Episode – Page 44 – Digital Finance Analytics (DFA) Blog

The Volatility Game Continues…

Financial markets are bracing for what could be another momentous week, with a Federal Reserve meeting, U.S. employment data and earnings from technology heavyweight Apple Inc possibly setting the course for stocks and bonds the rest of the year.

So far October has lived up to its reputation for volatility, as a surge in Treasury yields and geopolitical uncertainty hitting stocks. The S&P 500 index is down 3.5% for the month, adding to losses that have left it over 10% off its late-July high.

Whether the ride remains rough for the rest of 2023 may depend in large part on the bond market. The Fed’s ‘higher for longer’ stance on interest rates and rising U.S. fiscal worries pushed the benchmark 10-year Treasury yield – which moves inversely to prices – to 5% earlier this month, the highest since 2007. Higher Treasury yields are seen as a headwind to stocks, in part because they compete with equities for buyers. It was little changed at 4.838% after crossing 5% earlier in the week.

Investors worry that yields could rise further if the Fed reinforces its hawkish message at the central bank’s Nov. 1 monetary policy meeting. Strong U.S. employment data next Friday could also be a catalyst for yields to rise if it bolsters the case for keeping rates elevated to cool the economy and prevent inflation from rebounding.

Investors are playing a “waiting game of how much does each economic data point need to increase to put another rate hike back on the table,” said Alex McGrath, chief investment officer for NorthEnd Private Wealth.

http://www.martinnorth.com/

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The Volatility Game Continues...

00:00 / 00:18:54

APRA Hopeless On Branch Closures…

Journalist Dale Webster over at The Regional has rightly launched an attack on APRA, the banking regulator.

https://www.theregional.com.au/post/apra-bogged-in-a-data-mess-of-its-own-making

They released their annual points of presence data that showed an 11 per cent fall in bank branches nationally in 12 months. It triggered HEADLINES around Australia last week screamed out about bank closures. Channel Nine was one of many media outlets that picked up the story, reporting 424 branches had “shut their doors for the final time”.

As Dale writes, the problem is APRA never actually said that.

“The latest statistics show a further decline in bank branches in the year to 30 June 2023, with a reduction of 424 branches across Australia (11 per cent), including 122 branches (7 per cent) in regional and remote areas. This continues a trend that has seen branch numbers decline by 34 per cent in regional and remote areas, and 37 per cent overall, since the end of June 2017.”

What unsuspecting media did not pick up on was that among those 424 branches were a number of sites that had been stripped of branch status because they no longer provided the level of service required to be classified as such by law.

The doors are still very much open but they are among the growing number of banks that have no tellers and customers can only get cash from an ATM.

So we are left with what could be described as a bit of a situation, according to Dale. I think it is more deliberate, as APRA again manages to hide the real story – on this they have form, given their close alignment to the Banks. They are in my view hardly independent, nor an effective regulator.

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APRA Hopeless On Branch Closures...

00:00 / 00:05:53

Will The RBA Blink First?

On Melbourne Cup day we will get the next RBA cash rate decision. Michelle Bullocks testimony before the Senate this week was pretty vague – waiting for data, will update forecasts etc.

But as Christopher Joye writes in the AFR, following the material upside surprise to inflation in the September quarter, almost all economists and investors agree that the Reserve Bank of Australia should lift interest rates in November.

But participants worry that a concerted campaign to politically compromise Australia’s central bank may result in the RBA remarkably choosing not to seek to combat its existential inflation crisis.

This would be the latest in a chapter of accidents, with the RBA cutting rates too low, and stoking the economy via the Term Funding Facility, and Quantitative Easing. Their yield control attempts went wrong, and then they held rates way to low, promising no hike for years. And their forecasting is a disaster.

This is a central bank with a 4.1 per cent cash rate that is just a smidge above what it assesses to be the neutral rate of 3.8 per cent. And that is a cash rate that is 1.0 to 1.5 percentage points below peer rates in the US, Britain, Canada and New Zealand.

Even the RBA’s outgoing assistant governor Luci Ellis, who is now chief economist at Westpac, called a “hike” only days after she predicted that inflation would not be robust enough to warrant one.

In sum, we know the RBA should hike in November. Whether it actually does or not appears to now be a question of its ability to resist political interference.

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Will The RBA Blink First?

00:00 / 00:11:41

Are Equities Toast In The Higher For Longer World?

In my post yesterday, I highlighted the 4200 support level for the S&P 500 and the risks if that was breached. Well, today as the tech sector melted down it dragged the S&P 500 index under the 4,200 support level.

Rising Treasury yields and political gridlock in D.C. dominate financial headlines, but it was GOOGL’s poor results that became one straw too many, and the index shed another 1.4%.

And significantly, soaring U.S. Treasury yields are further boosting the appeal of bonds over stocks, deepening an already painful equity selloff while threatening to weigh on equity performance over the long term.

If earnings growth is squeezed as expected there are many stocks which are currently significantly overvalued – so perhaps the real message here is that individual stock-picking is back baby, rather than playing the index. Plus, there is always the risk of course Central Banks panic and cut rates hard into a recession, something which they have form on doing.

So, in fractious markets sometimes watching from the sidelines is the best move, until things shake out. Remember October is often the worst month for stocks across the year!

http://www.martinnorth.com/

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

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Are Equities Toast In The Higher For Longer World?

00:00 / 00:10:24

Will The Inflation Shock Lead To An Interest Rate Hike?

Australia’s CPI inflation came in stronger than expected in the September quarter, with headline inflation rising 1.2% over the quarter versus 1.1% expected and 5.4 per cent annually, according to the latest data from the Australian Bureau of Statistics (ABS).

As noted by Justin Fabo from Macquarie group, “trimmed mean inflation in Q3 was MUCH stronger than the RBA’s August forecast…about 0.4ppts stronger on a year-ended basis”:

And as he notes. “Measures of the BREADTH of quarterly inflation ticked higher and broadly supports the signal from the trimmed mean.

It is also broad based, with“43% of the CPI basket by number rose at an annualised rate of at least 5% in Q3”,

This is going to put more pressure on the RBA to hike rates, potentially on Melbourne Cub day. This is especially because Annual inflation remains elevated, for a range of services such as vets, restaurant meals and hairdressers.

Annual inflation continues to rise for some service categories including rents, dental services and insurance, while inflation for holiday travel has more than halved in the past two quarters. Again, inflation is broad based, you cannot just blame, oil prices for example.

Now, in a speech today RBA Governor Michelle Bullock said “Our focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing. It is possible that this can be done with the cash rate at its current level but there are risks that could see inflation return to target more slowly than currently forecast. The Board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation. At the same time, the Board is mindful that growth in demand and the rate of inflation have been moderating, and that there are long lags in the transmission of monetary policy. The Board will receive several pieces of information before its next meeting that will be important for this assessment. This includes a full update of the staff’s forecasts”.

We should also note that the CPI weights are typically updated each year in the December quarter to ensure the weights used in the CPI basket reflect current household spending patterns. But the ABS said that with the continued increase in Australians holidaying overseas, a partial update of the CPI weights has been implemented in the September 2023 quarter. This partial update increases the weight for international holiday travel, with the weight for the other components in the basket adjusted to offset the increase in travel weights. International holiday travel and accommodation was down 3.4%. Convenient, when travel costs dropped, whilst others rose. Just saying.

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

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Will The Inflation Shock Lead To An Interest Rate Hike?

00:00 / 00:12:54

Is It Déjà Vu All Over Again?

With bond yields surging back to levels not seen since 2016 in recent months, there has been no shortage of comparisons between the current state of markets and that on the eve of the global financial crisis. In fact, the parallels drawn between conditions now and in 2007 appear pretty strong when you take a look.

Simultaneous falls in bonds and equities could hit parity trades. The sort of asset mismatches we saw in the collapse of Silicon Valley Bank could return. With mortgage rates in the US at 8 per cent, both sides (sell and buy) of the real estate market could completely freeze.

Pockets of the economy that have less transparency could be in trouble, such as private equity and particularly private credit provided by hedge funds, which has become increasingly important given the banks have backed away from commercial lending.

As in the GFC, “trust between banks could suddenly evaporate”, while a move up in the US dollar could sap global liquidity at the wrong time.

Perhaps ASX investors should think about the bigger picture. Despite all that’s happened in the past 15 years – the GFC and recovery, the pandemic and recovery – they don’t have a lot to show for it.

http://www.martinnorth.com/

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Is It Déjà Vu All Over Again?

00:00 / 00:12:03

The Slow Strangle That Higher Rates Causes…

While analysts still talk about the strength of the consumer, if you chose to look below the hood there are real issues emerging, thanks to the higher for longer interest rates that are now in the system because of Central Banks attempts to quell the inflation that they created by their earlier actions.

Jerome Powell conceded this past week that with perfect hindsight, their monetary policy settings through the pandemic would have been tighter – with rates not dropped so low, and quantitative easing less extreme.

My surveys in Australia continue to highlight the pressure on some households with for the first time more than half of mortgage holders underwater from a cashflow perspective. And its not only in Australia.

Americans, for example are falling behind on their auto loans at the highest rate in nearly three decades. With interest rate hikes making newer loans more expensive, millions of car owners are struggling to afford their payments. It’s a clear indication of distress at a time when the economy is sending mixed signals, particularly about the health of consumer spending.

And in the UK the bad news keeps coming for Britain’s lettings market, as a surge in mortgage payments pushes more landlords to the brink and threatens to pile extra misery on tenants.

Landlords paid 40% more mortgage interest in August than the same month a year ago, equating to an extra £4.3 billion ($5.3 billion), according to a report from broker Hamptons International. Mortgaged landlords handed over an average of 37% of their rental income to pay interest in August, up from 28% a year earlier.

“For some investors, this will be unaffordable,” said Aneisha Beveridge, head of research at Hamptons. “They will likely bow out, keeping upward pressure on rents.”

And more broadly, UK banks expect to tighten a squeeze on the mortgage market in the coming months as high interest rates stretch affordability and loan defaults pick up.

The Bank of England’s quarterly credit conditions survey found that lenders decreased the supply of mortgages in the third quarter and will restrict availability further in the coming months. Defaults and losses on home loans picked up in the third quarter as more households are forced to refinance at much higher interest rates.

http://www.martinnorth.com/

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

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The Slow Strangle That Higher Rates Causes...

00:00 / 00:08:52