This week, the FOMC and Brexit have been the focus globally. On the domestic front, investment partials were received ahead of next week’s Q3 GDP report.
Beginning offshore, comments by Chair Powell were taken as dovish by the market, the US 10-year touching the 3.00% level having started the week at 3.04%. Since then however, the 10-year has come back to 3.03%, leaving it effectively unchanged for the week. While Chair Powell did reference the federal funds rate as being “just below” estimates of neutral, context is key. ‘Estimates of neutral’ here refers to the 100bp range from 2.5% to 3.5% put forward by FOMC members, hence attaining a neutral stance could mean one hike or five. We expect that the total number of hikes to come is likely nearer the top of that range than the bottom. Our forecast is for four more, from December 2018 to September 2019. As per the FOMC’s own view, this forecast rests on the strength of underlying momentum in their economy, driven by the consumer. There are, of course, risks to this view. Chief among them are household wealth and sentiment and, for the business sector, the uncertainty created by US trade policy.
For the UK, in stark contrast to the US, the uncertainty felt by the market this week is a true reflection of current conditions. The only positive is that the date of the UK Parliament vote on the draft agreement has now been set, 11 December. Other than this announcement, headlines have carried dire predictions of the economic effect on the UK economy should a no deal Brexit occur, while numerous political interests have continued voicing their displeasure with the draft agreement and process. These are clearly troubling times for the UK, and this uncertainty will remain a threat for some time yet.
While in Europe, it is also worth covering President Draghi’s appearance before the EU Parliament’s Economic Committee. His remarks again highlighted their confidence in the Euro Area’s underlying momentum, albeit while recognising that the data received since his last appearance had been weaker than anticipated. In terms of their forecasts, one has to expect that the December ECB forecast update will see modest downward revisions; however, with regards to core inflation, their expectation of an uptrend remains intact, and with it their plans to end asset purchases at December. Whether the anticipated rate hikes past summer 2019 come to pass will depend on if the current growth slowdown leaves momentum above or below trend in 2019. We argue for the former, and hence continue to see the deposit rate inching towards zero from late-2019.
Coming back to Australia, we received two opposing updates on investment for Q3 this week.
The construction work done release reported broad-based weakness across all components, with total activity down 2.8%. While we expect residential investment to continue declining over the coming year, the Q3 weakness in non-residential construction is likely just a temporary blip given the considerable pipeline of work that remains in place for the sector. This is also the case for infrastructure investment, which is receiving material support from state government spending – particularly in NSW and Victoria.
In the CAPEX survey however, offsetting strength in equipment investment was seen, +2.2%. In the quarter, manufacturing provided the strength, while services was flat and mining declined. Important for the outlook, not only was the Q3 print an upside surprise, but so too were expectations for the 2018/19 financial year. Estimate 4 points to a 3–4% gain for investment in the current financial year, up from –1% at estimate 3. Also worthy of note, the sectoral mix of investment intentions was positive, with services and manufacturing leading the way. Our core view on investment remains for a modest gain in non-mining investment, spurred by the needs of a growing population.
Looking ahead to the GDP report next week, we anticipate a 0.7% increase in the quarter, leaving annual growth at 3.4%. To this view, based on the above investment data, risks are tilted to the downside. For all the detail of our forecast, see the GDP preview in our weekly. Further updates on components of Q3 GDP will be received next Monday and Tuesday ahead of GDP on Wednesday.
Finally for the week, the RBNZ has released their latest Financial Stability Report. As expected, the RBNZ eased its loan-to-value limits on mortgage lending after price and credit growth slowed to be broadly in line with income growth. However, it was also announced that banks will be required to hold more capital. Our NZ team note that the latter is a preliminary decision with a consultation paper to follow.
