The Federal Open Market Committee decided to leave the cash rate unchanged yesterday, and it’s weird that the biggest financial news from Wednesday is that they did nothing at all, and did not committing to doing anything in future, despite the call from some to cut rates in a pre-emptive intervention to head off a recession.
As always traders parsed every nook and cranny of the FOMC statement, while billions of dollars changed hands.
Powell said decisions on monetary policy are a “very difficult judgment call,” and he laid out scenarios for everything from cutting several times this year to no cuts at all. If inflation moves down in line with expectations, growth remains reasonably strong, and the labor market remains consistent with its current condition, a rate cut could be on the table in September, he says.
Eyes now turn to the Bank of England, who may or may not cut rates in the UK today. With inflation close to 2% and an expectation of an ECB like rise in inflation ahead, it’s a line ball call.
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The ABS released their latest on CPI, with the quarterly results to June, and the monthly. The data of course feeds into the RBA rate decision next Tuesday. The Consumer Price Index (CPI) rose 1.0 per cent in the June 2024 quarter and 3.8 per cent annually. So real prices are still rising. Underlying inflation which measures reduce the impact of irregular or temporary price changes in the CPI – the annual trimmed mean inflation was 3.9 per cent, down from 4.0 per cent in the March quarter. This is the sixth quarter in a row of lower annual trimmed mean inflation, down from the peak of 6.8 per cent in the December 2022 quarter.
At first blush, the data could be bent in support of an argument that inflation continues to fall, especially if you focus on the core measure, which is precisely where Treasure Chalmers went in his statement, and in which he also argued that inflation was about 0.5% lower thanks to Government support for electricity and rents, etc. ““While headline inflation is proving sticky and stubborn, and is more persistent than we would like, it is less than half its peak,” he said. “Inflation is lingering for longer than we had hoped across the globe, and Australia’s experience is no different.”
But then, remembering RBA Governor Bullock said she would look through these temporary adjustments, the story swings more to the rise in headline inflation, which came in as expected. Actually the RBA was forecasting CPI inflation to reach 3.8%yr in the June quarter, in line with today’s result. However, for core inflation, the RBA was also forecasting 3.8%yr for June, so the 3.9%yr pace was a touch stronger than they were expecting.
All this means if the RBA felt the need to lift rates they could justify it, but also if not, they could find reason to hold, so if comes down to judgement and weighting the political and economic consequences. Nothing here though to justify a rate cut.
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This is an edited version of a live discussion with Robbie Barwick from the Australian Citizens Party, as we explore the current status of the war on cash, regional banking, post offices, and the need to revolutionize the financial system for ordinary people.
As the wackiness continues, property insider Edwin Almeida and I pick over the bones of the market, as expectation of rate hikes harden, people are starting to talk about weakness in some places, while the media continue to spruik as though their lives depended on it.
We also look at fascinating insights from Chinese students in Australia and how they manage their finances.
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If you chose to look below the hood, you can see some changing dynamics across the property market which may indicate the recent rises in some areas are easing, to the point where the boss of the country’s biggest real estate group has cautioned that vendors may need to rein in their price expectations this spring, after property price growth eased in July amid concerns of another interest rate rise.
CoreLogic’s Daily Home Value Index shows capital city house prices are up 0.4 per cent over the first 27 days of July, compared with growth of 0.7 per cent in June. As the AFR reported, “Vendors need to be careful regarding price growth expectations,” Ray White Group managing director Dan White said.
Another factor we are seeing playing out is the number of investment properties coming onto the market a feature we noted first in Melbourne where rules on investment property were tightened by the state government.
There net investment yields ( that’s the costs to service the property relative to the rental received) is negative for more than half of properties. Trouble is, many of these properties are also lemons, given they often need more than just a bit of TLC, given many have poor wiring, leaks, asbestos and worse.
Now, NSW Premier, who has been talking about making property in Sydney more affordable, announced the introduction of a ban on no-reason evictions, and an extension of mandatory notice periods to 90 days from 60 days. In other words, owners who use legally permitted grounds for eviction – including if they want to live in their own homes – will have to give three months’ notice. In these cases, their renters can walk out, at any time, without penalty. The NSW changes are slated to start early next year.
It already looks like some property investors are leaving the field, thus reducing the supply of rental property. True a first time buyer might step up, but lending standards at higher rates make borrowing capacity an issue. And the risk I see playing out is that well meaning first time buyers will be buying lemons, alongside some ill-informed property investors who still weirdly believe property only ever goes up in value. Just look across the ditch for a dose of reality, as I highlighted recently. There, thanks to slower migration and high interest rates, prices are nose-diving. Will we see a similar scenario in Australia, or will the Government play another card to keep prices buoyant, or APRA reducing lending buffers. Frankly on both counts its likely, but remember folks, a lemon remains a lemon, so in the current environment buy with great care, and prepare for the cracks to swallow up potential prices rises ahead.
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Today’s post is brought to you by Ribbon Property Consultants.
This is our latest weekly market update, where we check in the markets across the USA, Europe Asia and Australia and also cover commodities and crypto.
This past week once again was full of swings, up earlier, then down, and then an upswing on Friday, though still to end lower once again across the week. It is worth recalling that to make money in stocks the idea is to buy low, and sell high. In recent times we saw investors piling into already over expensive tech stocks – essentially buying high and hoping for higher. Some of that is now reversing. And there is probably more to come.
The US markets did get a boost at the end of a wild week after key economic data bolstered speculation the Federal Reserve will set up the stage for a rate cut in September as the volatility index slide 11 per cent from recent highs. While every major group in the S&P 500 rose on bets that the start of the Fed easing cycle will keep fuelling the outlook for Corporate America, once again, smaller firms largely beat the cohort of tech megacaps — extending their July surge to about 10 per cent.
The S&P 500 CLOSED 1.11% higher, the DOW was up 1.64% and the NASDAQ rose 1.03 per. The Russell 2000 of small caps climbed 1.65 per cent, while the gauge of the “Magnificent Seven” megacaps added just 0.7 per cent. The S&P Financials were up 1.49%.
The Australian dollar fell in its longest stretch of losses in almost a year as concerns about China’s economic recovery continue to weigh on the currency and commodity prices. The Aussie – which had been rallying on the interest rate differentials between Australia and the US – has not been immune to the latest sell-off in metals prices. It was last at 65.49. But AMP’s chief economist Shane Oliver is also sticking by his forecast, projecting the Aussie to reach US70¢ by the end of the year.
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Another outing with Journalist Tarric Brooker, as we pick over the latest data, with a focus on what is happening in the real economy. We also discuss the real race many are running in terms of no real income growth, and the political and economic implications of this ahead.
You can find Tarric’s charts at https://www.burnouteconomics.com/
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Markets Are Clearly Confused. The S&P 500 closed sharply lower on Wednesday, suffering its biggest one day lost since 2022 as tech stocks nosedived following underwhelming second-quarter earnings from heavyweights Alphabet and Tesla.
After the recent political machinations in America, with Trump in the ascendency, followed by the switch from Biden to Harris, the Trump trade got reversed. In Big Tech, the rotation from AI stocks has continued, as players like Google reportedly are spending even more Capax than expected investing in AI, without a clear uptick in revenue, while Tesla pushed out some of their new business plans, while reporting weaker sales revenue.
Then we have the prospect of US rate cuts now emerging in September, having at the start of the year priced in up to six cuts, a month ago considering a rise as inflation appeared more sticky, but now economic cracks may suggest a series of cuts soon.
And in China, data continues to be weak, after the recent conflab there did little to clarify Government support for the weak economy, with speculation rise that they will wait for the US election result.
And while rate cuts continued in Canada yesterday, and are expected in Europe, and the UK, in appears rate rises are more likely in Japan and Australia.
Finally, we have the normal summer thinner volumes, and then the prospect of the typically wobbly markets we often see in September and October, before a run up towards the end of the year.
So traders are going cautious, taking money off the table, and into safe havens, switching from the high tech bet, and watching for the next moves.
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A new report from the Finance Industry Peak Body, UK Finance, which represents more than 300 firms in the UK, reveals that cash remained the second most popular payment method, after debit cards – with an estimated three million people still relying on it. Their research suggests 1.5 million mainly used cash in 2023, up from 900,000 the previous year.
This was it appears an unexpected jump in the number of people who mainly use notes and coins for their daily spending, despite all the propaganda that the UK moving closer to becoming a cashless society. A UK Finance spokesperson said it would monitor the situation regarding people who mainly used cash to see if this was the start of a trend or merely a “statistical blip”. We think it’s more than that.
As I highlighted in a recent post the chaos caused by the global IT outage last week underlines the risk of moving towards a cashless society. Even if the data forecasts that cash will represent only 6% of payments in a decade’s time, it’s critical if other systems go down, as we saw with the outage last week” UK Finance said. This is as close to the Swedish message of make sue you keep cash on hand in case of emergencies as it gets, without saying it!
In Australia, as I reported recently there was also a rise in cash usage, despite the banks best worst efforts, and the recommendation from the recent Senate Inquiry into Regional Branch closures also recommend making access to cash an essential service.
Its simple really people, keep using cash, and we retain a backup in case of emergency. We also know people using cash regularly has a better handle on their finances, teaches kids the real value of money, and acts as an antidote to tap tap credit based society, where banks make a dollar from every transaction, which costs us all. While the war on cash is far from over, use it, or lose it. Its that simple!
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This is an edited version of a live discussion with Dr Cameron Murray, Independent Economist over at Fresh Economic Thinking.
Fresh Economic Thinking is Australia’s newest think-tank, with independent and insightful takes on major economic debates.
Cameron thinks economics could be much better than it is so he often writes very fine technical critiques of economic theory and comments on the nature of the profession. He specialises in property and housing markets, environmental economics, and corruption. I dabble in just about everything: macro, money, institutions, evolutionary economics, and more.
For the past four years, he was a Post-Doctoral Research Fellow in the Henry Halloran Trust at The University of Sydney.
https://www.fresheconomicthinking.com
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