News

13 October 2021

Summary: Household sentiment deteriorates slightly in October; consumers “relatively upbeat” despite NSW, Vic lockdowns; still above long-term average; little difference in largest states’ readings; three of five sub-indices lower; unemployment index 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 early October, household sentiment has deteriorated slightly. Their Consumer Sentiment Index declined from September’s reading of 106.2 to 104.6.

“Despite both Sydney and Melbourne remaining in lock down throughout the last month, consumers are relatively upbeat,” said Westpac Chief Economist Bill Evans.

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 above the long-term average reading of just over 101.

Domestic Treasury bond yields fell noticeably on the day, somewhat outpacing the overnight movements of their US Treasury counterparts. By the close of business, the 3-year ACGB yield had shed 3bps to 0.73%, the 10-year yield had lost 8bps to 1.66% while the 20-year yield finished 9bps lower at 2.24%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.03%, remained fairly soft. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until July 2022 and then rise to 0.43% by February 2023.

Evans noted there was “little difference in the state readings”, with the four largest states each producing a similar reading to the national reading. “Consumers in New South Wales and Victoria are clearly looking towards their states reopening as vaccine coverage reaches globally competitive rates.”

Three of the five sub-indices registered lower readings, with the “Economic conditions – next 5 years” sub-index posting the largest monthly percentage fall.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, declined from 120.5 to 107.1. Lower readings result from fewer respondents expecting a higher unemployment rate in the year ahead.

12 October 2021

Summary: Business conditions deteriorate in September; ANZ expects September to be “low point”; confidence up markedly; driven by large shifts in NSW, Victoria following reopening roadmap announcements, rising vaccination rates; economy shows considerable resilience, rebound expected; capacity utilisation rate declines again; four of eight sectors of economy below 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, 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 fall markedly in the middle of this year.

According to NAB’s latest monthly business survey of over 500 firms conducted over the last two weeks of September, business conditions have deteriorated. NAB’s conditions index registered 5, down from August’s reading of 14.

“While there has been some volatility over the past few months as different regions of the country move in and out of lockdowns and restrictions are eased and tightened, we expect this will be the low point, with New South Wales already progressing to its next stage of reopening,” said ANZ senior economist Catherine Birch.

In contrast, business confidence improved markedly. NAB’s confidence index rose from August’s revised reading of -6 to 13, back 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.

“The improvement was driven by large shifts in confidence in New South Wales and Victoria following the announcement of reopening roadmaps in these states as well as rising vaccination rates across the country,” said NAB senior economist Brody Viney.

Short-term Commonwealth Government bond yields increased noticeably on the day. By the end of it, the 3-year ACGB yield had added 6bps to 0.77% while 10-year and 20-year yields each slipped 1bp to 1.74% and 2.33% respectively.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, remained largely unchanged. At the end of the day, contract prices implied the cash rate would rise to around 0.46% by February 2023.

“Overall, the economy has shown considerable resilience through the most recent round of lockdowns, supported by policy and adaptations learned through past lockdown experiences, but this resilience may be wearing thin,” said NAB’s Viney. He currently expects a “strong rebound” while noting the presence of uncertainties associated with future consumer behaviour and government policy settings.

NAB’s measure of national capacity utilisation indicated it had declined again, falling from August’s revised figure of 80.1% to 78.4%. Four of the eight sectors of the economy were reported to be operating below their respective long-run averages. The mining, manufacturing, transport/utilities and construction sectors were reported to be still operating at or above average levels.

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

12 October 2021

Summary: US quit rate hits series high of 2.9% in August JOLTS report; “reflective of ease which workers switching jobs”; quits, separations up, job openings down.

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 but proceeded to recover back to its pre-pandemic rate in the third quarter of 2020.

Figures released as part of the most recent Job Openings and Labor Turnover Survey (JOLTS) report show the quit rate hit a new series high in August. 2.9% of the non-farm workforce left their jobs voluntarily, up from July’s 2.7%. There were 242,000 more quits during the month, offsetting an additional 366,000 people employed in the non-farm sector in percentage terms.

Ray Attrill, NAB’s Head of FX Strategy within its FICC division, said the current quit rate is “reflective of the ease which workers are switching jobs, in part at least for better pay or conditions elsewhere.”

Shorter-term US Treasury bond yields rose while longer-term yields fell on the day. By the close of business, the 2-year Treasury yield had gained 3bps to 0.34%, the 10-year yield had shed 4bps to 1.57% and the 30-year yield finished 8bps lower at 2.08%.

The rise in total quits was led by 157,000 more resignations in the “Accommodation and food services” sectors while the “Real estate and rental and leasing” sector experienced the single largest decline, falling by 23,000. Overall, the total number of quits for the month rose from July’s revised figure of 4.028 million to 4.270 million.

In contrast, total vacancies at the end of August decreased by 659,000, or 5.9%, from July’s revised figure of 11.098 million to 10.439 million. The drop was driven by a 240,000 fall in the “State and local government” sector, a 224,000 fall in the “Health care and social assistance” sector and a 178,000 fall in the “Accommodation and food services” sector. Overall, 12 out of 18 sectors experienced fewer job openings than in the previous month.

Total separations increased by 211,000, or 3.6%, from July’s revised figure of 5.792 million to 6.003 million. The rise was led by the “Accommodation and food services” sector, where there were 203,000 more separations than in July. Separations increased in 11 out of 18 sectors.

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.

08 October 2021

Summary: Non-farm payrolls increase by 194K in September; well below expectations; previous two months’ figures revised up by 169K; jobless rate down to 4.8%, participation rate ticks down to 61.6%; “a big miss” but upward revisions, lower jobless rate, higher hourly wages counteract; jobs-to-population ratio increases to 58.7%; jobs growth “should be sufficient” for Fed to taper; underutilisation rate falls from 8.8% to 8.5%; annual hourly pay growth increases to 4.5%.

The US economy ceased producing jobs in net terms as infection controls began to be implemented in March 2020. The unemployment rate had been around 3.5% but that changed as job losses began to surge through March and April of 2020. The May 2020 non-farm employment report represented a turning point and subsequent months provided substantial employment gains. Changes in recent months have been generally more modest but still well above the long-term monthly average.

According to the US Bureau of Labor Statistics, the US economy created an additional 194,000 jobs in the non-farm sector in September. The increase was well below the 500,000 which had been generally expected earlier in the week and just over half the 366,000 jobs which had been added in August after revisions. However, employment figures for July and August were revised up by a total of 169,000.

The unemployment rate fell from August’s rate of 5.2% to 4.8%. The total number of unemployed decreased by 710,000 to 7.674 million while the total number of people who are either employed or looking for work decreased by 184,000 to 161.354 million. The decline was enough to tick the participation rate down from August’s rate of 61.7% to 61.6%.

NAB currency strategist Rodrigo Catril described the report as “a big miss” but noted previous month’s revisions, the lower jobless rate and higher hourly wage growth “resulted in a relative subdued reaction by markets…”

Longer-term US Treasury yields rose moderately on the day. By the close of business, the 10-year bond yield had gained 4bps to 1.61 and the 30-year yield had increased by 3bps to 2.16%. The 2-year yield unchanged at 0.31%.

ANZ economist Hayden Dimes said, “Average jobs growth this year should be sufficient to keep the Fed tapering announcement on track for next month.”

NAB’s Catril agreed, stating “the inner strength in the report suggests the numbers have past the Fed’s test for a “reasonable enough” report to allow for a QE tapering announcement in November.”

One figure which is indicative of the “spare capacity” of the US employment market is the employment-to-population ratio. This ratio is simply the number of people in work divided by the total US population. It hit a cyclical-low of 58.2 in October 2010 before slowly recovering to just above 61% in late-2019. September’s reading increased from 58.5% to 58.7%, still some way from its April 2000 peak reading of 64.7%.

Wage growth spiked in the US during the early stages of pandemic restrictions as lower-paid jobs disappeared at a faster rate relative to higher-paid jobs, disrupting the usual relationship between wage inflation and unemployment rates. Normally, wages tend to grow as the supply of labour tightens.

One measure of tightness in the labour market is the underutilisation rate. In September, this measure fell from 8.8% to 8.5%. Hourly pay growth over the previous 12 months accelerated from August’s revised rate of 4.1% to 4.6%.

06 October 2021

Summary: ADP payrolls up by 568K in September, more than consensus expectation; August increase revised down by 34K; provides “some early encouragement” withdrawal of pandemic jobless benefits encouraging take-up of jobs”; figures up across firms of all sizes, bias towards large firms; around 80% of gain in services sector, led again by leisure/hospitality sector; tapering trigger for Fed should upcoming non-farm payroll report meet expectations.

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 568,000 in September, more than the 430,000 which had been generally expected. August’s increase was revised down by 34,000 to 340,000.

Short-term US Treasury yields moved a little higher on the day while longer-term yields slid a touch. By the close of business, the 2-year Treasury bond yield had added 2bps to 0.30% while the 10-year yield slipped 1bp to 1.52% and the 30-year yield shed 2bps to 2.08%.

In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months remained soft. Federal funds futures contracts for September 2022 implied an effective federal funds rate of 0.175%, about 10bps above the current spot rate.

ANZ economist John Bromhead said the report “provided some early encouragement” the withdrawal of pandemic unemployment benefits “may be encouraging the take-up of jobs” alongside signs of an easing in US coronavirus infections.

Employment numbers in net terms increased across businesses of all sizes, with a strong bias towards large firms. Firms with less than 50 employees filled a net 63,000 positions, mid-sized firms (50-499 employees) gained 115,000 positions while large businesses (500 or more employees) accounted for 390,000 additional employees.

Employment at service providers accounted for a little under 80% of the total net increase, or 466,000 positions. The “Leisure & Hospitality” sector was the largest single source of gains for a sixth consecutive month, with 226,000 additional positions. Total jobs among goods producers increased by a net 102,000 positions.

Prior to the ADP report, the consensus estimate of the change in August’s non-farm employment figure was 500,000. The non-farm payroll report will be released by the Bureau of Labor Statistics this coming Friday night (AEST), 8 October.

Ray Attrill, NAB’s Head of FX Strategy within its FICC division, said such an increase would be “likely good enough to trigger the Fed into a QE tapering announcement next month.”

05 October 2021

Summary:  Job ads down 2.8% in September; 60.8% higher than same month in 2020; employment “likely to fall heavily in Victoria in September”; ads-to-workforce ratio slightly lower.

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 decreased by 2.8% in September on a seasonally-adjusted basis. The fall followed declines of 2.7% and 1.5% in August and July respectively after revisions. On a 12-month basis, total job advertisements were 60.8% higher than in September 2020, down from August’s comparable figure of 80.1%.

“So far, employment losses have been concentrated in New South Wales but employment is likely to fall heavily in Victoria in September. Again, the youngest workers and those in the lowest-earning occupations are being hit hardest,” said ANZ senior economist Catherine Birch.

Longer-term Commonwealth Government bond yields rose on the day, largely in line with movements of their US Treasury counterparts. By the close of business, the 10-year ACGB yield had added 2bps to 1.54% and the 20-year yield had gained 3bps to 2.17%. The 2-year yield finished unchanged at 0.51%.

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. 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.

04 October 2021

Summary: Melbourne Institute Inflation Gauge index up 0.3% in September; index up 2.7% on annual basis; bond yields little changed at end of day.

Despite the RBA’s desire for a higher inflation rate, ostensibly to combat recessions, attempts to accelerate inflation through record-low interest rates have failed to date. The RBA’s stated objective is to achieve an inflation rate of between 2% and 3%, “on average, over time.” Australia’s inflation rate had been trending downwards at a modest rate after the GFC but the “coronavirus recession” then crushed it in the June quarter of 2020. Since then, the inflation rate has picked up, initially aided by what economists call “base effects”.  The Melbourne Institute’s latest reading of its Inflation Gauge index indicates consumer inflation increased by 0.3% in September. The rise follows a flat result in August and a 0.5% increase in July. On an annual basis, the index rose by 2.7%, accelerating from August’s comparable figure of 2.5%.

Commonwealth Government bond yields were little changed on the day. By the close of business, the 3-year ACGB yield had inched up 1bp to 0.51%, the 10-year yield had returned to its starting point at 1.52% while the 20-year yield had slipped 1bp to 2.14%.

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 headline rate by around 0.1% on average.

Given the Inflation Gauge’s tendency to overestimate, the latest figures imply an official CPI reading of 0.3% (seasonally adjusted) for the September quarter or 2.6% in annual terms. However, it is worth noting the annual CPI rate to the end of March 2019 was 1.3% when the Inflation Gauge had implied a 2.0% annual rate.

01 October 2021

Summary: US Fed’sfavoured inflation measure increases by 0.3% in August; slightly higher than market expectations; annual rate steady at 3.6%; Treasury bond yields moderately lower.

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 spiked up above 3% in this year’s June and September quarters.

The latest figures have now been published by the Bureau of Economic Analysis as part of the August personal income and expenditures report. Core PCE prices rose by 0.3% over the month, slightly higher than the 0.2% increase which had been generally expected figure but in line with July’s increase. On a 12-month basis, the core PCE inflation rate remained unchanged at 3.6% for a third consecutive month.

US Treasury bond yields fell moderately on the day. By the close of business, the 2-year Treasury bond yield had slipped 1bp to 0.27%, the 10-year yield had lost 4bps to 1.46% while the 30-year yield finished 3bps lower at 2.03%.

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; it 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.

30 September 2021

Summary: Private sector credit grows by 0.6% in August, just above expected figure; annual growth rate rises from 4.1% to 4.7%; businesses currently accessing credit lines to boost cash; owner-occupiers, business loans again mostly account for net growth; investor loans up modestly again, personal loans down; housing loan growth “elevated”, outstripping income growth, thus a concern for RBA.

The pace of lending to the non-bank private sector by financial institutions in Australia has been trending down since late-2015. Private sector credit growth appeared to have stabilised in the September quarter of 2018 only to deteriorate through to the end of 2019. The early months of 2020 provided some positive signs but they disappeared in April 2020. Recent months’ figures indicate the downtrend is over.

According to the latest RBA figures, private sector credit growth increased by 0.6% in August. The result was just above the generally expected figure of 0.5% but just under July’s 0.7%. On an annual basis, the growth rate increased from July’s revised rate of 4.1% to 4.7%.

“As we have highlighted previously, businesses are currently accessing credit lines in much greater numbers in orders to boost cash flows. This is in response to the Bondi delta outbreak which sent New South Wales and Victoria back into lockdown,” said Westpac senior economist Andrew Hanlan.

Commonwealth Government bond yields moved a touch higher on the day. By the close of business, 3-year and 10-year ACGB yields had each inched up 1bp to 0.48% and 1.52%. The 20-year yield finished unchanged at 2.16%.

Owner-occupier loans and business loans accounted for most of the net growth over the month. Investor loans again grew quite modestly while total personal debt contracted again.

The traditional driver of loan growth rates, the owner-occupier segment, grew by 0.8% over the month, slightly slower than July’s 0.9% increase. The sector’s 12-month growth rate sped up from July’s revised rate of 7.9% to 8.4%.

Lending in the business sector slowed as business credit expanded by 0.6%, slightly more than half the rate of July’s 1.1% increase. The segment’s annual growth rate increased from July’s 2.4% to 3.4%.

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 became positive again from December 2020. In August, net lending grew by 0.2%, in line with July’s revised rate. The 12-month growth rate increased from July’s revised rate of 1.9% to 2.2%.                            

Total personal loans contracted by 0.6% in August following a 1.0% decrease in July, with the annual contraction rate slowing from 5.9% to 5.6%. This category of debt includes fixed-term loans for large personal expenditures, credit cards and other revolving credit facilities.

ANZ senior economist Adelaide Timbrell noted housing credit growth was “elevated” and “will likely continue to outstrip income growth, which the RBA has consistently said is a concern for them.”

30 September 2021

Summary: Home approval numbers rise 6.8% in August, contrasts with expected figure; up 31.2% on annual basis; rises across houses, units, nearly all major states; house approvals “still above pre-pandemic range” but units “starting to catch up”; house approvals up 3.8%, apartment approvals up 12.7%; non-residential approvals up 43.8%, residential alterations up 10.0% over month.

Building approvals for dwellings, that is apartments and houses, had been heading south since mid-2018. As an indicator of investor confidence, falling approvals had presented a worrying signal, not just for the building sector but for the overall economy. However, approval figures from late-2019 and the early months of 2020 painted a picture of a recovery taking place, even as late as April of that year. Subsequent months’ figures then trended sharply upwards before easing somewhat in the June and September quarters of 2021.

The Australian Bureau of Statistics has released the latest figures from August and total residential approvals increased by 6.8% on a seasonally-adjusted basis. The rise over the month was in contrast with the 5.0% fall which had been generally expected as well as July’s 8.6% decrease. Total approvals increased by 31.2% on an annual basis, up from the previous month’s revised figure of 21.0%. Monthly growth rates are often volatile.

“While we should always be wary of monthly volatility with this release, the detail was also solid with rises across both houses and units and nearly all major states,” said Westpac senior economist Matthew Hassan.

Commonwealth Government bond yields moved a touch higher on the day. By the close of business, 3-year and 10-year ACGB yields had each inched up 1bp to 0.48% and 1.52%. The 20-year yield finished unchanged at 2.16%.

“House approvals are still convincingly above their pre-pandemic range of 7,500 to 10,500, perhaps due to a shift in preferences towards detached dwellings as more people leave the cities for regional Australia or require home offices and thus larger dwellings. But units are starting to catch up, perhaps reflecting more investor interest in residential property,” said ANZ senior economist Adelaide Timbrell.

Approvals for new houses increased by 3.8% over the month after falling by 5.5% in July after revisions. On a 12-month basis, house approvals were 23.7% higher than they were in August 2020, down from July’s comparable figure of 26.6%.

Apartment approval figures are usually a lot more volatile and August’s total rose by 12.7% after a decrease of 14.3% in July. The 12-month growth figure increased from July’s revised rate of 11.2% to 47.7% as the effect of a large fall in August 2020 bolstered the year-on-year result.

Non-residential approvals increased by 43.8% in dollar terms over the month and by 16.5% on an annual basis. Figures in this segment also tend to be rather volatile.

Residential alteration approvals increased by 10.0% in dollar terms over the month and were 42.4% higher than in August 2020.