Key insights from the week that was.
In Australia, Westpac-MI Consumer Sentiment remains in deeply pessimistic territory, with consistently weaker results only seen in the deep recession of the 1990s. This is despite a prolonged pause by the RBA, emphasising the cumulative impact of cost-of-living pressures. The sub-index tracking family finances over the past year is incredibly weak; at 63.1, the current read is in the bottom 3.5% of observations over the survey’s history. Consistent with the weakness in households’ views on finances, ‘time to buy a major household item’ is currently within the bottom 2.5% of observations. Thankfully, households’ views on the labour market remain constructive. These results emphasise that, for confidence to return and spending to sustainably accelerate, inflation pressures must abate and interest rate cuts come into view.
Before moving offshore, a quick note on businesses. The latest NAB business survey pointed to a further softening in business conditions (–3pts to +11) amid subdued new orders and fragility in business confidence (flat at +1). Constructive for the outlook is that firms’ cost pressures eased notably in September – down to a quarterly pace of 1.8%. The pace of price increases also moderated to a two-year low of 1.0%qtr. These developments, if sustained, would point to a further deceleration in consumer inflation, supporting the view that interest rates have peaked – outcomes that would be welcomed by households.
Offshore, news coverage has focused on the tragic loss of life and destruction in Israel and Gaza following Hamas’ initial attack and hostage taking. Israel’s declaration of war against Hamas in response and the ensuing fighting has kept market participants focused on potential implications for commodity markets and broader risks; but with oil supply currently unaffected, price moves associated with the war have been marginal. Market pricing has instead been driven by developments related to US monetary policy and inflation.
Mid-week, the September FOMC meeting Minutes broadly reflected public comments made by members since the meeting. The Committee discussed the increase in longer-term yields, which have risen even more since the meeting, and noted they have contributed to tighter financial conditions. While partially a result of stronger-than-expected data, together with tighter credit standards, rates are set to weigh on growth and inflation hence. Of key importance regarding policy, the minutes noted that “the current stance of monetary policy was restrictive and that it broadly appeared to be restraining the economy as intended.” However, more evidence is necessary for the Committee to be confident inflation will decelerate all the way back to 2%yr.
The latest US CPI report again provided mixed messages. September’s headline and core outcomes were broadly as expected at 0.4% and 0.3% respectively. Annual headline inflation was unchanged at 3.7%, while core edged a little lower to 4.1%. However, the detail was problematic. Shelter inflation doubled from 0.3% to 0.6% month-to-month, largely as a result of a rebound in owners’ equivalent rent as growth in tenant rents held up – results in stark contrast to the continued downtrend in market rents. Lodging away from home also rebounded sharply, reversing the decline of the prior two months. Thankfully, core goods were slightly weaker than anticipated, declining 0.4% for a fourth consecutive monthly decline.
Looking ahead, given the current price of oil and our forecasts, energy will provide significant support to inflation until December, but then be broadly neutral on a 6-month annualised basis. Food is less certain. Given the continued abrupt deceleration in wage growth, it seems most likely that providers of ‘food away from home’ are responding to the totality of input price inflation over recent years as well as current volatility in energy and food commodities. If this uncertainty remains, we likely won’t see any further disinflation in this category, even as wages continue to slow. ‘Food at home’ is also likely to prove sticky hence.
For the FOMC, this is a difficult result as there is not a lot they can do to ease inflation from shelter, food or energy. Meanwhile, the other sub-categories of inflation are largely on track, abstracting from month-to-month volatility. As an example, September’s lodging away from home rebound could be read as a sign of resurgent discretionary demand. But prices for the sub-category are roughly flat over 3 months, while other related categories (airfares and car hire) are down over the period.
With term interest rates near their highs for the cycle and considerable uncertainty over the cumulative impact of inflation and high rates on demand into 2024, the FOMC are justified in remaining on hold in November. But we’ll pay close attention to Chair Powell and other speakers next week ahead of the 31 October /1 November meeting.
Finally, in the UK, GDP rose 0.2%mth in August following a 0.5% decline in July. August’s result was driven by an improvement in services, although production and construction declined further. Forward indicators suggest production will remain under pressure, leaving Q3 GDP at risk of undershooting the Bank of England’s expectation for a 0.4% increase.
