Key insights from the week that was.
The ABS Monthly CPI Indicator surprised to the upside in April, a solid 0.5% lift raising the annual rate of inflation from 6.3% to 6.8%, well above the consensus estimate for a slight up-tick to 6.4%. Although dwelling prices and rents came in stronger than expected, this was largely offset by a fall in electricity prices, leaving total housing costs up only 0.3% in the month. In our view, the most significant driver for headline inflation was a 7.2% rise in holiday travel/accommodation costs. Highlighting the breadth of the pulse, the annual trimmed mean measure – which was reinstated in April– showed underlying inflation lifting from 6.5% to 6.7%.
The April CPI update poses upside risk to our current Q2 CPI forecast of 1.1% and highlights the need to continue carefully assessing inflation risks.
In the lead-up to next week’s Q1 GDP report, the ABS also released two partial indicators for investment.
Construction work done rose by a solid 1.8% in the three months to March, centred on the continued uptrend in infrastructure investment, public infrastructure up a sizeable 18%yr and private infrastructure 12%yr. Private building experienced mixed fortunes however, with new dwelling construction down 2.6% but renovation work up 2.7%.
The Q1 CAPEX survey subsequently delivered an upside surprise. In the detail for current activity, equipment spending posted a notable 3.7% gain, with strength most apparent in mining. On spending intentions, the second estimate for 2023/24 CAPEX plans remained constructive, up 5.0% compared to the second estimate a year ago. In our view, this implies a 5.9% rise in CAPEX spending over the financial year. While positive for now, we anticipate the investment outlook will soften, with later estimates likely to see firms mark down their plans.
Despite the solid reads on construction work and equipment spending, we have revised down our forecast for Q1 GDP from 0.4% to 0.2%, reflecting a softer read on consumption and a materially weaker contribution from net exports.
Before moving offshore, a quick note on housing. The recent stabilisation in Australia’s housing market continues to reverberate through CoreLogic’s home price (PDF 179KB) data, as evinced by the 1.4% gain in May across the nation’s capital cities, leaving prices up 3% over the last three months alone. Reflective of this progress, private credit growth (PDF 127KB) within housing-related lending segments is also stabilising at a subdued level, tracking a three-month annualised pace of 4%. While developments around the established market were mostly positive, an 8.1% decline in dwelling approvals highlights the hit to new construction from interest rates and construction costs. For a comprehensive update on the sector, see the Westpac Housing Pulse.
Offshore, China’s NBS manufacturing PMI remained in contractionary territory for a second consecutive month in May at 48.8 as the initial wave of re-opening faded. The non-manufacturing PMI also fell, but at 54.5 remained materially above 50, signalling continued expansion.
Lower demand from developed economies and anxiety over the outlook likely contributed to the deceleration, with the new export orders detail for manufacturing weaker than total new orders. For services, despite a material decline in new orders, the employment index held steady. This speaks to confidence in the medium-term outlook amongst the service sector. A historic comparison highlights why: over the 5 years before the pandemic, the non-manufacturing PMI averaged 54.1, 0.4pts below May; during the period, annual GDP averaged 6.7%.
Input and output prices also saw a substantial decline in the month across the economy. The producer price index has been declining on a year ago basis since October 2021 despite the input prices metric in the PMI growing for much of that time. Depressed input prices are flowing through to output prices, contributing to the palsy CPI prints seen since the start of the year – the CPI up just 0.1%yr in April.
Clearly then, the inflation concern of the developed world is not an issue for China. This provides scope for authorities to offer additional support if/ when they feel there is need. We expect data to remain volatile over coming months, but to orbit a strengthening trend. Policy support should only prove necessary at the margin.
Over in the US, the ISM manufacturing PMI ticked down to 46.9 points in May from 47.0 in April. The biggest change was seen in the ‘prices paid’ detail which plunged below 50 to 44.2. Assessed together with the Chinese data, this outcome suggests falling commodity prices and slower demand are resetting price growth globally. New orders and the order backlog also declined, signalling ongoing contraction in coming months. That said, manufacturers look as though they intend to hold onto staff, with the employment index holding above 50.
The desire to hold onto staff is being seen more broadly across the economy. Earlier in the week, the JOLTS survey reported 10,103k job openings in April, up from 9,745k in March, breaking the downtrend present since December 2022. The series tends to be highly volatile, so this result should not be taken as a sign of renewed labour market tightness but rather resilience. Supporting this view, the hiring rate remained stable in April, corroborating reports from the Fed’s beige book that businesses seem less keen on expanding their labour force, with many reporting they are ‘pausing hiring or reducing headcount’. Employees are also clearly of the view that it is better to remain in a known role than chance a new opportunity, the quit and separation rates continuing their downward trend.
Considering economic activity, the Fed’s Beige book also confirmed a slowdown in demand for transport services which likely fed through to input costs. But the Fed also reported “growth in spending on leisure and hospitality” and for economic activity overall, pointing to GDP growth below trend or stagnation instead of recession.
Finally to policy. FOMC committee member Barkin emphasised in a speech this week that he is looking at the employment and inflation data before determining whether demand-side pressures are abating in supporting the case for a pause at the June meeting. Jefferson and Harker however seemed to have a June pause as their base case ahead of tonight’s nonfarm payrolls release, as we do. Importantly, this week also saw the debt ceiling suspended until 2025, the market’s uncertainty fading as the bill moved through Congress.
The monetary policy outlook for Europe is much more uncertain. The flash CPI reported inflation fell to 6.1%yr in May as services inflation decelerated to 5%yr. But core inflation remains uncomfortably high. Indeed, ECB President Lagarde opined this week that “there is no clear evidence that underlying inflation has peaked” and that there is still “ground to cover to bring interest rates to sufficiently restrictive levels”.
