Cliff Notes: expectations tested
Key insights from the week that was.
In Australia, the latest update on Westpac-MI Consumer Sentiment was somewhat discouraging. February’s gain, initially viewed as a tentative sign of a recovery in confidence, has largely reversed over March and April, the headline index declining 1.8% then 2.4% to 82.4 in April, just above the average of the six months to January (81.0). Australian consumers are experiencing one of the most drawn-out cycles of deep pessimism in the past fifty years, second only, since the survey began in the 70s, to the sharp economic recession of the early 1990s.
The component detail highlighted households’ ongoing concerns around cost of living and the inflation outlook; views on the 5-year economic outlook and ‘time to buy a major household item’ were down sharply in April (–4.4% and –6.6%). Though views on family finances improved at margin this month, they remain very weak. The upcoming Stage 3 tax cuts will benefit, but consumers are unconvinced of any near-term relief with respect to monetary policy – mortgage rate expectations lifted slightly in April.
In this week’s essay, Chief Economist Luci Ellis explores the broader implications of cross-country policy divergence, taking into consideration both monetary and fiscal policy.
Other data updates received this week continued to reinforce recent trends. The latest NAB business survey reported a modest fall in business conditions (–1pt to +9), continuing the downtrend from well above average levels in 2022 to a little below the 10-year average currently. Having experienced a decline in forward orders in 10 of the past 12 months, businesses are cautious over the outlook, with confidence around average levels (+1pt to +1). Encouragingly for inflation, the survey continues to report moderating labour cost and price pressures, now at their lowest levels in around two years. As is the case for consumers, any sustained lift in conditions and confidence is unlikely to be achieved until both the upcoming tax cuts and the beginning of the easing cycle works its way through the economy.
Finally, housing finance approvals posted a slight increase in February (+1.5%), the gains tilted slightly more to owner-occupiers (+1.6%) than investors (+1.2%). Of note, revisions to the monthly profile trimmed the cumulative decline over November to January from –7.9% to –3.4%, making approvals recent performance look a little firmer than initially reported. That said, state outcomes have been generally flat to slightly negative over the past three months, albeit with wide tails – Victoria (–4.8%qtr) and WA (+5.3%qtr).
In the US, the March CPI surprised to the upside, rising 0.4%mth and 3.5%yr. Most of the upward pressure was outside the direct control of policy – energy contributed positively for the first time since February 2023, and the continuing surge in motor vehicle insurance premiums saw transport costs jump. The shelter component also continued to give outsized support to aggregate inflation, both because of its extreme weight and as shelter inflation continues to moderate slowly from its historic highs. Excluding shelter, annual CPI inflation has averaged 1.7%yr the past 11 months, with all annual outcomes over the period between 1.0%yr and 2.3%yr. Note, these outcomes include supercore services’ strength – the current concern of the market. On the broader CPI ex-shelter view, the FOMC have achieved their aim and are positioned to increasingly focus on the downside risks evident in the business surveys regarding employment and investment.
The minutes of the FOMC's March meeting showed the Committee is making this transition, though at this stage still have meaningful lingering concerns over inflation. The pace at which these fade will be determined by the strength of consumer demand and nonfarm payrolls.
In Europe, the European Central Bank remained on hold but opened the door for a first rate cut in June. An addition to the opening statement set the foundation noting, "If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction."
In the press conference there were references to easing underlying inflation, moderating wage growth and firms partly absorbing increases in labour costs. While progress in inflation has been seen, services inflation has remained sticky at around 4.0%, accounting for more than 70% of total inflation. The ECB's Bank Lending Survey meanwhile points to policy having a restrictive impact with business loan demand falling sharply and credit conditions tightening. Data in the lead up to the June meeting should give the ECB sufficient confidence to begin easing.
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