Cliff Notes: Confidence Provides a Robust Foundation for Recovery

Fundamental analysis of Forex market

Key insights from the week that was.

Confidence was the key theme in Australia and the world this week.

Beginning with Australia’s NAB business survey. In mid-to-late September when the survey was taken, the end of lockdown was in sight for NSW and Victoria thanks to rapid progress with vaccination. This resulted in confidence surging 19pts to +13 nationally – a reading well above the long-run average. In NSW specifically, confidence surged 42pts to +27, while in Victoria (where the re-opening is later and the trajectory of cases more threatening) confidence gained ‘only’ 16pts to +5.

According to our Westpac-MI sentiment survey, consumers also clearly have their eye on re-opening, with confidence levels across Australia’s states broadly in line despite NSW still being under restrictions until after October’s sampling period ended, and Victoria expected to remain locked down until late in the month. At 104.6, the national measure of sentiment remains above average as well as the level seen prior to the pandemic.

While the economic expectations sub-indexes fell in the month, both the 1 and 5-year views remain well above their long-run averages. Views on family finances also fell in the month but are, in contrast, only just above average. The promise of an end to lockdown conditions saw unemployment expectations fall in the month; and, relative to its long-run average, this series is pointing to a strong recovery in employment and a tight labour market.

Housing affordability is clearly a worry for households however, with ‘time to buy a dwelling’ down 14% in the month and 37% from its November 2020 peak. An initial tightening of loan assessment conditions mid-way through the sample week would have been an additional negative for views on affordability in October, in addition to the strong price gains of the past year.

Nonetheless, house price expectations remain strong, holding near 8-year highs in October. Recent results from this survey and in housing markets across the nation have led Westpac Economics to revise up our house price views for 2021 and 2022. Respectively, the annual price growth forecast for each year has been lifted by 4ppts and 3ppts to 22%yr and 8%yr at the national level. The modest decline anticipated in 2023 because of the cumulative effect of macroprudential measures as well as rate increases from early-2023 remains -5%yr. A detailed view by state can be found in the Bulletin released by Chief Economist Bill Evans and Senior Economist Matthew Hassan linked above. Chief Economist Bill Evans also discussed macroprudential policy and the outlook for interest rates in our October edition of the Market Outlook in Conversation podcast.

The other key release for Australia this week was the September labour force survey. The loss of jobs in the month was a little less than anticipated by the market (-138k actual against -150k consensus), continuing the run of outperformance through the pandemic. Despite the loss of jobs, the unemployment rate barely moved (up 0.1ppt to 4.6%) thanks to a 0.7ppt fall in participation. While participation will rebound as each state re-opens in late-2021 and there is likely to be an initial mismatch of workers and jobs, causing the unemployment rate to rise, the September update suggests the peak for the unemployment rate may be closer to 5% than the 5.4% we have forecast.

Offshore, this week data broadly met consensus expectations and was in line with existing policy views. In the US, the September CPI and PPI data supported the belief that the current inflation burst will prove transitory, but also that risks are skewed to the upside. More important for policy, FOMC speakers confirmed they view late-2021 as the right time to announce a taper despite a second-straight downside surprise for nonfarm payrolls in September (released last Friday).

As we detailed on Monday, there is enough strength in the household survey and sufficient reason to look through the soft September nonfarm payrolls print to justify a November taper announcement by the FOMC. Also, per this week’s September FOMC meeting minutes and our own forecasts, the US taper should conclude around mid-2022, leaving space for a first rate hike in December 2022. These key themes were also discussed in this month’s Market Outlook in Conversation podcast.

While this week’s events confirmed the US’ progress towards monetary policy normalisation, the US dollar is ending the week below its starting level on a DXY basis. As per our forecasts, relative growth and policy divergence matter far more than the outright stance of policy in any one jurisdiction, even the US.

To March 2022, we look for the US dollar to take another (modest) leg lower, from around 94 currently to 91.5, as asset purchases are tapered across key markets and fiscal uncertainty challenges the market’s outlook for US growth. From there however, a US dollar uptrend on a DXY basis is set to build strength, taking the index back to, then above, its current spot level through 2022 and 2023.

Currencies heavily exposed to global momentum and economic development such as our own Australian dollar and, more notably, China’s Renminbi are set to outperform this trend. On the outlook for the latter, as our video update outlined this week, current uncertainties with regards to Evergrande and power supply in China are likely to have little consequence for China’s outlook beyond the next few months.