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October economic roundup

Our usual end of month review of economic conditions around the world shows that despite heightened concern about global economic growth prospects for 2015, recent economic readings from the United States and China have mostly been a touch stronger than expected and although Europe remains soft, there has been a firmer edge in the data of late. In Australia too, the data has been mixed-strength, but with evidence that inflation is very well contained. Central banks, including the RBA, have mostly adopted policy guidance on the easier side of expectations. All told, the run of slightly more positive than expected economic data plus dovish central bank guidance seem to have arrested and partly reversed the downward correction in risk assets through September and the first half of October.

US economic readings through October have mostly been quite firm. September non-farm payrolls rose more strongly than expected, up by 248,000 with August revised up as well to 180,000 (initial reading 142,000). The unemployment rate fell from 6.1% in August to 5.9% in September, the lowest reading since mid-2008 before the onset of the global financial crisis. Regional manufacturing surveys presented mixed readings, but still comfortably inside expansionary territory. Industrial production rebounded strongly in September, up by 1.0% after falling by 0.2% in August. Indicators of housing activity also mostly took a more positive turn in September with existing home sales up 2.4% and new home sales up 0.2%. Housing starts in September rose by a stronger-than-expected 6.3%.

Despite the continuing expansion in US economic activity, inflation remained low. The September CPI showed annual inflation stable at 1.7% y-o-y and on underlying basis, excluding food and energy prices, was also 1.7% y-o-y and stable. The minutes of the Federal Reserve’s (Fed’s) September policy meeting surprised in the sense that the members of the committee showed uniform concern about how less robust global economic growth prospects could compromise relatively firm US economic growth prospects. The sense that the Fed may take longer than previously expected to lift interest rates was reinforced by the speeches of several senior Fed officials after the minutes were released.

In China, the world’s second biggest economy, data released through October also had a more positive tone than expected, on balance. September exports rose by 15.3% y-o-y against expectations of an 11.8% increase and a 9.4% lift in August. Industrial production in September was also much stronger than expected, up 8.0% y-o-y (market expectation 7.5%) after rising 6.9% in August. Q3 GDP was also a touch stronger than expected, up 1.9% q-o-q, 7.3% y-o-y (market expectation, 1.8% q-o-q, 7.2% y-o-y). Exceptions to the stronger than expected data were September retail sales, up 11.6% y-o-y (market expectation 11.8%), reflecting the continuing crack-down by the authorities on conspicuous consumption by some communist party officials, and urban fixed asset investment spending up 16.1% y-o-y (market expectation 16.3%) reflecting slowing residential investment spending.

Inflation in China remained very low with the CPI up only 1.6% y-o-y in September, well below the Peoples’ Bank’s (PBOC’s) target of 3.5%. The PBOC has ample room to ease policy conditions and has started the process with selective reductions to bank reserve ratio requirements and some easing of macro-prudential controls relating to investment housing.

Most data out of Europe remains comparatively soft although most recently both the flash October EC composite (manufacturing and services sectors) purchasing managers’ index and preliminary October EC consumer confidence survey were stronger than expected. The publication of the ECB’s European bank stress report also showed European banks in comparatively good shape. Twenty five banks failed the stress test, but that was less than widely feared and no banks in Germany, France or Spain failed the test. The ECB continues to fret that inflation is too low in Europe and ECB President Draghi reaffirmed the intention of ECB to buy assets.

In Australia, housing activity remained strong with August home building approvals up more strongly than expected, by 3.0% in the month and by 14.5% y-o-y. Retail sales grew by only 0.1% in August, somewhat disappointing after the 0.4% gain in July. Consumer confidence appeared to lift slightly according to the Westpac monthly survey although continues to run below long term trend. Gauging the strength of the labour market has become harder with the Australian Bureau of Statistics admitting to problems with its seasonally adjusted estimates of employment over recent months. The immediate solution has been to turn off the seasonal adjustment factor for the last few months. On that basis employment fell by 29,700 in September, after increasing by 31,100 in August and the unemployment rate edged up to 6.1% from 6.0% in August. Tentatively, the data looks quite soft.

The RBA continued to welcome the continuing lift in home building activity, but also to warn home loan providers and housing investors that interest only housing loans were growing too quickly and in any case presented potential risk for borrowers and lenders in the event of falling house prices. The RBA also made it plain, however, both at its policy meeting and in the later minutes of that meeting that economy is likely to grow below trend and with an outlook of contained inflation for some time ahead, a period of interest rate stability is still the best policy option for the RBA.

The Q3 CPI report confirmed strikingly that inflation is moderating. The CPI rose by 0.5% q-o-q, 2.3% y-o-y compared with Q2, up 0.5% q-o-q, 3.0% y-o-y. Most of the inflation in Q3 was also confined to food prices, up 1.2% q-o-q, and tobacco and alcohol, up 1.1% q-o-q. Seven of the eleven major sub-components of the CPI showed inflation at 0.5% q-o-q or less. The two main underlying inflation readings, the trimmed mean and weighted median, watched closely by the RBA were also very well contained, showing respectively 0.4% q-o-q, 2.5% y-o-y and 0.6% q-o-q, 2.6% y-o-y. Given wage growth is still very low it is unlikely that inflation will challenge the top of the RBA’s 2-3% target band for at least the next year or so. As a result of this low inflation outlook it is the RBA is likely to leave the cash rate at 2.50% for many months to come.