The news continues to confuse, as Wall Street contended with another volatile session. Investors mulled the Federal Reserve’s path of interest-rate hikes while assessing mixed economic data and a slew of earnings reports, whilst the ECB doubled official deposit rate, and Credit Suisse revealed their plans to revamp their business.
At the end of the day, the Dow closed higher on Thursday, as a rally in Caterpillar and Boeing cushioned the rout in tech after META delivered disappointing quarterly results. The Dow Jones Industrial Average gained 0.61%, the NASDAQ was down 1.6% and the S&P 500 fell 0.55%. The S&P 500 closed lower, after swinging between gains and losses for most of the session.
The big news was Meta Platforms which fell nearly 25% after reporting third-quarter results that missed on the bottom line and were an “absolute train wreck,” according to Wedbush.
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The Bank of Canada lifted the cash rate by less than expected – and people are now redefining “a pivot”. But what does this mean for inflation and future rates, and broader economies. We also look at the market movements.
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News flash: Liberal Senator Andrew Bragg has given notice of a motion for a major inquiry into ASIC, which will be voted on tomorrow (Thursday). Labor currently opposes the inquiry, and the Greens haven’t taken a position yet.
Urgent: Call – today – the ALP and Greens Senators on the Economics References Committee to tell them they must support an inquiry. See their contact details below.
Whatever Senator Bragg’s motives, a major inquiry into ASIC is VERY important, as this will be the first specific, detailed, inquiry into ASIC since the 2018 Banking Royal Commission laid bare its many failures. And the Adams Report into ASIC’s very low rate of investigations – just 0.74% of all complaints – shows that it’s performance hasn’t improved.
An example of ASIC’s failure is Sterling First, which has left the lives of the elderly tenants ruined.
Below is the text of Senator Bragg’s motion:
Chair of the Economics References Committee (Senator Bragg): To move—
That the following matter be referred to the Economics References Committee for inquiry and report by the last sitting day in June 2024: (This will be a long, detailed inquiry.)
The capacity and capability of the Australian Securities and Investments Commission to undertake proportionate investigation and enforcement action arising from reports of alleged misconduct, with particular reference to: (a) the potential for dispute resolution and compensation schemes to distort efficient market outcomes and regulatory action; (b) the balance in policy settings that deliver an efficient market but also effectively deter poor behaviour; (c) whether ASIC is meeting the expectations of government, business and the community with respect to regulatory action and enforcement; (d) the range and use of various regulatory tools and their effectiveness in contributing to good market outcomes; (e) the offences from which penalties can be considered and the nature of liability in these offences; (f) the resourcing allocated to ensure investigations and enforcement action progresses in a timely manner; (g) opportunities to reduce duplicative regulation; and (h) any other related matters.
The Senators to call are:
Senator Nick McKim Greens: 02 6277 3601 senator.mckim@aph.gov.au
Senator David Shoebridge Greens: 02 6277 3169 senator.shoebridge@aph.gov.au
Senator Jess Walsh ALP: 02 6277 3744 senator.walsh@aph.gov.au
Senator Jana Stewart ALP: 02 6277 3004 senator.stewart@aph.gov.au
In the past week, Adams has published a new 25-page supplementary report examining ASIC’s FY 21-22 performance. Yesterday, this was sent to over 30 federal parliamentarians for their review.
ASIC’s FY 21-22 performance data is the worse in 11 years. The new supplementary report demonstrates the importance of why a stand-alone parliamentary inquiry is required.
There are major problems at ASIC and stakeholders across the country need to have their voices heard be being able to put their case forward to Parliament. The normal oversight hearings only allow ASIC to provide a one-sided distorted picture.
Adams will be going to Federal Parliament tomorrow to do the rounds and find what the sentiment is. It is imperative that the audience and the community at large become aware of what is happening with Australia’s police force and ensure that Parliament is aware of your stories.
We need to give Federal Parliament a push in order to get an inquiry up and going.
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Join me for a live discussion about the current state of the financial markets with Damien Klassen, Head of Investments at The Walk The World Funds and Nucleus Wealth.
You can ask a question live.
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Now Boris Johnston has said he is not standing for British PM, the path may be open to Rishi Sunak, to bring some sense to British Politics. But this does not necessarily solve the broader financial pressures we are seeing, for example in the Bond Market, in the UK and elsewhere.
Indeed, the Bank of England has said they will start selling short term government gilts as part of its QT programme, having recently bought bonds further out down the yield curve. This reminded me of the famous Operation Twist, a name given to a type of monetary policy operation performed by Central Banks which involves buying and selling government bonds in an effort to provide monetary easing for the economy, although it’s not quite as aggressive as quantitative easing. The term “Operation Twist” was first used in 1961–in a reference to a Chubby Checker song and the dance craze it engendered–when the Fed employed a similar policy.
Now of course Central Banks are trying to move to QT rather than QE, as well as higher interest rates to tame inflation.
But could we see this Twist type of operation again, as the battle to fight inflation, now stubbornly intrenched is driving rates higher, risking higher unemployment and even a recession. Could we see a whole new front open up in Economic Policy, using Twist type operations again?
It is conceivable this could create capacity for Governments to spend more (again). But wait, there is more.
If you then added in a Central Bank Digital Current, the central planners could then direct spending – and interest rates more specifically at certain sectors of the economy. For example, they might offer “cheap” money for small business investment, but “expensive” money for vehicle purchases as a potential mechanism to bring supply and demand back into balance, and so help address the inflation problem. This might mean rates would not need to go so high. It also expands the role of the Central Bank, to the point where it merges back in the Government Treasury operations.
So, I would not be at all surprised to see these old twist techniques becoming new again as Central Planners around the world try to put years of poor policy back in the bottle – by trying to control yet more elements of the economy – which is a ways away from Free Market Capitalism – but a Central Planners dream.
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The RBA has lifted the cash rate by 2.5% and more rate hikes are expected in the months ahead as they try to head off inflation. The budget on Tuesday is expected to show inflation is expected to peak at around 8%, but stay above their target range of 2-3% right into 2024, with no real wages growth in the immediate outlook.
One factor which is being debated is the potential impact of home prices across the country, as we see higher cash rate costs translate into higher mortgage rates and lower borrowing power. The RBA recently showed a reduction of around 20% could be on the cards, though my analysis and conversations with prospective borrowers suggests that some are seeing their ability to borrow on the same set of income and expenditure parameters falling by as much as 30%.
And as I need to keep reminding you, availability of credit is the single most powerful influencer of home price moves. If you cut rates, and allow borrowers to leverage up with greater borrowing power, prices will rise, but on the other hand, if rates rise and borrowing power will fall.
Which then takes us to the question of what the direction of travel on home prices is expected to be.
Again those following my analysis will know we run three scenarios, a Best case, which assumes rates drop mid next year as inflation is conquered and wages rise – now largely discounted by the latest coming from Treasury around the budget, a Base case, which assumes higher rates through next year and beyond, inflation start above target into 2024, and no real wages growth, but no local recession, despite recessions appearing in Europe and possibly the US; and a worse case, where we get into recessionary territory here, causing rates to go higher initially, then fall back later as the RBA tries to dial back its over tight stance.
When I last ran my model, we suggested a base case fall in average house prices would fall by over 20% in the next couple of years, while Units, on average would fall by a little less because their run up in the past couple of years (driven by ultra-low rates and stimulus) was a little less. And I should say these are national averages, there are different outcomes across individual states and post codes, as well as property types. Check out our other shows for more granular information on this, or our Patreon programme to get the underlying data.
But our central view is a significant drop, which by the way will hardly be offset by higher migration, and additional Government incentive programes. Availability of credit is the main driver as I have explained.
Which takes us to the RBA. Now, on Friday there was a very interesting FOI release from the RBA. I will put the link in the comments below.
The request was for “documents from 1 May to 30 August 2022 about the impact of interest rate increases on the Australian property market (including any of: how far prices could fall under various scenarios; impacts on consumption and/or wealth effects; impact on construction employment and/or other related employment).”
In this week’s market review we highlight once again the volatility in the markets. The fear gauge in the US is sitting at around 30, and still signals more uncertainty ahead. It is worth remembering that such massive swings are being harvested by the algo’s and big financial players who are able to trade on them, and which in turn help to exacerbate the moves. Such large swings are not a sign of a well-functioning market, more a sign of the how close to chaos we are. And as normal we will start with the US, look across Europe and Asia and end in Australia.
Equities have been under pressure this year as the central bank has embarked on an aggressive rate hike path as it attempts to reign in stubbornly high inflation, increasing worries of a policy error that will send the economy into a recession.
The latest edition of our finance and property news digest with a distinctively Australian flavour.
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Once again, volatility continues to surge, as the S&P 500 gave up gains on Thursday driven by rising Treasury yields despite the bulk of quarterly results suggesting corporate America is in better shape than feared. Recession fears are growing. More broadly the stresses and strains are showing across UK Politics, Oil, and Investment Banking, so we will touch on all these in today’s post.
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