Author: Martin North

Martin North is the Principal of Digital Finance Analytics

Do The Recession Sirens Call?

Our latest weekly market update.

Last week was quite a week, with the start driving markets higher in an AI induced hallucination, before the reality of rates higher for longer hit home, thanks to Federal Reserve Chairman Jerome Powell’s testimony in which he signaled more interest rate hikes ahead but vowed the central bank would proceed with caution. And the Bank of England lifted 0.5% to 5%, a 15 year high, as recession talk came to the fore, supported by a range of weak PMI’s.

The 10-Year-2-Year curve is burrowing southward, perhaps for a test of the inversion low earlier this year. While people tend to worry that a yield curve inversion is a trigger to economic recession, it is actually the steepening that follows that usually brings the trouble, whether it be inflationary or deflationary.

Japanese stocks slide after inflation grows more than expected Japan’s Nikkei 225 index slid 1.7%, while the TOPIX fell 1.5% after data showed consumer price index inflation grew more than expected in the 12 months to May. While core inflation read lower from the prior month, a reading that showed inflation excluding food and fuel costs surged to a 42-year high in May, indicating that underlying Japanese inflation remained high. The trend points to mounting pressure on the Bank of Japan to tighten policy, even as the bank reiterated that it has no plans to alter its ultra-loose policy in the near future.

In Australia, a sharemarket sell-off gathered pace through Friday, erasing a week’s worth of gains for the S&P/ASX 200, as energy producers headlined the falls on a softening oil price. The benchmark index fell 1.3 per cent, to 7099.2, extending the day-earlier 1.6 per cent decline and leaving the market at its lowest since it closed at 7091.3 points on May 31.

The worst-performing sector was energy . The real estate and banking sectors also declined as investors worried about that the strength of the economy as the Reserve Bank of Australia lifts interest rates higher.

“The risk of recession in Australia is now very high,” said Shane Oliver, the chief economist at AMP. “Our assessment remains that the RBA has already done enough to slow the economy and bring inflation back to target, and we are seeing clear evidence of slowing demand in terms of falling real retail sales, falling building approvals, slowing plans for growth in business investment, slowing GDP growth and early indications of a slowing jobs market.”

The outperformance of Bitcoin recently has been tied in part to a filing last week from BlackRock, the world’s largest asset manager, seeking approval for a spot-bitcoin ETF. If approved, it would be the first of its kind, and many experts believe it would increase accessibility and create demand for the asset. But So far dozens of attempts have been made to get a spot-bitcoin ETF approved but all have failed, and the SEC has not shown signs yet that it will back down.

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Australia’s Recession Chances In Charts: With Tarric Brooker!

Another exploration of the current economic situation Journalist Tarric Brooker. How baked in is Australia’s recession?

See the slides here: https://avidcom.substack.com/p/charts-and-links-from-appearance-a42

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Markets Face Reality For Now, As AI Deceives….

U.S. stocks closed lower on Wednesday as Federal Reserve Chairman Jerome Powell’s congressional testimony reinforced the central bank’s objective to rein in inflation as he hinted at the likelihood of further interest rate hikes.

At the start of this year, markets were expecting a bumpy ride on the markets. Yet, the S&P 500 is up by almost 15% this year, while the tech-heavy Nasdaq 100 Index has advanced by almost twice that amount.

While it’s still not clear quite what great things have happened in the last six months to justify the extra optimism, it’s obvious that the excitement over AI has been essential to the positive surprise. The ChatGPT artificial intelligence service was launched just as strategists began unveiling their 2023 predictions, at a time when few at the time saw this artificial intelligence-charged rally coming.

But, if you exclude the most prominent AI stocks, the rest of the S&P 500 is broadly on course for the year people expected, and since then rate expectations are higher because inflation is more embedded.

The Bank of England lifted rates again today, At its meeting ending on 21 June 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.5 percentage points, to 5%. Two members preferred to maintain Bank Rate at 4.5%. In Australia, the RBA needs to see unemployment rising to try to grip inflation, as rates stay higher for longer.

As a result markets are likely to be weaker for longer, to the point where some are arguing we are seeing a re-run of the 1999 dot com boom bust. We will see.

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Another Bad UK Inflation Print Signals Higher Rates Still: Recession Incoming?

Ahead of the Bank of England cash rate decision tomorrow, the latest CPI numbers were hotter than expected, with core CPI higher. As a result, expectations for rate hikes have taken off, with a prospective terminal rate of around 6%, the highest in years.

Added to the growing defecit and the prospect of a recession, and it seems the UK is at the worst end of the inflation drama!

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Extend And Pretend, Some More…

CBA has joined the lender cutting the buffers rate to 1% for certain borrowers, despite the Council of Financial Regulators saying 3% was appropriate. More extend and pretend.

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

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

If you are buying your home in Sydney’s contentious market, you do not need to stand alone. This is the time you need to have Edwin from Ribbon Property Consultants standing along side you.

Buying property, is both challenging and adversarial. The vendor has a professional on their side.

Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make.

Edwin understands your needs. So why not engage a licensed professional to stand alongside you. With RPC you know you have: experience, knowledge, and master negotiators, looking after your best interest.

Shoot Ribbon an email on info@ribbonproperty.com.au & use promo code: DFA-WTW/MARTIN to receive your 10% DISCOUNT OFFER.

DFA Live Replay 20 June 23 – Latest Financial Stress Analysis

This is an edited version of our latest live stream where we look at the latest economic data, our modelling and post level results.

We also corrected the audio which in the live version was a bit all over the place!

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A Deeper Dive On Mortgage Stress

Introduction

The latest edition of the DFA Household surveys (a 0.5% sample across Australia), reveals the creeping mortgage and rental stress which is continuing to reach new highs. We measure stress in cash flow terms – money in and money out, and where there is a deficit, households are identified as “stressed”. Often households will be able to hang on for months by tapping into savings, drawing down more from refinanced loans, or from other forms or credit, or by tightening their spending. Some have been able to gain temporary relief by refinancing to a cheaper loan (even if on extended terms), but as income growth remain below the current inflation rates, incomes continue to lose ground. Data this past week showed more than ever households were now working multiple jobs to get buy.

The rises in stress since before COVID are stark.

 
Analysis By State

We display the latest results by state and highlight in yellow where the proportion have rises since last month in yellow. Tasmania continues to experience the highest proportion of mortgage stressed households. But the more populous states of NSW and VIC reported strong increases. Rental stress remained highest in the ACT. Financial Stress, an aggregate measure across all households remained highest in NSW, where the average house price remain most extreme, compared to income.

 
Analysis By Cohort


We can also analyse the data by our segments, or cohorts. This is a critical dimension to understand, given that generally younger households, including first time buyers are the most exposed. But other cohorts, including first generation migrants, and older households continue to drop into stress. Underlying inflation, as well as increasing mortgage rates, and rents explain this.

Post Code Analysis

We list the top households – by count – for each post code. We use counts to avoid over-weighting small household post codes.

We find that the focus of high stress remains in the high growth new-development suburbs, where many households purchased ant peak low rates and high home prices. But regional areas, and more developed suburbs are also registering. This is a national issue, not just confirmed to the main cities.


Future Outlook and Conclusions

We expect the RBA to lift rates again, as inflation is still far from being controlled and it is both sticky and embedded. Prices for electricity will rise from 1 July by up to 25% in some east coast states, whilst the mortgage cliff is reaching its heights in the same period.

The recent FWC award will have a small inflationary impact, and we expect more wages rises in the services, as well as more prices rises as businesses seek to support their margins.

Households in cash flow difficulty should discuss their mortgage situation with their bank, build robust cash flows, and prioritise effectively, because this is a crisis years in the making, and it will not abate any time soon. Moreover, hopes of cash rate cuts this year are fading, despite the rising risk of recession and higher unemployment, both of which may amplify stress further.
We will update our analysis in a months’ time.