News

27 January 2022

Summary:  US GDP up 1.7% (6.9% annualised) in December quarter, more than 1.4% expected; inventory main driver of result; GDP price deflator annual rate rises from 5.5% to 6.4%.

US GDP growth slowed in the second quarter of 2019 before stabilising at about 0.5% per quarter. At the same time, US bond yields suggested future growth rates would be below trend. The US Fed agreed and it reduced its federal funds range three times in the second half of 2019. Pandemic restrictions in the June quarter of 2020 sent parts of the US economy into hibernation; the lifting of those same restrictions sparked a rapid recovery.

The US Bureau of Economic Analysis has now released December quarter “advance” GDP estimates and they indicate the US economy expanded by 1.7% or at an annualised growth rate of 6.9%. The figure was higher than the +1.4% (+5.7% annualised) which had been generally expected as well as the September quarter’s 0.6% expansion after revisions.

“A large driver of growth was a lift in inventories, which contributed 4.9% to quarterly growth,” said ANZ economist Kishti Sen. “Net exports of goods and services were flat in the quarter. Government spending subtracted 0.5%.”

US GDP numbers are published in a manner which is different to most other countries; quarterly figures are compounded to give an annualised figure. In countries such as Australia and the UK, an annual figure is calculated by taking the latest number and comparing it with the figure from the same period in the previous year. The diagram above shows US GDP once it has been expressed in the normal manner, as well as the annualised figure.

US Treasury bond yields moved higher at the short end but noticeably lower at the long end on the day. By the end of it, the 2-year Treasury bond yield had added 3bps to 1.19% while the 10-year yield had lost 7bps to 1.81% and the 30-year yield had shed 9bps to 2.09%.

In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months firmed slightly in favour of earlier rate rises. Federal funds futures contracts for March implied an effective federal funds rate of 0.23%, 15bps above the current spot rate, while April contracts implied an effective federal funds rate of 0.385% and June contracts implied 0.67%. February 2023 futures contracts implied an effective federal funds rate of 1.345%, 127bps above the spot rate.

One part of the report which is often overlooked are the figures regarding the GDP price deflator, which is another measure of inflation. The GDP price deflator is restricted to new, domestically-produced goods and services and it is not based on a fixed basket as is the case for the consumer price index (CPI). The annual rate rose from the September quarter’s revised figure of 5.5% to 6.4%.

25 January 2022

Summary: Conference Board Consumer Confidence Index declines in January; reading slightly above expected figure; views of present conditions improve, short-term outlook less rosy; US economy on “solid footing” but moderating growth likely in first quarter; inflation concerns decline for second month but remain “elevated”.

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 from the survey 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 January indicated US consumer confidence has deteriorated marginally after a modest improvement in December. January’s Consumer Confidence Index registered 113.8 on a preliminary basis, a reading which was slightly above the median consensus figure of 111.9 but less than December’s final figure of 115.2.

Consumers’ views of present conditions improved while their outlook for the near-future deteriorated. The Present Situation Index increased from a revised figure of 144.8 to 148.2 while the Expectations Index declined from a revised figure of 95.4 to 90.8.

“The Present Situation Index improved, suggesting the economy entered the new year on solid footing. However, expectations about short-term growth prospects weakened, pointing to a likely moderation in growth during the first quarter of 2022,” said Lynn Franco, a senior director at The Conference Board.

US Treasury bond yields jumped at the short end but rose much modestly elsewhere along the curve on the day. By the close of business, the 2-year Treasury bond yield had gained 6bps to 1.03% while 10-year and 30-year yields both finished 1bp higher at 1.78% and 2.13% respectively.

In terms of US Fed policy, expectations for the federal funds range over the next 12 months moved a little more in favour of more rate rises. April contracts implied an effective federal funds rate of 0.345%, 26bps higher than the current spot rate while June contracts implied 0.57%. February 2023 futures contracts implied an effective federal funds rate of 1.125%, 105bps above the spot rate.

Franco noted respondents’ inflation concerns declined for a second month “but remain elevated after hitting a 13-year high in November 2021.” He expects households will “continue to be challenged by rising prices and the ongoing pandemic.”

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.

25 January 2022

Summary: ifo business climate index up 2.5 to 95.7 in January, above expected figure; expectations index up, current conditions index down; German economy starting new year with “glimmer of hope”; expectations index implies euro-zone GDP contraction of 1.5% in year to April 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 over the past six months have declined.

According to the latest figures released by the Institute, its business climate index increased to 95.7 in January. The reading was above the expected reading of 94.4 as well as December’s final reading of 94.8. The average reading since January 2005 is just above 97.

“While companies’ assessments of the current situation were somewhat less positive, their expectations improved considerably,” said Clemens Fuest, President of the ifo Institute. “The German economy is starting the new year with a glimmer of hope.”

The expectations index increased from December’s revised figure of 92.7 to 95.2, driving the business climate index higher. The current situation index declined slightly from 96.9 to 96.1.

German and French long-term bond yields increased moderately on the day. By the close of business, German and French 10-year yields had each gained 3bps to -0.08% and 0.33% respectively.

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.  January’s expectations index implies a 1.4% year-on-year contraction rate to the end of April 2022.

25 January 2022

Summary: Business conditions deteriorate slightly in December; noticeably larger fall in confidence; businesses facing “growing worker shortages”; capacity utilisation rate drops; 6 of 8 sectors of economy at/above respective long-run averages; price pressures continue.

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, declining to below-average levels by the end of 2018. Forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 and the index trended lower, hitting a nadir in April 2020 as pandemic restrictions were introduced. Conditions improved markedly over the next twelve months, only to revert back to more normal levels in the latter part of 2021.

According to NAB’s latest monthly business survey of over 390 firms conducted over the first two weeks of January, business conditions have deteriorated slightly. NAB’s conditions index registered 8, down from November’s revised reading of 11.

“The fall in business conditions was driven by the employment component, which fell despite strong jobs growth reported in official data, reflecting the complexity of the labour market situation as businesses faced growing worker shortages and the prospect of a ‘shadow lockdown’ through the summer,” said NAB senior economist Brody Viney.

Business confidence also deteriorated but the change was noticeably larger. NAB’s confidence index fell from November’s reading of 12 to -12, a reading well below 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.

The report was released on the same day as the December quarter’s CPI figures and Commonwealth Government bond yields increased on the day. By the close of business, the 3-year ACGB yield had gained 5bps to 1.46%, the 10-year yield had inched up 1bp to 1.97% while the 20-year yield finished 3 bps higher at 2.48%.

In the cash futures market, expectations of a change in the actual cash rate firmed a little in favour of earlier rate rises. At the end of the day, contract prices implied the cash rate would rise gradually from the current rate of 0.050% to 0.14% by April, then increase to 0.58% by August and then to 1.25% by February 2023.

NAB’s measure of national capacity utilisation dropped from November’s figure of 83.2% to 80.6%. Six of the eight sectors of the economy were reported to be operating at or above their respective long-run averages. The transport/ utilities and recreational/personal services sectors were the exceptions.

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

The report also contained several references to inflationary pressures. “Price pressures also continued in December, with both reported labour and purchase cost growth near record levels,” said Viney. Wholesale prices increased “from an already high rate” while retail prices increased at “2% in quarterly terms”, or over 8% when annualised. “With significant disruption to supply chains and labour markets, price pressures are to be expected and the key question will be how quickly, if at all, these pressures abate over coming months.”

21 January 2022

Summary: Euro-zone households slightly less optimistic in January; index falls 0.1 points to -8.5; still above long-term average; euro-zone sovereign bond yields moderately lower as equity markets fall.

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 slid back towards the long-term average.

Consumer confidence deteriorated in January according to the latest survey conducted by the European Commission. Its Consumer Confidence Indicator recorded a reading of -8.5, essentially in line with the -8.7 which had been generally expected and slightly lower than December’s figure of -8.4. However, the current reading is still above the long-term average of -11.6.

Sovereign bond yields fell moderately in major euro-zone bond markets on the day as equity market suffered sizable falls. By the end of it, the German 10-year bund yield had shed 5bps to -0.07% while the French 10-year OAT yield lost 3bps to -0.7%.

21 January 2022

Summary: US leading index up 0.8% in December, in line with expectations; on rising trajectory, US economy to expand well into northern spring; “headwinds” may moderate economic growth; Conference Board forecasts 0.5% growth for March quarter.

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 rose by 0.8% in December. The result was in line with the consensus forecast slightly above the 0.8% increase and slightly larger than November’s revised figure of 0.7%. On an annual basis, the LEI growth rate accelerated from 8.7% to 9.2%.

“The US LEI ended 2021 on a rising trajectory, suggesting the economy will continue to expand well into the spring,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board.

US Treasury bond yields fell on the day as US equity markets were sold off and investors moved into lower-risk assets. By the close of business, the 2-year yield had lost 2bps to 1.01%, the 10-year Treasury yield had shed 5bps to 1.76 while the 30-year yield finished 4bps lower at 2.08%.

In terms of US Fed policy, expectations for the federal funds range over the next 12 months remained largely intact. April contracts implied an effective federal funds rate of 0.335%, 25bps higher than the current spot rate while June contracts implied 0.55%. February 2023 futures contracts implied an effective federal funds rate of 1.13%, 105bps above the spot rate.

While the LEI’s reading pointed to robust growth in the short-term, Ozyildirim noted some ongoing impediments. “For the first quarter, headwinds from the omicron variant, labour shortages and inflationary pressures, as well as the Federal Reserve’s expected interest rate hikes, may moderate economic growth.”

The Conference Board currently forecasts an expansion of around 0.5% in the March quarter, or 2.2% annualised and 3.5% for calendar year 2022. Regression analysis suggests the latest reading implies a 4.7% year-on-year growth rate in March, up from February’s 4.5%.

19 January 2022

Summary: Household sentiment deteriorates mildly in January; “surprisingly solid result” given omicron spread; still above long-term average; states impacted by ‘delta’ lockdowns “less unsettled” than other states; three of five sub-indices lower.

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.

According to the latest Westpac-Melbourne Institute survey conducted in the week beginning 10 January, household sentiment has again deteriorated mildly. Their Consumer Sentiment Index declined from December’s reading of 104.3 to 102.2, maintaining a run of slightly-above average readings.

“This is a surprisingly solid result given the rapid spread of the omicron COVID variant over the last month,” said Westpac Chief Economist Bill Evans. “The 2% decline compares to the 5.2% drop seen in the first month of the delta outbreak in New South Wales, a 6.1% drop heading into Victoria’s ‘second wave’ outbreak in 2020 and the epic 17.7% collapse when the pandemic first hit in early 2020.”

Any reading of the Consumer Sentiment Index above 100 indicates the number of consumers who are optimistic is greater than the number of consumers who are pessimistic. The latest figure is still slightly above the long-term average reading of just over 101.

Domestic Treasury bond yields increased moderately on the day. By the close of business, the 2-year ACGB yield had gained 4bps to 1.42%, the 10-year yield had added 5bps to 2.03% while the 20-year yield finished 4bps higher at 2.52%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.05%, remained fairly soft until May. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until April 2022 and then rise to 0.31% by June. February 2023 contracts implied a cash rate of 1.18%.

“Consumers in states impacted by ‘delta’ lockdowns appear to have been less unsettled by the rapid spread of the omicron variant than those in states experiencing their first major wave of COVID infections,” noted Evans. New South Wales and Victoria recorded increases in their respective sentiment indices whereas the readings for Queensland, Western Australia and South Australia all fell.

Three of the five sub-indices registered lower readings, with the “Economic conditions – next 12 months” sub-index posting the largest monthly percentage loss. Readings for the sub-indices “Family finances versus a year ago” and “Time to buy a major household item” both improved.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, rose from 104.1 to 112.7. Higher readings result from more respondents expecting a higher unemployment rate in the year ahead.

14 January 2022

Summary:  US retail sales down 1.9% in December, fall greater than 0.1% decline expected; highest inflation in 40 years impacting consumer behaviour; ongoing congestion at US ports, Omicron hampering production, consumption “everywhere”;  falls in nine of twelve retail categories; “Non-store” segment” the largest single influence, falls 8.7%.

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” sales numbers released by the US Census Bureau, total retail sales declined by 1.9% in December. The fall was greater than the 0.1% decline which had been generally expected and in contrast to November’s +0.2% after it was revised down from 0.3%. On an annual basis, the growth rate slowed from November’s revised figure of 18.2% to 16.9%.

“The data suggest the highest inflation in 40 years is impacting consumer behaviour and this may well extend into Q1, when the end of the child tax credits will also weigh,” said ANZ Head of Australian Economics David Plank.

US Treasury bond yields moved noticeably higher on the day. By the close of business, the 2-year Treasury yield had gained 7bps to 0.96%, the 10-year yield had added 9bps to 1.79% while the 30-year yield finished 8bps higher at 2.12%.

Plank noted supply shortages have not helped. He noted ongoing congestion at US ports while “Omicron is hampering production and consumption everywhere.”

Nine of the twelve categories recorded lower sales over the month. The “Non-store retailers” segment, provided the largest single influence on the overall result, falling by 8.7% for the month, although this segment still managed a 10.7% rise for 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 a little over 14% of all US retail sales and it has become the second largest segment after the vehicles and parts segment.

14 January 2022

Summary: US industrial output down 0.1% in December, contrasts with 0.2% expected; up 3.7% over past 12 months; weakness driven by vehicles, parts; capacity utilisation rate down 0.1ppt to 76.5%; above February 2020 figure, still well 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 but then began recovering in subsequent months.

According to the Federal Reserve, US industrial production contracted by 0.1% on a seasonally adjusted basis in December. The result was in contrast to the 0.2% increase which had been generally expected as well as November’s 0.7% expansion. On an annual basis, the expansion rate slowed from November’s figure of 5.0% to 3.7%.

“The weakness in manufacturing was driven by a 1.3% drop in auto vehicles and parts,” said ANZ Head of Australian Economics David Plank.

US Treasury bond yields moved noticeably higher on the day. By the close of business, the 2-year Treasury yield had gained 7bps to 0.96%, the 10-year yield had added 9bps to 1.79% while the 30-year yield finished 8bps higher at 2.12%.

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%. December’s reading slipped from 76.6% to 76.5%, still above February 2020’s reading of 76.3% but still well 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.

14 January 2022

Summary: US consumer confidence remains weak in January; University of Michigan index below consensus figure; views of present conditions, future conditions both deteriorate; decline attributed to infections, escalating inflation rate.

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

The latest survey conducted by the University indicates confidence among US households remained weak on average in January. The preliminary reading of the Index of Consumer Sentiment registered 68.8, below the generally expected figure of 70.0 and December’s final figure of 70.6. Consumers’ views of current conditions and expectations regarding future conditions both deteriorated in comparison to those held at the time of the December survey.

“While the Delta and Omicron variants certainly contributed to this downward shift, the decline was also due to an escalating inflation rate. Three-quarters of consumers in early January ranked inflation, compared with unemployment, as the more serious problem facing the nation,” said the University’s Surveys of Consumers chief economist, Richard Curtin.

US Treasury bond yields moved noticeably higher on the day. By the close of business, the 2-year Treasury yield had gained 7bps to 0.96%, the 10-year yield had added 9bps to 1.79% while the 30-year yield finished 8bps higher at 2.12%.

Less-confident households are generally inclined to spend less and save more; some decline in household spending could be expected to follow. As private consumption expenditures account for a majority of GDP in advanced economies, a lower rate of household spending growth would flow through to lower GDP growth if other GDP components did not compensate.