Key insights from the week that was.
The past week has been significant for global central banks. Key data releases have also been received for Australia, New Zealand and China.
Beginning in Australia, most notable this week was the February labour force survey which came in ahead of our top-of-the-range forecast; in the month, 77k jobs were created, taking the unemployment rate down to 4.0% despite a 0.2ppt rise in participation. Notably, this is only the third time in the history of the monthly labour force survey that the unemployment rate has been this low; and, in this instance, it has been achieved with participation at a record high.
Looking ahead, both the NAB business survey and our own Australian Chamber–Westpac Survey of Industrial Trends point to Australian businesses remaining keen to hire and willing to pay higher wages to secure staff. Historically weak population growth also remains a key factor behind our tight labour market.
Speaking of Australia’s re-opening, February’s arrivals and departures were little changed from last month (+7.1k and -9.5k respectively), pointing to a modest pick-up in overseas travel. The vast majority of arrivals are Australian residents returning from short-term trips, but this still remains only 16% of pre-pandemic levels. At 49.4k, students are currently the largest source of visa-component arrivals. With the border reopening to all fully vaccinated individuals in late February and a significant pick-up in travel related expenditure (as shown in the latest Westpac Card Tracker), travel abroad and into Australia should continue to strengthen in coming months.
While thankful and cognisant of the gains being made by the Australian economy, as detailed in this week’s March meeting minutes, the RBA remains acutely aware of the risks to the outlook stemming from Russia’s invasion of Ukraine and other global risks as well as lingering uncertainty around the length of time required to see a broad-based and sustained pick up in wages growth, necessary to achieve inflation at target into the medium term. The latest episode of our Market Outlook in conversation podcast explores the outlook for Australian interest rates and the dollar, amongst other salient themes.
Across in New Zealand, their economy’s 3.0% gain in the December quarter was a little below market expectations but above the RBNZ’s February forecast and large enough to wipe out the majority of the 3.6% decline in the three months prior.
Turning then to China. First off, a much stronger set of activity partials was received for February than was anticipated by the market. Most striking was fixed asset investment which came in at 12.2%ytd against expectations for a 5.0%ytd gain. However, retail sales and industrial production were also nearly twice the market’s expectation, respectively 6.7%ytd and 7.5%ytd.
While we recognise the sharp rise in COVID-19 cases and stringent restrictions put in place to stop the virus’ spread is a concern for consumption and activity into the end of Q1, it must be remembered that authorities continue to act this way so the rest of the country can operate near normal. Also, as occurred in prior instances, this round of restrictions looks to be having quick success, limiting the duration of the shock. From the late-2021 GDP pulse and the February activity prints, it seems fair to conclude that the net economic impact of authorities’ zero COVID-19 approach is declining. We continue to hold an above-consensus view for growth in 2022 of 5.7%.
Over in the UK, the Bank of England’s March meeting delivered a rate hike with dovish undertones – the latter to the market’s surprise. The Monetary Policy Committee was more divided than expected, with 8-to-1 in favour of a 25bp lift in the bank rate to 0.75%, the strength of the labour market and domestic cost pressures being cited as the key justifications for a hike. The Committee did however clearly soften their commitment to tightening policy over coming months, suggesting it “may be appropriate” rather than “likely” depending on the data. The risks associated with Russia’s invasion of Ukraine dominated the domestic and global economic discussion.
The UK’s growth and employment outlook have weakened, the report stressing inflation’s intensifying impact on real incomes. Since the February report, where the Committee outlined their central projection for a peak in inflation of 7.25%, considerable upside risk to energy and commodity prices has materially worsened the inflation outlook. The Committee now sees inflation lifting to 8% in Q2 2022 and possibly peaking higher this year before falling back materially at some time “further out”. The dampened policy outlook raise questions as to whether inflation could be pulled below target by 2025, as per the February projections. Whether the Committee will react to building inflationary pressures in coming months will be highly contingent on global developments and their effect on the UK.
While all these global developments were significant, the most important outcome this week was that of the March FOMC meeting. As expected, a 25bp fed funds hike was delivered and the post-meeting communications guided that balance sheet normalisation was but two to three months away. Unsurprisingly, the Committee also showed a great deal of confidence in the labour market and broader economy, to end-2024 and into the medium term. The surprise however was the aggressive shift in rate expectations amongst Committee members.
We are not particularly surprised that the FOMC has adopted the top of the market range for fed funds rate hikes in 2022. What is of interest is that they see a need to continue raising rates in 2023 even with inflation having been brought back to near target and given the 6-12 month lag in policy’s effect. Against the 6 more hikes in 2022 and 3-4 hikes in 2023 now forecast by the FOMC, we continue to anticipate 4 more hikes in 2022 and 2 in 2023. We remain comfortable with this view as financial conditions have already tightened materially, and will tighten further on rate hikes and balance sheet normalisation, and as real wages continue to decline.
