicated “a broadening of inflation pressures” and noted core PCE had not been this high since April 1983. “Russia’s invasion of Ukraine is likely to add to global food price inflation, already rampant,” he added.

US Treasury bond yields barely moved on the day. By the close of business, 2-year and 10-year Treasury bond yields had both returned to their respective starting points at 1.57% and 1.97% while the 30-year yield finished 1bp lower at 2.28%.

In terms of US Fed policy, expectations of a higher federal funds rate over the next 12 months firmed up. At the close of business, March contracts implied an effective federal funds rate of 0.24%, 16bps higher than the current spot rate. June contracts implied a rate of 0.825% while March 2023 futures contracts implied an effective federal funds rate of 1.825%, 175bps 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.

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Capex up in December quarter; reflects capacity constraints, supply-chain disruptions

24 February 2022

Summary: Private capital expenditures up 1.1% in December quarter; less than 2.5% expected; reflects capacity constraints, supply-chain disruptions; 2021/22 capex estimate 1.2% higher than November’s estimate, 16.0% higher than comparable estimate from 2020/21; 2021/22 capex expectations not as strong as expected, usual upgrades occur earlier.

Australia’s private capital expenditure (capex) spiked early in the 2010s on the back of investment in the mining sector. As projects were completed, capex growth rates fell away and generally remained negative for a good part of a decade. Capex as a percentage of GDP is now back to a level more in line with the 30-year average.

According to the latest ABS figures, seasonally-adjusted private sector capex in the December quarter increased by 1.1%. The result was less the 2.5% rise which had been expected but in contrast to the September’s revised figure of -1.1%. On a year-on-year basis, total capex increased by 9.8% after recording an annual rate of +13.4% in the previous quarter.

NAB economist Taylor Nugent said the lower-than-expected result “are more likely to be a reflection of capacity constraints and supply-chain disruptions rather than a negative signal for the demand outlook.”

Commonwealth Government bond yields dropped on the day as investors fled equity markets on news of Russia’s invasion of Ukraine. By the close of business, the 3-year Treasury bond yield had shed 9bps to 1.66% while 10-year and 20-year yields each finished 11bps lower at 2.17% and 2.61%.

Expectations of the cash rate’s path over time were pulled lower in the cash futures market. 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 0.47% by August. February 2023 contracts implied a cash rate of 1.355%.

The report also contains capex estimates for the current financial year. The latest capex estimate for the 2021/22 financial year, Estimate 5, is $140.8 billion, 1.7% higher than November’s Estimate 4 and 16.0% higher than Estimate 5 of the 2020/21 financial year.

“Expectations for 2021/22 capex were not as strong as we expected in Q4, after a very strong upgrade in Q3, said ANZ senior economist Adelaide Timbrell. “When we look at the difference between Q2 expectations and Q4, the six-month change is close to the average for the previous five years. So rather than firms getting shaky about Omicron, we think it’s more likely that their usual upgrade in expectations occurred earlier than usual.”

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Delta disruptions to Dec quarter construction more extended than anticipated

23 February 2022

Summary: Construction spending declines 0.4% in December quarter; fall contrasts with 2.5% increase expected; delta disruptions more extended than anticipated; residential sector down 2.9%, non-residential building up 1.3%, engineering up 0.7%.

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 December quarter declined by 0.4%. The fall was in contrast with the 2.5% increase which had been expected but it was not as large as the September quarter’s 1.4% decrease after it was revised down from -0.3%. On an annual basis, the growth rate remained unchanged at 2.9%.

“The disruptions associated with the delta outbreak had a more extended impact than anticipated, particularly in Victoria, where several lockdowns have distorted the profile of activity,” said Westpac senior economist Andrew Hanlan.

The figures were released at the same time as the latest Wage Price Indices and domestic Treasury bond yields moved noticeably higher on the day. By the close of business, the 2-year ACGB yield had jumped 8bps to 1.75%, the 10-year yield had gained 7bps to 2.28% while the 20-year yield finished 4bps higher at 2.72%.

In the cash futures market, expectations of the actual cash rate’s path over time remained largely unchanged. 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 0.555% by August. February 2023 contracts implied a cash rate of 1.445%.

“Looking through the noise created by delta, the construction sector is experiencing an underlying uptrend in work. This is in response to substantial policy stimulus; notably, record low interest rates, the HomeBuilder program and additional public works,” Hanlan added.

Residential building construction expenditures fell by 2.9%, down from the September quarter’s -0.8% after revisions. On an annual basis, expenditure in this segment was 0.6% higher than the December 2020 quarter, down from the September quarter’s revised figure of 7.2%.

Non-residential building spending increased by 1.3%, in contrast with the previous quarter’s -1.2%. On an annual basis, expenditures were 4.1% higher than the December quarter of 2020. The September quarter’s comparable figure was 0.3% after revisions.

Engineering construction increased by 0.7% in the quarter, a turnaround from to the previous quarter’s -1.5% after revisions. On an annual basis, spending in this segment was 4.2% higher than the December 2020 quarter, up from the September quarter’s comparable figure of +1.0% after revisions.

“Victoria is once again the source of surprise,” said Westpac senior economist Andrew Hanlan. He noted construction work in Victoria had increased by 5.8% while in other states jurisdictions construction had increased by 1.1%.

Quarterly construction data compiled and released by the ABS are not considered to be of a “primary” nature in the same way as 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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US households slightly less confident in February

22 February 2022

Summary: Conference Board Consumer Confidence Index deteriorates slightly in February; reading slightly essentially in line with consensus expectations; view of present conditions improve, short-term outlook deteriorate; inflation concerns pick up but relatively confident about short-term growth; households neutral regarding economic conditions.

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 two weeks of February indicated US consumer confidence has deteriorated slightly. February’s Consumer Confidence Index registered 110.5 on a preliminary basis, a reading which was essentially in line with the median consensus figure of 110.0 but slightly below January’s final figure of 111.1.

Consumers’ views of present conditions improved a little while their outlook for the near-future deteriorated slightly. The Present Situation Index crept up from a revised figure of 144.5 to 145.1 while the Expectations Index declined from a revised figure of 88.8 to 87.5.

Lynn Franco, a senior director at The Conference Board said inflation concerns picked up among households but “consumers remain relatively confident about short-term growth prospects.”

US Treasury bond yields jumped at the short end but remained almost unchanged elsewhere along the curve on the day. By the close of business, the 2-year Treasury bond yield had gained 7bps to 1.54%, the 10-year yield had returned to its starting point at 1.93% while the 30-year yield finished 1bp lower at 2.23%.

In terms of US Fed policy, expectations for a higher federal funds rate over the next 12 months hardened noticeably. At the close of business, March contracts implied an effective federal funds rate of 0.265%, 19bps higher than the current spot rate. June contracts implied a rate of 0.90% while March 2023 futures contracts implied an effective federal funds rate of 1.825%, 175bps above the spot rate.

Franco also said households remained fairly neutral regarding economic conditions. However, he expects household confidence and spending “will continue to face headwinds from rising prices in the coming months.”

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.

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German economy betting on end of virus crisis: ifo

22 February 2022

Summary: ifo business climate index up 2.9 to 98.9 in February, above expected figure; expectations, current conditions indices both up; German betting on end of coronavirus crisis; expectations index implies euro-zone GDP expansion of 1.4% in year to May 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 which lasted until early 2021. Readings through the remainder of that year generally fluctuated around the long-term average.

According to the latest report released by ifo, German business sentiment has improved. February’s Business Climate Index recorded a reading of 98.9, above the expected reading of 96.4 as well as January’s final reading of 96.0. The average reading since January 2005 is just above 97.

“Companies were more satisfied with their current business. There was a marked improvement in expectations. The German economy is betting on an end to the coronavirus crisis,” said Clemens Fuest, President of the ifo Institute. The Ukrainian situation “remains a risk factor,” he added.

German firms’ views of current conditions and the outlook both improved. The expectations index increased from January’s revised figure of 95.8 to 99.2 while the current situation index rose from 96.2 to 99.2.

German and French long-term bond yields increased modestly on the day. By the close of business, the German 10-year bund rate had gained 3bps to 0.23% while the French 10-year OAT yield finished 1bp higher at 0.72%.

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. February’s expectations index implies a 1.7% year-on-year expansion in GDP to the end of May 2022.

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US leading index slides in January; “continued, albeit slower, economic growth”

18 February 2022

Summary: US leading index down 0.3% in January; in contrast with +0.2% expected; first decline since February 2021; points to “continued, albeit slower, economic growth” into northern spring; forecasts 3.5% growth for calendar 2022.

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.

The latest reading of the LEI indicates it declined by 0.3% in January. The result contrasted with the +0.2% consensus forecast as well as December’s revised figure of 0.7%. On an annual basis, the LEI growth rate slowed from 9.4% to 8.5%.

“Initial claims for unemployment insurance, consumers’ outlook and declines in stock prices, and the average work week in manufacturing all contributed to the decline, the first since February 2021,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board.

US long-term Treasury bond yields fell noticeably on the day as investors moved to lower-risk assets. By the close of business, the 10-year yield had lost 5bps to 1.92% and the 30-year Treasury yield had shed 6bps to 2.24%. The 2-year yield finished unchanged at 1.47%.

In terms of US Fed policy, expectations for the federal funds range over the next 12 months softened a little while still implying a swag of 25bps rises. April contracts implied an effective federal funds rate of 0.395%, 32bps higher than the current spot rate. June contracts implied a rate of 0.815% while March 2023 futures contracts implied an effective federal funds rate of 1.715%, 165bps above the spot rate.

Ozyildirim noted “widespread strengths” among the LEI’s components and said they “still point to continued, albeit slower, economic growth into the spring.”

The Conference Board forecasts March quarter GDP growth “to slow somewhat from the very rapid pace of Q4 2021” but still grow by 3.5% over calendar year 2022. Regression analysis suggests the latest reading implies a 4.5% year-on-year growth rate in April, down from March’s 4.9%.

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