Digital Finance Analytics (DFA) Blog – Page 20

Danger! Inflation Traffic Accident Dead Ahead!

The latest monthly data on inflation from the ABS which came out today reported Annual growth in the non-seasonally adjusted monthly CPI lifted from 3.5 per cent last month to 3.6 per cent, above market expectations, while seasonally adjusted CPI is even higher at 3.8 per cent, and annual trimmed mean inflation (which removes food, fuel and holiday travel) rose to 4.1 per cent, from a low of 3.8 per cent in January.

Consumers were hit with the biggest increase in health insurance premiums in several years, following the annual lift in health insurance premiums, bad weather caused fruit and vegetable costs to rise. The outcome was also driven by higher petrol prices, less household goods discounting, stamp price rises and rents. In fact, both goods and services inflation rose.

While the RBA still considers the quarterly CPI the best gauge of inflationary pressures, the new monthly indicator factors into the central bank’s interest rate decisions, particularly when it delivers an unexpected outcome.

Judo Bank chief economic advisor Warren Hogan said the latest CPI figures would test the RBA’s patience. “Inflation is not falling back to target with signs that inflation’s underlying ‘pulse’ might be picking up in 2024,” he said.

“The RBA was very close to hiking the rate earlier this month. This number could tip them over to raising rates at their next meeting on June 18.”

This is not the progress the Reserve Bank wants to see, especially given the weakness in consumer spending evident across the economy, whether in official retail sales data (which is going backwards in inflation-adjusted terms), or the big profit downgrades in the last week from the likes of listed car dealers Eagers Automotive and Peter Warren Automotive.

With inflation surprising to the upside and the Fair Work Commission to announce next week an increase in the minimum wage, UBS chief economist George Tharenou said there was a “lingering risk” the RBA could be forced to raise the cash rate in the coming months.

Households, already under pressure, continue to feel the pain, as the latest data from Roy Morgan on consumer confidence reported another fall, and the accumulating data from the DFA surveys for May will report a further distressing rise in financial stress: The first results will be reported in the Sunday show, with more detailed analysis to follow.

Markets reacted to the news, with the ASX 2000 down 1.3%, while the 2-year bond rate rose 0.84% to 4.183. The Aussie rose 0.13% against the USD to 66.56 cents. The ASX Rate tracker shows a slight rise to October, and cuts pushed well out into 2025.

So, higher for longer, again, and I would remind you that the RBA’s blunt instrument of interest rate rises is only indirectly hitting many of the sectors of the economy. More significantly, global shipping costs are rising again, with Drewry’s World Container Index up 16% to $4,072 per 40ft container this past week. All major routes are impacted.

http://www.martinnorth.com/

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Bankers Lose Over Bank Branch Closures: But Now The Political Games Begin!

The Senate published their Report into Regional Bank Branch Closures late last Friday.

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Rural_and_Regional_Affairs_and_Transport/BankClosures/Report

I will be discussing this on my live YouTube show on Tuesday with Robbie Barwick. https://youtube.com/live/NJnaqhARu90

But already, the award winning Journalist Dale Webster over at the Regional has written an excellent article:

https://www.theregional.com.au/post/banks-blow-their-chance-to-self-regulate-by-betraying-trust

Over the 13 hearings held across Australia and in more than 600 written submissions the only defence of the banks’ actions came from the banks themselves, but when their executives appeared to give evidence, all they managed to do was convince the senators of just how out of touch they were with their customer heartland.

This arrogance was perfectly summed up by expert witness Andy Schmulow, Associate Professor of Law from the University of Wollongong.

“When it comes to closing branches, Australia is a free for all in which banks are entirely unconstrained: there is no degree to which they are held to account in discharging their obligations to communities which have supported them for generations. This, it is respectfully submitted, is disgraceful and indefensible,” Dr Schmulow said.

The senators agreed. On Friday they handed down an historic report with eight bold recommendations.

But now lets see the actions to protect regional communities and access to cash. I want to see real action now, not just political games, so I will be watching closely.

http://www.martinnorth.com/

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

Peddling The Housing Supply Myth: Again…

Housing is in crisis in Australia, its too expensive and relative to population there is not enough of it. As I discuss with independent Journalist Tarric Brooker last week, though shockingly, we have built more homes per 100,000 people than Canada, The US and the UK. In other words, we have a greater proportion of our economy dedicated already to housing construction, with perhaps 1.35 million people working in the sector. And we also know completion times are blowing out now, thanks to poor supply chains, lack of available labour, and poor-quality construction. In NSW half of high-rise projects have severe defects.

But the Government wants to push the supply-side levers some more, as exemplified in their Attachment to the budget papers: Statement 4, Meeting Australia’s Housing Challenge from the Treasury.

It starts out “Australia has a housing shortage. There are not enough homes being built in the right areas to meet the needs of our communities. This statement focuses on the reasons for the current undersupply of housing, how it affects affordability, and the changes required to more quickly unlock supply to meet the housing needs of all Australians. It also sets out how the Government’s policy responds to these drivers of undersupply”.

This undersupply they say accounts for the increases in rents, mortgage repayments and house prices.

Talk of course is cheap, but will this translate into real actions? And what about the elephant in the room because of course, the focus should be to curtail migration from is very high current levels, and bring demand back closer to long term averages, and over the budget period both sides of politics have to a degree been talking about this, though, as I discussed in my recent show The Migration Question Amplified; But Not Tackled… By Anyone!, it’s a battle of announcables, with numbers being banded about.

But my take is that neither side of politics are really wanting to take this on seriously, despite the direct link to higher inflation. The net result will be higher inflation for longer, requiring higher interest rates than otherwise needed.

Macro Versus Company Returns; What’s Driving The Chaotic Markets?

The roller coaster ride continued again this week on the markets, as traders were dazzled by strong corporate results from NVIDA underscoring the power of the AI super cycle on one hand, and by really mixed data signals on the other thanks to a raft of better-than-expected purchasing managers’ index (PMI) data from across the northern hemisphere, while rates higher for longer came back into focus, with hope of rate cuts being squeezed further.

The economic data points to a strong economy and inflation that won’t go away. Couple yesterday’s PMI data with a slew of Fed speakers this week and the Fed minutes, which suggested the central bank could keep rates high for longer than expected, as well as a string of warnings on inflation from Federal Reserve officials, investors have realized that either the Fed has no idea what it is doing when it comes to inflation and the path of monetary policy or investors are starting to sense that the Fed rate hiking cycle may not be over. Financial markets now fully price just one quarter-point interest rate cut from the Federal Reserve this year – compared to the six built into futures prices at the start of 2024.

European equities have traded lower at the end of the week, tracking weakness in Asia and also Wall Street as increasing anxiety over sticky U.S. inflation and high interest rates battered sentiment towards risk-driven assets.

China was hit with a wave of negative sentiment this week as a trade war with the U.S. appeared to have escalated.

A Wall Street sell-off rattled Australian capital markets on Friday as bond yields rose and investors trimmed rate cut bets, sending technology, retail and banking sector shares sharply lower.

So standing back, signs of the consensus belief in a soft landing, interest rate cuts and resilient growth in earnings are everywhere. There’s the grind higher in share market indices despite rich valuations and non-existent risk premiums (the difference between earnings yields and bond yields).

It’s worth remembering the words of an eternal bull in the late, great Charlie Munger, who urged investors to “invert, always invert”. “Turn a situation or problem upside down. Look at it backwards. What happens if all our plans go wrong? Where don’t we want to go, and how do you get there?”

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

Inequality Rules (Great For Some; Horrid For Most)!

There is a three-way split across the country as inequality rises with mortgage holders and renters bearing the brunt of poor policy decisions for years, while older property-owning cohorts are doing just fine.

I have been highlighting the growing gulf between households and now the Australian Productivity Commission has released their research paper “A Snapshot of Inequality in Australia” which explores how the distribution of wealth and incomes changed over the COVID-19 period, to assess the state of economic inequality in Australia.

They show that Australian wealth is overwhelmingly tied up in residential property, followed by superannuation. Property (owner-occupier and other) comprises the majority of wealth for middle- and higher-income Australians, i.e., the top 60% of households. They also show that households in the two oldest age groups—55-64 and 65-plus—hold the most wealth and wealth has grown strongest for older Australians aged 65-plus.

Other signals of inequality can see seen in spending patterns. Data from CommBank iQ shows that the cost-of-living crisis and high interest rates are having a disproportionate impact on Australians’ spending habits based on their generation.

Many of these older cohorts are not impacted by rising mortgage rates or rents, because they own their homes outright. And many of these households are also benefitting from increased investment returns. The accounts for about one in three households.

There is a second cohort the rents who are experiencing massive rent rises, one reason why we seen rental stress going through the roof in our surveys, with three quarters of renters in cash flow stress.

The remaining third of households are those burdened with mortgages, where stress is also registering as strongly as I have ever seen it.

Beyond perceptions of inequality, which matter, the overall wellbeing of society can suffer when inequality is high. This is because inequality can lead to uneven access to social opportunities and services such as health and education, waste human capital potential, and increase vulnerabilities to economic shocks and the resources needed to recover from these.

It also can reduce social justice and adversely perpetuate narrowly focused institutional arrangements and decision-making processes.

There are direct economic consequences for the economy, as reports show that higher income inequality is correlated with lower economic growth, at least at current levels of inequality (OECD 2014). The gap between low-income households and the rest of the population appears to be particularly detrimental to growth. Recent analysis also suggests that lower inequality is correlated with faster and more durable growth.

A possible consequence of increasing inequality is that it could harm social cohesion. This could happen when different economic interests lead to social and political conflict. Although this aspect is subjective and hard to quantify, some research suggests that countries with more inequality also have more corruption and political instability.

Economic inequality also determines the opportunities of the next generation – that is, the more unequal a society is, the more likely that children will have the same economic situation as their parents. Intergenerational inequality and mobility are linked.

These are important and uncomfortable concepts, which boil down to a question, what type of society do we want? I for one do not think the current setting are right, and social cohesion is coming unglued. Bad policy leads to bad society, as we are seeing.

http://www.martinnorth.com/

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

New Zealand Rates Held Higher For Longer As Hawks Fly!

The Reserve Bank of New Zealand left the Official Cash Rate at 5.5% on Wednesday, saying that Restrictive monetary policy has reduced capacity pressures in the New Zealand economy and lowered consumer price inflation. Their statement on Monetary Policy had a decidedly hawkish tone, signalling rate cuts will be delayed until around August 2025, which is implying that markets are pricing cuts about 12 months too soon. This is important as we will see, later.

And folks, 5.5% is significantly higher than the weaker 4.35% in Australia, suggesting that we could be facing higher for longer too.

The report said annual consumer price inflation is expected to return to within the Committee’s 1 to 3 percent target range by the end of 2024. That said, in an economic note, ASB says they continue to expect the RBNZ will remain on hold until early 2025, but the risks are tilted to a later start. The RBNZ’s forecasts have inflation holding up higher for longer, with inflation not back to 2% until 2026 (though it is a rounding error from that mark over the second half of 2025).

The RBNZ did discuss the possibility of lifting the OCR at this meeting but didn’t see the need given inflation is still expected to be comfortably back in the target band over the “medium term” i.e. the next couple of years. The clear conclusion, though, was that interest rates need to hold up for longer – as the forecasts showed.

http://www.martinnorth.com/

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

Another Dose Of Sticky Inflation Lands…

Today we got the April inflation read for the UK, (and a election announcement) which was expected to be lower than the previous month thanks to a substantial cut in the costs of energy to households. But in the end, UK inflation slowed by less than economists had predicted thanks to services inflation proving sticky, which prompted traders to pare their bets on when the Bank of England will cut rates. The first reduction isn’t now fully priced in until November, three months later than the prevailing expectation over the past few weeks and all but eliminating the chance of a cut in June that was in play yesterday.

Services inflation — which the BOE is watching carefully for signs of domestic pressures — remained little changed at 5.9% after a 6% reading the month before. It was a much smaller fall than the cooling to 5.5% expected by UK central bank, with strong wage growth keeping services inflation stubbornly high.

The easing in the annual inflation rates in April 2024 principally reflected price changes in the housing and household services – particularly for gas and electricity where a 12% drop in the UK’s energy price cap, a mechanism designed to protect consumers from sharp moves in natural gas and electricity costs came through.

http://www.martinnorth.com/

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