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Our monthly roundup of global and local economic data and events shows continuing improvement in the US economy, but patchy to soft economic readings in China and Europe. The Australian economy presents a very mixed bag and the world’s major central banks are closer to the point of diverging, with the US Federal Reserve (Fed) edging towards starting to hike its funds rate while most others are still looking to maintain or extend very easy monetary conditions. The different messages from the major central banks may generate more volatility in financial markets than has been the case over the past year or so.
In the US, the majority of economic data and survey releases through September were relatively strong. There were some notable exceptions to the stronger data run including July non-farm payrolls that rose by 142,000 – well short of the 200,000+ monthly readings over the previous six months – and August industrial production, down by 0.1%. At the leading edge of US economic activity, new housing activity seems to be gathering pace on balance. August new home sales rose by 18.8%, July pending home sales were strong too – up by 3.3% – and the National Association of Home builders’ index rose to 56 – one of the strongest readings in 2014. The final revision of Q2 GDP (4.6% annualised from the previously and upwardly revised figure of 4.2%) also showed that growth rebound was particularly strong.
The Fed provided mixed messages after its two day September policy meeting; downgrading slightly its growth forecast for 2014, retaining the wording, “considerable time”, in its statement (used to describe the period between the expected ending of asset purchases, or QE, at its next policy meeting in October, and the start of lifting the near-zero Fed funds interest rate), but also lifting the Fed governors’ forecast funds rate for the end of 2015 to 1.375%, up 25 basis points from the previous estimate three months ago. The inconsistency between the “considerable time” wording and the upwardly revised funds rate forecast led Fed Governor, Yellen, to explain that the time between the end of QE and interest rate increases, as well as the Fed Governors’ rate forecasts, are entirely flexible and are dependent upon the run of US data and its relative strength. What is more certain is that strong US economic data are more likely to lead to higher market interest rates.
In China, the economic numbers were (again) mostly softer than expected in August, with the most disappointing being industrial production, up only 6.9% y-o-y against expectations of 8.7%. Exceptions to the softer run were August exports, up a stronger-than-expected 9.4% y-o-y, and the flash September HSBC-Markit manufacturing PMI, improving to 50.5 from 50.3 in August. The messages from policymakers in China in the wake of the mostly soft economic readings were ambiguous in terms of commitment to the 7.5% growth target. The Peoples’ Bank of China announced the equivalent of $US81billion of liquidity support for China’s five biggest banks which fosters market speculation of a possible raft of more growth-supportive policy measures. The likelihood of more expansionary policy settings in China, however, was dented at the G20 Finance Ministers’ meeting in Cairns when China’s Finance Minister seemed to imply a softening commitment to strict growth targets.
In Europe, the data from the common currency area continues to point to weak economic growth although the ECB responded at its September policy meeting, easing policy by pushing official interest rates further into negative territory. Pressure continues to build on the European Central Bank to ease monetary policy even further, notably to institute full-blown quantitative easing. In the United Kingdom, the focus shifted to the Scottish independence referendum. A ‘yes’ vote could have had destabilising repercussions given that the financial system in Scotland is many times bigger than Scottish GDP. In the event, the reasonably convincing ‘no’ vote avoided a re-pricing of Scottish banking assets that might have reverberated in Australia.
In Australia, monthly business and consumer sentiment readings weakened, but most of the official monthly economic readings were stronger through September. Retail sales rose in July by 0.4%, consolidating a 0.6% lift in June. Home building approvals lifted by 2.5% in July and continue to point to booming housing construction. August employment provided the biggest surprise, rising by 121,000, the biggest monthly gain on record, attributed partly to issues with the rotation of the labour force survey providing too big a reading of part-time employment. Even going backwards a little, the Q2 GDP report was not quite as soft as widely feared coming in at +0.5% q-o-q, +3.1% y-o-y. However, with Australian national income growing much more slowly than output and soft industrial commodity prices keeping growth in national income restrained, concern remains that GDP growth will be comparatively soft over the next year or so.
One part of the economy that is showing signs of too much strength is housing activity, more specifically, investor housing demand in Sydney and Melbourne. The RBA used its quarterly Financial Stability Review to reiterate a message that housing demand is unbalanced, and while this is unlikely to undermine the stability of Australian financial institutions it may lead to weakness in spending in the economy when house prices eventually fall and/or lending interest rates rise. The RBA says that, together with APRA, it is examining measures to contain investment housing demand although, it seems unlikely that the RBA would countenance the considerable distortions that might arise if it were to actively pursue macro-prudential controls.
Most of the Australian economy still seems to need interest rates at current rates or lower, and we expect this need to continue to dominate monthly discussion of monetary policy – much as it has over the past year when the cash rate has been steady at 2.50%. Our view remains that it will probably be a year, at least, before the RBA sees a need to lift the cash rate. However, we do expect the RBA to continue to issue blunt warnings to investors in the housing market not to become over-committed at a time when house prices appear to be over-inflated.