The RBA, FED and BOE kept rates unchanged. The US and China agreed to a ‘phase one’ trade deal where the US will remove tariffs and China will make structural reforms and change trade practices. The UK election saw a dominant Boris Johnson-led conservative party victory, providing a strong mandate to deliver his promised exit from the EU.
Developments in the global economy
Over December the Reserve Bank left the cash rate unchanged at a historic low of 0.75%. The RBA is waiting to further assess the impact of the three rate cuts since June ’19, however it appears that the economy has not improved sufficiently to rule out further easing.
The Westpac-Melbourne Institute Consumer Sentiment Index fell 2.0% to 95.1 in December from 97.0 in November. It has been below the 100-neutral level for six successive months and is down 8.9% over the year. The index measuring the time to buy a major household item declined 2.1% in December, leaving it 3.7% down over 2019. Weak readings have been consistent with poor outcomes for retail sales at the beginning of the December quarter. Consumer inflation expectations were unchanged at an annual rate of 4.0% in December, pointing to inflation being stable.
The six-month annualised growth rate in the Westpac-MI Leading Index fell from -0.78% in October to -0.81% in November. The index indicates the likely pace of economic activity relative to trend, three to nine months into the future. Furthermore, the business confidence index fell to 0 in November, from a 2 in October. The business conditions index was unchanged at 4. The conditions and confidence indexes remain below their 10-year average of 6 and 5, respectively.
Australian employment posted its biggest monthly gain in 15 months in November, led by a surge in part-time jobs. Over the month, there was a net gain of 39.9k jobs, more than offsetting the 24.8k drop in October. The unemployment rate dropped to 5.2% in November. The participation rate remained stable at 66.0%, near its record high of 66.2% in August.
The CoreLogic home value index, covering the major eight capital cities, rose 1.2% in December following the strong 2.0% gain in November. Sydney and Melbourne continued to record the fastest pace of growth, with house prices outweighing those for units. Sydney dwelling prices jumped 1.7%, while Melbourne was close behind, recording a rise of 1.4%. The smaller markets of Brisbane and Adelaide grew at a slower pace of 0.7% and 0.5% respectively. The rental market held reasonably firm. The national rental index rose 0.1%, however rental yields continued to remain compressed.
Housing market lending showed further expansion signs over October. Updated Australian Bureau of Statistics (ABS) numbers showed the value of new lending (excluding refinancing) rose 2.0%, after a 0.4% fall in September. Growth in new lending to owner occupiers outpaced investor growth, recording a 2.2% increase over October in value terms compared to a 1.4% rise in investor lending.
As widely expected, the Federal Reserve left interest rates unchanged at a range of 1.50-1.75%. The key message was that monetary policy would remain unchanged for some time, with the Fed signalling rates would stay on hold throughout 2020. Fed Chair Powell said that the economic outlook remained “a favourable one, despite global developments and ongoing risks”. The Fed cut US interest rates in three successive meetings starting in July to late October in order to shield the economy from the disruptive trade war with China that has negatively impacted business investment, harmed exports and contracted the manufacturing sector.
The US and China have reached a ‘phase one’ trade deal just prior to new tariffs coming into effect, that would have affected a mass of consumer goods. The US has decided not to progress with 15% tariffs on US$160 billion worth of consumer goods that were scheduled to take effect December 15, and will reduce the September 1 tariffs on US$120 billion of Chinese goods. However, the 25% tariffs on US$250 billion of Chinese imports will remain.
The University of Michigan’s US consumer sentiment survey was revised slightly higher to 99.3 in December. It was the highest reading since May. The survey indicated that future spending and savings habits for consumers were seen more positively while on the negative side, inflation expectations declined which could be considered an alarm bell for the FED. Most of the December gain for the index was among upper income households.
Headline inflation was a touch above expectation levels. CPI increased 0.3% in November, for an annual rate of 2.1%. The pick-up reflected higher gasoline prices. Core inflation – all items excluding food and energy – read at an expected rate of 2.3% for a second time in a row.
In China, consumer prices rose by 4.5% in the year to November, up from an annual growth of 3.8% from the month before. The Caixin PMI fell to 51.5 in December from 51.8 in the previous month. New orders growth slowed to a three-month low amid a marginal increase in export level, while output expansions remained strong overall. Generally, sentiment was weaker due to intense market competition and trade tensions. Imports to China rose 0.5% year-on-year in November, while exports dropped by 1.3%.
China has arranged to increase the purchase of US goods and services by at least US$200 billion over the next two years, suspend retaliatory tariffs, implement intellectual property safeguards and put in place a tariff exclusion process for US products. Furthermore, China will import US$40 - $50 billion worth of US agriculture products.
The Japanese manufacturing sector remained stuck in a downturn. Jibun Banks PMI remained below the 50-neutral mark, reading 48.4 for December, from 48.9 in November. Output volumes fell at the fastest rate since March amid a further decline in orders. Weakness also remained apparent on the export front. The impact of typhoon Hagibis, the largest to hit northern Japan in decades, along with the the increased consumption tax hike effective 1 October, have led to weakened economic activity in the final quarter. Softer demand from trading partners led to further reduction in exports. More positively, survey data indicated further gains on the employment front in Japan’s manufacturing sector in December, amid expectations of higher production volumes.
The Bank of England’s Monetary Policy Committee voted 7-2 to maintain the bank rate at 0.75%. Minutes of the meeting showed that policymakers think economic growth is set to pick up from current rates, which are seen to be below the country’s potential, due to a reduction in Brexit uncertainties. The British government has named Andrew Bailey as the next governor of the Bank of England.
Boris Johnson’s conservative party won the UK general election with a convincing majority, removing some uncertainty as to where Brexit is headed. A New Withdrawal Agreement Bill introduced in Parliament, differing in important respects from the bill considered before the election in October. The bill covers “divorce” payments to the EU, citizens’ rights and the proposed 11 month transition period. Proceedings on the bill will continue in January.
UK PMI was revised slightly higher to 47.5 in December, below the previous month’s 48.9. Production experienced the largest decline since July 2012. Additionally, employment shrank for the ninth month in a row, albeit the weakest pace since August. Inflation in the UK held steady at 1.5% in November, the lowest since November 2016.
The German ZEW survey of economic sentiment increased more than expected in December. Investors were buoyed by an unforeseen rise in export levels during October. Manufacturing PMI was revised higher to 43.7 in December, below November’s five month high of 44.1. The latest reading pointed to the 12th consecutive month of contractions, with investment good makers seeing the worst performance.
The European Central Bank (ECB) has paused its policy of monetary easing, reacting to early signs that the world economy is stabilising as international tensions and uncertainties begin to fade. The ECB has left its key interest rate on hold at minus 0.5%. Christine Lagarde, the ECB’s new president, told reporters that she detected “some initial signs of stabilisation” in Eurozone growth and somewhat “less pronounced” risks to the economy. The Eurozone inflation rate accelerated to 1.3%, from 1.0% in November. Eurozone Manufacturing PMI was revised higher to 46.3. The reading pointed to the eleventh straight month of contraction in factory activity.
A more detailed summary can be found here.
Information current as at 30 December 2019.
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