News

29 September 2021

Summary: Euro-zone composite sentiment index rises from 117.6 to 117.8 in September; slightly above expectations; readings up in three of five economic sectors, up in Germany, Span, down in France, Italy; sovereign bond yields slightly lower on day; index implies 5%+ GDP growth to September 2021.

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 117.8 in September, slightly above the market’s expected figure of 117.0 and August’s revised reading of 117.6. The average reading since 1985 has been just under 100.

Confidence improved in just three of the five sectors. The construction, industry and consumer sub-indices improved while the services and retail trade sub-indices both deteriorated. On a geographical basis, the ESI increased in Germany and Spain but declined in France and Italy.

German and French 10-year bond yields finished the day slightly lower. By the close of business, the German 10-year bond yield had slipped 1bp to -0.21% while the French 10-year yield finished 2bps lower at 0.14%.

End-of-quarter ESI readings and annual euro-zone GDP growth rates are highly correlated. This latest reading corresponds to a year-to-September GDP growth rate of 5.4%, which is unchanged from August’s revised figure. Such a growth rate implies a 4.3% increase in the September quarter.

28 September 2021

Summary: Conference Board Consumer Confidence Index fall for third consecutive month in September; reading below expected figure; views of present conditions, short-term outlook both less positive; concerns regarding Delta, US economy, elevated inflation dampens optimism; 30% fall in new case numbers from peak should see higher optimism over coming months if higher Delta cases behind result.

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 this year when they reached elevated levels.

The latest Conference Board survey held during the first three weeks of September indicated US consumer confidence deteriorated for a third consecutive month. September’s Consumer Confidence Index registered a preliminary reading of 109.3, below the median consensus figure of 114.6 and August’s final figure of 115.2.

Consumers’ views of present conditions and their outlook for the near-future were both less positive. The Present Situation Index fell from a revised figure of 148.9 to 143.4 while the Expectations Index decreased from a revised figure of 92.8 to 86.6.

“Consumer confidence dropped in September as the spread of the Delta variant continued to dampen optimism,” said Lynn Franco, a senior director at The Conference Board. “Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos and major appliances all retreated again. Short-term inflation concerns eased somewhat but remain elevated.”

Long-term US Treasury bond yields increased noticeably on the day as another Fed official said he was in favour of two rate rises next year and Fed Chair Jerome Powell noted higher energy prices may prolong high inflation rates. By the close of business, the 10-year Treasury bond yield had added 7bps to 1.55% and the 30-years had jumped 11bps to 2.10%. The 2-year yield finished unchanged at 0.31%.

In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months remained low. Federal funds futures contracts for September 2022 implied an effective federal funds rate of 0.17%, about 9bps above the current spot rate.

NAB senior economist Tapas Strickland said if higher Delta cases were substantially behind the result “then the 30% fall in new case numbers from their peak should see a reversal over coming months.” However, he also noted consumer inflation rates in excess of 5% were also a factor which had “not gone unnoticed by consumers.”

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.

24 September 2021

Summary: ifo business climate index declines 0.8 to 98.8 in September, slightly above expected figure; expectations, current conditions indices both down; procurement of raw materials, intermediate products “putting the brakes on”, manufacturing experiencing “bottleneck recession”; expectations index implies euro-zone growth of 0.7% in year-to-December.

Following a recession in 2009/2010, the ifo Institute’s business climate index largely ignored the European debt-crisis of 2010-2012, remaining at average-to-elevated levels 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.

According to the latest figures released by the Institute, its business climate index declined to 98.8 in September. The reading was almost in line with the expected reading of 98.5 but it was also slightly below August’s final reading of 99.6. The average reading since January 2005 is just above 97.

“Companies were less satisfied with their current business. They were also more sceptical about the coming months. Problems in the procurement of raw materials and intermediate products are putting the brakes on the German economy. Manufacturing is experiencing a bottleneck recession,” said Clemens Fuest, the president of the ifo Institute.

The expectations index also declined from August’s revised figure of 97.8 to 97.3, above the generally-expected figure of 96.5. The current situation index decreased from 101.4 to 100.4.

German and French long-term bond yields both increased moderately on the day. By the close of business, German and French 10-year yields had each gained 3bps to -0.23% and 0.11% 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.  September’s expectations index implies a 0.7% year-on-year growth rate to the end of December.

23 September 2021

Summary: US leading index up 0.9% in August, above expectations; trend “consistent with robust economic growth in the reminder of the year” despite Delta, rising inflation fears; Conference Board 2021 forecast basically unchanged at nearly 6.0%.

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 had recovered rapidly.

The latest reading of the LEI indicates it rose by 0.9% in August. The result was above the 0.5% increase which had been generally expected and slightly higher than July’s revised figure of 0.8%. On an annual basis, the LEI growth rate slowed from 10.7% to 9.9%.

“While the Delta variant, alongside rising inflation fears, could create headwinds for labour markets and the consumer spending outlook in the near term, the trend in the LEI is consistent with robust economic growth in the reminder of the year,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. Changes over time can be large but once they are standardised, a clearer relationship with GDP emerges. The latest reading implies a 4.9% year-on-year growth rate in November, down from October’s comparable figure of 5.3% after revisions. The Conference Board currently forecasts an expansion of nearly 6.0% across all of calendar 2021, basically unchanged from their forecast of 6.0% one month ago.

Zero in the chart above represents the average year-on-year US GDP growth rate from September 2002, or about 1.8% year on year.

Long-term US Treasury bond yields jumped on the day. At the close of business, the 10-year Treasury yield had increased by 12bps to 1.43% and the 30-year yield had increased by 13bps to 1.94%. The 2-year yield finished 2bps higher at 0.26%.

22 September 2021

Summary: Euro-zone households more optimistic in September; index rises 1.3 points to -4.0; still at elevated level; euro-zone sovereign bond yields slightly 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.

Consumer confidence improved in September according to the latest survey conducted by the European Commission. Its Consumer Confidence index recorded a reading of -4.0, a level which is could reasonably described as elevated. The reading was above the -5.9 which had been generally expected as well as August’s figure of -5.2. The average reading since the beginning of 1985 is -11.6.

The report was released on the same day as the FOMC’s September policy meeting and sovereign bond yields declined a touch in major euro-zone bond markets on the day. By the end of it, German and French 10-year bond yields had each slipped 1bp to -0.33% and +0.01% respectively.

22 September 2021

Summary:  Leading index growth rate falls again in August; index holds up “surprisingly well” during latest downturn but likely “more weakness on the way”; reading implies annual GDP growth of 3.25% during December/March quarters; Westpac cuts September, December quarter growth forecasts again, still expects 7%+ over 2022.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth in the short-term. After reaching a peak in early 2018, the index trended lower through 2018 and 2019 before plunging to recessionary levels in the second quarter of 2020. Subsequent readings were markedly higher but more-recent readings have steadily declined.

The latest reading of the six month annualised growth rate of the indicator fell in August, from July’s revised figure of +1.40% to +0.50%.

“The Leading Index has held up surprisingly well during this downturn but it seems likely that there is more weakness on the way,” said Westpac Chief Economist Bill Evans.

Index figures represent rates relative to “trend” GDP growth, which is generally thought to be around 2.75% per annum. The index is said to lead GDP by up to nine months, so theoretically the current reading represents an annual GDP growth rate of around 3.25% in the final quarter of 2021 or the first quarter of 2022.

Long-term domestic Treasury bond yields moved slightly lower on the day. By the close of business, the 10-year ACGB yield had lost 2bps to 1.28% and the 20-year yield had slipped 1bp to 1.91%. The 3-year yield finished unchanged at 0.36%.

Westpac has again cut its September quarter GDP growth forecast, this time from -2.6% to -4.0%. Additionally, the bank’s December quarter forecast has been pruned from 2.6% to 1.6%. However, Westpac also expects a 7.4% growth rate over calendar 2022.

16 September 2021

Summary:  US retail sales rise by 0.7% in August, contrasts with -0.8% expected; report “a solid one”, suggests “less impact on consumer from Delta wave”; rises in all bar one retail categories; “vehicles and parts” the largest single influence, falls 3.6%.

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 early 2021.

According to the latest “advance” sales numbers released by the US Census Bureau, total retail sales increased by 0.7% in August. The rise was in contrast to the 0.8% decline which had been generally expected, as well as July’s 1.8% fall after it was revised down from -1.1%. On an annual basis, the growth rate remained unchanged from July’s revised figure of 15.7%.

US Treasury bond yields rose on the day. By the close of business, the 2-year Treasury yields had inched up 1bp to 0.22%, the 10-year yield had gained 4bps to 1.34% while the 30-year yield finished 2bps higher at 1.88%.

“In the end the report was a solid one…sales ex-autos jumped 1.8%, also well above the consensus…The jump in the core reading was boosted by downward revision to the July print but they were still a positive surprise, suggesting less impact on the consumer from the Delta wave,” said NAB currency strategist Rodrigo Catril.

All bar one of the categories recorded higher sales over the month. However, the “Motor vehicle & parts dealers” segment provided the largest single influence on the overall result, falling by 3.6% for the month while still remaining 10.7% higher for the year. Sales at ”non-store retailers” also had a significant influence on the total, rising by 5.3%.

15 September 2021

Summary: Household sentiment improves in September; resilience of consumer sentiment “truly remarkable”; above long-term average; Queensland, New South Wales improve, Victoria unchanged; access to vaccine “key factor behind these results”; four of five sub-indices higher; 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 the second week of September, household sentiment has improved modestly. Their Consumer Sentiment Index increased from August’s reading of 104.1 to 106.2.

“The resilience of consumer sentiment in a period when Australia’s two major cities have been locked down and the economy has been contracting is truly remarkable,” 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 above the long-term average reading of just over 101.

Domestic Treasury bond yields fell on the day, largely in line with the overnight movements of their US Treasury counterparts. By the close of business, the 3-year ACGB yield had shed 3bps to 0.33%, the 10-year yield had lost 4bps to 1.24% while the 20-year yield finished 5bps lower at 1.84%.

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 0.185% by December 2022.

Confidence levels largely improved in the three largest states. Queensland recorded the largest rise, while New South Wales also improved and Victoria remained unchanged.

Evans suggested access to the vaccine “appears to be a key factor behind these results”. He noted respondents who are unvaccinated but are intending to become vaccinated were much more confident than those who had received at least one dose. In contrast, respondents unwilling to be vaccinated or who are undecided were much more pessimistic.

Four of the five sub-indices registered higher readings, with the “Economic conditions – next 5 years” sub-index posting the largest monthly percentage increase. As in the July and August surveys, the “Time to buy a major household item” sub-index posted another decline.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, declined from 124.6 to 120.5.Lower readings result from fewer respondents expecting a higher unemployment rate in the year ahead.

15 September 2021

Summary: Euro-zone industrial production up 1.5% in July, triple expected figure; annual growth rate falls, “base effects” still present; production up in all four of euro-zone’s largest economies.

Following a recession in 2009/2010 and the debt-crisis which flowed from it, euro-zone industrial production recovered and then reached a peak four years later in 2016. Growth rates then fluctuated for two years before beginning a steady and persistent slowdown from the start of 2018. That decline was transformed into a plunge in March and April of 2020 and it has taken fifteen months to claw back these losses.

According to the latest figures released by Eurostat, euro-zone industrial production jumped by 1.5% in July on a seasonally-adjusted and calendar-adjusted basis. The rise was triple the 0.5% increase which had been generally expected and in contrast to June’s 0.1% contraction. On an annual basis, the calendar-adjusted growth rate slowed from June’s revised rate of 10.1% to 7.7%.

(Monthly production figures collapsed during the June quarter of 2020, resulting in significantly lower bases for annual calculations. i.e. “base effects”.)

German and French sovereign bond yields rose moderately on the day. By the close of business, German and French 10-year bond yields had both gained 4bps to -0.31% and 0.02% respectively.

Industrial production growth expanded in all of the euro-zone’s four largest economies. Germany’s production grew by 1.0% while the comparable figures for France, Italy and Spain were +0.3%, +0.8% and +0.3% respectively.

15 September 2021

Summary: US industrial output expands by 0.4% in August, more than expected; up 5.9% over past 12 months; Hurricane Ida subtracts estimated 0.3 percentage points; capacity utilisation rate rises to 76.4%, exceeds February 2020 figure, still below 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 expanded by 0.4% on a seasonally adjusted basis in August. The result was a little higher than the 0.3% increase which had been generally expected but half of July’s 0.8% expansion after it was revised down from 0.9%. On an annual basis, the expansion rate slowed from July’s figure of 6.6% to 5.9%.

The report stated production would have been an estimated 0.3% percentage points higher were it not “shutdowns related to Hurricane Ida.”

US Treasury bond yields hardly moved on the day. At the end of the day, the 2-year Treasury yield had returned to its starting point at 0.21%, the 10-year yield had inched up 1bp to 1.30% while the 30-year yield finished unchanged at 1.86%.

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%. August’s reading rose from July’s revised figure of 76.2% to 76.4%, exceeding February 2020’s 76.3% but still short of the long-term average of 79.6%.

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.