Cliff Notes: labour market critical to households’ resilience
Key insights from the week that was.
The January edition of the Westpac-MI Consumer Sentiment Index showed cost-of-living pressures and concerns over elevated interested rates remain firmly entrenched in the minds of consumers. Highlighting the significance of these factors, at 81.0, the index is currently among the bottom 7% of observations since the inception of the survey in the 1970’s. Perceptions of ‘family finances versus a year ago’ are almost 30ppts below long-run average levels and expectations for the year ahead are 13ppts below average. It is unsurprising then ‘time to buy a major household item’ fell heavily in the month to be 37ppts below average. In 2023, the labour market provided a degree of insulation against cost pressures, offering opportunities to find a better job or pick up more hours. Views here are beginning to shift however, the Unemployment Expectations Index softening to 130.7 in January, a result slightly above the long-run average.
That development is consistent with the overarching tone of the December Labour Force Survey. The seasonally adjusted headline figures from the survey were impacted by shifts in seasonal patterns into year-end, perhaps a consequence of the growing prominence of Black Friday Sales. Abstracting from this volatility, both employment growth and hours worked are slowing and the unemployment rate is drifting higher. While these dynamics point to emerging slack, the labour market is still very tight versus history and remains a critical support to households. Inflation continuing to trend lower, as forecast, will allow modest policy easing by the RBA from the September quarter, aiding activity and limiting excess capacity in the labour market.
In the UK, the CPI surprised to the upside rising 4.0%yr in December driven by recreation and culture as well as alcoholic beverages and tobacco. Energy prices continued to dampen the annual number, however. Inflation’s breadth is narrowing: 71% of the CPI basket grew above 2% compared to almost 90% at the start of 2023. But services inflation remains sticky and is now responsible for almost all inflation. Wages remain a concern for the inflation outlook. Data released this week showed wages growth has eased from 7.2%yr to a still-elevated 6.5%yr. Last week’s Decision Maker Panel survey also showed wage expectations edged up to 5.2%yr at the turn of the year. The BoE arguably has the most significant challenge across the developed world in reining in inflation.
In the US, anecdotes from the Federal Reserve’s Beige Book provided evidence of balance in the labour market with contacts reporting “larger applicant pools, lower turnover rates, more selective hiring by firms, and easing wage pressures”. Sentiment around prices was benign: consumer price sensitivity causing retail firms to reconsider pushing through increases in the cost of production, insurance premium hikes having a broad impact on bunesses cost across the economy.
While a majority of Federal Reserve Districts reported “little or no change in economic activity” in the latest survey period, retail sales beat expectations in December, total sales rising 0.6%mth and the control group (which feeds into GDP) 0.8%. For consumers, there is a growing tension between greater comfort with the cost of living (given mortgage rates are fixed for 30-years and inflation is returning to target) and growing uncertainty over job prospects. The net result is likely to be a period of below-trend consumption in 2024, though bursts of activity are still likely.
Of Fed speakers this week, Governor Christopher Waller’s remarks at the Brookings Institute received the most attention. Market participants viewed his discussion of current conditions and prior rate cutting cycles as an attempt to rein in the market’s expectations vis a vis both the timing and scale of rate cuts. We instead assess his intent as being focused on the extent of easing over 2024, with Governor Waller twice noting that the 3 and 6-month rate of core PCE inflation “has been hovering close to a 2 percent annual rate”, the FOMC’s target, where it is expected to remain in coming months.
To us, an effective way to manage expectations over the policy response to a soft landing is to cut in March but then signal in revised March forecasts that the decision was one of the three cuts the FOMC projected for calendar 2024 at the December 2023 meeting. Westpac’s view remains that four cuts will be delivered by the FOMC in 2024; even after this week’s data and remarks, the market still has almost six priced.
In Asia, Q4 GDP showed that the Chinese economy expanded by 5.2%yr, meeting the government's growth target of 'around 5%'. Fixed asset investment grew by a modest 3% overall, but investment in high-tech industries was much stronger at 10%, with some key sub-sectors related to electric vehicles and green power stronger still. China has focussed on research and development for goods related to the green transition over the past decade and is now ramping up capacity to meet burgeoning global demand.
This industrial strength is a striking contrast to the uncertainty that continues to burden consumers. There are promising signs regarding discretionary consumption, but households remain very cautious on housing’s outlook. An end to the now two-year contraction in house prices and investment will need additional support from authorities. Until this transpires, consumer demand will remain at risk given the hit household wealth has taken. All told, we remain of the view that China can achieve growth at or above 5% in 2024 and 2025 but, at least in the near-term, downside risks bear careful monitoring.
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