Key insights for the week.
In Australia, the monthly CPI index fell by 0.3% in October, bringing the annual inflation rate down from 5.6% to 4.9%. While encouraging for policy, there were no convincing upside surprises in the details. In fact, commodity prices, which account for the bulk of the new information at this point in the quarter, were It was reported that the stock fell by 0.1%. The key result was a decline in services inflation (-0.7% m/m). However, note that we may see a partial reversal as a large portion of the services basket will be explored next month.
Other consumer statistics released this week were also weak. Nominal retail sales fell 0.2% in October after increasing 0.9% in September. Taking into account inflation and population growth, real retail spending per capita has declined sharply, ranging from -4.5% to -5.0% per year. Another “tumultuous” month for housing approvals, but it did little to change the underlying narrative. Approvals remain weak, with limited signs of a sustainable recovery, suggesting that housing availability and affordability will continue to have a significant impact on prices and rents. For a comprehensive update on the current state of Australia’s housing market and its outlook, read the latest edition of Westpac’s Housing Pulse.
As Chief Economist Lucy Ellis has argued, the flow of data since the RBA’s November meeting has not provided any further significant upside surprises. But in recent weeks, RBA Governor Bullock has spent much effort explaining the nuances surrounding Australia’s inflation outlook. The key message is that if there is a threat that inflation will take longer to return to target than currently expected, the RBA Board will respond by tightening policy further. While these risks will certainly come to a head early next year, we still believe that inflation will most likely slow by the end of the year and into 2024, eliminating the need for further increases in the cash rate. If inflation moves convincingly towards the target, he will probably have room to start easing policy from the third quarter of 2024. Over this period and the medium term, the cost and productivity of labor and capital will continue to be important to policy.
Ahead of its third quarter GDP report, ABS also released two sub-indicators on investment this week.
It revealed construction activity rose 1.3% in the quarter, in line with Westpac’s forecasts. The details continue to highlight the increasing contribution from public works, mainly infrastructure projects (+4.2% quarter-on-quarter). On the other hand, private construction remains at a high level (-0.7% quarter-on-quarter). Housing activity continues to be disappointing, with new home construction still 0.7% below pre-COVID-19 levels, while renovation activity is up 16.1%.
Then, the third quarter capital spending survey showed a surprising upside compared to our expectations, with current activity increasing by 0.6%. His 0.5% increase in total capital expenditures was constructive, although the performance of the mining and non-mining sectors was clear (+5.9% vs. -0.5%). In terms of spending intentions, the fourth estimate of capital expenditure plans for 2023/24 remains optimistic, increasing by 10% compared to the fourth estimate a year ago. In our view, this represents a 9% increase in nominal capex over the financial year. But momentum is likely to wane as the momentum from tax breaks wanes and the drag from weak demand becomes more apparent.
Following the strong results in capital spending, we slightly raised our third quarter GDP forecast to 0.4% (1.8% y/y).
In the United States, anecdotes from the Federal Reserve’s 12 districts were published in the latest Beige Book. Regarding economic activity, demand for goods is perceived to have weakened, but services have held up. Expanding the change in total momentum, “2 [Districts indicated] Condition is flat to slightly down, 6 [noted] Only “four districts reported modest growth” compared to “slight decline in activity.” There were also clear signs that the labor market was cooling, with applicants more readily available and companies feeling more comfortable letting go of underperforming talent. While consumer credit remained strong, corporate loan demand also declined. Still, some banks say they are seeing an increase in consumer delinquencies. In this context, comments from FOMC members throughout the week expressed optimism that a soft landing is being achieved and that current policy settings are sufficient to contain inflation.
Adding weight to this view is that the PCE deflator was flat month-on-month and 3% year-over-year in October. These components are consistent with his recent CPI results, suggesting that the next level of inflation will need to be driven by the haven component. Personal income and spending both increased by 0.2% from the previous month. However, income growth outpaced spending throughout the year, highlighting consumer restraint. The pace of real income growth will be crucial in determining the extent to which consumption and GDP will remain below trend in 2024, and the likelihood of a subsequent recovery. Significant job cuts, which the Beige Book suggests are a risk, would destabilize income growth and lead to a significant decline in GDP. Financial status and credit status are also important.
In Europe, the preliminary CPI slowed in November from 2.9% to 2.4% y/y, while the core indicator also improved significantly from 4.2% to 3.6% y/y. This slowdown was driven by a surprisingly large slowdown in services inflation from 4.6% to 4.0% annually. While the results ostensibly support the case for cutting interest rates in the near term, European Central Bank President Nagel made it clear that risks remain “skewed to the upside” and that if inflation picks up again. He also said he would not rule out the possibility of further rate hikes.
In Asia, China’s NBS PMI was almost flat in November. Manufacturing input prices fell by 1.9 percentage points, reflecting the impact of excess capacity in the economy as global supply pressure eased. Although output prices improved, the index remained below 50. Further downward price pressure will support global goods deflation. It is important to recognize that this trend is driven not only by softening demand, but also by improvements in capacity, productivity, and efficiency. On the other hand, the non-manufacturing PMI remained slightly above 50. Fortunately, employment and new orders appear to be stabilizing, albeit at weak levels.
