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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The unemployment rate rose by 0.1 percentage point to 3.9 per cent in November (seasonally adjusted), up from a revised 3.8 per cent in October, according to data released today by the Australian Bureau of Statistics (ABS).
The ABS said: “With employment increasing by 61,000 people, and the number of unemployed people rising by 19,000, the unemployment rate rose to 3.9 per cent in November.
“The combination of strong growth in both employment and unemployment in November saw the employment-to-population ratio return to a record high of 64.6 per cent and the participation rate reach a new high of 67.2 per cent.
“We have continued to see employment growth keeping pace with high population growth through 2023. The employment-to-population ratio has been high for a long time now, between 64.4 per cent and 64.6 per cent since February 2023, and between 64.3 per cent and 64.6 per cent for the past 18 months.
“Similarly, participation continues to be high. In addition to strong employment growth over the past year, the number of unemployed people has also increased by around 81,000 people, and the unemployment rate has risen by 0.4 percentage points. However, both unemployment measures remain well below their pre-pandemic levels.”
At this point just note that from September 2023, the ABS sample frame has been updated with information from the 2021 Census, with sample selection from the new sample being phased in over eight months from September 2023 to April 2024.
And specifically, The ABS has revised the original Labour Force series from July 2016 to reflect the latest estimated resident population (ERP) based on the 2021 Census (final rebased ERP). So the usual resident civilian population in October 2023 was revised up by around 0.2% (around 37,200 people).
To add to the data tweaks, the incoming November sample had a higher unemployment rate and higher participation, which also helps to explain some of the slightly weird movements this month.
This helps to explain why while employment growth continued into November 2023, rising by 0.4 per cent, monthly hours worked rose by less than 0.1 per cent.
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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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The Mid-Year Economic and Fiscal Outlook (MYEFO) update released on Wednesday estimates the Australian economy is expected to expand by a low 1.75% in 2023–24 before regaining momentum in 2024-25, when improved real incomes are expected to support a recovery in household consumption. It also notes inflation – although moderating – is still too high.
The outlook attributes that mainly to global oil prices and Treasury has not changed its forecast timetable for inflation’s return to the 2-3% target band, with 2.5% hit in mid 2025, so the Government is more optimistic than the RBA when it comes to expected progress on inflation. The RBA expects inflation to be at 3.0% by mid-2025.
Treasury’s analysis of the structural budget position suggests that the budget in 2023-24 is neutral with respect to inflation – it is neither adding nor reducing inflationary pressures.
Treasury continues to expect the economy will slow over the next few years to grow below trend with the unemployment rate drifting higher to 4.5% in 2025-26.
The migration intake has been a hot topic recently. As expected, the MYEFO forecasts upgrade the outlook for net overseas migration (NOM) in 2023-24 by 60k to 375k. We suspect that this will likely undershoot the eventual outcome. In 2024-25, forecasts for NOM have been marked down slightly to 250k, likely reflecting the expected impact of the Government’s recently announced migration strategy.
Gross debt is expected to peak at 35.4% of GDP in 2027-28, this is 0.2 percentage points lower than projected in the May Budget. While debt is expected to be lower, the expected cost of capital has also increased since the May Budget, reflecting the rise in government bond yields. Overall, these counteracting forces net out to a slight increase in interest payments as a share of GDP over the medium term.
Sadly, in a blow for budget transparency, there is still a line for decisions taken but not yet announced. We don’t know what decisions these are, but they are significant – the estimates start at $270 million in 2023-24 and rise to $1.8 billion in 2026-27. It is impossible to tell what this spending is for. If the government were to reverse those decisions between now and the next budget update, we will never know.
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You will recall that Australia’s October monthly CPI indicator from the Australian Bureau of Statistics came in below market expectations at 4.9%/yr (versus the consensus of 5.2%/yr). There were a number of factors which messed with the data, as I discussed in a previous show.
According to CBA, other surveys also suggest that trimmed mean CPI in Q4 23 is unlikely to be stronger than the RBA’s ~1.0%/qtr forecast.
But these monthly numbers are flaky, because the critical services price movements are not captured until the quarterly series which is due out in January.
As I discussed in my earlier show, the problem is the last mile problem – in that the last part of getting inflation down towards the target is the hardest, especially when then RBA now has a 2.5% central target, and as in the US data out yesterday, its services inflation which is driving the numbers as goods inflation eases back.
On this theme, Statistics New Zealand on Wednesday released its new monthly inflation gauge, which captures around 45% of the CPI basket.
The conclusion of all this, is the partial monthly numbers may well deceive, and should be taken with a truck load of salt. When the quarterly numbers land later then check out the services components. Goods price inflation may be coming under control, but services is not. And within that, watch the rental and housing sector in particular.
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The last mile of the journey in getting inflation back into its box, is the hardest and most intractable. So while US inflation is much lower than it was the latest release yesterday, ahead of the FED rate decision today shows it’s not declining quickly and remains above the Federal Reserve’s targets.
In summary, core inflation matched market expectations in November, increasing at a marginally faster rate of 0.3%. In annualised trend terms, core inflation is running at 3¼%, with rapid core goods disinflation of 3¾% broadly offsetting faster core services inflation of 5½%. But core services excluding housing inflation has picked up to 6% in annualised trend terms, while the trimmed mean CPI – which gives a sense of the breadth of price rises – has picked back up to 3¾%.
The initial spike in 2021 was driven by goods prices, which had been stable for years. That was mainly thanks to the pandemic’s effect on supply chains. That shock is over. At this point, inflation is almost entirely about core services, which include shelter.
The FOMC won’t change rates this week, but it does get to revise the “dot plot” which shows its projected course of interest rates ahead. That would be a way to assure the market that rates are coming down swiftly, but for now the Fed could be reluctant to do anything that encourages more speculation.
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More reports of banks removing cash services, at a time when the Senate Inquiry into Regional Branch closures highlighted again the need for access to cash.
According to the Bank of England, cash is still important for several reasons. Cash is a fast and convenient way to pay. It is widely accepted. It is helpful for budget management. Cash payment is entirely anonymous. Moreover, cash is a stable currency system that is resilient in times of crisis and reflects a nation’s identity . It is also the most secure means of payment.
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More from Edwin Almedia, our property insider, as we look at the latest “announcables” relating to housing and migration… how much is smoke and mirrors? The latest from the Treasurer makes the point!
The outlook is higher construction costs, a tilt towards migrants with more capacity to buy property, and the risk of more low quality construction, as high-rise height limits are relaxed.
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Ahead of our upcoming live stream on Tuesday at 8pm Sydney (12th December) I run through our latest analysis based on our surveys, We see that many households are in a pickle with regards to cash flow, and over time this can lead to significant consequences, with defaults expected to rise in the months ahead.
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