NAB survey shows business conditions at six-year low; currencies, ASX decline

Among the latest batch of data, the NAB survey stands out as the most significant, with the drop in profitability drawing particular attention. The survey notes that profitability tends to act as a leading indicator for labour market conditions, a factor that the RBA would likely weigh more heavily than the headline confidence or conditions figures. This creates a dilemma for the AUD: ongoing cost pressures and elevated inflation are keeping swap pricing near a 69% probability of a fourth RBA rate hike this month, even as the business survey indicates slowing growth and margin compression, which typically would support a more cautious approach.

The ASX's move below 9,000 points, combined with the steep decline in consumer sentiment, underscores the narrative of a domestic economy losing steam due to interest rates and energy-driven inflation.

Regarding the NZD, a comment from the RBNZ that the official cash rate may already be in neutral territory provides a slightly dovish input, reducing expectations for further tightening and contributing to the softer tone for both currencies. However, neither currency's move is yet significant enough to indicate a decisive change.

---

• China trade data due later today; a better-than-expected result could strengthen the AUD as a proxy for demand.

---

The AUD is in a bind between a central bank inclined to hike again and a business survey showing genuine concern, while the NZD received a minor downward adjustment from a neutral-rate comment.

• In August, the NAB business conditions index dropped five points to -1, the first negative reading since the pandemic began, while confidence fell to -8, far under the long-term average of +5.
• Profitability decreased by 10 points and sales by 5 points, reaching levels not seen since after COVID-19. NAB noted that the decline in profitability is notable because it often precedes changes in labour market conditions.
• Cost pressures stayed high, with fuel costs increasing again due to heightened Middle East tensions. The spread between purchase costs and product prices remains at historically wide levels.
• The ASX 200 declined 0.4% to 8,979.70, slipping under the 9,000 mark, led lower by financials and healthcare. Commonwealth Bank fell 1% and is now about 8% below its level since it reported weaker mortgage volume growth last month.
• Derivatives pricing indicates a 68.8% chance of an RBA rate increase this month, which would be the fourth this year. HSBC projects a 13% decline in Australian house prices nationally by mid-2027.
• The Westpac-Melbourne Institute consumer sentiment index dropped 5.2% to 84.4 in September, erasing most of August's improvement. Family finances fell 9.2%, and sentiment among mortgage holders declined 13%.
• RBNZ MPC member Prasanna Gai stated that it is plausible the official cash rate is already in neutral territory, a remark that has slightly pressured the NZD.

The Australian and New Zealand dollars are trading slightly lower, with the key driver being the NAB August business survey indicating conditions at a six-year trough. The conditions index fell five points to -1, the first negative reading since the 2020 pandemic, and the confidence index dropped one point to -8, significantly below the long-term average of +5. The weakness was widespread across sectors, with profitability down 10 points and sales down 5 points, both at post-COVID lows. NAB noted that the profitability decline is important to monitor because it often leads changes in labour market conditions, and described the survey's overall message as slowing growth against ongoing cost and price pressures, with fuel costs rising again in August due to Middle East tensions.

The mix of slowing growth and persistent inflation creates a real tension for the outlook. Swap pricing shows a 68.8% likelihood of an RBA rate hike this month, which would be the fourth this year, despite the NAB survey indicating a slowing economy. Australian shares reflected this concern, with the ASX 200 down 0.4% to 8,979.70, falling below 9,000 as financials and healthcare dragged. Commonwealth Bank lost another 1%, extending its roughly 8% decline since reporting weaker mortgage volume growth last month. HSBC forecasts a 13% national drop in Australian house prices by mid-2027, citing property tax changes and higher rates.

Consumer sentiment contributed to the weak tone, as the Westpac-Melbourne Institute index fell 5.2% to 84.4 in September, reversing most of August's gain and standing nearly 12% lower than a year ago. Westpac's Matthew Hassan attributed the decline to fuel prices and interest rates, and noted it likely adds to concerns about softening housing markets. Family finances plunged 9.2%, and sentiment among mortgage holders dropped 13%, while renters saw a much smaller 0.6% decline.

Across the Tasman, the NZD faced a slight headwind after RBNZ MPC member Prasanna Gai said it is plausible that the official cash rate is already in neutral territory. This comment reduces expectations for further tightening and has put mild pressure on the currency.