"Intelligent Insight"
An in-depth look at New Zealand, as the Reserve Bank holds rates at 5.5% and underscores the need to hold rates higher for longer. Plus, the inquiry into Banking Competition fires up, and the Chief statistician says people do not want to talk to them! Wonder why?
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Wall Street’s main stock indexes closed sharply lower on Tuesday after stronger-than-expected retail sales data stoked worries interest rates could stay higher for longer, while U.S. big banks dropped on a report that Fitch could downgrade some lenders.
The U.S. retail sales data comes on the heels of strong inflation readings for July, and could potentially give the Fed more impetus to remain hawkish in the coming months. Such a scenario bodes poorly for risk-driven assets, particularly tech stocks.
The Commerce Department report showed retail sales grew 0.7% last month against expectations of a 0.4% rise, suggesting the U.S. economy remains strong.
After the data, traders’ bets of a pause on hikes by the Federal Reserve next month stayed intact at 89%, yet analysts said investors were worried rates could stay at current levels longer than anticipated.
Banks saw the brunt of the selling as investors grew more anxious about interest rates. The U.S. Treasury yield curve has been inverted for over a year, with longer-term bonds yielding less than short-term debt instruments. This persistent situation pressures profits that banks can earn on loans.
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Home prices are driven by a combination of demand where population growth thanks to high migration puts upward pressure on prices; supply where more property for sale puts downward pressure on prices, and availability of credit as the catalyst for transactions to occur.
Much of the debate is currently centered on supply side issues. As I discussed last week, Outgoing Governor Phil Lowe, urged governments at all levels to work together to address the problem of housing affordability. Notably, he dismissed rent controls as a short-term fix that would provide immediate relief by reducing the incentive to fix the key problem: supply.
“There aren’t short-term solutions here. The solution has to be putting in place a structure that makes the supply side of the housing market more flexible and that means zoning and planning deregulation and it means state and local governments being part of the solution.”
This means that first time buyer incentives, or rental support just make the problem, worst – something which I have highlighted over the years (and which by the way the Productive Commission also confirmed).
But my fear is that the un-defused credit bomb will be skirted around and as the supply side elephant is paraded through the streets. But it is the credit Elephant in the room which should be addressed, even if it shrinks bank balance sheets and profits. If not, nothing will fundamentally change and prices will remain as out of whack as they currently are.
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Our latest dissection of the property market – at the start of an important week in the future of housing with our property insider Edwin Almeida.
We look at the range of serious issues ahead, with an uptick in potential visitors to Australia, a small rise in listings, and a fall in rental availability as some of the factors crimping property investors bite.
We also look at the proposed rental freeze legislation from the Greens.
In such an important week, we will be live tomorrow with Edwin and taking questions on these critical issues. https://youtube.com/live/KpdkhMrhl_k
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Our normal weekend market update, as incoming data is all over the show. No wonder things are volatile!
The S&P 500 and the Nasdaq Composite fell on Friday and posted their second straight weekly losses, as hotter-than-expected U.S. producer prices data pushed Treasury yields higher and sank rate-sensitive megacap growth stocks. Being data dependent, means markets will be highly volatile over the northern summer.
Data on Thursday showed U.S. consumer prices increased moderately in July, with the smallest annual increase in core inflation in nearly two years, lifting hopes that the Federal Reserve is at the end of its rate hike cycle.
However, San Francisco Fed Bank President and CEO Mary Daly said that more progress is needed before she would feel comfortable the Fed has done enough to rein in inflation.
US producer prices picked up in July, primarily due to increases in certain service categories, highlighting the choppy nature of getting inflation back down to target.
According to the Bureau of Labor Statistics the producer price index for final demand, as well as the core index which excludes food and energy, both rose by 0.3% in July, While those came in slightly more than forecast, downward revisions to the prior month tempered some of the strength.
Normalizing global supply chains, tepid demand abroad, and a broader shift in consumer spending toward services and away from goods have generally helped alleviate inflationary pressures at the producer level over the last year. But headwinds are building again as oil prices climb.
Service costs rose by the most in nearly a year, reflecting increases in categories including portfolio management, outpatient care and passenger transportation. Several categories from the PPI report, notably in health care, are used to calculate the personal consumption expenditures price gauge — the Federal Reserve’s preferred inflation measure — that will be released later this month.
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A key measure of US consumer prices rose only modestly for a second month, bolstering hopes that the Federal Reserve can tame inflation without sparking a recession. But the results hardly moved markets at all, bearing in mind the next FED meeting is in September to more data will be to hand.
The core consumer price index, which excludes often-volatile food and energy costs, rose 0.2% for a second month, Bureau of Labor Statistics data showed Thursday. That marked the smallest back-to-back gains in more than two years.
Economists view the core measure as a better indicator of underlying inflation than the overall CPI, which also increased 0.2%. The annual CPI measure, however, picked up slightly due to a less-favorable comparison with the index a year ago.
Or in other words, the past help from the base effect is diminishing.
The progress on inflation, combined with solid economic growth and a healthy but gradually cooling labor market, represent another step in the right direction for the central bank. The highest interest rates in 22 years have played a role in calming price pressures but have yet to tip the nation into a recession many economists once thought was inevitable.
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The outgoing RBA Governor appeared before the House Economics Committee on Friday. We look at some of the key themes, including the trajectory of interest rates and inflation, rental control, productivity, bank profits and the impact of rising gas prices.
Interestingly he did suggest the RBA had done too much through COVID and this included the creation of too much liquidity, and too low rates – as insurance – which was not ultimately needed!
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Today’s post is brought to you by Ribbon Property Consultants.
The Bank of England, alongside other Central Banks say they are being data dependent as they try to balance interest rates, inflation, growth and employment.
So the latest from the UK ONS revealed that the UK economy delivered its strongest quarterly growth in more than a year, a surprising show of resilience that will keep pressure on the Bank of England to raise rates further to generate more weakness to bring inflation down in line with its forecasts.
The Bank of England is concerned that the economy’s pace, while sluggish by historical standards, is fanning upward pressure on wages and prices. While inflation has edged lower from last year’s high, it remains more than triple the BOE’s 2% target.
Gross domestic product rose 0.2% from the first quarter, the biggest increase since the start of 2022, the Office for National Statistics said Friday. The Bank of England had expected a 0.1% expansion. Output in June jumped 0.5%, more than double the 0.2% pace expected by economists.
Manufacturing and construction output were both stronger than expected in June, rebounding from the loss of a working day in May for King Charles III’s coronation. The figures point to momentum in the economy that’s likely to fan upward pressure on wages and prices, underpinning the case for more rate hikes.
Consumer spending during the quarter rose 0.7%, its biggest quarterly increase in more than a year. Business investment climbed 3.4%, a similar pace to the previous quarter. There was also a strong increase in government spending. Together, these factors offset a drag from net trade, as the volume of imports outpaced exports.
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The Australian economy has been relatively stable in the face of the higher interest rates, until now but cracks may be forming as new data arrives. Our mortgage stress analysis which we reported on earlier is one.
Now Payroll jobs data says the same.
The Australian Taxation Office (ATO) receives payroll information from employers with Single Touch Payroll (STP) enabled payroll and accounting software each time the employer runs its payroll. The ATO provides selected employer and job level data items from the STP system to the ABS to produce statistics.
And according to the ABS Payroll jobs fell 0.2 per cent in the month to 15 July 2023, following a 0.3 per cent rise in the previous month.
I should say Payroll jobs are not seasonally adjusted and are predominantly employee jobs paid through payrolls. Some industries, such as Agriculture, forestry and fishing and Construction, have high proportions of owner managers who are not included in payroll reporting.
So we should note that in each release, as more complete data are received, payroll job estimates are revised. The magnitude of revisions can vary at some points of the year, such as the end of the financial year and calendar year in line with changes in the reporting activity of businesses.
That said, the ABS says “The latest month of data showed some slowing in jobs growth around the school holidays, together with the end of financial year seasonality we usually see in payroll reporting.”
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UK households are facing an avalanche of cost pressures triggered by rising interest rates and the worst cost-of-living crisis in a generation. Key mortgage rates soared above 6% again this summer, and homebuilders including Ballymore Properties and Vistry Group Plc have already said they’re planning to cut staff numbers.
No surprise then that Britain’s property market showed signs of slowing to a crawl after a jump in mortgage costs reduced both buyer demand and the volume of sales. The figures add to evidence that the housing market is weakening after the quickest series of increases in interest rates lifted the cost of mortgages. Lenders including Nationwide and Halifax say property prices are falling, and some expect a peak-to-trough slump of 10% to 12% is “very likely.”
The Royal Institution of Chartered Surveyors (RICS) UK Residential Survey for July 2023 says at the national level, new buyer enquiries posted a figure of -45%, like last month’s figure of -46%. As a result, this metric continues to signal a sharp downturn in buyer demand following the latest escalation in mortgage interest rates. When viewed at the level of the English regions and the four nations, all parts of the UK display a firmly negative return for new buyer enquiries over the month.
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