Australia & NZ weekly Week beginning 10 November 2014

Australia & NZ weekly
Week beginning 10 November 2014

RBA Statement on Monetary Policy:
growth & inflation forecasts, minimal changes.

RBA Assistant Governor (Economic) speaking.

G20 Leaders’ Summit, Brisbane, 15-16 November.

Australia: Westpac-MI Consumer Sentiment,
wages, housing finance, house prices, NAB business survey.

NZ: RBNZ Financial Stability Report, REINZ housing update.

China: October partials.

Europe: Q3 GDP.

US: retail sales, consumer sentiment, labour market conditions index.

Key economic & financial forecasts.
Information contained in this report was current as at 7 November 2014
Economic Research
Sydney +61 2 8254 8720
economics@westpac.com.au
New Zealand +64 9 336 5671
London +44 20 7621 7061
Westpac weekly
RBA Statement on Monetary Policy
Growth & inflation forecasts, minimal changes
As we expected, the Reserve Bank made minimal changes to
their growth and inflation forecasts in the November Statement
on Monetary Policy (SoMP). They retained the call that growth
to December 2014 would be 2½%; to December 2015 would be
2½-3½%; and to December 2016 2¾-3¾%. On the inflation front
underlying inflation is still forecast at 2¼% to December 2014
and 2¼-3¼% to December 2015. There has been a modest lift in
the inflation forecast to December 2016 from 2-3% in August to
2¼-3¼% in this November SoMP. The Bank attributes that slightly
higher inflation forecast to the lower Australian dollar which is used
in the November forecasts. Specifically, the forecasts are based on
an AUD of TWI 68 and USD 0.86. That compares with TWI 72 and
USD 0.93 in August. The key exchange rate for the forecasts is the
TWI which is assessed as 4½% lower than in August.
As we noted in our preview we expected that the lower exchange
rate forecast would boost underlying forecasts for net exports but
there would be a substantial offsetting effect from the assumed
fall in the terms of trade. That comes about as a result of the
assumption in August that iron ore and coal prices would remain
close to their current levels whereas we have seen substantial falls
since then. Overall, the Bank has revised down its forecast for the
terms of trade by around 2½% leading to an expected fall of around
4% over the rest of 2014 and early 2015. Weaker terms of trade
weigh on national income and expenditure and it is this effect that
is seen to offset the boost from the lower AUD. The Bank notes that
the net effect of these factors would provide “a small boost to GDP
in the near term” but this boost is offset by a downward revision to
business investment specifically related to weaker expected growth
in non-residential construction.
If we scrutinise the near term growth and inflation forecasts the
following pattern emerges: the Bank is expecting GDP growth in the
second half of 2014 to be only 0.9%, an average quarterly print of
0.45%. That is expected to lift to average quarters of around 0.8% in
the first half of 2015.
We were a touch surprised that underlying inflation is still forecast
at 2¼% for 2014. That implies a 0.5% print for underlying inflation
in the December quarter. That is expected to lift to a 0.7% pace in
each of the four quarters of 2015.
There are some significant changes in the Bank’s assessment of the
overall economic environment and the risks. On the international
front, the rhetoric around Europe is softened from “gradual
recovery” to “recovery expected to be modest”. The outlook for
the US is unchanged but the commentary on China is different,
specifically, the Bank now notes that “GDP growth [in China] in
2015 and 2016 is expected to trend gradually lower”. While in
August the Bank allocated 13 lines to discussing its concerns
around the Chinese housing market, the November report lifts the
coverage to 34 lines highlighting the significant risks to Australia’s
economy and terms of trade of a “protracted decline in the Chinese
property market”. Clearly that scenario does not figure in the Bank’s
central view but its commentary does not include a convincing
discussion as to why these risks may be overstated.
On the domestic economy some familiar themes are repeated
around a likely wealth effect to boost consumer spending (an
implied fall in the savings rate) with an interesting observation that
consumer spending has been at its strongest in the states of NSW
and Victoria where house price appreciation has been the most
rapid. It is also noted that stronger house price appreciation in the
other states might therefore provide a more widespread boost to
consumption. Indeed it comes as a mild surprise that the discussion
in the “Uncertainties” section does not provide strong language
around the risks of rising house prices and excessive leverage.
The views around the labour market are little changed with the
unemployment rate being described as elevated, the participation
rate as low and wages growth as low. In August however it
was specifically speculated that there would not be a period of
sustained decline in the unemployment rate until 2016. In this note
that timing is described as “not expected for some time”. Arguably
that choice of language provides a little more optimism around the
labour market outlook than before. Certainly from our perspective
we expect improving conditions to evolve before 2016.
The Bank has taken a modest backward step in its assessment of
the strength of non-mining business investment: “a slight reduction
in the strength of the forecast recovery in non-mining investment”
particularly weighed down by non-residential building approvals
and spending intentions for buildings & structures from the Capex
survey.
Conclusion
Despite the fact that there has been little change in the Bank’s
forecasts there are some interesting nuances in this statement.
Firstly, we have noted over the last few statements a real evolution
in the attitude towards China. Earlier in the year the Bank took
a fairly complacent attitude to risks in China whereas now the
decision to provide such a detailed assessment around the risks
associated with the housing market is worth noting. The housing
market has clearly been on the Bank’s radar screen for some
months now given that they dedicated a “fact-based” specialist
report in the August statement without highlighting the risks in the
same way.
Secondly, the discussion around household leverage and house
prices appears to be less alarmist than we have seen in recent
months with the wealth effect of house prices being highlighted
as a potential boost to consumer spending growth which is still
described as “modest” in the near term. Indeed the justification for
the assumptions of an above trend outlook for consumer spending
growth relies on falls in the savings rate.
The fall in the AUD which the Bank uses for these new forecasts has
clearly been very timely. With the need to further reduce the terms
of trade forecast by 2½%, no fall in the AUD would have required
the Bank to further lower its growth forecasts which are already
below trend for both 2014 and 2015.
Key themes around the timing of the expected lift in non-mining
investment and a sustained recovery in the labour market remain
fairly fluid. The Bank really has not received any additional data
since August to be able to express any more confidence about the
timing of those key macro developments.
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
2
Westpac weekly
Monetary policy works with a lag of around 12 months.
Consequently it is the Bank’s forecasts for growth and underlying
inflation in 2016 that should be signalling their current assessment
as to whether it will be necessary to tighten policy in the second
half of 2015 – our current forecast. In that regard the Bank
continues to provide some wide forecast ranges. For growth, the
range is 2¾-4¼% in 2016 and for inflation 2¼-3¼% (increased from
2-3% in August due to the lower trajectory for the AUD). If those
numbers were assessed over the course of the next 6 months or
so to be favouring the upper range of those bands then the Bank
would be preparing itself to tighten policy. At the moment of course
they continue to refer to “a period of stability in interest rates”
and based on the 2015 forecasts that seems entirely appropriate.
Over the course of the next 6 months those 2016 forecasts will
begin to be tightened up and the direction of interest rates will be
determined accordingly.
We remain comfortable with our expectation that the next move in
rates will be up but not until the September quarter of 2015.
Bill Evans, Chief Economist
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
3
Westpac weekly
Data wrap
Sep dwelling approvals
Sep retail trade
• Dwelling approvals came in much weaker than expected in
Sep with an 11% fall that was concentrated in Vic but included
significant declines in most states and segments. The market
was expecting a slight 1% decline. Westpac was forecasting a 2%
fall.
• The Sep retail report was much stronger than expected with
both monthly sales and Q3 real retail sales coming in well above
expectations.
• Note that approvals were coming from a high starting point,
with the Aug reading consistent with a 200k annual reading.
Big monthly moves are also quite common for total dwelling
approvals – historically, 4 in every 10 monthly observations has
been a move of over 5% while 1 in every 10 has been over 10%.
• Some pull-back was expected in Sep as Aug’s 3% gain was
heavily concentrated in NSW and Vic units – a segment where
large projects often result in big month to month swings. The
detail confirms this was a factor in Sep – unit approvals in Vic
and NSW were down 12.8%mth and 27.8%mth respectively,
reversing Aug gains of 20.9%mth and 30.7%mth respectively.
However, weakness went well beyond this particular segment.
Unit approvals ex NSW and Vic were also down 12.9%mth.
• Private sector house approvals were down notably with a
2.3%mth fall that is a relatively big move for this more stable
segment. Here the weakness was more heavily concentrated in
Vic which registered a 14.3% drop. The Vic weakness suggests
there may have been some ‘extenuating circumstances’ in the
month. The Vic state government has amended the way its
residential zoning system that came into effect at the end of Oct
and may have contributed to swings.
• Other aspects of the survey were a touch better. The value
of renovation approvals rose 0.7%mth to be up 10.1%yr and
3.4%qtr. The quarterly gain follows a 1.3% decline in Q2 and
an 8.7% surge in Q1. The state breakdown shows renovation
activity rising strongly in NSW and Vic and on a flatter and lower
trajectory in Qld and WA.
• The value of non-residential building approvals rose 1.4%mth but
remains well down on levels a year ago (–22.9%yr). Approvals
are down across all states although again the weakness is more
pronounced in Qld and WA.
• Clearly the Sep result for dwelling approvals is a weak one that
goes beyond simple one-off factors. It points to a turn in the
cycle from an apparent peak at the start of the year into some
sort of downswing. Gauging the pace of that downswing is now
the key. Survey volatility and some possible extenuating factors
in Vic means getting a good fix on the slowdown will require
several more observations. In the meantime actual dwelling
construction is likely to remain strong as the previous backlog
of approvals comes through, with the slowdown only coming
through once we are well into 2015.
• Retail sales rose 1.2% in Sep, the strongest monthly gain since
Nov 2009 (but only just).
• That said the detail shows an extraordinary 9.2%mth jump in
‘electrical and electronic goods retailing’. That jump may reflect
the launch of the iPhone 6 although the launch came late in the
month and previous iPhone versions released each year around
the same time have not resulted in similar jumps. Sales ex this
category were up a solid but less spectacular 0.7%mth.
• The quarterly wash-up showed nominal sales up 1.3%qtr and real
retail sales up 1%qtr. That compares to market expectations of a
0.5%qtr gain. A 0.3% rise in the implied retail price deflator was a
touch weaker than the 0.5% rise that had been suggested by the
Q3 CPI.
• Aside from the aforementioned jump in electronics, the other
category detail did show fairly broad-based gains in both the
month and the quarter. By state, nearly all recorded strong gains,
even ex electronics, with Qld the only notable soft patch.
• While there appears to have been a product-related one-off
boost in the latest month, the broader picture from the Sep retail
report is still more positive than had been expected. That in turn
suggests demand momentum has firmed in the third quarter. How
well this sustained into the year end remains unclear. Consumer
sentiment remains downbeat and appears fragile. Next week’s
read will be a very important read of the mood leading into the
peak Christmas period.
• Although the linkage between retail and components of consumer
spending in the national accounts has become increasingly
tenuous, the upside surprise clearly reduces downside risks to
Q3. Our forecast for Q3 total consumer spending remains for a
0.6%qtr gain, up a touch from Q2’s 0.5%qtr.
Oct TD–MI inflation gauge
• The Gauge rose 0.2% in Oct, following a mild 0.1% in Sep and
three consecutive flat prints before that.
• The annual pace lifted to 2.3%yr in Oct from 2.2%yr in Sept but
this is still less than the 2.4%yr in Aug, 2.5%yr in Jul and a recent
peak of 3.0%yr in Jun. The most recent low in the annual pace of
the Inflation Gauge was 2.1%yr in Oct 2013.
• In the first half of 2014 the Gauge was threatening to breach the
RBA’s inflation target band; it is now back in the bottom half of
the band.
• The annualised three monthly pace has lifted to 0.9%yr in Oct,
from the Sep print of 0.3%yr and the Aug low of 0.2%yr. The
three month annualised pace is still well down on the 3.6%yr
pace in May.
• Westpac estimates a small negative seasonal factor for Oct and
we again highlight that the 4th quarter is a seasonally soft one
for the Gauge.
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
4
Westpac weekly
Data wrap
Sep trade balance
Oct labour force
• Australia's trade deficit widened sharply in September to $2.3bn,
up from $1.0bn for August, which was revised from an originally
reported deficit of $0.8bn.
• Total employment rose 24.1k, which in the game of forecasting is
bang on Westpac’s forecast for a 25k rise. The market had been
expecting a 20k rise with a wide range of estimates from 0k to
35k.
• The September outcome was weaker than the market consensus
but the deterioration was short of our forecast (market median
–$1.8bn & Westpac –$2.6bn)
• Imports jumped by 5.6% in the month, meeting our expectations
(Westpac f/c 5.5%).
• Exports surprised, increasing by 1.0%, whereas we had forecast
a decline of 1.1%. A gold rush was the source of the surprise.
Exports excluding gold declined by 1.3%.
• Note, the AUD moved lower in September, down 1.3% on a TWI
basis and down 2.6% against the US dollar – a move that acts to
boost the cost of imports and boost AUD export earnings.
• The trade balance in Q3 was a deficit of $4.5bn, a slight
improvement on Q2 (based on the sum of the monthly
seasonally adjusted estimates).
• Net exports will add to growth in the September quarter. The
risks to our forecast for a positive contribution of 0.3ppts are
skewed to the upside.
• Full-time employment rose +33.4k following a –34.9k decline in
Sep while part-time employment fell –9.4k following an 11.2k rise
in Sep. Annual growth in full-time employment is looking more
reasonable now at +65.2k/0.8%yr compared to +4.8k/0.1%yr in
Sep.
• In Oct the participation rate rose from 64.5% (64.50%) to 64.6%
(64.56%) as a result of a 31.2k rise in the labour force. This
was marginally more than the rise in total employment but
the unemployment rate was flat at 6.2% when rounded; at two
decimal places it was a small rise to 6.24% from 6.20%. Youth
unemployment continues to rise hitting 14.0% in Oct which is the
highest rate in 13 years.
• The ABS reports a modest uptrend in the unemployment rate
from 6.0% in Jan to 6.2% in Oct. Were it not for the decline in the
participation rate, it was 64.8% in Oct 2013, the unemployment
rate would be much higher.
• This month there were no great surprises in the data, which in
itself is somewhat surprising.
• Total hours worked lifted 1.6%mth but this only took the annual
rate up to 1.2%yr which is still more reasonable that the rather
shocking –0.3%yr printed in Sep. Stepping back from the monthly
volatility, the three month average change was –2.9k in Oct
compared to –2.5k in Sep and +11.0k in Aug.
• The leading indicators continue to suggest that total employment
growth should be around 1½%yr. Given base effects, this is
not a hard target to hit by year end. But this is still slower
than the growth in working age population (1.8%yr) so without
a more meaningful drop in participation we believe that the
unemployment rate can hit 6.3% in late 2014 or early 2015.
Round–up of local data released over the last week
Date
Release
Mon 3
Sep dwelling approvals
Oct AiG PMI
Oct RP Data–Rismark home price index
Oct TD–MI inflation gauge %yr
Oct ANZ job ads
Sep retail trade
Q3 real retail trade
Sep trade balance, AUDbn
RBA policy announcement
Oct AiG PSI
Oct employment chg
Oct unemployment rate %
Tue 4
Wed 5
Thu 6
Previous
Latest
Mkt f/c
3.4%
46.5
0.1%
2.2%
0.8%
0.1%
–0.1%
–1.0
2.50%
45.4
–23.7k
6.2%
–11.0%
49.4
1.0%
2.3%
0.2%
1.2%
1.0%
–2.3
2.50%
43.6
24.1k
6.2%
–1.0%
–
–
–
–
0.3%
0.5%
–1.8
2.50%
–
20k
6.2%
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
5
Westpac weekly
New Zealand: week ahead & data wrap
Escaping the bind
This week we released our latest quarterly Economic Overview.
As always, it’s a compact but comprehensive summary of our views
on the New Zealand economy, available on our website at
http://www.westpac.co.nz/wib/economic-updates/.
Three key developments have informed our latest thinking: the recent
commodity price downturn, the intensifying housing shortage in the
Auckland region, and the absence of inflation. Combined, they add up
to continued solid, albeit uneven, economic growth, supported by a
more muted hiking cycle from the RBNZ.
Sharply lower dairy and forestry prices are certainly going to make
life difficult for some New Zealand regions and sectors over the next
year. Compared to a ‘normal’ dairy payout in the low $6 range, the
$4.80 payout we expect for this year’s season represents a revenue
loss of about $2.5bn for the industry. Add the hit to log exports and
the likely flow-on effects to confidence and government revenues, and
the impact on economic activity could plausibly exceed 0.5% of annual
GDP.
But construction activity is going gangbusters, fuelled by the
Canterbury rebuild, burgeoning construction activity elsewhere, and
booming net immigration. Net immigration has continued to exceed
even our bullish expectations, and we now expect the annual rate
to reach an unprecedented 55,000 in the first half of next year. The
resulting population growth has seen the Auckland housing squeeze get
noticeably tighter, despite the increase in building we have already seen
in the region. In recognition we have significantly upped our forecasts
for Auckland residential construction – and even on that assumption
Auckland’s housing shortage is likely to get worse before it gets better.
In part, low wage inflation is simply a reflection of low consumer
price inflation, which means less need for cost-of-living
adjustments. And some of the reasons for low inflation, such as the
soft patch in the global economy, are likely to wane. But there’s also
the fundamental fact that the economy’s capacity to meet demand
has proven more elastic than we gave it credit for – thanks to the
growing labour force, and an investment and efficiency drive by
businesses over the last few years.
Our current OCR forecasts reflect this reality. While we do expect
another tranche of OCR hikes starting in September next year, the
peak is likely to be a tepid 4.75%. There simply isn’t enough time left
for inflation pressures to gather a serious head of steam before the
Canterbury rebuild starts to wind down.
A key way in which this will give the economy more breathing space
is by pushing out the day of reckoning for New Zealand’s housing
market. Fixed mortgage rates have already fallen sharply as markets
have priced out further OCR rises, and could fall further in the near
term. Along with strong population growth and an election result
removing the risk around capital gains tax, that could well give the
housing market a modest second wind.
In recent months the housing market has shown little momentum,
possibly due to pre-election uncertainty. Hence we are looking forward
to next week’s October housing market data with interest. That said,
though we think conditions for a post-election rebound are in place,
they may not be leading to results just yet. While mortgage approvals
and listings picked up noticeably in October, data from a major
Auckland realtor suggest that this hasn’t yet translated into a pickup in
sales.
On balance we expect economic growth to maintain a respectable 3.2%
pace through next year, following 3.6% growth this year. Ordinarily, we
would expect sustained growth at this rate to run into a wall of rising
inflation and rising interest rates. But inflation has been largely missing
in action.
Also of relevance to the housing market will be the Reserve Bank’s halfyearly Financial Stability Review, out on Wednesday. The RBNZ has said
it will take the opportunity to review the mortgage lending restrictions
it put in place last year. We wouldn’t be surprised if it set out a plan for
their removal, the only real question being at what pace.
The themes of solid growth but tame inflation were clearly illustrated by
this week’s labour market data. Businesses continued to hire at a rapid
clip in the September quarter – employment rose 0.8%, to be up 3.2%
for the year. The payrolls-based Quarterly Employment Survey sent a
similar message, with filled jobs up 1% in the quarter and 3% over the
year.
On most relevant metrics the impact of the LVR restrictions has
met or exceeded expectations. House price inflation has clearly
moderated, despite resurgent migration. Housing credit is growing at
its slowest pace since early 2013. The number of new high-LVR home
loans written by banks remains safely below the Reserve Bank’s
stipulated speed limit, and on our estimates the high-LVR share of the
total stock of mortgage loans is back to the post-recession lows seen
in 2010. And while monetary policy won’t be the Reserve Bank’s main
concern in this context, surely the fact that inflation is at the bottom
of the target band won’t be entirely irrelevant.
But the resulting drop in the unemployment rate, to 5.4%, was
incremental. Surging population growth may be adding to housing
pressures, but it is also boosting the pool of available labour, as is rising
workforce participation among both older and younger workers. And
wage inflation continued to be subdued, inching up to 1.9% (according
to our preferred measure, the private sector, ordinary time Labour Cost
Index) and sitting at just 1.7% if we include public sector workers.
Round-up of local data released over the last week
Date
Tue 4
Wed 5
Thu 6
Release
Oct ANZ commodity price index
GlobalDairyTrade auction
Q3 HLFS employment
Q3 HLFS unemployment rate
Q3 Labour cost index
Oct QV NZ house prices
Previous
–1.3%
1.4%
0.4%
5.6%
0.6%
6.4%
Actual
–0.8%
–0.3%
0.8%
5.4%
0.5%
5.9%
Mkt f/c
–
–
0.6%
5.5%
0.5%
–
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
6
Westpac weekly
Data previews
Aus Sep housing finance (no.)
Owner-occupier finance & the rate cycle
Nov 10, Last: –0.9%, WBC f/c: –1.0%
Mkt f/c: –0.4%, Range: –3.0% to 2.7%
'000
• The Aug report showed a continued softening in the number
of owner-occupier finance approvals with NSW and WA leading
the way. The slowdown in consistent with the weaker consumer
sentiment reads on 'time to buy a dwelling' since late last year.
Notably both the number of construction related approvals and
the value of investor finance approvals (the latter excluded from
the headline measure) remain firmer.
• Industry data suggests owner-occupier finance approvals
continued to slip in Sep. We expect to see a further 1% decline
in the number of owner-occupier approvals. The figures around
investor activity will arguably be of more focus given the RBA's
recently voiced concerns. There are no reliable industry guides
on this front. Firming auction clearance rates and prices may
be a sign that this segment remains more active.
50
• Australia's housing markets have seen a moderate slowdown in
2014 after a strong surged in the second half of 2013. The ABS
residential property price index posted a solid 1.8% gain in Q2,
up 10.1%yr, a touch firmer than Q1's 1.5% rise but maintaining
the slower pace seen since Q4's 4% burst. Note that this
measure now includes 'attached' dwellings (i.e. townhouses,
terraces, units etc). Previously it covered only detached houses.
* excluding refinance
11
mortgage rate, standard variable (rhs)
9
40
7
30
5
2000’s avg
1995-1999 avg
Sources: ABS, Westpac Economics
20
Aug-98
Aus Q3 residential property price index
Nov 11, Last: 1.8%, WBC f/c: 1.0%
Mkt f/c: 1.5%, Range: flat to 2.8%
%
owner-occupiers
housing finance * (lhs)
Aug-02
Aug-06
Aug-10
3
Aug-14
Residential property price index, ABS measure
40
% qtr
% ann
qtrly (rhs)
30
7.5
*established house price
index prior to 2004
20
5.0
10
2.5
0
• Available private data on 'all dwelling' measures show gains
of 0.8%qtr, 7.9%yr (APM), 2.0%qtr, 8.4%yr (Residex to Aug),
and 2.8%qtr, 9.4%yr (RP Data-Rismark). The ABS measure
tends to track the APM series more closely due to their similar
construction. Accordingly we expect it to show a 1.0% gain,
down a touch on the first half of 2014 and taking annual price
growth back below 10%.
10.0
annual (lhs)
0.0
Sources: ABS, Westpac Economics
-10
Jun-90
Aus Nov Westpac-MI Consumer Sentiment
-2.5
Jun-94
Jun-98
Jun-02
Jun-06
Jun-10
Jun-14
Consumer Sentiment Index
Nov 12 Last: 94.8
• Consumer sentiment remained subdued in Oct with the
Westpac-Melbourne Institute Consumer Sentiment Index
in 'cautiously pessimistic' territory at 94.8 – the reading means
pessimists outnumber optimists by 5.2%.
130
• The Nov survey is in the field in the week to Nov 9. With the
RBA policy unchanged at its Nov meeting as expected, other
developments will have more of a bearing. In particular, the
ASX has rebounded 6% since the last survey, which was
conducted in the midst of a sharp sell-off (ASX –7.3% between
Sep and Oct surveys). Economic data has been mixed with
stronger than expected retail sales but softer data on housing
and jobs. The Budget-related concerns that have weighed on
sentiment for much of the year may start to dissipate although
this factor is very difficult to judge. The Nov sentiment read
is particularly important for setting the tone heading into the
critical Dec-Jan peak season for many retailers.
index
index
130
120
120
110
110
100
100
90
90
80
80
Sources: Westpac Economics, Melbourne Institute
70
Oct-98
70
Oct-02
Oct-06
Oct-10
Oct-14
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
7
Westpac weekly
Data previews
Aus Q3 wage price index
Nov 12 Last:0.6%, WBC f/c: 0.5%
Mkt f/c: 0.6%, Range: 0.5% to 0.8%
Labour market still has ample slack
4.5
WPI %yr
Net bal. %
Sources: ABS, Westpac Economics
• The Q2 Wage Price Index came in below our and the market’s
expectations, printing at 0.6%. Annual growth eased a tick to
2.59% from 2.61%, a new record low for the series which dates
back to Q3 1997.
• Following two strong quarters (0.9% in Q4 2013; and 0.8% in
Q1 2014), public wages increased by a more modest 0.6%
in Q2. Annual public sector wage growth slowed markedly to
2.8%yr, in line with the pace seen a year ago but well below Q2
2012’s 3.3%yr result. Private sector wage growth was on par
with that of the public sector in Q2 at 0.6% but annual growth
is weaker at 2.4%yr (or 2.3%yr including bonuses).
50
40
30
4.0
labour hard to
find
20
10
3.5
0
-10
3.0
Westpac-ACCI labour easy/hard
- adv 3 qtrs (rhs)
2.5
-20
labour easy
to find
-30
Private WPI %yr (lhs)
-40
-50
2.0
Sep-02
Sep-05
Sep-08
Sep-11
Sep-14
• Ample slack remains in the labour market and the public sector
is implementing wage restraint. The Sep quarter is set for
another benign wages print.
Card transactions, annual % change
NZ Oct retail electronic card spending
Nov 11, last -0.1%, Westpac f/c: 0.9%
• Retail electronic card spending slowed unexpectedly sharply
last month. With no obvious catalyst, we suspect a good part of
this was monthly volatility, and expect a corresponding rebound
in October.
• That said, the trend pace of growth in card spending does
appear to have moderated in the course of the year, as
consumer sentiment has come off the boil, the housing market
has slowed, and low inflation has further dampened increases
in dollar spending.
14
%
%
14
Core retail
12
12
Total retail
10
10
8
8
6
6
4
4
2
2
Source: Statistics NZ
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
NZ RBNZ Financial Stability Report
0
New mortgage lending by loan-to-value ratio
Nov 12
• The RBNZ has been hinting for some time that it would review
its 'speed limit' on high loan-to-value ratio (LVR) mortgage
lending towards the end of this year. Back in May the RBNZ
said: "Before removing the LVRs, we will want to be confident
that the housing market is responding to interest rate
increases, and that immigration pressures are not causing
a resurgence of house price pressures." We think those
conditions have been comfortably met.
• The remaining questions are: (1) whether the RBNZ will
give a firm or conditional timetable for removal, and (2)
whether it will be loosened initially or removed all at once.
We're reluctant to guess at a date, but on the latter we suggest
it would be prudent to at least retain some non-binding limit,
to discourage a return to the previous habits that prompted the
restriction in the first place.
35
%
%
35
30
30
25
25
High-LVR share before
exemptions
High-LVR share after exemptions
20
15
20
15
Expected share before
exemptions
10
10
LVR limits came into
effect October 2013
5
5
Source: RBNZ
0
Oct-11
0
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
8
Westpac weekly
Data previews
NZ Oct REINZ house prices and sales
REINZ house prices and sales
Nov 14 (tbc), Sales last: -0.1%, Prices last: 4.1%yr
• The housing market was noticeably subdued ahead of the
22 September election, reflecting concerns that a change of
government would bring a broader capital gains tax and the
removal of ring-fencing for investment properties.
• Indicators for October suggest that both buyers and sellers
were ready to spring into action again, with a substantial lift
in both mortgage approvals and new listings. However, figures
from Auckland's largest realtor suggested that this hadn't
translated into a rise in sales yet.
• Annual house price growth is almost certain to slow further in
October, given that this time last year buyers were scrambling
to get in ahead of the RBNZ's limit on high-LVR lending.
12000
sales
%yr 30
25
Source: REINZ
10000
20
15
8000
10
5
6000
0
4000
-5
2000
0
1993
Eurozone GDP barely growing in Q3.
Sales (lhs)
-10
REINZ house prices (rhs)
-15
-20
1996
1999
2002
2005
2008
2011
2014
Euro zone GDP growth
Nov 14, Last: 0.0% *, WBC f/c: 0.1%
% chg
• Euroland GDP stalled in Q2 with Spanish growth of 0.6% and
GDP bounces in Holland and Portugal offset by 0.2% falls in
Germany (weather-related) and Italy (ongoing recession as
GDP has contracted every quarter for 3 years; Q1 was rounded
up to 0.0%). France remained on the sidelines, stalled right
through H1 2014 (also contracting in Q2 before rounding).
• Spain has already reported 0.5% growth (and Belgium 0.2%)
in Q3. Elsewhere, activity will have been tempered by falling
business confidence and geopolitical tensions. Those factors
have not by-passed Germany which "hardly expanded" in Q3
according to the Bundesbank (our forecast 0.1%); partial data
suggest ongoing malaise in France and Italy (both forecast flat).
% chg
4
4
2
2
0
0
-2
-2
qtr
yr end % chg
-4
-4
Sources: Eurostat, Westpac Economics
-6
Jun-02
Jun-04
Jun-06
-6
Jun-08
Jun-10
Jun-12
Jun-14
• Our Q3 Eurozone growth forecast is 0.1%; *Special note: GDP
history has been revised following adoption of new national
accounting standards. These show Q2 revised up to 0.1%.
US Oct retail sales
US retail sales
Nov 14: Last: –0.3%, WBC f/c: 0.2%
• Retail sales fell 0.3% in September, with auto and gasoline
sales both down 0.8%. But the surprise was a 0.1% fall in
core retailing (ex autos/gas), the first since January this year
(also for the first month in seven there was not an upward
revision to core retailing in the prior month). In September, of
the 12 storetypes outside of car dealers and servos, only four
recorded sales gains, the strongest being electronics thanks to
the Sep 19 launch of Apple's Iphone 6.
• This component may lead an upward revision to September
sales as the latest report incorporates returns for the last
week of the prior month. Our 0.4% core forecast for Oct (or a
slightly lower outcome if Sep is revised higher) suggests some
momentum in consumer spending resuming, despite patchy
earnings growth. But auto sales stalled and gasoline prices fell
further, weighing on the headline which we forecast at 0.2%.
9
% ann
% mth
6
Sources: Ecowin, Westpac Economics
6
4
3
2
0
0
Monthly: ex-autos & gas (rhs)
-3
-2
Retail sales (lhs)
Retail ex autos & gas (lhs)
-6
Sep-09
-4
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
9
Westpac weekly
Key data & event risk for the week ahead
Last
Sat 8
Chn
Market Westpac
median forecast Risk/Comment
Oct trade balance USDbn
30.9
42.2
Mon 10
Aus
Sep housing finance
Chn
Oct PPI %yr
Oct CPI %yr
Oct new loans RMBbn
Oct total credit RMB
Oct money supply M2 %yr
US
Oct labour market conditions index
Can
Oct housing starts
–0.9%
-1.8%
1.6%
620
880
12.9%
–
0.5%
–0.4%
-2.0%
1.6%
857
1052
12.9%
–
–
–1.0%
–
–
–
–
–
–
–
Tue 11
Aus
Oct NAB business survey (conditions)
Q3 residential property price index
NZ
Oct retail electronic card spending
UK
Oct BRC retail sales %yr
US
Oct NFIB small business optimism
1
1.8%
–0.1%
–2.1%
95.3
–
1.5%
–
–
95.0
–
1.0%
0.9%
–
94.9
In Sep, both conditions & confidence down 2pts to LR average levels.
Price growth has moderated in 2014, back below 10%yr.
Expect monthly rebound within a slower trend.
Same store sales.
Some tendency to track ISM services which was lower in Sep-Oct.
Wed 12
Aus
Nov Westpac–MI Consumer Sentiment
Nov Westpac–MI unemploy expectations
Q3 wage cost index
NZ
RBNZ Financial Stability Report
Inr
Oct CPI %yr
Sep industrial production %yr
Eur
Sep industrial production
UK
Oct jobless claims change
Q3 employment change
BoE inflation report
US
Sep wholesale inventories
Fedspeak
Can
Oct house prices %yr
94.8
–3.9%
0.6%
–
6.5%
0.4%
–1.8%
–19k
46k
–
0.7%
–
5.4%
–
–
0.6%
–
–
–
0.5%
–25k
162k
–
0.2%
–
–
–
–
0.5%
–
–
–
0.5%
–20k
146k
–
0.0%
–
–
Key reading to set the tone heading into Dec-Jan peak season for retail.
Fallen close to 5% since Feb but remain at historically elevated level.
Ample slack in the labour market will keep wage inflation contained.
Possible announcement on the loosening/removal of LVR limits.
Headline heading lower on base effects and energy prices.
PMI subdued, domestic demand trending higher, but in erratic fashion.
Factory PMI turned up in Oct but any Sep IP bounce might be modest.
Claimant count falling less rapidly as GDP growth moderates.
Employment growth picking up from mid year slowdown.
Guidance unlikely to suggest increased urgency re 2015 tightening.
Lower gasoline prices to weigh on total.
Kockerlakota; Plosser in London.
Teranet/National Bank measure
Thu 13
Aus
Nov MI consumer inflation expectations
RBA Assistant Governor Economic
NZ
Oct manufacturing PMI
Oct food price index
Chn
Oct fixed investment %ytd
Oct retail sales %yr
Oct industrial production %yr
Jpn
Sep machinery orders %mth
Krw
Bank of Korea decision
Idr
Bank Indonesia decision
UK
Oct RICS house price balance
US
Initial jobless claims w/e 8/11
Sep JOLTS
Oct monthly budget statement, $bn
Can
Sep new house prices %yr
3.4%
–
58.1
–0.8%
16.1%
11.6%
8.0%
4.7%
2.00%
7.50%
30%
278k
–
–111.7
1.5%
–
–
–
–
16.0%
11.6%
8.0%
–
2.00%
7.50%
25%
–
–
–
1.5%
–
–
–
–0.9%
–
–
–
–
2.00%
7.50%
–
270k
–
–
–
Expectations remain well anchored below LR avg of 4.5%.
Dr Kent speaking, "The business cycle", ABE, Sydney, 12:30.
Strong gains in recent months, perhaps aided by lower NZD/AUD.
Produce prices were unusually subdued over winter.
Real estate, heavy industry in decline, infra & utilities imperfect offset.
Consumer sentiment weak, purchasing plans subdued despite iphone.
Sep bounce possibly over-stated; proxies point to a lesser pace.
Steady rebound to date after tax-induced Q2 crash.
Has cut twice to GFC low, but REER still strong, CPI low, Q3 GDP soft.
Growth slowing, inflation becalmed, nervously watching the Fed.
UK housing market coming off the boil on range off measures.
Running at lowest trend pace so far this century.
Job openings and labour turnover.
Budget position improved from last year.
Broadly steady pace of gain this year, below established price gains.
–0.1%
4.1%
2.38%
–9,100
6.4%
0.4% a
0.0%
–0.2%
–3.9%
–0.5%
–0.3%
0.2%
86.9
6.0%
–
–3.3%
–
–
–
–
–
0.4%
0.1%
0.1%
4.0%
–1.8%
0.2%
0.3%
87.5
–
–
1.1%
–
–
–
–
–
0.4%
0.1%
0.1%
–
–1.5%
0.3%
0.1%
88.5
–
–
–
Due this week. Expect a post-election bounce in coming months.
House price growth likely to remain subdued.
Core at 2.7%. Lagged impact of weak growth highly disinflationary.
Exports (prices down, ore ban) & imports (capex downswing) both weak.
Reliant on consumer and exports at present. GCE, GFCF soft, M modest.
Uptick from 0.3% largely due to Italian education and utility prices.
Spain the new engine room of European growth! See text box.
Q3 partials pretty dire. Some risk of technical recession.
Construction PMI in upswing suggesting Aug fall erratic.
Oil prices down sharply during month, and USD stronger.
iphone sales boost in Sep-Oct but drag from autos, gasoline prices.
Inventories were drag on Q3 GDP growth.
Lower gasoline prices; also politics and equities influence.
Continued unwind from post-recession peak in 2010 (defaults).
Bullard.
Aug fall due autos after July surge.
–
–
Fri 14
NZ
Can
Oct REINZ house sales
Oct REINZ house price index %yr
Oct wholesale prices %yr
Q3 current account USDmn
Q3 GDP %yr
Oct CPI final %yr
Q3 GDP advance
Q3 GDP advance
Sep construction output
Oct import prices
Oct retail sales
Sep business inventories
Nov UoM consumer sentiment prelim
Q3 mortgage default/foreclosures
Fedspeak
Sep manufacturing sales
Sat 15
Aus
G20 Summit
Inr
Idr
Myr
Eur
Ger
UK
US
– Imports bounced in Sep, export over-invoicing rumours are back.
Owner-occupier demand clearly cooling. Focus will be on Investor loans.
Raw materials and capital goods in decline, food, clothing up a touch.
Shelter receding, lower transport fuel, non-food lowest since early 2010.
Tentative date: Last two Octobers have been in the low 500s.
Tentative date: Consensus implies approximate 2% gain on a year ago.
Tentative date: FX reserves declined in Q3, onus on PBOC to offset.
Fed's new composite indicator for assessing slack in the job market.
Residential permits decline a near-term constraint.
– G20 Leaders’ Summit, Brisbane, 15-16 November
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
10
Westpac weekly
Economic & financial forecasts
Interest rate forecasts
Latest (7 Nov)
Dec 14
Mar 15
Jun 15
Sep 15
Dec 15
Cash
2.50
2.50
2.50
2.50
2.75
3.00
90 Day Bill
2.76
2.65
2.55
2.65
3.00
3.25
3 Year Swap
2.85
3.00
3.20
3.50
3.75
4.00
10 Year Bond
3.33
3.50
3.70
4.00
4.50
4.60
94
100
110
120
130
130
0.125
0.125
0.125
0.125
0.250
0.500
2.38
2.50
2.60
2.80
3.20
3.30
10 Year Spread to US (bps)
International
Fed Funds
US 10 Year Bond
US Fed balance sheet USDtrn
4.53
4.57
4.57
4.57
4.57
4.57
ECB Repo Rate
0.05
0.05
0.05
0.05
0.05
0.05
Cash
3.50
3.50
3.50
3.50
3.75
4.00
90 day bill
3.67
3.70
3.70
3.75
4.00
4.25
2 year swap
3.93
3.80
3.90
4.10
4.50
4.70
10 Year Bond
4.03
3.90
4.00
4.20
4.50
4.70
10 Year spread to US
165
140
140
140
130
140
Latest (7 Nov)
Dec 14
Mar 15
Jun 15
Sep 15
Dec 15
AUD/USD
0.8570
0.88
0.88
0.90
0.91
0.92
NZD/USD
0.7690
0.77
0.77
0.78
0.79
0.80
USD/JPY
115.10
116
117
117
119
121
EUR/USD
1.2380
1.23
1.23
1.24
1.25
1.26
AUD/NZD
1.1140
1.14
1.14
1.15
1.15
1.15
New Zealand
Exchange rate forecasts
Australian economic growth forecasts
2013
GDP % qtr
annual change
2014
2015
Calendar years
Q4
Q1
Q2
Q3f
Q4f
Q1f
Q2f
2013
2014f
2015f
2016f
0.8
1.1
0.5
0.8
0.8
0.8
0.8
2.3
3.2
3.2
3.5
2.6
3.4
3.1
3.0
3.0
3.0
3.3
–
–
–
–
Unemployment rate %
5.8
5.9
6.0
6.1
6.3
6.3
6.2
5.8
6.3
5.9
5.2
CPI % qtr
0.8
0.6
0.5
0.5
0.2
0.4
0.6
–
–
–
–
2.7
2.9
3.0
2.3
1.8
1.6
1.7
2.7
1.8
2.5
2.7
0.9
0.6
0.6
0.5
0.7
0.6
0.7
–
–
–
–
2.6
2.7
2.7
2.6
2.4
2.4
2.5
2.6
2.4
2.7
2.6
annual change
CPI underlying % qtr
annual change
New Zealand economic growth forecasts
2013
2014
2015
Calendar years
Q4
Q1
Q2
Q3f
Q4f
Q1f
Q2f
GDP % qtr
1.0
1.0
0.7
0.8
0.8
0.9
0.6
–
–
–
–
Annual avg change
2.8
3.2
3.5
3.6
3.6
3.5
3.4
2.8
3.6
3.2
2.9
Unemployment rate %
6.0
6.0
5.6
5.4
5.4
5.2
5.2
6.0
5.4
4.9
4.5
CPI % qtr
0.1
0.3
0.3
0.3
0.1
0.6
0.7
–
–
–
–
Annual change
1.6
1.5
1.6
1.0
1.0
1.3
1.7
1.6
1.0
2.2
2.4
2013
2014f
2015f
2016f
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken
to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or
unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
11
Disclaimer
Things you should know: Each time someone visits our site, data is captured so that we can accurately evaluate the quality of our content and make
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If you are located in Australia, this material and access to this website is provided to you solely for your own use and in your own capacity as a
wholesale client of Westpac Institutional Bank being a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (‘Westpac’). If you
are located outside of Australia, this material and access to this website is provided to you as outlined below.
This material and this website contain general commentary only and does not constitute investment advice. Certain types of transactions, including
those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you
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such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or
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subscribe for, purchase or sell any financial instrument or to enter a legally binding contract. Past performance is not a reliable indicator of future
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assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks
and uncertainties. The ultimate outcomes may differ substantially from these forecasts.
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unit, Australian carbon credit unit or eligible international emissions unit.
Additional information if you are located outside of Australia
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Disclaimer continued
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related financial instruments may be limited. Non-U.S. companies may not be subject to audit and reporting standards and regulatory requirements
comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments
denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or
income from such securities or related derivative instruments.
The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated
person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise
specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by
Westpac and/or its affiliates.
For the purposes of Regulation AC only: Each analyst whose name appears in this report certifies that (1) the views expressed in this report
accurately reflect the personal views of the analyst about any and all of the subject companies and their securities and (2) no part of the
compensation of the analyst was, is, or will be, directly or indirectly related to the specific views or recommendations in this report.
For XYLO Foreign Exchange clients: This information is provided to you solely for your own use and is not to be distributed to any third parties.
XYLO Foreign Exchange is a division of Westpac Banking Corporation ABN 33 007 457 141 and Australian credit licence 233714. Information is
current as at date shown on the publication. This information has been prepared without taking account of your objectives, financial situation or
needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation
or needs. XYLO Foreign Exchange’s combined Financial Services Guide and Product Disclosure Statement can be obtained by calling XYLO Foreign
Exchange on 1300 995 639, or by emailing customercare@XYLO.com.au.
The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no
responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability
for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any
inaccuracy which may become apparent at a later date. Past performance is not a reliable indicator of future performance. The forecasts given in
this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are
reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may
differ substantially from these forecasts.
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