Episode – Page 19 – Digital Finance Analytics (DFA) Blog

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

This is our regular weekly market update.

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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Digital Finance Analytics (DFA) Blog

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

00:00 / 00:23:52

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.

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Digital Finance Analytics (DFA) Blog

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

00:00 / 00:10:48

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.

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Digital Finance Analytics (DFA) Blog

New Zealand Rates Held Higher For Longer As Hawks Fly!

00:00 / 00:09:02

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.

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Digital Finance Analytics (DFA) Blog

Another Dose Of Sticky Inflation Lands...

00:00 / 00:08:27

DFA Live Q&A Replay: Playing The Home Sales Game: With Edwin Almeida

This is an edited version of a live discussion, with our property insider Edwin Almeida as we explored how to plan and prepare a property for sale in the current climate.

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Digital Finance Analytics (DFA) Blog

DFA Live Q&A Replay: Playing The Home Sales Game: With Edwin Almeida

00:00 / 01:37:18

Its Edwin’s Monday Evening Property Rant!

In this weeks Rant Edwin and I discuss the fallout from the budget, the latest developments in non-approved extensions, and trends from the WeChat Chatters and Silent Tigers as Australian property is still used to launder money.

You can also join Edwin and I for a live show on Tuesday 21st May at 8pm Sydney as we discuss how to prepare your property for sale. You can ask a question live: https://youtu.be/38o1E_69o3c

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Today’s post is brought to you by Ribbon Property Consultants.

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Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make.

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Digital Finance Analytics (DFA) Blog

Its Edwin's Monday Evening Property Rant!

00:00 / 01:09:22

Digital Tyranny Another Step Closer As Digital ID Bill Is Passed!

This past week, while we were distracted with the budget, our controlled digital future came one step nearer, as the Australian Federal Governments Digital ID Bill sailed through Parliament last week with the support of the crossbench, having been previously passed in the Senate.

The passing into law of this bill may at a superficial level sound sensible, given that as more Australians are increasingly transacting online, our identities are vulnerable in new ways. So the Digital ID is to provide “secure” access system for other services that we can have confidence and trust in; the Government says.

But as I discussed in my previous show from the 29th March, Digital Tyranny Is One Step Closer! https://youtu.be/kVVmG_7ddWg I am reminded of the parable of the frog, who slowly gets cooked to death, in a pot as the temperature rises – the same in true for Australians, as civil liberties such as the use of cash, are removed, even as the digital architecture for future control gets put in place. You can see parallels elsewhere round the world and aligned with the agenda of several high profile non-elected bodies like the World Economic Forum – of “you will own nothing and be happy” fame.

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Digital Finance Analytics (DFA) Blog

Digital Tyranny Another Step Closer As Digital ID Bill Is Passed!

00:00 / 00:11:27

The Bulls Are Running Again; For Now…

This is our weekly market update. After recent wobbles on concerns of higher rates for longer, the Bulls have been stomping through the markets this week. Data dependency is a marvellous thing because each shiny new data point has the potential to swing the market violently. Some might well be detecting signs of weakness below the surface, suggesting further reversals ahead.

The blue-chip Dow Jones Industrial Average passed the 40,000 level for the first time ever earlier in the week, and record highs have also been seen by major indices in Europe and Asia as investors took advantage of expectations of lower interest rates globally. These markets have remained relatively resilient even as U.S. macro data have shown signs of softening, with the PMI and ISM surveys declining in April, labour-market data worsening, consumer confidence dropping and the housing market deteriorating again.

The bulls of the ASX are running again this week in a classic “bad news is good news” rally. Lingering concerns that sticky inflation could force the Federal Reserve or the Reserve Bank to raise rates have suddenly been extinguished. For all that worry about higher-for-longer rates exposing cracks in the local economy – the weakening consumer spending we’re seeing, the rising corporate insolvencies, weakening consumer and business sentiment – the ASX 200 has quietly added 4 per cent within two weeks, and is now up 3.3 per cent this year. Since October 2022, it has gained 22 per cent.

Never mind that valuations look stretched and equity risk premiums on both sides of the Pacific (the difference between the equity market’s earnings yield and the 10-year bond yields) are almost non-existent. Local investors continue to plough into their market darlings in the firm belief that rate cuts are coming.

The latest edition of our finance and property news digest with a distinctively Australian flavour.

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Digital Finance Analytics (DFA) Blog

The Bulls Are Running Again; For Now…

00:00 / 00:25:49

The Migration Question Amplified; But Not Tackled… By Anyone!

Last week Michele Bullock the RBA Governor was asked a good question about how high migration might impact inflation. But her answer was well, weird, as she tried to trade off pressure on the housing market from higher demand driven rent rises against supplying more workers to meet business demand (and implicitly increasing economic activity).

Treasurer Jim Chalmers, Speaking at the National Press Club on Wednesday explained that Tuesdays Budget forecast of headline CPI inflation falling to 2.75% by the end of Financial Year 2024-25 (not I January as I noted some reporting claimed), was predicated on at least in part the government cutting net overseas migration.

“We’re seeing a substantial moderation in inflation in the forecasts and in the last couple of years as well, and that is largely because of how we’re managing the budget but it will also be increasingly about how we’re managing the population as well”, Chalmers said.

Right, so it must also be true that if lower migration will ease inflation, then high migration will drive inflation higher.

Then we got Opposition Leader Peter Dutton’s policy as part of his budget response. He promised that a Coalition government would drastically slash migration as its main way of freeing up more than 100,000 homes over five years. A Dutton government would reduce Australia’s permanent migration program by a quarter – from 185,000 to 140,000 for the first two years “in recognition of the urgency of this crisis”, Dutton said.

Treasurer Jim Chalmers has described the opposition leader’s budget reply proposing migration cuts as an “unhinged and risky rant”.

But again, 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.

In both cases, this is more of policy announcements to try and win an election than nation building policy reform, which is needed for both migration and the gas market.

The net result will be higher inflation for longer, requiring higher interest rates than otherwise needed.

Digital Finance Analytics (DFA) Blog

The Migration Question Amplified; But Not Tackled… By Anyone!

00:00 / 00:17:42