Daily Commentary BY THE CURVE TEAM –

Domestic Headwinds and US Tailwinds Intensify

10th of September, 2018

The Australian data flow finished the week on a soft note and pointed to continued weakness in the housing market. In the US the data pointed to further rate hikes ahead despite growing risk of further escalation in the trade war between the US and China.

On Friday the ABS released the latest housing finance figures which showed that excluding refinancing, new home lending was down again. Owner occupier finance was slightly lower while investors continue to step back with investor financing down 16% over the past year and 23% below the most recent peak.

The data preceded another weekend of soft auction results in the two key major housing markets. It comes as the spring season starts to gather pace and the level to total housing listings swell. With investors exiting the market and banks tightening lending standards, a further softening in the housing market could have broader economic implications.

This week will bring some key updates on the domestic front. The months business and consumer surveys are due out on Tuesday and Wednesday respectively. With the business survey it will be interesting to see if last months softening continues this month.

More importantly it will be interesting to see what impact the softening housing market and recent political instability has had on consumer sentiment. With consumption still the biggest component of growth, an upbeat consumer is critical to the long run health of the economy.

Offshore and the tightening of the labour market in the US is starting to push wages higher. While the strong headline increase in jobs growth was offset by negative revisions to the previous two months, it was the wage data the was the focus.

Wage growth for the month was 0.4%, double what the market was expecting. It saw the annual rate lift to a post GFC high of 2.9% and on a 3 month annualised bases is running at 3.6%.

The data has seen expectations for two more rate hikes this year by the Fed. Something that three Fed speakers all seemed to support in various speeches overnight. It is also clear that the Fed will continue to purse normalisation of monetary policy until such time that the outlook no longer warrants it.

One thing that could de-rail the Fed’s plans is further escalation of the trade war, especially with China. Over the weekend President Trump indicated that the next tranche, $200bln worth, of tariffs is imminent. What was more concerning was that he said “behind that is another $267 billion ready to go on short notice if I want” before adding “that totally changes the equation.”

Data from China over the weekend showing that exports to US hit yet another record high will likely strengthen Trump’s resolve on trade. The market seems to be underpricing the risk of further escalation. It sets up for an interesting few weeks.

David Flanagan

Director - Interest Rate Markets