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Summary: Melbourne Institute inflation rate declines in May; annual rate above 3 per cent as April 2020 fall drops out of calculation.

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.” Since the GFC, Australia’s inflation rate has been trending lower and lower; the “coronavirus recession” then crushed it in the June quarter of 2020.

The Melbourne Institute’s latest reading of its Inflation Gauge index declined by 0.2% in May, following increases of 0.4% in April and March respectively. On an annual basis, the index rose by 3.3%, accelerating from April’s comparable figure of 2.3%.  It is worth noting a good chunk of the annual increase is the result of a 1.5% bounce through June 2020 and July 2020 following a 1.2% drop in April of last year.

The figures were released on the same day as the latest private credit figures. Long-term Commonwealth bond yields increased, ignoring lower yields in US Treasury bond markets overnight. By the close of business, the 10-year ACGB yield had added 2bps to 1.65% while the 20-year yield finished 3bps higher at 2.37%. The 3-year yield remained unchanged at 0.22%.

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.

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

Summary: Private sector credit grows at modest rate in April; half expected figure; credit growth “gains momentum”; housing credit growth continues, business loans down, personal loans flat; mortgage pay-downs, weak personal, business credit capping overall rise.

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 but the annual growth rate then continued to deteriorate through to the end of 2019. The early months of 2020 provided some positive signs but they disappeared in April 2020.

According to the latest RBA figures, private sector credit growth slowed In April, rising by 0.2%. The result was half the generally expected figure of 0.4% and slower than March’s 0.4% increase. However, the annual growth rate still increased from 1.0% in March to 1.3%.

“In 2021, credit growth has gained momentum, with the 3 month annualised pace accelerating to 3.5% in April,” said senior Westpac senior economist Andrew Hanlan.

Owner-occupier loans accounted for about half of the net growth while investor loans accounted for much of the balance. Business loans contracted and personal debt was flat.

The figures were released on the same day as the Westpac-Melbourne Institute’s latest reading of their Inflation Gauge. Long-term Commonwealth bond yields increased, ignoring lower yields in US Treasury bond markets overnight. By the close of business, the 10-year ACGB yield had added 2bps to 1.65% while the 20-year yield finished 3bps higher at 2.37%. The 3-year yield remained unchanged at 0.22%.

The traditional driver of loan growth rates, the owner-occupier segment, grew by 0.6% over the month, slightly slower than March’s 0.7% increase. The sector’s 12-month growth rate ticked up from 6.1% to 6.2%.

Growth rates in the business sector went into reverse as total business credit contracted by 0.3%, a turnaround from March’s increase of 0.4%. The segment’s annual growth rate remained negative, its contraction rate increasing from March’s revised rate of 2.6% to 3.0%.

Summary: US Fed’s favoured inflation measure jumps in April; above market expectations; annual rate accelerates above 3%; bond market accepting Fed “transitory” position; Treasury bond yields 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.

The latest figures have now been published by the Bureau of Economic Analysis as part of the April personal income and expenditures report. Core PCE prices jumped by 0.7% over the month, above the generally expected figure of 0.6% and March’s 0.4% increase. On a 12-month basis, the core PCE inflation rate accelerated from March’s revised figure of 1.9% to 3.1%.

“The Federal Reserve thinks that these elevated monthly prints are transitory and, for now, the bond market is buying into that guidance,” said ANZ Head of Australian Economics David Plank.

US Treasury bond yields declined on the day. By the close of business, the 2-year Treasury bond yield had slipped 1bp to 0.14%, the 10-year yield had shed 3bps to 1.58% while the 30-year yield finished 2bps lower at 2.26%.

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.

Summary:  Leading index declines in April; “strong above-trend” GDP growth expected; reading implies annual GDP growth to rise to around 5.5% during second, third quarter; year to December 2021 GDP growth expected to be around 4.5%.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth over the next three to six months. 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 have been markedly higher.

The latest reading of the six month annualised growth rate of the indicator declined in April, from March’s revised figure of +3.31% to +2.85%.

“The Leading Index growth rate continues to point to strong above-trend growth momentum carrying through the second half of 2021 and into early 2022,” said Westpac senior economist Matthew Hassan.

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 three to six months, so theoretically the current reading represents an annual GDP growth rate of around 5.5% in the second or third quarters of 2021.

Longer-term Commonwealth Government bond yields fell on the day, slightly lagging falls in US Treasury yields overnight. By the end of the day, the 10-year ACGB yield had lost 2bps to 1.61% and the 20-year yield had lost 4bps to 2.29%. The 3-year yield finished 1bp higher at 0.21%.

The RBA’s May Statement on Monetary Policy forecasts GDP growth for the years ending June 2021 and December 2021 to be 9.25% and 4.75% respectively. Should the RBA’s forecasts prove to be accurate, an increase of 2.4% in first half is implied. Westpac also currently expects an increase of 2.4% in the first half but a slightly-lower 4.5% for the 2021 calendar year.

Summary: US consumer confidence essentially steady in May; marginal decline in Conference Board index reading less than expected; view of present conditions rises, short-term outlook falls; consumers “remain optimistic”; “economic growth remains robust” but “decelerating growth, softening labour market” expected; peak consumer confidence reached but “plenty of pent-up demand.”

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.

The latest Conference Board survey held during the first half of May indicated US consumer confidence essentially held steady after four consecutive months of rises. May’s Consumer Confidence Index registered 117.2, under the median consensus figure of 120.0 and just below April’s final figure of 117.5.

Consumers’ views of present conditions improved while their outlook of the near-future deteriorated. The Present Situation Index rose from 131.9 to 144.3 while the Expectations Index fell from 107.9 to 99.1.

“Overall, consumers remain optimistic, and confidence should remain resilient in the short term, as vaccination rates climb, COVID-19 cases decline further and the economy fully reopens,” said Lynn Franco, a senior director at The Conference Board.

Long-term US Treasury bond yields moved lower on the day. By the close of business, the 10-year Treasury bond yield had lost 4bps to 1.56% and the 30-year had shed 5bps to 2.25%. The 2-year yield remained unchanged at 0.15%.

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 May 2022 implied an effective federal funds rate of 0.09%, about 3bps above the current spot rate.

Franco said the improvement in the Present Conditions index suggests “economic growth remains robust” in the June quarter but the fall in the Expectations Index reflected “expectations of decelerating growth and softening labour market conditions in the months ahead.” She also noted respondents’ views of their prospects “were also less upbeat this…a reflection, perhaps, of both rising inflation expectations and a waning of further government support…”

Summary: ifo business climate index up again in May; above expected figure; expectations, current conditions indices both up; index consistent with positive euro-zone GDP growth.

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 increased to 99.2 in May. The reading was above the expected reading of 97.8 and 2.6 points above April’s final reading of 96.6. The average reading since January 2005 is just below 97.

“Sentiment among German managers has improved considerably,” said Clemens Fuest, the president of the ifo Institute. “The German economy is picking up speed”. He noted the index registered its highest reading since May 2019.

The expectations index increased, rising from April’s revised figure of 99.2 to102.9, also above the generally-expected figure of 101.0. The current situation index rose from 94.2 to 95.7.

Summary: Euro-zone households more optimistic in May; above pre-pandemic values; index above consensus expectation, long-term average; major euro-zone bond yields stable/down a little.

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.

The May survey conducted by the European Commission indicated its Consumer Confidence index increased to -5.1, higher than pre-pandemic readings at the end of 2019. The reading was above the -7.5 which had been generally expected and April’s figure of -8.1. The average reading since the beginning of 1985 is -11.7.

Sovereign bond yields either remained stable or fell a little in major European bond markets on the day. By the end of it, the German 10-year bond yield had shed 2bps to -0.12% while the French 10-year yield finished unchanged at 0.22%.

Summary: US leading index reading slightly above expectations in April; index surpasses previous peak; Conference Board raises 2021 forecast again; growth “may accelerate” in near term.

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” but then subsequent readings indicated the US economy was recovering rapidly.

The latest reading of the LEI indicates it rose by 1.6% in April. The result was above the 1.2% increase which had been generally expected and more than March’s 1.3% rise. On an annual basis, the LEI growth rate increased from +8.2% after revisions to +15.7%.

“With April’s large monthly gain to start the second quarter, the U.S. LEI has now recovered fully from its COVID-19 contraction, surpassing the index’s previous peak, reached at the very onset of the global pandemic in January 2020,” 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 7.2% year-on-year growth rate in July, up from June’s 4.2%. The Conference Board forecasts a 6.4% expansion across all of calendar 2021, up from their forecast of 6.0% a month ago.

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

US Treasury bond yields ended the day lower. At the close of business, the 2-year Treasury yield had slipped 1bp to 0.15%, the 10-year yield had lost 5bps to 1.62% while the 30-year yield finished 4bps lower at 2.33%.

Summary: Household sentiment softens in May; still “second-highest” reading since 2010; sentiment index still substantially above long-term average; all five sub-indices lower; unemployment index lower; “limited uplift” from Federal Budget.

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 around 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 May, household sentiment has softened while remaining at an elevated level. The Consumer Sentiment Index declined from April’s reading of 118.8 to 113.1.

“While a 4.8% fall is always going to attract attention we should put this result in perspective. It is still the second-highest print for the Index since April 2010 and does follow an 11% rise in the Index over the previous three months,” 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 substantially above the long-term average reading of just over 101.

Domestic Treasury bond yields hardly moved on the day. By the close of business, the 2-year ACGB yield remained unchanged at 0.26%, the 10-year yield had slipped 1bp to 1.72% while the 20-year yield finished unchanged at 2.42%.

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 slowly, reaching 0.11% by September 2022.

All five sub-indices registered lower readings; the “Family finances – next 12 months” sub-index experienced the largest monthly percentage decline, followed by the “Economic conditions – next 5 years” sub-index.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, fell from 118.4 to 100.2. Lower readings result from more respondents expecting a lower unemployment rate in the year ahead.

Summary: US consumer confidence dims in May; University of Michigan index well below consensus figure; views of present conditions, future conditions deteriorate; driven by households expecting higher future inflation rates; “easier for retailers to pass higher costs”.

US consumer confidence started 2020 at an elevated level. However, surveys had begun to reflect a growing uneasiness with the global spread of COVID-19 and its reach into the US by March of that year. After a plunge in the following month, household confidence recovered in a haphazard fashion, holding at below-average levels. While recent surveys suggested optimism may be about to rise, the most-recent one has not lent weight to this argument.

The latest survey conducted by the University of Michigan indicates the average confidence level of US households deteriorated in May. The University’s preliminary reading from its Index of Consumer Sentiment registered 82.8, well below the generally expected figure of 90.0 and noticeably lower than April’s final figure of 88.3. Consumers’ views of current conditions and expectations regarding future conditions both deteriorated in comparison to those held at the time of the April survey.

“Consumer confidence in early May tumbled due to higher inflation; the highest expected year-ahead inflation rate as well as the highest long term inflation rate in the past decade. Rising inflation also meant that real income expectations were the weakest in five years,” said the University’s Surveys of Consumers chief economist, Richard Curtin.

The report was released on the same day as April’s retail sales numbers and industrial production figures. US Treasury bond yields moved lower and, by the end of the day, the 2-year Treasury yield had slipped 1bp to 0.15%, the 10-year yield had lost 2bps to 1.64% while the 30-year yield finished 6bps lower at 2.35%.

ANZ Head of Australian Economic David Plank said, “Consumers don’t set prices, but when they expect inflation it certainly makes it easier for retailers to pass higher costs on without fear of backlash.”