To Infinity And Beyond – The Property Imperative Weekly 16 Nov 2019

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.

Contents

0:20 Introduction
1:05 Live Stream 19th Nov
1:30 US
2:00 US China Trade
2:50 US Economy
3:10 CASS Shipping
4:40 Fed Policy
5:20 US Markets
07:57 Hong Kong
8:25 UK
09:35 New Zealand

11:22 Australian Section
11:23 Employment
12:00 Wages
13:20 Sentiment
14:00 Home Prices
17:18 Auctions
17:50 Pay Day Research
19:10 Insolvencies
20:00 RBA on Mortgage Arrears
22:35 Australian Markets

November Live stream: https://youtu.be/dMaixx5Sf34

More Treasury Cash Ban Tricks – KPMG

The latest on the Cash Restrictions Bill – with Treasury hiding a key submission from KPMG, the architect of the ban… I discuss with Robbie Barwick from the Citizens Party.

Still time to make a submission – just….

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

Public Disclosure Proves That Treasury Lied To And Misled The Government

Economist John Adams and Analyst Martin North examines the latest disclosures relating to the Cash Transaction Restriction Bill, and considers the implications in the count down to the end of the Senate submission window which expires on 15th November.

Did The End Of The World Just Get Postponed?

Something happened late last week, which superficially might be attributed to positive news on the US China trade talks (later downplayed by Trump) but it was wider and more significant than that.

In recent months many traders have been positioning for a significant market correction, and potentially a US or global recession. Thus, risk stocks were downplayed, while bonds and gold were all the rage.

This drove the yields on bonds down, to the point where in several countries, like Germany they went negative, and at its peak, it was estimated that around $17 trillion of bonds were effectively underwater. A couple of weeks back, we pointed out that Gold had shot ahead of itself, and that the Gold futures meant it would slide. It did, falling by more than $30 an ounce.

The 10-year US Treasury yield rose on Friday to 1.94%. up nearly 50 basis points from the lows at the end of August. Remember that the Fed cut its interest rate target twice, by a total of 50 basis points, and short-term Treasury yields have fallen by about that much. With the one-month yield now down to 1.56% and the 10-year yield up at 1.94%, the yield curve has un-inverted and steepened.  Recession has been postponed, for now.

Germany’s 30-year bonds are interesting in that they tried to sell them at a negative yield of -0.11% on August 21, with a 0% coupon – so no interest payments for 30 years – and at a premium, in order to achieve the negative yield of -0.11%. While €2 billion of these bonds were offered, only €824 million were sold. And those investors may rue the day they bought.

We discuss the underling issues.

Does Monetary Policy Work Any More?

In its quarterly statement on monetary policy, released today, the Reserve Bank of Australia declared its preparedness to “ease monetary policy further if needed”. Via The Conversation.

This suggests the bank still thinks monetary policy – in this case lowering interest rates to stimulate the economy – could help “support sustainable growth in the economy, full employment and the achievement of the medium-term inflation target”.

But in the wake of the bank last month lowering the official interest rate to a record low and the current somewhat sad state of the Australian economy, many commentators have speculated that monetary policy doesn’t work any more.

Is that right?


Reserve Bank cash rate

Source: RBA

There are a number of variants of the “monetary policy doesn’t work” argument. The most basic is that the Reserve Bank has this year cut rates from 1.50% to 0.75% without any improvement to the Australian economy.

This is a textbook example of one of the classic logic fallacies known as “post hoc ergo propter hoc” (from the Latin, meaning “after this, therefore because of this”).

Put simply, it assumes the rate cuts have had no effect and doesn’t account for the possibility things might have been worse had there been no cuts.

Things might have been even worse. We’ll never know.

It also ignores what might have happened if the RBA had cut sooner. Again, we can’t know for sure. It is possible, though, to make an educated guess.

When to cut rates

Had Reserve Bank governor Philip Lowe acted, say, 18 months earlier to cut rates, he would have signalled that Gross Domestic Product growth was indeed lower than desired, that the sustainable rate of unemployment was more like 4.5% than 5%, and, most importantly, that he understood the need to act decisively.

That would have sent a powerful signal.

It would also have ameliorated the huge decline in housing credit that pushed down housing prices in Sydney and Melbourne by double digits.

That, in turn, would have prevented some of the weakening in the balance sheets of the big four banks that has occurred (witness this annual general meeting season).

All of this would have pumped more liquidity into the economy and put households in a much stronger position, likely leading to stronger consumer spending than we have seen.

Bank pass through

One gripe both the Reserve Bank governor Philip Lowe and federal treasurer Josh Frydenberg have had with the banks is their failure to fully pass through the RBA cuts.

It is true there is a problem with banks not being able to cut deposit rates below zero, and as a result having less scope to cut mortgage rates, which are majority funded from deposits.

But there are, of course, other ways monetary policy can work. The leading example is quantitative easing (QE).

This is where the central bank pushes down long-term interest rates by buying government and corporate bonds. At the same time this expands the money supply, thereby adding some upward inflationary pressure.

There is little reason to think such measures wouldn’t work.

The power of free money

Perhaps paradoxically, the closer interest rates get to zero the more powerful those rates may end up being.

To put it bluntly, if someone shoves a pile of money into your hand and asks almost nothing in return, you’re likely to use it. In fact, you would be pretty silly not to.

Suppose your mortgage rate really goes to zero – as has happened in Europe.

You might decide to redraw that and spend the money on a home renovation or some other productive purpose. Or you might decide to buy a more expensive house.

Such spending provides an economic boost.

The effect is all the more pronounced if people expect interest rates to be low for a long period of time. Aggressive cutting coupled with quantitative easing – which lowers long-term rates – signal just that.

But not only monetary policy

Just because monetary policy still has some effect at near-zero rates doesn’t mean we should pin all of our economic hopes to it.

A near consensus of economists have argued repeatedly for the use of more aggressive fiscal policy – including more infrastructure spending and more tax cuts.

Indeed, Philip Lowe has raised eyebrows by speaking so forthrightly on this issue. That doesn’t make him wrong, though.

There is little doubt the Reserve Bank should have acted much earlier to cut official interest rates. There is also a very good chance it will need to begin to use other measures such as quantitative easing in the relatively near future.

All of that says the Australian economy, like most advanced economies around the world, is in bad shape.

But it doesn’t mean monetary policy has completely run out of puff.

Author: Richard Holden, Professor of Economics, UNSW

The Roller Coaster Ride Continues – The Property Imperative Weekly 09 Nov 2019

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.

Contents:

00:24 Introduction
1:23 US China Trade Talks
3:04 US Markets
6:15 China

7:50 Australian Section

7:55 RBA on Monetary Policy
10:50 Household Confidence
11:10 Lending
11:40 REA
14:50 High Rise Construction
15:30 Property Market
16:20 Auctions
16:50 Bank Profit Results
17:50 Australian Markets

NAB Takes A Hit As Well

Nab reported a 13.6% fall in statutory net profit for 2019, at $4,798 million, compared with $5,702 million last year. Along with ANZ and Westpac, it is the same story of a massive hit from customer remediation (past results inflated by milking customers, and many customers still require remediation), margin compression, not helped by lower cash rates, weak loan growth, and higher mortgage delinquency and provisions. And again they expect 2020 to be a weak year economically speaking. So no growth story here.

Revenue was down 4.2%, although they at pains to point out that excluding customer-related remediation, revenue rose 1.1% mainly reflecting growth in business lending partly offset by lower margins. Of course they dismiss many of the writes-downs as a one-off, and there will be some “putting the trash out” as the new CEO takes up the reigns. $2,092 million for customer remediation all up, is a big number, and not yet final. But do not be misled, the underlying business is under extreme pressure, and competition for the meager loan volumes is intense.

Net Interest Margin (NIM) declined 7 basis points (bps) to 1.78%. Excluding Markets and Treasury and customer-related remediation, NIM declined 4bps with home lending competition an important driver.

Expenses rose 0.2%. Excluding large notable items, expenses were up 0.4% with productivity benefits and lower performance based compensation largely offsetting higher investment and increased spend to strengthen the compliance and control environment.

But the revenue excludes customer-related remediation $1,207m in FY19, $249m in FY18. Expenses excludes: customer-related remediation $364m in FY19, $111m in FY18; capitalised software policy change $494m in FY19; restructuring-related costs $755m in FY18.

In cash earnings terms, they fell by 10.6%, from $5,702 million in 2018 to $5,097 in 2019.

FY19 cash earnings includes charges of $1,100 million after tax for additional customer-related remediation. During FY19 they uplifted customer remediation practices with more than 950 people (including NAB employees and external resources) solely dedicated to remediating customers.

In combination with provisions raised in 2H18 which have not yet been utilised, provisions for customer-related remediation as at 30 September 2019 total $2,092 million. They warn that the final cost of such remediation matters remains uncertain.

Cost savings of $480 million were achieved in FY19 bringing total savings since September 2017 to $800 million.

Collective provisions rose to 0.96% of CRWA’s, which equates to $3,360 million.

Whereas specific provisions fell to 39.7%, but were also higher.

Credit impairment charges increased 18% to $919 million, and as a percentage of gross loans and acceptances rose 2bps to 15bps. FY19 charges include $60 million of additional collective provision forward looking adjustments for targeted sectors experiencing elevated levels of risk.

The ratio of 90+ days past due and gross impaired assets to gross loans and acceptances increased 22bps to 0.93%, largely due to rising Australian mortgage delinquencies.

While Australian housing arrears increased further, loss rates for this portfolio is 2bps. Collective provision forward looking adjustments for targeted sectors increased over FY19 and now stand at $641 million. In their scenario testing, they estimate a Peak Net Credit Impairment of $1.8bn in year 2, which equates to 57 basis points, based on an average home price fall of 25.2%

2.4% of mortgages in Australia are above 100% LVR (based on SA3 level CoreLogic data, so not very specific).

The final fully franked dividend of 83 cents per share (cps) has been held stable with the 2019 interim dividend, bringing the total for FY19 to 166 cps. This represents a 16% reduction compared with FY18.

Across the divisions in cash earning terms:

Business & Private Banking $2,840 were down 2.4% on last years, reflecting higher credit impairment, charges and higher investment spend. Revenue increased 1% reflecting good SME business lending growth.

Consumer Banking & Wealth $1,366 were down 11.2% where banking earnings decreased given lower margins with competitive pressures in housing a key driver, combined with increased credit impairment charges.

Wealth earnings also declined reflecting the impact of customer preferences and repricing on margins, and lower average funds under management and administration.

Corporate & Institutional Banking $1,508 down 2.1% reflecting higher credit impairment charges relating to impairment of a small number of larger exposures. Revenue increased 1% despite lower Markets income, with higher lending volumes benefitting from continued focus on growth segments.

New Zealand Banking NZ$1,055m up 5.1% benefitting from
growth in lending, partly offset by increased investment spend and higher credit impairment charges.

The Group Common Equity Tier 1 (CET1) ratio is 10.38%, up 18bps from September 2018, and includes $1 billion (25bps) of proceeds received in
July from the 1H19 underwritten Dividend Reinvestment Plan and 34bps adverse impact from regulatory changes relating to operating risk and derivative counter party credit risk measurement.

Leverage ratio (APRA basis) of 5.5%

Liquidity coverage ratio (LCR) quarterly average of 126% and Net Stable Funding Ratio (NSFR) of 113%

NAB expects weak credit growth ahead, a GDP result in 202 of around 2% and business confidence also weakened which may dampen business credit growth.