Key insights from the week that was.
Developments in Australia and the US this week were supportive of our views for the RBA and the FOMC.
The Westpac-MI Consumer Sentiment survey delivered a positive update on confidence. The RBA’s decision to leave the cash rate unchanged in April proved to be a major support, resulting in the headline index surging 9.4% in the month, up from 78.5 to 85.8. This is also highlighted not only by the upswing across the survey’s housing sub-indexes – confidence among mortgage holders up 12.2%; the ‘time to buy a dwelling’ index up 8.2%; and house price expectations up 16.7% – but also by the broader recovery in household’s expectations around the near-term economic outlook and family finances. While these developments certainly mark a clear improvement from the deeply pessimistic reads observed over February and March – a situation that was only comparable to the major economic dislocations in the 1980s-90s – at 85.8, the headline index is still characterised as being in weak territory.
As discussed by Chief Economist Bill Evans, survey evidence from prior tightening cycles suggests that upon more convincing evidence that the RBA Board will pause policy for a sustained period, there is greater scope for Consumer Sentiment to return towards more normal levels. For now, consumers remain circumspect around whether the RBA’s April pause will last; a view which we share, as we continue to forecast one final 25bp rate hike at the May Board meeting.
The March labour force survey is also consistent with our view, delivering an upside surprise. The lift in the participation rate (up 0.9ppt to 66.74%) saw the labour force grow by 51.4k, broadly matching the gain in employment of 53.0k. The labour market remains extremely tight, with the unemployment rate surprising to the low side for a second consecutive month, unchanged at a near-50 year low of 3.5%. The employment-to-population ratio rose to a near-record high of 64.4%. Overall, the update confirmed that businesses’ appetite for new workers remains robust, and with continued gains in labour supply growth – as also evinced by the underlying strength in overseas arrivals – labour force outcomes have been able to remain sound and above expectations at this stage of the cycle.
Before moving offshore, a quick note on businesses. The latest NAB business survey provided further evidence of: an economy operating at a high level of capacity; an economic slowdown over the past half year; and a fragile and pessimistic mood amongst businesses. The business conditions index declined once again, falling by 1pt to +16 in March, well down from around +24 last September and reflective of the loss of momentum within the Australian economy as a consequence of high inflation and rapid interest rate rises. Having lifted 3pts to a still subdued -1, the business confidence index may receive some further reprieve from the RBA’s decision to pause in the April survey; however, the greater concern for businesses is the downbeat outlook for domestic demand and the fragile and volatile global economy.
Turning to the US, two key data reports were released this week. Non-farm payrolls data indicated that 236k jobs were created in March (219k net of revisions to the prior two months), providing a benign read on the health of the labour market – strong enough to limit concern over imminent recession, soft enough to ward off concern over additional inflation pressures. While household employment rose by a much larger 577k in March, this outsized gain only partly offsets the persistent relative weakness in household employment versus payrolls over the past year. Also notable was that the participation rate continues to rise, the increase in the labour force offsetting 480k of the 577k jobs created in the month. Offering further support to the idea that labour demand and supply are now close to balanced, hourly earnings rose by a modest 0.3% in the month, and weekly hours worked edged down by another 0.1hrs to be 0.3hrs lower than a year ago. It is also worth emphasising that the ISMs are pointing to a continued downtrend in job creation which, given the uncertainties around the banking system, is likely to gather pace over the coming months.
On the March CPI report, core inflation (excluding food and energy) was in line with expectations, the 0.4% monthly gain nudging the annual rate slightly higher to 5.6%. The main reason for the ‘stickiness’ in the core measure is due to shelter inflation, which is being held up by the cost of short-term accommodation (2.7%). For the policy outlook, this is not a concern as all leading indicators of rents point to an abrupt deceleration ahead. The remaining detail was also constructive. Other segments of core services – besides shelter – is showing promising signs, with annual inflation across transportation, medical care and recreation all continuing to decelerate. Positively for households, energy prices posted a larger-than-expected decline of 3.5% and grocery prices fell by 0.3%, resulting in headline inflation coming in below expectations at 0.1% in the month.
For the FOMC, these updates provide a balanced look into the progress on inflation and underlying pressures within the economy. We continue to believe that the prudent path for policy is to allow inflation to continue its deceleration without raising the risk of materially weaker growth. With the fed funds rate already at a heavily contractionary 4.875%, policy should remain on hold over 2023 before interest rates can be brought back near neutral over 2024 and 2025, allowing growth to slowly accelerate back towards trend.
