Key insights from the week that was.
Trust was the key theme in Australia and around the world this week.
Starting with the NAB Australian Business Survey. By mid-September, when the investigation was conducted, an end to the lockdown was in sight for NSW and Victoria thanks to rapid progress in vaccination. This translated into a 19 point increase in confidence to +13 nationally – a reading well above the long-term average. In NSW in particular, confidence jumped 42 pts to +27, while in Victoria (where the reopening is later and the trajectory of cases more threatening), confidence gained “only” by 16 pts to +5.
Consumers also have a clear eye on the reopening, according to our Westpac-MI sentiment survey, with trust levels in Australian states broadly aligned, although NSW is still under restrictions until the end of the period. October sampling, and Victoria is expected to stay locked up until late in the month. At 104.6, the national sentiment measure remains above average as well as the level seen before the pandemic.
While the economic expectations sub-indices fell over the month, the 1- and 5-year outlook remains well above their long-term averages. Opinions on family finances also fell over the month, but are only slightly above average. The promise of an end to lockdown conditions brought unemployment expectations down during the month; and, relative to its long-term average, this series indicates a strong recovery in employment and a tight labor market.
However, housing affordability is clearly a concern for households, with ‘home buying time’ down 14% in the month and 37% from its peak in November 2020. A Initial tightening of loan valuation conditions in the middle of the sample week would have been an additional negative factor for affordability opinions in October, on top of the sharp price hikes last year.
Nonetheless, house price expectations remain strong, remaining near 8-year highs in October. Recent results from this survey and on housing markets across the country have led Westpac Economics to revise our views on house prices for 2021 and 2022. Respectively, the annual price growth forecast for each year has been increased by 4ppts and 3ppts at 22% per year and 8% year at the national level. The modest decrease expected in 2023 due to the cumulative effect of macroprudential measures as well as rate increases from the start of 2023 remains at -5% per year. A detailed view by state can be found in the Bulletin published by Chief Economist Bill Evans and Chief Economist Matthew Hassan linked above. Chief Economist Bill Evans also discussed macroprudential policy and the interest rate outlook in our October edition of the Market Outlook in Conversation podcast.
The other key release for Australia this week was the September Labor Force Survey. The loss of jobs over the month was a little less important than expected by the market (-138k real against -150k consensus), continuing the race of outperformance through the pandemic. Despite the job cuts, the unemployment rate barely budged (+ 0.1% to 4.6%) thanks to a 0.7ppt drop in participation. While turnout will rebound as each state reopens in late 2021 and there is likely to be an initial mismatch between workers and jobs, leading to an increase in the unemployment rate, the September update suggests that the rate spike unemployment rate could be closer to 5% than the 5.4% we predicted.
Offshore, this week’s data largely met consensus expectations and was in line with existing political views. In the United States, CPI and PPI data for September supported the belief that the current explosion in inflation will prove to be transient, but also that risks are skewed upward. More importantly for policy, FOMC speakers have confirmed they see the end of 2021 as a good time to announce a cut despite a second straight downside surprise for non-farm payrolls in September (released last Friday).
As we detailed on Monday, there is enough strength in the household survey and reason enough to look through the impression of the September non-farm payrolls to warrant a November cut announcement by the FOMC. Moreover, based on the minutes of this week’s September FOMC meeting and our own forecast, the US typing is expected to end around mid-2022, giving way to a first rate hike in December 2022. These themes keys were also covered in this month’s Market Outlook in Conversation podcast.
While the events of this week have confirmed the progress of the United States towards normalizing monetary policy, the US dollar ends the week below its starting level on a DXY basis. We predict that relative growth and policy divergence matters far more than the outright position of policy in any jurisdiction, even the United States.
Until March 2022, we expect the US dollar to decline further (modestly), from around 94 currently at 91.5, as asset purchases decline in key markets and fiscal uncertainty calls into question the outlook for market growth in the United States. From there, however, an uptrend in the U.S. dollar on a DXY basis should strengthen, pushing the index back to, and then above, its current spot level through 2022 and 2023.
Currencies highly exposed to global dynamics and economic development, such as our own Australian dollar and, in particular, the Chinese renminbi, should outperform this trend. Regarding the latter’s outlook, as our video update highlighted this week, the current uncertainties surrounding Evergrande and China’s electricity supply are expected to have little impact on China’s outlook beyond the next few months. .