Key insights from the week that was.
In Australia, the latest Westpac-MI Consumer Sentiment Survey provided another encouraging update on the health of the consumer. An impressive 11.8% rebound over the past two months has left the headline index at 94.6, the strongest reading in over two-and-a-half years and well within striking distance of a ‘neutral’ reading. Most of the improvement in sentiment has been centred on forward-looking measures, namely year-ahead views on the economy (+23% vs. Sep) and family finances (+7.3% vs. Sep).
While the sub-indexes tracking ‘family finances versus a year ago’ and ‘time to buy a major household item’ have seen some improvement, they both remain at historically weak levels – consistent with evidence from card activity data that points to a limited pick-up in spending following the introduction of the Stage 3 tax cuts. An added complication was the reaction to the US Presidential Election, which saw sentiment deteriorate notably over the course of the survey week – the net effect being greater-than-usual uncertainty about how the rapid recovery in confidence may evolve as the year draws to a close.
Consumers remain confident in the jobs outlook – unsurprising given the strong growth in employment evinced by the labour force survey. Coming off a multi-month above-trend performance, employment growth slowed in October, printing a modest gain of 15.9k. However, that was still enough to keep the employment-to-population ratio unchanged at a record high of 64.4% – a signal employment is still keeping pace with historic population growth. A marginal easing in labour force participation also left the unemployment rate at 4.1% for a third consecutive month. These results, together with little-change in average hours worked and other broader measures of labour underutilisation, imply the labour market remains in robust health, with slack building only at the margin. If sustained, this trend will see nominal wages growth continue to moderate through 2025, but enough momentum persist to deliver further modest real income gains. The outlook for wages, inflation and RBA policy was discussed at length this week by Westpac Chief Economist Luci Ellis.
Before moving offshore, the latest NAB business survey provided further confirmation of a stabilisation in business conditions, the index marking time at +7 points in October. This is consistent with our view that economic growth is current at or near its nadir, having slowed to 1.0%yr mid-year. With consumers having begun to receive their tax cuts and monetary policy easing around the corner, businesses are becoming more optimistic on the outlook, confidence up seven points to +5 in the month. Westpac sees GDP growth accelerating to 1.5%yr by year-end, then 2.4%yr by December 2025.
Globally, financial markets this week continued to assess the implications of a second Trump presidency, attempting to ascertain the President-elect’s priorities through appointment announcements for the incoming administration. The US dollar rallied and longer-dated Treasury yields meanwhile rose as a Republican majority, albeit a slim one, was confirmed for the House of Representatives, giving President Trump more freedom to implement his agenda, centred around lowering taxes, deregulation and reducing immigration.
As we discussed this week, while an extension of the household income tax cuts due to expire next year should be easily achievable, agreement on other tax changes might prove more difficult and/or time-intensive to achieve, with views on next steps for tax policy varied even amongst Republicans. Import tariffs, another critical piece of Trump’s agenda, should support an expansion of domestic manufacturing activity, but only gradually and not without negative effects on consumers, with the price of imported and local production to lift. Note as well there is a timing difference too: tariffs will impact inflation and spending long before investment in new domestic supply can be planned, built and commissioned. We expect these policies to have a meaningful and sustained effect in consumer inflation which the FOMC will have to respond to in late-2026 when we have two 25bp rate hikes forecast – for full detail see Westpac Economics’ Market Outlook November 2024.
Between now and late-2025, the current disinflationary trend is expected to persist however, allowing the FOMC to reduce the fed funds rate to 3.375% by September 2025, a rate we regard to be broadly neutral for the economy. This week, October’s CPI report again confirmed that inflation pressures are benign, 0.2%mth and 0.3%mth increases in headline and core prices in line with the prior month as well as market expectations. Shelter is now the one significant laggard for inflation, with annualised and annual growth near 5%. The FOMC continue to show little-to-no concern over this item however, given rental growth for current agreements is close to zero. As the shelter component of the CPI factors these results in, annual headline inflation will tend from 2.6%yr currently towards the FOMC’s medium-term target of 2.0%yr.
Turning to Asia, just released October activity data for China showed authorities shift towards pro-active support is paying dividends, but more so that additional stimulus is necessary. Retail sales surprised to the upside, the annual rate accelerating from 3.2%yr in September to 4.8%yr in October, although year-to-date the pickup was considerably more timid, from 3.3%ytd to 3.5%ytd. House prices also responded to authorities’ directives, new and existing home price declines slowing abruptly, from -0.7%mth and -0.9%mth in September to -0.5% in October. Growth in fixed asset investment and industrial production was little changed though, at 3.4%ytd and 5.8%ytd.
Late last Friday, China’s run of policy announcements continued, a debt swap package already mooted detailed to the market. CNY10trn in new special bond issuance will be made available through two programs over 3 and 5 years to local governments to refinance ‘hidden debt’ onto public balance sheets. The primary benefit is an expected CNY600bn reduction in interest payments over 5 years. The measures will also aid the bring forward of infrastructure spending into late-2024 and early-2025 and ready local governments to buy up housing assets and land from 2025, another initiative previously announced, and intended to provide lasting support to home prices and construction. Authorities clearly remain focused on strengthening the financial position of both the public and private sector, removing impediments to growth and encouraging new activity. But by refraining from announcing outright stimulus, they continue to disappoint the market and, potentially, are putting confidence amongst consumers and business at risk.
Note though, last Friday, Finance Minister Lan Fo’an reportedly promised “more forceful” fiscal stimulus next year and, while discussing today’s data the NBS spokesperson pledged to achieve 2024’s annual growth target of 5.0%. As such, outright stimulus is arguably a matter of time, the length of the waiting period likely to depend on the evolution of US trade policy and global economic uncertainty.
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