Key insights from the week that was.
‘Risk off’ has been the defining characteristic of this week thanks to COVID-19, economic data and geopolitical concerns.
Beginning with COVID-19, this week yet another significant rise in daily new cases in Australia and an outbreak in New Zealand hit expectations hard, the Australian and New Zealand dollars falling around 2 cents against the US dollar.
For New Zealand, it was a particularly abrupt turn of events, with the new cases of COVID-19 and the re-introduction of Level 4 restrictions coming just a day before the RBNZ was expected to raise their cash rate for the first time in this cycle. Instead, the RBNZ held fire.
Our New Zealand economics team continue to believe that rate hikes will be forthcoming given the strength of domestic demand and capacity constraints related to closed borders. However, the virus’ near-term economic effect means the rate hike cycle is unlikely to begin until November. While it pre-dates this week’s developments by a day, the release of Westpac NZ economics’ August Economic Overview provides a timely in-depth update on New Zealand’s economy.
Back in Australia, August’s RBA meeting minutes again highlighted the confidence the RBA have in recovery post lockdown. As per their other recent communications, given monetary policy changes affect the future, and as this jolt to the economy is seen as temporary, at the time of the August meeting, the Board believed there was no reason to deviate from their planned taper process.
Instead of a loss of circa 1.0% as forecast by the RBA in their Statement on Monetary Policy, we are forecasting a 2.6% contraction in the September quarter. However, like the RBA, and as discussed by Chief Economist Bill Evans and the team in our latest Market Outlook in conversation podcast, we also continue to expect a strong rebound into 2022.
Labour market data received this week highlighted the underlying strength of Australia’s economy. In the month of July, 2k jobs were created – a materially better outcome than the market consensus of 43k job losses. Clearly, as the NSW lockdown took effect, instead of firing their staff, affected businesses (temporarily) reduced hours, with NSW hours worked down 7.0% in the month. The other key lockdown labour market dynamic to call out is for participation: in short, the lack of available work and family responsibilities saw participation fall 0.2ppts and the unemployment rate consequently decline 0.3ppts to 4.6%.
While we see large declines in employment in August through October, the robust underlying health of the labour market coming into this prolonged disruption supports the idea that the recovery from employment’s nadir will be quick.
The outlook for wages growth seems more uncertain however after the June quarter Wage Price Index (WPI) printed well below expectations at just 0.4%, 1.7%yr. Wage pressures were only evident in isolated instances across the economy despite the relatively low level of unemployment and closed borders, with private wages gaining just 0.5%, 1.9%yr overall. Wage growth in the public sector meanwhile remained weak, rising 0.4% for a third consecutive quarter, 1.3%yr.
Moving then to China. While there have been a lot of headlines regarding the risk of a large Delta outbreak there, evidence to hand suggests the situation remains under control, with only around 100 new cases being reported each day. The downside surprise to retail sales in July however implies the restrictions necessary to limit Delta’s spread were still having a significant effect on growth as the September quarter began. If restrictions and related uncertainty persists, as discussed in Market Outlook in conversation, China growth will have to be marked materially lower, likely down to the low 8% range from 9.25% at the time of our August Market Outlook.
Also investigated in our latest podcast, while the US economy and dollar is presently being given the benefit of the doubt with respect to Delta’s spread, readers should recognise the US is not immune to this latest wave of COVID-19. To the contrary, new cases are currently around half the peak level of December/January, on a proportional level of testing, and hospitalisations are rising rapidly.
While the minutes of the July FOMC meeting provided a constructive view of the economic outlook and continued to point to a taper announcement from the FOMC in September, also apparent was a desire to recognise risks and adapt policy. Since then, the US and global Delta outbreaks have intensified, and some indicators of sentiment and consumer spending have wavered. The effect of this current outbreak on US consumer sentiment and spending will be critical for the outlook for both monetary policy and the US dollar, particularly as fiscal support is rapidly coming to an end. Next Friday will provide a pivotal update on the outlook for the economy and policy, with FOMC Chair Powell to speak at the Jackson Hole Symposium.
