Key insights from the week that was.
In Australia, there was finally a sigh of relief for consumers as October’s Westpac-MI Consumer Sentiment Survey reported a 6.2% increase in the headline index to 89.8, a two-and-a-half year high. The chief culprit behind this improvement was a significant pull-back in interest rate hike fears, as consumers take the cue from lower measured inflation and the broader global economic backdrop, which has seen many other peer economies begin to lower interest rates. This led consumers to have a much more positive view on the economy, with the sub-indexes tracking the 12mth and 5yr ahead view up 14.3% and 8.0% respectively in the month. Meanwhile, the progress on family finances remained relatively more subdued, highlighting the extent to which cost-of-living pressures have loomed over households. While pessimism still dominates overall, this marked one of the most constructive single-month reads since the RBA began raising interest rates.
This backdrop bodes relatively well for businesses too, given that both business and consumer confidence tend to move together over an economic cycle. On the conditions front, the latest NAB business survey also suggested that business conditions have found somewhat of a ‘floor’ over the course of this year. This is consistent with our view that economic activity is current around its nadir, having slowed to 1.0%yr in Q2 2024. In a context of recent tax cuts and monetary policy easing on the horizon, there is certainly scope for further improvement in sentiment and, hence, consumer spending. We are forecasting a recovery in growth hereafter to a pace of 1.5%yr by year-end and 2.4%yr in 2025. For more detail behind our view and forecasts, please see our latest Market Outlook published on WestpacIQ.
The RBA’s September Minutes provided another opportunity to digest the Board’s views on the balance of risks. There were two important developments on this front. Firstly, on the topic of the supply-demand balance, the RBA acknowledged that momentum in demand was weaker than initially expected. This, in effect, toned down some of their hawkishness on inflation from August, when the Board was telegraphing a more pessimistic view on supply potential. Secondly, there was a larger emphasis on assessments of financial conditions and the risk that they could turn out to be insufficiently restrictive to return inflation to target. We will continue to watch how the discussion of these points evolves over the coming months, but for now, the RBA’s focus is clearly squared on the dynamics around underlying inflation. We continue to expect the RBA to deliver its first rate cut in February 2025, before reaching a terminal rate of 3.35%. In this week’s essay, Chief Economist Luci Ellis details the longer-run trends guiding our thinking behind the global interest rate structure.
Offshore, the focus remained on US monetary policy.
Before jumping into this week’s events, a quick note on the September non-farm payrolls print released late last week. Non-farm payrolls surprised to the upside rising 254k and exceeding the median market expectations of 150k. There was also an upward revision of 72k for the previous two months, attributed to a recalculation of seasonal factors. The unemployment rate inched down to 4.1%, 0.3ppt below the FOMC’s forecast for Q4 2024. And the average hourly earnings rose by 0.4%mth with annual growth at 4.0%yr, up from 3.6% in July.
This week, minutes for the FOMC’s September meeting were released. They showed that both 25 and 50bp cuts were on the table and the committee chose to go with the latter. Interestingly, several members argued that a 25bp cut was more consistent with a gradual path to easing as well as providing a degree of predictability. And the committee expressed concern about how the 50bp cut will be perceived with the minutes noting that “it was important to communicate that the recalibration of the stance of policy at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be more rapid than participants’ assessments of the appropriate path”. With regards to the FOMC’s assessment of the US economy, the labour market was perceived to be close to the long-run maximum employment, and less tight than prior to the pandemic. Risks of its further unwanted deterioration were assessed to have increased (this is before the release of the September jobs data). And the FOMC had greater confidence in inflation’s return to 2.0% noting upside risk had ‘diminished’.
On the face of it, this week’s CPI data release for September was somewhat inconsistent with FOMC’s assessment, with both the headline and core CPIs rising slightly more than expected, by 0.2%mth and 0.3%mth respectively. Both rates were unchanged from August and fully in line with the averages over the last twelve months suggesting that inflationary pressures in the US remained stable last month. But details suggested that the upside surprise was accounted mainly by higher inflation in the core goods category and quite volatile items in it. The shelter component, one of the key drivers of headline inflation, showed that prices increased by 0.2%mth, half the average pace seen in 2024 so far. Ex-shelter, the annal CPI growth rate was just 1.1%yr. Subsequent comments from the FOMC members downplayed the importance of the September CPI print suggesting they are continuing to focus on the longer-term decline in inflation.
Closer to home, the Reserve Bank of New Zealand cut the overnight cash rate by 50bp to 4.75% in line with expectations. The move was driven by an assessment that the economy has excess capacity which should facilitate lower price and wage-setting behaviours. “Subdued” economic activity and employment conditions which continue to “soften” were credited to the still-restrictive monetary policy stance. Westpac expects another 50bp cut to come in November and for the policy rate to fall to a low of 3.75% in 2025.
