Key insights from the week that was.
A quiet week for data kept the focus on monetary policy here and in New Zealand.
The RBA’s October meeting came and went with little fanfare. Their plan to February 2022 had already been announced, so the statement was simply an opportunity to update the market on any changes to the Bank’s views.
With domestic developments in the past month largely as anticipated, there were no significant new observations on the economy. In short, GDP is expected to have “declined materially” in the September quarter, but this set back is believed “temporary”, with the economy “expected to be back around its pre-Delta path in the second half of next year”. Despite this recovery, the RBA remains cautious on the outlook for wages and hence committed to “not increase[ing] the cash rate until actual inflation is sustainably within the 2-3 per cent target range”.
With the latest RBA Financial Stability Review due today at 11:30am and given the strength of the housing market in 2021, Tuesday’s October decision statement included additional commentary on prudential policy. Specifically, Governor Lowe noted “it is important that lending standards are maintained“ and “that loan serviceability buffers are appropriate”. These comments were followed by APRA undertaking the first macroprudential policy tightening of this cycle in the form of a 50bp increase in the serviceability buffer, the benchmark spread used to assess potential borrowers’ capacity to repay their loan if interest rates increase. From APRA’s perspective, the decision was made as “increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building”.
Chief Economist Bill Evans discussed this decision and the implications for housing during an extended period of rates at the lower bound in this week’s video update.
Before moving offshore, it is worth commenting on Australia’s two data releases of note.
In August, the trade surplus printed its third consecutive record high as export revenue rose 4.1% and import expenses fell 1.5%. On the export side, both prices and volumes were stronger than anticipated. For imports, global supply chain issues and lockdowns in Australia were likely, at least in part, to blame for the downside surprise.
The ABS’ payrolls release for the fortnight ending 11 September highlighted again the significant shock to Australia’s labour market from ongoing lockdowns, with national payroll jobs down 0.7% in the fortnight to 11 September after a 1.5% fall in the previous period. Victoria was responsible for 72% of payroll loss given their share of total employment and the progression of restrictions. Pleasingly, NSW payroll jobs fell by only 0.3% in the latest fortnight compared to -1.6% in the two weeks prior.
This report provides no reason to revise our -200k forecast for September employment as per the ABS labour force survey. The state result for NSW meanwhile points to a promising path out of lockdown, supporting our view for a quick reversal of recent job loss into year end and come early-2022.
Over in New Zealand this week, the RBNZ went ahead with their first rate hike for this cycle, increasing the cash rate 25bps to 0.50%. They also signalled the stance of policy will be tightened further. As detailed by our New Zealand economics team, the RBNZ’s medium-term views have not been affected by the interruptions to near-term activity caused by the current outbreak and associated restrictions. Our team continue to see additional rate hikes coming at the November, February and May policy reviews, and a consequent move to a cash rate of 2.0% by end-2023.
China, the prime focus for markets of late, was quiet this week as National Day was marked by a week of public holidays. We expect attention will again quickly turn to the plight of Evergrande and the effect of recent power outages – topics discussed at length in our October Market Outlook, due for release today on Westpac IQ – as China returns to work from today.
In the US too, the intensity of the news flow will ramp up quickly, with tonight’s September payrolls report likely to determine if the FOMC will formally announce their taper program at the November meeting or delay another month till December. We also expect many more headlines regarding fiscal policy.
Reports imply a short-term debt ceiling extension will be granted today until December, when the recent spending authority extension also lapses. However, debate over policy is unlikely to abate, with a few critical Democrats holding opposing views on key components of President Biden’s infrastructure agenda, threatening its passage.
The Republicans are unlikely to be helpful in resolving this conflict, and so it seems the US economy is not only at risk of a sentiment shock because of rolling uncertainty over the debt ceiling and the Government’s authority to spend, but also the significant long-term spending promised by the administration which market participants have already priced into their baseline expectations.
