23 October 2021
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Major global economic events and implications

Shane Oliver
28 September 2021

US business conditions PMIs and housing remain strong. US business conditions PMIs fell slightly in September as Delta concerns and supply constraints remain but remain strong. While home sales were mixed, home builder conditions along with housing starts remain strong.

Source: Bloomberg, AMP Capital

Eurozone PMIs fell in September but remain strong.

The Bank of England was more hawkish than expected opening up the possibility of an earlier end to QE and earlier rate hikes, and Norway’s central bank became the first G10 central bank to raise rates.

The Bank of Japan made no changes to its ultra-easy monetary policy but provided details as to how its Green Financing operations will work (cheap funding to clean green financial institutions that meet certain conditions). Meanwhile, Japanese business conditions PMIs improved slightly in September and core inflation remained weak at just -0.5%yoy.

Australian economic events and implications

Australian payroll employment still falling. Payroll jobs fell -1.3% in the second half of August and are down -1.7% since July with lockdowns continuing to impact and the full impact of the Victorian and ACT lockdowns starting to show. Meanwhile quarterly jobs data confirmed that the biggest jobs losses have been in hospitality and leisure including the arts. We continue to expect employment to have fallen another 150,000 or so in September before starting to recovery with “reopening”.

Fortunately, business conditions PMIs look to have bottomed. The composite PMI remained weak in September as lockdowns depress the services sector, but managed to rise 2 points as reopening roadmaps boosted optimism.

Household wealth surged by another 5.8% in the June quarter. No surprises here as both property prices and the share market were strong. This is providing a boost to consumer spending via a positive wealth effect.

What to watch

Chinese business conditions PMIs (Thursday) will be watched for some improvement after the relaxation of some coronavirus restrictions this month.

In Australia, expect August retail sales (Wednesday) to fall -2.5% as the lockdowns continue to impact, building approvals to fall -3% reflecting the ongoing unwinding of the HomeBuilder boost, a further acceleration in housing credit and August job vacancies to have held up reasonably well consistent with private job ad data (all due Thursday), and housing finance to show a -2% fall but CoreLogic home price data to show a solid 1.3% gain in capital city property prices led by Brisbane, Sydney and Adelaide (both due Friday).

Outlook for investment markets   

Shares remain vulnerable to short-term volatility with possible triggers being coronavirus, global supply constraints and the inflation scare, less dovish central banks, likely US tax hikes and a debt ceiling standoff and the slowing Chinese economy. But looking through the short-term noise, the combination of improving global growth and earnings, vaccines ultimately allowing a more sustained reopening and still low interest rates augurs well for shares over the next 12 months. 

Expect the rising trend in bond yields to resume as it becomes clear the global recovery is continuing resulting in capital losses and poor returns from bonds over the next 12 months.

Unlisted commercial property may still see some weakness in retail and office returns but industrial is likely to be strong. Unlisted infrastructure is expected to see solid returns. 

Australian home prices look likely to rise by around 20% this year before slowing to around 7% next year, being boosted by ultra-low mortgage rates, economic recovery and FOMO, but expect a progressive slowing in the pace of gains as poor affordability impacts, government home buyer incentives are cut back, fixed mortgage rates rise, macro prudential tightening kicks in and immigration remains down relative to normal. 

Cash and bank deposits are likely to provide poor returns, given the ultra-low cash rate of 0.1%. The setback from coronavirus lockdowns could push the first rate hike back into 2024.

Although the $A could pull back further in response to the latest coronavirus outbreaks, the threats posed to global and Australian growth and falling iron ore prices, a rising trend is likely over the next 12 months helped by strong commodity prices and a cyclical decline in the US dollar, probably taking the $A up to around $US0.80.

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