Martin North – Page 8 – Digital Finance Analytics (DFA) Blog

Markets Caught Saying Hello To A Hard Landing!

This is our weekly market update where we start in the US, cross to Europe and Asia and end in Australia, covering commodities and crypto on the way, and a reminder, this show is data rich, not shouty stupidity like so much on socials these days, and the purpose is to help me understand what is really going on at the moment. If it helps you too, that’s great!

As often in September, market uncertainty rippled through markets this week, adding fuel to an already-volatile period which points to more of the same ahead.

The flows of data remained mixed, and U.S. stocks tumbled on Friday after closely watched jobs numbers showed labor market momentum slowing more than expected, suggesting a narrower path for the U.S. to achieve a soft landing, defined as the Fed being able to cool inflation without badly damaging economic growth. Beyond that, investors are still grappling with a shift in Federal Reserve policy, a tight U.S. election and worries over stretched valuations, plus numerous geopolitical tensions, and a resetting of AI tech related expectations to boot.

So, we saw an ebbing risk appetite across markets. The S&P 500 dropped 1.7% on Friday and has lost nearly 4.3% in the past week, its worst weekly decline since March 2023.

Nonfarm payrolls expanded by 142,000 last month, compared with expectations for a 165,000 advance. The prior two months of gains were lowered, another sign that the US labour market is weakening.

Positioning remains extreme, and investors are complacent about the risks that a soft landing could turn into something nastier. September often brings volatility on markets, but don’t ignore the direction of travel.

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Worst Ever Great Idea: Australia IMPORTS LNG!

I have been talking about the absolutely stupid Government policy of gas supply, as a few big multinational companies continue to pump and export gas owned by Australia abroad, using energy from said gas sufficient to support Australian need, in order to liquidity it for export.

The stupidity stems from the lack of an east coast reservation approach (something which Western Australia has done well with a mandated domestic gas reservation policy and there energy prices are lower as a result), with exporters making massive profits (most of which do not hit Australian shores either) thanks to high international demand.

Australia does not have a physical shortage of gas so much as an artificial one, given most of the country’s supplies are exported via long-term contracts to lucrative markets in North Asia.

Gas has become a proxy fuel in two ways. First the marginal price of gas – which is roughly 5 times what it should be – drives the cost of electricity, which is also high – even after government support for households. In addition, the use of gas as a transition strategy despite its high contribution to the climate predicament we are in, blunts other more sustainable long term options. Gas is just as much a problem as oil and coal, a harmful fossil fuel that will doom the world to rising temperatures and ever more pollution.
But nevertheless here we are, because successive Governments appear under the thumb of big gas, and mumble on about Australia’s reputation risk if they acted in the interests of Australians!

The Australian Energy Market Operator (AEMO) is forecasting that within just a few short years, supplies of gas on the east coast could fall well short of demand at peak times, typically in winter.

So now, for the first time, and in spite of Australia’s position as one of the world’s biggest gas exporters, the country is preparing to do something that was once unthinkable. The scene of the crime of a place I know well, Port Kembla in New South Wales, near Wollongong and about 100 k’s south of Sydney.

Kiwis See Average 16% Home Price Falls From Peak, But Hopium Ahead!

In this show we look at the latest property data from New Zealand, from the REINZ and CoreLogic.

The Real Estate Institute of New Zealand (REINZ) released its July 2024 data at the end of August. The national median price decreased by 2.2% year-on-year, from $770,000 to $753,000, and decreased by the same amount month-on-month. For New Zealand, excluding Auckland, the median price decreased 1.5% year-on-year from $680,000 to $670,000. Month-on-month, the median price also decreased by 1.5%.

But here is the REINZ spin. “In July, we saw an increase in sales across the country compared to last year and June 2024. As more listings hit the well-supplied market, buyers are slower to make decisions, extending the average Days to Sell. Despite ongoing economic challenges, early signs suggest potential improvement, indicating favourable conditions in the residential property landscape might be on the horizon,”

The value of New Zealand homes continued declining in August, according to property data company CoreLogic. The median value of NZ dwellings was $811,583 in August, down 0.5% from July. August was the sixth consecutive month the national median value has declined. It’s now down $31,000 since its summer peak in February, and is 16.8% lower than its all time high set in January 2022.

“This all adds up to likely further restraint on property values, although the potential impact of lower mortgage rates can’t be ignored.”

So, as listings rise of course this puts downward pressure on asking prices as prospective purchasers have more choice and negotiating power. The RBNZ rate cut will certainly help the market, especially if further cuts follow. But lower net migration, and the cold winds of recession will continue to haunt the market.

It is certainly worth considering the fate on Australian home prices in the light of what happened in New Zealand, as rate cuts and recession grind the market down. But the one sure thing, true in both markets is that Real Estate Industry Hopium remains fully intact!

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Smashed

Well now we know. Australia’s annual GDP growth rate fell to its lowest level since December 1991, outside of the pandemic as consumers hunkered down in the face of elevated borrowing costs and stubbornly sticky inflation.

Annual GDP growth has slowed markedly from a decade average of 2.4%, partly due to the RBA’s rate tightening campaign through 2022-23 to rein in inflation. The cash rate is currently at a 12-year high of 4.35% and policymakers have signaled they’re in no rush to cut any time soon.

Australia’s Q2 GDP was worse than economists expected, growing by only 0.2% over the quarter to be up only 1.0% year-on-year. The result missed analysts’ expectations of a 0.3% quarterly rise.

With Australia’s population still growing aggressively through net overseas migration, population increased by 0.6% in Q2, meaning that per capita GDP declined by another 0.4%. In fact, Australia’s per capita GDP has now declined for six consecutive quarters and seven of the past eight quarters, to be down 2.0% from its peak.

As you will know if you have been following my surveys, the household sector is especially hurting as higher household earnings were partly offset by an increase in income tax payable and mortgage payments and so despite the population surge, Household spending actually fell 0.2% in the second quarter, detracting 0.1 percentage point from GDP growth. Discretionary consumption was hit particularly hard. This puts a number on the political pain of falling living standards from the inflationary cost-of-living squeeze, made worse for mortgage borrowers by the RBA’s higher interest rates.

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

DFA Live Q&A HD Replay: Investing Now: With Damien Klassen

This is an edited version of a live discussion with Head of Investments At Walk The World Funds And Nucleus Wealth, Damien Klassen as we review the past volatile month and talk about what is ahead for the markets.

Original show here with chat: https://youtube.com/live/SSvtwrLRNEw

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

https://digitalfinanceanalytics.com/blog/dfa-one-to-one/ for our One to One Service.

Why Rate Cuts Won’t Come Soon To Australia…

Markets have reduced their expectation of a cash rate cut this year following key data at home and in the US suggests both economies were still on solid footing despite elevated inflation and decade-high borrowing costs. Now Australian money markets are no longer fully pricing in an interest rate cut this year, implying an 85 per cent probability of an easing, against 118 per cent on Tuesday.

Actually, in Australia, money markets are pricing in two to three rate cuts by early April and this dialling back came after the monthly consumer price index indicator for July, released on Wednesday, beat analysts’ forecasts by rising to 3.5 per cent, against 3.4 per cent expected. The outcome added to the case for the cash rate to stay on hold in coming months.

Then on Friday, data showed retail sales in July were unchanged, following a 0.5 per cent lift in June. While the reading missed forecasts of a gain of 0.3 per cent, it also came after two months of strong gains, potentially in anticipation of tax cuts which kicked off on July 1.

Overall, it seems we are caught in this higher for longer rate cycle much longer than many expected, and the expectation of cuts in the next few months are unlikely to eventuate, black swan event excepted. The likely inflation pulse from too much Government spending and badly targeted “support” suggests our inflation battle is far from being over, even as growth will come in weak on 4th September when the National Accounts are released to June 2024.

For households and businesses on the sharp end of all this, its bad news, but is should also question those in positions of power, as Governments, Central Bankers and perhaps even markets have lost the plot.

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Markets Gain Ground Despite Choppy Trading!

This is our weekly market update, where we start in the US, cross to Europe and Asia and end in Australia. And let me say this is a calm and methodical summary, not a shouty content light thing which might be all the rage on some social media, but which for me does not cut the mustard, as I use this to help me understand what is really going on.

Well riotous August ended with global stocks edging higher in choppy trading on Friday, making it the fourth consecutive month of gains. MSCI’s world share index rose 0.77%, for a 2.40% monthly gain. This despite some questions over AI leading to a broadening of interest in other sectors, a bout of heavy selling in early August, and more support for gold as a safe haven. All this despite U.S. economic data that helped the dollar snap a weeks-long losing streak. US markets will be closed on September 2 for the Labor Day holiday so we can expect rudderless trading on Monday.

The S&P 500 ended the final session of the week higher, with a late spike, as the latest batch of data pointed to an ever-resilient US consumer, potentially slowing the pace of rate cuts. The benchmark S&P 500 closed August with a 2.3 per cent gain for the month. It’s now up 18.4 per cent so far this year and is within 0.4 per cent of the all-time high it set in July.

In Europe the Stoxx index closed up 0.09% after touching a record intraday high while Britain’s FTSE index hit over a three-month high on Friday, clocking gains for the topsy-turvy month, with real estate shares in the lead as interest rate-cut hopes held firm, while energy shares tumbled on demand concerns, capping intra-day gains. It still registered its second straight monthly gain and third consecutive weekly advance.

In Asia, Asian stocks rose on Friday as technology stocks recovered from Nvidia-induced losses, while month-end bargain buying saw Chinese shares rebound from more-than six-month lows. But most regional markets were still headed for a loss in August, as they struggled to recover from debilitating losses clocked at the beginning of the month.

The Australian share market finished near a record high on Friday, as higher oil prices and a final flurry of better than expected results from earnings season helped secure the benchmark’s third straight week of gains.

But once again, more questions than answers.

http://www.martinnorth.com/

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