"First indications of a strong rebound" from NAB’s October survey

Summary: Business conditions improve in October; confidence also improves; first indications of “strong rebound in activity”; upstream price pressures “not fully filtering into downstream final price growth”; capacity utilisation rate rises; six of eight sectors of economy at/above respective long-run averages.

NAB’s business survey indicated Australian business conditions were robust in the first half of 2018, with a cyclical-peak reached in April of that year. Readings from NAB’s index then began to slip, declining to below-average levels by the end of 2018. Forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 and the index trended lower, hitting a nadir in April 2020 as pandemic restrictions were introduced. Conditions improved markedly over the next twelve months, only to fall back in the middle of this year.

According to NAB’s latest monthly business survey of over 400 firms conducted over the last week and a half of October, business conditions have improved. NAB’s conditions index registered 11, up from September’s reading of 11.

Business confidence also improved and NAB’s confidence index rose from September’s revised reading of 10 to 21, well above the long-term average. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences have appeared in the past from time to time.

“Overall, the results provide first indications of a strong rebound in activity as the major states emerge from lockdowns, with more improvement likely in November as Victorian restrictions continue to ease,” said NAB senior economist Brody Viney.

Commonwealth Government bond yields generally fell on the day, although ultra-long yields remained stable. By the close of business, the 3-year ACGB yield had shed 3bps to 1.05% and the 10-year yield had lost 5bps to 1.77%. The 20-year yield finished unchanged at 2.34%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.03%, remained fairly soft. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until May 2022 but then rise to 0.75% by November 2022 and to 1.06% by March 2023.

“Further gains in business sentiment and activity measures will likely be welcomed by the RBA as further confirmation that the economy is recovering from state lockdown-imposed weakness. The RBA may also feel somewhat relieved by the fact that higher upstream price pressures are not fully filtering into downstream final price growth,” said Citi Research economist Josh Williamson.

NAB’s measure of national capacity utilisation increased noticeably, rising from September’s revised figure of 78.2% to 81.5%. Six of the eight sectors of the economy were reported to be operating at or above their respective long-run averages, with only the retail and recreational/personal services sectors operating at below-average levels.

Capacity utilisation is generally accepted as an indicator of future investment expenditure and it also has a strong inverse relationship with the unemployment rate.

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