Economics and Banking – Page 9 – Digital Finance Analytics (DFA) Blog

The Great Australian Savings Account Rip-Off!

If you have savings with a bank in Australia, it is highly likely you are being ripped off. After all, Australian Consumers depend on retail deposit products to conduct their everyday banking, to safely store over $1.4 trillion of their savings and, importantly, to earn a decent return on these funds.

However, as I have been highlighting in recent shows, changes in the cash rate (often referred to as the ‘official interest rate’) via the RBA, and which is the rate paid on lending between banks in the overnight cash market only indirectly affect the cost of funding from retail deposits and the interest rates paid on retail deposit products.

Banks are quick to lift mortgage rates on mortgages, but have been significantly less market driven in terms of deposit rates, with many savers loosing out. Yet relatively few consumers switch deposit products, despite there often being a range of alternative products offering better interest rates and conditions. This loyalty tax means consumers earn significantly less than they should, over all on deposits, which boosts bank profits significantly.

So now the ACCC just completed a report on Retail Deposit Account. They gathered information, and documents on retail deposit products supplied by 14 of the largest banks in Australia. These banks collectively hold more than 90% of household deposits in Australia. This included seeking information directly from these banks as to their retail deposit products and from APRA and RBA, as well as reviewing the information available to the public on the banks’ websites.

The ACCC findings highlights that despite the importance of transaction accounts, savings accounts and term deposits, the ongoing challenges consumers face in searching for, comparing, and switching between products means that consumer engagement with the market for retail deposit products is relatively low. This low level of engagement means many consumers miss out on earning more from their savings.

Widespread strategic and selective pricing also adds difficulty for consumers when seeking to locate key product information and compare market offerings. This lack of transparency may also damage consumer confidence in the market.

Given the range of factors that banks take into account and the strategic pricing approaches they employ when setting their retail deposit rates, the interest rates received by consumers do not automatically follow movements in the cash rate target.

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Are Future FED Cuts Now Being Peddled Back?

This is our regular weekly market update.

This past week was a doozy in the markets as the Fed started to flip the switch on monetary policy, which took the markets by surprise. Yields plunged. Stock and bond prices soared. And this time, it’s more than the Magnificent Seven stocks leading the charge.

The Russell 2000 ETF has more than doubled the return of both the S&P 500 and the Nasdaq 100 over the last month. And the S&P Regional Banking ETF, which has taken the brunt of the bears’ ire this year and is still down YTD, has surged ~36% since the beginning of November.

The markets feverish speculation about future interest rate cuts has further loosened global financial conditions, storing up risks for euphoric stock and bond markets if central banks view the easy funding environment as a reason to hold borrowing costs high.

Both Goldman Sachs and Jefferies said long/short hedge funds, which take positions betting stocks will rise and fall, got hit hard after Fed Chair Jerome Powell’s comments on Wednesday.

The investment bank’s global markets team said systematic long/short funds, based on a computer-driven strategy, were down 2.8% on Thursday, the worst single day since at least January 2016.

And in fact on Friday US equities gave back some of their weekly gains while the dollar advanced after New York Fed President John Williams told CNBC it was premature” to be thinking about a March rate cut”.

Williams’ Atlanta counterpart, Raphael Bostic told Reuters he was only pencilling in two quarter-percentage-point rate cuts in the latter half of 2024. Swaps traders were eying as many as six rate cuts for next year.

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Central Bank Inflation Poker Fragments

While markets seem to be thinking about coordinated rate cuts next year, the truth is, economies are in very different positions, with New Zealand already looking stagflationary, and the ECB and the Bank of England not sharing the rate cut love exhibited by the FED. Norge Bank lifted this past week, and the RBA is still not close to a cut.

So we think the inflation poker game is fragmenting. The results will still be higher rates for many, for longer than the markets are signalling.

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Do We Have A FED Pivot Now Then?

Is a great monetary pivot near as central bankers engineer a once-unthinkable soft landing in the world’s largest economy. It seems, finally, and for now, Wall Street traders and the Federal Reserve are on the SAME PAGE.

Wednesday was quite a day, which took an unexpected turn when the FOMC, the quarterly “dot plot” or survey of economic projections, and then Powell’s 45-minute press conference, all came as close to promising early rate cuts as a central bank could ever do. It smelt like a pivot was on the cards.

Sure, the FOMC wanted to leave a possible rate hike “on the table,” and said it intends to carry on shrinking its balance sheet by selling off bonds, which all else equal will tend to tighten monetary policy. But the direction of Powell’s comments was unmistakable. The Fed is now only too happy for the market to price in imminent rate cuts.

This was not what I had expected, given the recent data. Remember all the focus the Fed has directed to so-called “supercore” inflation (services excluding shelter), which was higher in November than in October on both a month-on-month and year-on-year basis?

But, no, in a rather remarkable press conference, the signals were sprinkled through the 45 minutes, as he said policy was now “well into restrictive territory” (not merely “restrictive” as he said in November, when conditions were tighter than now).

The markets reacted by pushing most asset prices higher, taking bound yields lower. The two-year yield, most sensitive to near-term rate cuts, its minute-by-minute moves show that it was taken by surprise. After a dive when the dot plot was published, it managed to fall significantly further as Powell spoke.

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Market Optimism Continues Thanks To US Soft Landing Hopes…

This is our weekly market update.

As we count down to the end of the year, U.S. stocks closed higher on Friday, with the S&P 500 and Nasdaq notching their highest closing levels since early 2022 and the Dow notched its longest weekly winning streak since 2019.

A robust U.S. jobs report fuelled investor optimism about a soft landing for the economy and so investors pared bets that the Federal Reserve will cut interest rates in March after a Labor Department report showed nonfarm payrolls increased by 199,000 jobs in November, compared with an estimated increase of 180,000.

The unemployment rate slipped to 3.7%, while average earnings edged up to 0.4% on a monthly basis, compared with forecasts of 0.3% growth. The uptick in wage growth, which risks boosting inflation, muddied the optimism for rate cuts, pushing Treasury yields higher, though some economists were quick to downplay the strength of report attributed to the return of employers that were on strike.

“Were it not for the strike, November would have been somewhere around 170k and October would have been around 180,000,” Jefferies said in a Friday note.

Interest rate futures show traders widely expect the Federal Reserve to hold interest rates steady at its meeting next week. However, futures prices now imply traders mostly expect the Fed to start cutting rates in May, two months later than the March meeting many investors had been betting on in recent days.

Treasurer Jim Chalmers confirmed the Reserve Bank of Australia board should aim to return inflation to the middle of the 2 to 3 per cent target band, or 2.5 per cent. Treasurer Jim Chalmers has axed a controversial proposal requiring the Reserve Bank of Australia to give “equal consideration” to full employment and inflation as part of a new agreement that may mean interest rates stay higher for longer.

The backdown followed warnings by the likes of former RBA governor Ian Macfarlane and former treasurer Peter Costello, who said the proposed wording was vague and would make the RBA less accountable for fighting inflation.

IFM Investors chief economist Alex Joiner said targeting the middle of the band made the prospect of a rate cut unlikely until late 2024, given the RBA’s current inflation forecasts do not show it achieving 2.5 per cent inflation at any point in the next couple of years.

Household Financial Pressures And RBA Propaganda…

Next Tuesday I will be running my live show on Household Financial Stress, which continues to worsen. However, what constitutes “stress” is being debated widely – its a matter of definition.

The RBA has joined the debate, but I will argue in today’s show they conveniently presented a lop-sided story, which understates the true picture.

Andrea Brischetto, Head of Financial Stability gave a speech at the Sydney Banking and Financial Stability Conference, University of Sydney, titled Financial Stability and the Financial Health of Australian Mortgagors.

There has understandably been a lot of focus on this issue of late, with many households facing substantial financial pressures from high inflation and higher interest rates. Some of the households feeling these pressures most acutely are those with lower incomes, including many renters.

But the focus was on households with mortgages and how their financial health relates to financial stability.

There has been a lot said and written about the issue of household financial stress in recent times, using a multitude of data sources and reporting on many different individual experiences. Wednesday’s national accounts showed how inflation, tax and interest rates have weighed on real household disposable income. And as RBA Governor Michele Bullock said when discussing the challenge of inflation following the RBA Board meeting this week: High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. The Governor emphasised that the effect of all of this is that many households are experiencing a painful squeeze on their finances.

So she presented an overall picture of the situation, drawing on the RBA’s extensive work in this area, which is published in detail in our regular Financial Stability Review.

You What? The Use Of Cash Is Up!!

An average of more than 50 UK bank branches have closed each month since 2015 and campaigners fear some retailers could stop accepting cash if it becomes too burdensome to process. That said, under government rules, free withdrawals and deposits will need to be available within one mile for people living in urban areas. In rural areas, where there are concerns over “cash deserts”, where the maximum distance is three miles.

This is important because cash remains a necessity for millions of people, research has found, with the elderly and those with disabilities among those likely to struggle. Branches have been more likely to close in disadvantaged areas.

Of course, Banks have pointed to the large reduction in branch use – a trend accelerated by the Covid pandemic – and the popularity of managing money via smartphones, as good reason for diluting their branch network.

But a recent survey by Age UK suggested that, among those who were uncomfortable about digital banking, the key concerns were fraud and scams, a lack of trust in online banking services, and a lack of computer skills.

And now, The British Retail Consortium says cash use has grown for the first time in 10 years as shoppers keep a close eye on their budgets while prices rise, retailers have said. They said 19% of purchases were made with notes and coins last year, echoing a report by banks showing a slight rebound. That’s up from 15% the previous year. Until 2015, notes and coins were used in more than half of transactions and, while card use now dominated, cash still had its benefits. Consumers made smaller but more frequent payments, the survey found.

The consortium said consumers were budgeting carefully to try to cope with cost of living pressures, and there was also a “natural return” for cash after it slumped during the pandemic.

It is essential use of cash is protected, you cannot leave it to the market, where banks are making a killing from extra fees on card transaction costs as a result of removing access to cash.