Martin North – Page 53 – Digital Finance Analytics (DFA) Blog

The Bears Are Back Baby!

This week has continued to underscore the change in the market weather, following the hopium of July.

“We’ve long been overdue for a correction in equities, and it’s clear that higher rates have now become the catalyst for that,” said Michael Reynolds, vice president investment strategy at investment and wealth advisory firm Glenmede. “When the opportunity cost for capital becomes more competitive, valuations should correct on risk bearing assets, especially large cap equities which have been trading at significant premiums this year.”

And news that China’s seemingly eternally beleaguered property giant Evergrande has sought bankruptcy protection in New York only added to the strange feeling the financial world has turned upside down. While the problems in the Chinese property sector are far better understood than they were when Evergrande teetered two years ago, China’s post-lockdown economic troubles – perhaps best typified by the nation’s slide into deflation – adds a new and worrying link in what seems increasingly like a negative feedback loop.

As 2023 began, the consensus was clear: China’s economy would surge out of COVID-19 lockdowns, with monetary and fiscal stimulus providing tailwinds, while the US would fall into a brief recession that would likely lead to equity market correction and rate cuts.

But instead, the US economy has proven extraordinarily resilient and equity markets have surged 22 per cent from their October 2022 lows. But in the US, the climb in long-term bond yields to levels not seen in more than a decade is a reminder that economic strength can also weigh on investors.

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Well, We’ll Cover As Much As We Can! – With Tarric Brooker…

Another deep dive into the data with Journalist Tarric Brooker as we explore the recent events in China, the housing story (and political announceables), the mortgage cliff (or not) and lots more.

Slides are available here: https://avidcom.substack.com/p/dfa-chart-pack-18th-august-2023

Tarric’s article which we mention is here: https://avidcom.substack.com/p/aussie-fixed-rate-mortgage-cliff

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“Captain! The Engines Canna Take More!”

Scotty from Star Trek cries, as the Enterprise shakes and hums, as they try to squeeze more out of the warp core. This to me is a good analogy to what’s happening in the economy, based on the latest data from the ABS.

First, Average weekly ordinary time earnings for full-time adults was $1,838 in May 2023, according to new seasonally adjusted figures released today by the Australian Bureau of Statistics (ABS).

The ABS also said the unemployment rate increased by 0.2 percentage points to 3.7 per cent in July (seasonally adjusted).

Now three points, we know that given the pressures on households many are seeking and able to work more hours, and many via multiple jobs to increase income to cover the rapidly rising costs of living – including of course rental payments or increased mortgage payments.

Second, the rise in the unemployment rate is partially explained by the school holidays which occurred through the sample period.

But third, again we have sampling changes as the ABS roll off old samples, and bring a new one in. And here we see the new sample contains significantly higher unemployment counts sufficient to move the dial.

Thus, there is little here to prove that unemployment is rising so implying the RBA won’t hike. Next month we will likely see things moving around, but the gross growth in hours worked in the real issue – how much further can that be pushed, I suspect we are to return to our Star Trek introduction, pushing the Australian economic engines as far as they can go – until something breaks!

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UK Inflation Still Not Beaten, As Wages Spiral (For Some…)

UK inflation remained higher than expected last month as the cost of travel and holidays climbed, adding to the case for the Bank of England to raise interest rates again, this despite an expected fall in energy prices.

The Consumer Prices Index rose 6.8% in July, exceeding the 6.7% rate expected by economists, the Office for National Statistics said Wednesday. It was the fifth time in six months the figures surprised on the upside. Inflation remains more than triple the BOE’s 2% target.

While falling energy and food price inflation brought the headline rate down from 7.9% in June, the cost of services accelerated by 0.2 percentage points to 7.4%, matching highs touched in May and in 1992.

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Today’s post is brought to you by Ribbon Property Consultants.

The New Zealand Cash Rate Is Held, But No Rate Cuts Can Be Expected Yet!

An in-depth look at New Zealand, as the Reserve Bank holds rates at 5.5% and underscores the need to hold rates higher for longer. Plus, the inquiry into Banking Competition fires up, and the Chief statistician says people do not want to talk to them! Wonder why?

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Higher For Longer Hits Home!

Wall Street’s main stock indexes closed sharply lower on Tuesday after stronger-than-expected retail sales data stoked worries interest rates could stay higher for longer, while U.S. big banks dropped on a report that Fitch could downgrade some lenders.

The U.S. retail sales data comes on the heels of strong inflation readings for July, and could potentially give the Fed more impetus to remain hawkish in the coming months. Such a scenario bodes poorly for risk-driven assets, particularly tech stocks.

The Commerce Department report showed retail sales grew 0.7% last month against expectations of a 0.4% rise, suggesting the U.S. economy remains strong.

After the data, traders’ bets of a pause on hikes by the Federal Reserve next month stayed intact at 89%, yet analysts said investors were worried rates could stay at current levels longer than anticipated.

Banks saw the brunt of the selling as investors grew more anxious about interest rates. The U.S. Treasury yield curve has been inverted for over a year, with longer-term bonds yielding less than short-term debt instruments. This persistent situation pressures profits that banks can earn on loans.

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The Elephants In The Room Of Property Prices

Home prices are driven by a combination of demand where population growth thanks to high migration puts upward pressure on prices; supply where more property for sale puts downward pressure on prices, and availability of credit as the catalyst for transactions to occur.

Much of the debate is currently centered on supply side issues. As I discussed last week, Outgoing Governor Phil Lowe, urged governments at all levels to work together to address the problem of housing affordability. Notably, he dismissed rent controls as a short-term fix that would provide immediate relief by reducing the incentive to fix the key problem: supply.

“There aren’t short-term solutions here. The solution has to be putting in place a structure that makes the supply side of the housing market more flexible and that means zoning and planning deregulation and it means state and local governments being part of the solution.”

This means that first time buyer incentives, or rental support just make the problem, worst – something which I have highlighted over the years (and which by the way the Productive Commission also confirmed).

But my fear is that the un-defused credit bomb will be skirted around and as the supply side elephant is paraded through the streets. But it is the credit Elephant in the room which should be addressed, even if it shrinks bank balance sheets and profits. If not, nothing will fundamentally change and prices will remain as out of whack as they currently are.

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Data Dependence Equals Volatility!

Our normal weekend market update, as incoming data is all over the show. No wonder things are volatile!

The S&P 500 and the Nasdaq Composite fell on Friday and posted their second straight weekly losses, as hotter-than-expected U.S. producer prices data pushed Treasury yields higher and sank rate-sensitive megacap growth stocks. Being data dependent, means markets will be highly volatile over the northern summer.

Data on Thursday showed U.S. consumer prices increased moderately in July, with the smallest annual increase in core inflation in nearly two years, lifting hopes that the Federal Reserve is at the end of its rate hike cycle.

However, San Francisco Fed Bank President and CEO Mary Daly said that more progress is needed before she would feel comfortable the Fed has done enough to rein in inflation.

US producer prices picked up in July, primarily due to increases in certain service categories, highlighting the choppy nature of getting inflation back down to target.

According to the Bureau of Labor Statistics the producer price index for final demand, as well as the core index which excludes food and energy, both rose by 0.3% in July, While those came in slightly more than forecast, downward revisions to the prior month tempered some of the strength.

Normalizing global supply chains, tepid demand abroad, and a broader shift in consumer spending toward services and away from goods have generally helped alleviate inflationary pressures at the producer level over the last year. But headwinds are building again as oil prices climb.

Service costs rose by the most in nearly a year, reflecting increases in categories including portfolio management, outpatient care and passenger transportation. Several categories from the PPI report, notably in health care, are used to calculate the personal consumption expenditures price gauge — the Federal Reserve’s preferred inflation measure — that will be released later this month.

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