Bassanese Bites: RBA to pause? – December 05 2022
Week in review
Global equities lifted for the second week in a row as Fed chair Powell all but confirmed the Fed would only raise rates by 0.5% at its policy meeting next week. Another benign US October inflation report also supported sentiment, with the core private consumption expenditure deflator (core PCED) rising only 0.2% (market +0.3%). Helped by a decline in bond yields, the S&P 500 has bounced back almost 14% from its end-week mid-October lows, to now be down only around 15% from its highs earlier this year.
That said, Fed officials still tried hard last week to contain ‘pivot party’ exuberance, with Powell himself noting that, due to a tight labour market and strong wage growth, inflation may be hard to bring down sustainably without some lift in unemployment. Other Fed officials also noted that next week’s meeting will likely include an upward revision to the median expected end-2023 Fed funds rate, from 4.6% to 5% or more. That would imply another 0.5-1.0% lift in the Fed funds rate next year.
The Fed’s concerns with the red-hot labour market were underlined by Friday’s payrolls report, which revealed corporate America managed to find another 263k workers to employ in November, albeit with a solid 0.6% gain in average hourly earnings in the process. Annual growth in average hourly earnings edged higher to 5.1%, well above market expectations for a slowing to 4.6% from October’s 4.9% read. An article in today’s Australian Financial Review notes that 50% of the the US core PCED reflects non-housing services, which are still running at more than 4%, underpinned by solid growth in wages.
In Australia a broadening range of economic data point to a slowing in growth, with nominal retail sales down 0.2% in October (after largely flat real retail spending in Q3). Home building approvals and home lending are also still trending down, while Q3 business capital expenditure eased back 0.6% – suggesting a somewhat more cautious approach to business investment. Although construction work did bounce back in Q3 this in part reflected payback from weather-related weakness in Q2. Last but not least, Core-Logic revealed national house prices continued to sink in November, to now be down 7.6% from their April peak. Sydney prices are down 11.4% from their January peak.
