We walk through the latest from our surveys and modelling ahead of our live show which will be on 13th February 2024 at 8pm Sydney where we will look at specific post codes in more detail.
Household financial stress continues to bite, and is spreading into many different types of communities.
Ahead, we do not expect cash flow to improve for many, as mortgage rates will not be falling very soon, the costs of living continue to rise and income growth in real terms is muted, at best.
If you want data on a specific post code, put it in the comments and I will either cover it Tuesday week, or via a separate show.
If you want to get the full data set, this is available via Patreon: https://www.patreon.com/DigitalFinanceAnalytics
Our One to One Service is also available: https://digitalfinanceanalytics.com/blog/dfa-one-to-one/
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Investors hate surprises and we got many this week – to the point where I begin to wonder whether markets are fundamentally broken as they were driven higher by good results from some of the magnificent seven, despite the shock revelation of mounting losses from commercial property by little-known banks in New York and Tokyo. And then the US jobs number came in so hot, as to lift bond yields while Central Bankers this week played a cautious hand, suggesting that they need to see more evidence before they start cutting rates, against market expectations.
Let’s start with commercial property. The problems particularly the office sector are well known: a combination of remote work and ageing buildings has pushed up vacancy rates and pushed down valuations; office property values in the US fell more than 20 per cent last year.
That’s a problem for landlords that must refinance loans against commercial property; about $US2.2 trillion of loans from the US and European commercial real estate sectors will come due between now and 2025.
US property billionaire Barry Sternlicht told a conference this week the US office property sector was worth $US3 trillion, and now it’s worth $US1.8 trillion. “There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.” At least some is in America’s regional banks, where commercial property loans account for about 30 per cent of all loans, compared with 6.5 per cent at large US banks.
Regional US lender New York Community Bancorp and Japan’s Aozora revealed problems with commercial property loans and dropped their share prices significantly underscored a critical question: is this the start of something bigger? Morgan Stanley strategist Mike Wilson says that even if banks holding this debt can cope with the losses, it crimps their ability to lend to other businesses.
But if there’s one broader lesson from the sudden re-emergence of commercial property fears, then it’s this: we still haven’t cleared out the excesses that built up in the era of very low interest rates, and were compounded during the pandemic period of extreme froth.
The world is now so indebted, and so financialised, that these cycles aren’t allowed to occur. With “households and corporates becoming hooked on leverage”, we can’t let bubbles pop because they’re “the essence of our economies”.
This is why investors are cheering the prospect of rate cuts with such gusto. And it’s why the fear of higher-for-longer interest rates – which the Federal Reserve reminded the world of on Thursday by killing off hopes of a March cut – is still real.
“The market has been horribly wrong about the near-term trajectory of Fed policy and this is another instance where that’s the case,” said Kevin Gordon, senior investment strategist at Charles Schwab in New York.
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An important discussion with Robbie Barwick from the Australian Citizens Party, about democracy, the role of the Reserve Bank, and use of cash, as some are now calling for a significant change in the balance of power.
Who will win? Will un-elected technocrats dictate the future direction of the country, or will electable politicians step up and weald their accountable power?
This is a battle for the future.
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Markets were disappointed yesterday, as the Federal Reserve held interest rates steady for a fourth straight meeting as expected but more importantly signaled the possibility of a rate cut, but later in the year and pretty much ditched the prospect of a reduction in March, which some optimistic economists were banking on.
As a result, Stocks saw their biggest decline on a Federal Reserve day since last March after Jerome Powell said officials want to keep their options open instead of rushing to cut interest rates.
“If stock bulls expected a rate cut in March, Powell seems to have closed the door on that,” said Oscar Munoz at TD Securities.
As a result, and other significant news, the S&P 500 fell 1.61%, the most since September while the Dow fell 0.82% and the NASDAQ slid 2.23%.
Treasuries rose as fresh concerns about regional lenders added to economic worries after New York Community Bancorp’s surprise loss which dragged their shares down by 38% after it cut its dividend and posted a surprise loss. As a result, Regional U.S. bank stocks sank on Wednesday, renewing fears over the health of similar lenders.
Interest rates took the elevator going up — but are going to take the stairs coming down.
Now we turn to the Bank of England, which will hold rates again today, and markets are not expecting a possible cut until later in the year – higher for longer, again!
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The ABS released the quarterly inflation read today, together with the monthly update. Overall the Consumer Price Index (CPI) rose 0.6 per cent in the December 2023 quarter, lower than the 1.2 per cent rise in the September 2023 quarter and 4.1 per cent annually, This was the smallest quarterly rise since the March 2021 quarter. The RBA’s preferred measure of underlying inflation (the trimmed mean), which strips out irregular or temporary price changes, rose 4.2 per cent annually, down from 5.1 per cent in the September quarter.
Remember of course this still means that prices continued to rise for most goods and services, though annual CPI inflation has fallen from a peak of 7.8 per cent in December 2022, to 4.1 per cent in December 2023.
Markets reacted by pushing the ASX 200 to a new all-time high, closing at 7,680.70 on Wednesday, 50 points higher that its previous peak set in August 2021 on the assumption that this CPI result will mean the RBA holds interest rates when they meet next Tuesday. Falls however are not expected until later in the year, or into 2025, depending on which economists you chose to listen to.
Money market traders are now fully pricing the first 0.25 of a percentage point cut to the 4.35 per cent cash rate in August, from September before the inflation data. A second rate cut is fully factored in by December.
Westpac chief economist and former RBA assistant governor Luci Ellis said the RBA was “unlikely to raise rates further this cycle”.
there is certainly some more positive news in these numbers, though of course real felt inflation is way off the official reported average numbers for some households.
But that said, domestic-generated inflation remained firm due to strong price rises for new dwellings (5.1 per cent), rents (7.3 per cent after extra rent assistance), insurance (16.2 per cent) and electricity (6.9 per cent after bill subsidies).
The inflation for so-called non-tradable goods and services, which are mostly influenced by domestic factors, rose 5.4 per cent, down from 6.2 per cent.
ANZ economist Catherine Birch said non-tradables inflation was “still very strong” and could make the RBA retain its “hawkish” tone on monetary policy at its meeting next week.
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This is an edited version of a live discussion as I explore the latest trends in population, home prices and productivity with Leith van Onselen, Chief Economist at the MB Fund and MB Super. He is also Chief Economist and co-founder of MacroBusiness. Leith writes as the Unconventional Economist. Leith has previously worked as an economist at the Australian Victorian Treasury and Goldman Sachs.
Original live stream and chat here: https://youtube.com/live/eclazIUDbz8
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More from our Property Insider, Edwin Almeida as we look at the low listings, and rentals, and the reasons why markets are not behaving as some (who should know better) said they would.
Edwin referred to this post: https://www.tiktok.com/@shallowchal/video/7326805682114645255
We also look at trends in Western Australia, as well as our normal East Coast analysis.
Things, as they say are getting interesting…
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Today’s post is brought to you by Ribbon Property Consultants.
The Australian’s Judith Sloan recently debunked KPMG chief economist Brendan Rynne’s spurious claim that a “short-sighted”, “kneejerk” cut to immigration would damage productivity and the economy.
So what are the latest figures telling us?
In the Financial Year 2022-23 we saw a record high net overseas migration of 518,000, while the federal government’s latest forecast is for a fall to around 375,000 which by the way would still be the second-highest annual read on record.
Such high volumes are driven in part by the student influx post pandemic.
Ahead, CBA expects a slowdown rate of population growth. “Using net overseas arrivals data for certain visa types till December 2023 suggest net overseas migration for 2023 was ~370k, roughly in line with government estimates for FY24″…
Now while the total number might be down, because the student element is the one moderating and most sensitive to rental demand, it might just help to cool rental growth a little – it is still way too high… many of those coming into the country still are cashed up and ready to buy property. So net, net given the limited supply of new property, due to falling building approvals, this will probably not help to ease under-supply.
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On Wednesday Statistics New Zealand released consumer price index (CPI) data for the December quarter. The data showed that New Zealand inflation slowed in the final three months of 2023, despite indicators of domestic price pressures remained stubbornly strong, which came in below the Reserve Bank’s expectations. As a result, it appears that policymakers are likely to hold until there’s a clearer picture of the economy.
“While this is the smallest annual rise in the CPI in over two years, it remains above the Reserve Bank of New Zealand’s target range of 1 to 3 percent,” consumers prices senior manager Nicola Growden said.
The OCR currently stands at 5.5%. While Investors are betting the RBNZ will start cutting the Official Cash Rate in the second quarter and will lower the benchmark to 4.75% by year’s end. But as I discussed recently, policymakers remained concerned about sticky core prices and most economists expect the RBNZ will delay a rate cut until the second half of 2024. In November, the central bank projected that inflation would drop below 3% in the third quarter of this year.
“Inflation continues to move in the right direction,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “The current state of play and the outlook should be sufficient to see the RBNZ pivot away from rate hikes. Rate cuts are not too far away.”
However, others remain more sanguine. “The divergence between the domestic and imported components of inflation helps to illustrate the big concerns that the RBNZ is trying to balance,”said Satish Ranchhod, senior economist at Westpac Banking Corp.
“Inflation is coming down. That will be important for stabilizing inflation expectations and means that the RBNZ will feel more comfortable keeping the OCR on hold for now.”
Westpac believes the CPI print will keep the Reserve Bank of New Zealand on hold through 2024 because inflation is “still uncomfortably high”.
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Another dose of charts and common sense from Tarric Brooker, as we look at the latest data and explore the implications for Australians on Australia Day. Houses and Holes, mate, Houses and Holes!
See the charts here: https://avidcom.substack.com/p/dfa-chart-pack-26th-january-2024
And Tarric’s article on the Houthi Strikes, The Closure Of The Gate Of Grief And The Sea Of Economic Consequences https://avidcom.substack.com/p/houthi-strikes-the-closure-of-the
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