Economic releases in November show signs of moderating economic activity in the US and Europe as well as lower inflation. Central bankers continue to warn that their task of returning inflation to their targets will still take time and will require a lengthy period of high interest rates. Financial markets are starting to factor in that the central banks will change their tune and will pivot towards reducing interest rates before long. The likely limited reduction in inflation over coming months point to disappointment for markets, an assessment that rings true for Australia where inflation is now higher and probably stickier than overseas and may require the RBA to hike rates further against a trend of stable but high official interest rates elsewhere.
In the US economic releases in November point to the strong growth evident in the 4.9% annualised growth in Q3 GDP having passed. At the leading edge, purchasing managers’ reports took a softer turn in the October reports with the ISM manufacturing survey index down to 46.7 from 49.0 in September and the non-manufacturing (services sector) index down to 51.8 from 53.6 in September. Current household spending appears to be softening with October retail sales down by 0.1% m-o-m after three strong monthly readings for July through to September (September was up 0.9% m-o-m on revision). The US labour market was not as tight in October as it was through Q3 with non-farm payrolls up 150,000 (+297,000 in September), annual growth in average hourly earnings moderating to 4.1% y-o-y from 4.3% in September and the unemployment rate lifting to 3.9% from 3.8% in September.
US annual CPI inflation after lifting from 3.0% y-o-y back in June to 3.7% in September fell back to 3.2% in October. Core annual CPI inflation (less food and energy prices) also edged lower to 4.0% y-o-y from 4.1% in September. Less strong economic growth and declining inflation allowed the Federal Reserve to leave the Funds rate unchanged at 5.50% at its November policy meeting and imply that it may be finished hiking interest rates. Senior Fed officials, including Chairman, Jerome Powell, subsequently indicated that rates would need to stay high for some time as the Fed was determined to return inflation to its 2% target and that would take some time.
In China, economic releases in November show slightly better growth but an economy still beset by the weakness and financial difficulties in the property sector. Fixed asset investment spending was a little weaker than expected in October, up 2.9% y-o-y from +3.1% in November. Industrial production in October edged up to 4.6% y-o-y from 4.5% in September while retail sales improved more than expected to +7.6% y-o-y from +5.5% in September. The authorities are starting to introduce some spending initiatives to prime growth, but the problem of over-supplied residential and commercial property markets remains. More generally over-supply shows in declining prices. China’s CPI fell in October by 0.1% m-o-m, -0.2% y-o-y while producer prices fell by 2.6% y-o-y.
More signs showed in November that recession has taken hold in Europe. The preliminary November manufacturing purchasing managers’ index came in at 43.8 (43.1 in October). Readings in the low forties point to recession. The services sector PMI came in at 48.2 in November from 47.8 in October. European GDP growth in Q3 at -0.1% q-o-q, +0.1% y-o-y is very weak and very weak September retail sales and industrial production at respectively -0.3% m-o-m and -1.1% point to even weaker growth ahead in Q4. Europe’s unemployment rate remains low at 6.5% in September but is starting to edge upwards. Europe’s recession is working to bring down inflation faster than elsewhere with annual CPI inflation falling to 2.9% y-o-y in October from 4.3% in September. Core annual CPI inflation is stickier but still fell to 4.2% y-o-y in October from 4.5% in September. The European Central Bank left official interest rates unchanged (4.00% for the deposit rate) at its November meeting and because of weak growth has more leeway than other central banks to stay on hold.
In Australia, economic releases in November show demand, the labour market and wage growth firmer than expected previously. The comparatively strong November data reports come after the release in late October of Q3 and September month CPI inflation reports showing sticky and high annual inflation at respectively 5.4% y-o-y and 5.6% y-o-y. Those high inflation reports pushed the RBA to revise upwards its inflation forecasts over the next two years and to hike the cash rate 25bps to 4.35% at its November policy meeting after sitting on hold at 4.10% for four months.
Returning to the November data releases, September retail sales were stronger than expected and up 0.9% m-o-m. October employment rose 55,000 with a lift in labour force participation to a record high of 67.0%. The unemployment rate edged up to 3.7% in October from 3.6% in September but continues to run below the 4%+ level that will be needed to bring pressure to contain wage growth and inflation. The wage price index rose by a record 1.3% q-o-q in Q3 lifting annual wage growth to 4.0% y-o-y and opening the way for a push above 4.0% in Q4 and beyond. RBA Governor, Michelle Bullock, noted that an improvement in productivity is necessary otherwise 4% wage growth is inconsistent with the RBA achieving 2-3% inflation.
In November, it has become more evident that Australian inflation is tracking high by international comparison and that local factors are underpinning inflation. At the same time, demand growth is not moderating enough to quell inflation quickly enough running the risk that community inflation expectations lift and make it more difficult to contain inflation.
Against the run of comments by the heads of major overseas central banks that their official rates are high enough, the RBA is watching local data for any undue strength that may force it to hike rates further. This week, the October retail sales and monthly CPI report will determine probably whether the RBA hikes rates again at its policy meeting next week. We pencil in one more rate hike either next week or at the first meeting in 2024 in early February. That will take the cash rate to 4.60%, probably the peak for this cycle. Australia’s sticky and still high inflation outlook implies that the peak cash rate will stay in place at least to the second half of 2024.