DATA on the macro front continues to support the soft-landing (or “goldilocks”) scenario.
Inflation data came in lower than expected in the US and UK last week.
The US print was accompanied by stronger-than-expected retail sales, emphasising there are no signs of a slowdown in US growth just yet.
The Atlanta Fed GDPNow model is estimating fourth quarter (Q4) GDP growth of 2%, which is above the consensus expectations of less than 1%.
This suggests the Fed hiking cycle is now well and truly done. Risk is now to the downside (ie rate cuts) should we see any real signs of a growth slowdown.
This is consistent with the bull case for markets we outlined last Monday (and drove a “risk-on” rally in equities last week). The S&P 500 rose 2.31%, the NASDAQ lifted 2.42%, while the S&P/ASX 300 was up 1.35%.
Bonds were also quick to adjust, with US 10-year yields dropping 22 basis points (bps). The market moved to price in more rate hikes, with a 78% chance of a cut by May and four cuts priced in for 2024.
In Australia we had some meaningful economic data, with wages accelerating to above 4% year-on-year (in line with expectations), a 55,000 rise in employment, and a 0.2% increase in the unemployment rate to 3.7%.
While this suggests a resilient labour force, some leading signs suggest pockets of weakness are emerging – for instance, an increasing share of part-time work, number of hours worked stalling and youth unemployment increasing to 9.2%.
Headline CPI came in higher at 0.045% month-on-month for October, which was below consensus expectations of 0.1% growth. Core CPI rose 0.227% on the month.
On an annual basis, headline inflation declined to 3.2% while core CPI declined to 4%.
This positive outcome was due partly to a 2.5% decline in energy prices, with softer demand and increased supply contributing to a 4.9% decline in energy goods (largely gasoline).
This decline is likely to continue into November, with retail petrol prices continuing to fall through the first few weeks of the month.
However, there was some offset from an acceleration in food prices to 0.3% in October – up from a three-month average of 0.2% monthly – which was driven by an uptick in the “food at home” category.
For core CPI, there was a 0.3% increase in core services inflation and a 0.1% decrease in core goods inflation.
Pleasingly, core services inflation decelerated to the second lowest print in CY23. This was the result of shelter inflation cooling from 0.6% in September to 0.3% in October, with owners’ equivalent rent declining from 0.6% to 0.4%.
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While core CPI is running at 4% year-on-year, core inflation (excluding rents) is now back to 2% – down from 8% at the peak in February 2022.
This is supportive for the core personal consumption expenditure (PCE) numbers (the Fed’s preferred inflation measure), which have less weighting to rent inflation.
Rents should also continue to come down in line with the forward-looking Zillow rent numbers.
Much of the downward pressure on core CPI inflation (excluding rents) has been driven by the ongoing decline in used vehicle prices, which fell a further 7.1% year-on-year in October. These lag auction prices, which are generally supporting further downside pressure.
PPI data was also lower than expected. Core PPI (excluding food, energy and trade services) was 0.14% month-on-month in October, versus the 0.2% consensus and is running at 2.9% year-on-year.
Headline PPI was also depressed by energy prices (down 7.4%, driven by gasoline and lower electricity prices), coming in significantly lower than expected at -0.5% month-on-month versus consensus growth of 0.1% and down from 0.4% in September.
Combined with the CPI data, this suggests that core PCE continues to soften for October. This report is due on 30 November.
October retail sales were stronger than expected, but confirmed a slowdown in consumption into Q4.
Headline sales were down 0.1% month-on-month versus the consensus expectation of a 0.3% decline, and down from 0.9% in September. Most categories (8/13) were negative.
It’s likely there will be a more sustained step-down in consumer spending in Q4, driven by softer consumption (the student loan moratorium ended in October), labour markets softening, and tighter credit conditions weighing on consumer spending.
Australian wage growth accelerated to 4% year-on-year, which was in line with expectations.
There was a 55,000-person rise in employment and a small 0.2% increase in the unemployment rate to 3.7%.
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This suggests labour-force resilience, though there are softer pockets emerging, such as an increased share of part-time work, hours worked stalling and the youth unemployment rate increasing to 9.2%.
Wages accelerated by a record 1.3% in September, lifting annual growth to 4% (from 3.6% in Q2).
But this was as expected given the 5.8% increase in award wages (accounting for some 20-25% of employees) and a lift in EBA wages growth.
However, wages growth under individual agreements was up only 0.01%, which is encouraging given this is the sector most sensitive to underlying labour market conditions.
Looking forward, third-party data is providing a mixed read on non-award/EBA wages growth.
The slower individual agreements data is supported by Xero’s Small Business Insights, which show wages rose only 1.9% year-on-year in September and are growing below the pre-COVID average of 3%.
However, Seek data supports current strength while EBA data suggests stabilisation around 4%.
Of the 55,000 new jobs, 38,000 were part-time – contributing to a mix shift, with 31% of employment now part-time. As a result, hours worked grew only 1.7% year-on-year versus employment figures up 3%.
A slow-down in hours worked can be a leading indicator, as companies may find it easier to reduce hours rather than lay-off their employees.
The youth unemployment rate also lifted materially to 9.2%, which is the highest rate since December 2021 and a good indicator of the strength of the overall market given the low-skilled and young tend to fare the worst when conditions get tough.
Labour market outcomes should ease in the near term with surging migration contributing to strong population growth (roughly 3% year-on-year in the working age population) and softer labour demand.
Both UK retail sales and inflation came in below consensus.
Retail sales fell 2.7% year-on-year, with October sales down 0.3% month-on-month versus consensus expectations of a 0.3% increase.
October’s headline CPI came in lower than expected, down from 6.7% year-on-year to 4.6%, and core CPI decelerated to 5.7%.
While most of the decline in core inflation has stemmed from goods (driven by lower energy prices and easing supply chain bottlenecks), services inflation has also started to decelerate, albeit from a much higher level.
Services inflation is closely tied to wages growth, which has remained strong at about 7% year-on-year, but there are signs that this is cooling.
Private sector regular pay decelerated from 8.1% year-on-year in August to 7.8% in September (below the Bank of England’s forecast), while a number of other metrics show data consistent with the moderation story.
The UK rates market has moved quickly to price earlier cuts, reflecting this data. Bond yields have declined as well, with the two-year down 46bps and the five-year down 58bps from the recent October peak.
We note that demand for US government debt from foreign buyers is decreasing, with foreigners now owning an estimated 30% of all outstanding US Treasury securities, down from 43% a decade ago.
The US Treasury has shifted to issuing more shorter-dated debt in response. This has helped restore market stability but is resulting in material changes in supply and demand dynamics.
As flagged last week, positioning by systematic strategies going into November was very underweight equities, particularly CTAs, which had the lowest exposure since 2018.
Over the last ten days, CTAs have bought nearly $70 billion in US equities – the largest ten-day buying volume that Goldman Sachs has on record.
Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.
She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.
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