Key insights from the week that was.
In Australia, nominal retail sales rose strongly in September, up 0.9% (2.0%yr). However, this was mostly due to transitory factors, including policy changes around medicines under the Pharmaceutical Benefits Scheme and major product releases, most notably the latest iPhone model. On a three-month rolling basis, nominal retail sales lifted 0.8% in September; underlying this, the just released quarterly data reports volumes rose 0.2% in Q3 following a 0.6% decline in Q2. Our Westpac Card Tracker suggests that through October, retail card activity partially retraced some of the gradual improvement experienced through Q3.
Turning to the housing data, the CoreLogic home value index posted another broad-based gain in October (0.9%) with solid increases reported in most of the major capital cities. Despite ongoing momentum in prices, housing finance approvals still imply a shaky recovery in transaction volumes, the total value of new loans up just 0.6% in September with the detail of the report very patchy, owner-occupier loans down 0.1% as investor loans gained 2.0%. Construction-related lending’s flat result in September and dwelling approvals 4.6% decline in the month also showcases lingering fragility for construction. Costs pressures and capacity constraints will act as a drag on building activity in the near-term, providing support for house prices and rents.
Australia’s goods trade surplus subsequently surprised to the downside in September, slipping from $10.2bn to $6.8bn. This was largely a consequence of a surprise surge in imports, up 7.5%, due to a spike in transport equipment. Exports meanwhile exhibited some softness in the month, falling –1.4%, as volatility in gold exports persisted. According to this data, the goods trade balance was soft in the quarter overall, with goods exports declining –1.4% and goods imports rising 3.0%. The Balance of Payments will provide an update on services trade in a few weeks’ time.
With a view to the medium term, Westpac Chief Economist Luci Ellis spoke this week at the Melbourne Institute 2023 Economic & Social Outlook Conference on sustaining full employment and low inflation. A copy of her presentation is now available on Westpac IQ.
First cab off the rank offshore was the Bank of Japan who changed the 1% upper bound for 10-year Japanese Government Bond (JGB) yield from a hard cap to a “reference”, potentially allowing the 10-year JGB yield to trade modestly above that level if market conditions warrant. However, their overall commitment to Yield Curve Control and the -0.1% policy rate are unchanged. While markets took the upper bound decision to mean the BoJ may be readying for a substantial policy shift, we believe the BoJ is instead planning to remain ultra accommodative for the foreseeable future. Revised forecasts show upward revisions to inflation in FY23 and FY24 to above the 2% target, but inflation is still expected to be back below target in FY25. Importantly, the BoJ attributed the upward revisions to stronger pass through of import prices. But, as import price growth dissipates, consumer prices are also expected to ease. Evidence of demand-driven inflation meanwhile remains scant.
Committee members would have taken into consideration the trade union confederation RENGO’s ‘above 5%’ wage demands for 2024 when they made the assessment that “if the behavior and mindset based on the assumption that wages and prices will not increase easily remain deeply entrenched, there is a risk that moves to increase wages will not strengthen as much as expected from next year and prices will deviate downward from the baseline scenario.” Overall, the BoJ’s decision reflects a desire to keep policy accommodative as long as necessary to encourage expectations to strengthen and inflation to hold sustainably at target.
The FOMC subsequently chose to keep rates steady and reaffirmed they believe the US economy is cooling sufficiently to meet the 2% inflation target in time. In the statement, changes to language were marginal and in response to recent data, economic activity “expanded at a strong pace” replacing “expanding at a solid pace” following Q3’s outsized 4.9% annualised gain. The tense of the revised statement is significant: yes Q3 was “strong”, but momentum ahead is uncertain.
Into 2024, the balance of risks will likely shift against growth, requiring the FOMC to make real-time judgements over the appropriate degree of policy restrictiveness. This is a determination that will depend not only on the right level of the real fed funds rate but also on an assessment of the stability of term premiums and credit conditions. The US release of the week is still to come, with the October employment report due tonight. With the Q3 Employment Cost Index benign and other partial data softer than expected, the market is likely hoping for a partial reversal of last month’s payrolls strength.
In the UK, the Bank of England kept rates steady at 5.25% in a 6-3 vote. The lower-than-expected inflation print resulted in a downward revision for 2023 inflation. However, 2024 and 2025 were revised up reflecting upside risks for inflation from energy prices and a longer-than-expected unwinding of second-round effects. This likely means policy will remain restrictive for longer in line with the global narrative. Concerns about growth remain ever-present as the BoE revised down its forecast for 2024 to be flat.
In Europe, headline inflation eased to 2.9%yr in October helped by base effects with 2022’s soaring energy prices falling out of the annual inflation calculation. Core inflation held above 4% (4.2%yr from 4.5%yr last month), confirming the ECB’s view that there would be a late but steep deceleration for core. These inflation outcomes were paired with a 0.1%qtr contraction in Q3 GDP following an upwardly revised 0.2% gain in Q2. While France, Italy, and Spain saw an expansion in Q3, likely fuelled by strong tourism spending, Germany posted a decline due to manufacturing sector weakness. Together these outcomes point to the ECB remaining on hold into 2024.
