Key insights from the week that was.
In Australia, the week began with the Federal Government’s announcement of a better-than-expected final budget outcome for 2023/24, a second consecutive surplus of $15.8bn. Relative to May’s estimates, the outcome was driven mostly by fewer payments, associated with delays in outflows to states and other programs, although receipts were also lower than expected too, reflecting a softening labour market. The budget has been in a temporary ‘sweet spot’, banking the windfalls associated with bracket creep, high commodity prices and high inflation. However, these are temporary dynamics; with inflation pressures fading and commodity prices falling – driving a narrowing in goods trade surplus since 2022 – forward estimates have the budget set to tip back into deficit.
Over the past two years, bracket creep has acted as a major drag on households’ disposable income growth, seeing consumer spending slow in official data. It was therefore encouraging to see retail sales bounce higher in August, up 0.7% (3.1%yr). While this may be partly explained by warmer-than-usual weather, the onset of Stage 3 tax cuts seems like the more likely culprit behind the larger increase – a lagged effect that is consistent with tax cuts through recent history.
While Stage 3 tax cuts are set to give back around $23bn in bracket creep, it has had a relatively muted impact on spending thus far, a conclusion that has been echoed in Westpac’s latest card activity data up to mid-September. More broadly, against the backdrop of persistent cost-of-living pressures and rapid population growth over the past two years, real (inflation-adjusted) spending remains quite weak on a per capita basis, suggesting that it will likely take some time before a meaningful pick-up in consumption takes hold.
Diverging trends across the states also remained an important theme in the latest CoreLogic data; underlying the 6.7%yr lift nation-wide house prices in September is a wide range of outcomes, from –1.4%yr in Melbourne up to 24.1%yr in Perth. The tight supply-demand balance across medium-sized capital cities is having a clear impact on affordability; and, in a context where dwelling approvals are showing a few signs of sustainable upwards momentum (WA being the only exception), risks around residential construction activity remain front-of-mind, once existing projects are worked through.
Offshore, escalation of the conflict in the middle east and US data was in focus. Comments from FOMC Chair Jerome Powell provided a positive view for the US economic outlook highlighting that the FOMC “is not a committee that feels like it’s in a hurry to cut rates quickly”. He also noted that a further deterioration in labour market conditions is not required to achieve the Fed’s inflation target. Economic data, released so far this week, was consistent with greater stability in the US labour market. Most notably, this week’s JOLTS report showed that the job openings recovered in August rising above 8mn after two months below that level. While the hiring rate ticked down from 3.4% to 3.3%, a bottom of the recent range, the separation rate decreased more sharply, to a multi-year low of 3.1%. Against this backdrop, all eyes are on the release of the US labour market report out later tonight, it is expected to show that the non-farm payrolls rose at a similar pace to that seen in August, by 150k.
The September manufacturing and services ISM PMIs were mixed once again highlighting diverging trends in the two sectors in the US. The manufacturing index disappointed, with the headline index coming in unchanged at 47.2, the second lowest level this year and well below historical average. Meanwhile, the services ISM index increased by 3.4pt to 54.9, the highest reading in nineteen months. The employment component was significantly weaker dipping back below 50 after two months in the expansionary territory. Prices paid were up for a third consecutive month to 59.4, the highest level since the start of the year.
Across the pond, European prices eased to 1.8%yr in September off the back of lower energy prices marking the first sub-2% reading of this cycle. Services inflation remained sticky at 4.1%. Commentary by ECB staff through the week suggests that with growth risks emerging, a faster cutting cycle could be expected. Inflation running below the ECB’s forecasts supports this.
Meanwhile, in the UK, the BoE Governor Andrew Bailey suggested that the BoE could be “a bit more aggressive” on lowering interest rates. His comments hinted at a possible shift from the forward guidance provided by the Monetary Policy Committee in September, when the monetary policy statement said that “a gradual approach to removing policy restraint remains appropriate”. In Japan, chances of another rate increase are looking slim as new PM Shigeru Ishiba noted he does not “think the environment is ready for an additional rate hike.” The comment followed a meeting with Governor Ueda who has increasingly lowered expectations for tightening. Ishiba also noted there will be further support for households in coming months which could help boost spending.
