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The MYEFO Magic Pudding…

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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Digital Finance Analytics (DFA) Blog

The MYEFO Magic Pudding...

00:00 / 00:10:58

Playing Inflation Chicken With Wonky Monthly Data

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

Digital Finance Analytics (DFA) Blog

Playing Inflation Chicken With Wonky Monthly Data

00:00 / 00:06:47

Disappointing US Inflation Data Will Keep The Fed Hawkish…

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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Disappointing US Inflation Data Will Keep The Fed Hawkish...

00:00 / 00:10:18

Cash Ditched From Some Branches…!

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.

https://www.news.com.au/finance/business/banking/no-longer-anz-ditches-cash-in-some-branches/news-story/56e1572f93eed4afdd835123aa193bce

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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Cash Ditched From Some Branches...!

00:00 / 00:15:16

Its Edwin’s Monday Evening Property Rant!

More from Edwin Almedia, our property insider, as we look ay 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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Its Edwin's Monday Evening Property Rant!

00:00 / 01:01:34

Market Optimism Continues Thanks To US Soft Landing Hopes…

This is our weekly market update.

As we count down to the end of the year, U.S. stocks closed higher on Friday, with the S&P 500 and Nasdaq notching their highest closing levels since early 2022 and the Dow notched its longest weekly winning streak since 2019.

A robust U.S. jobs report fuelled investor optimism about a soft landing for the economy and so investors pared bets that the Federal Reserve will cut interest rates in March after a Labor Department report showed nonfarm payrolls increased by 199,000 jobs in November, compared with an estimated increase of 180,000.

The unemployment rate slipped to 3.7%, while average earnings edged up to 0.4% on a monthly basis, compared with forecasts of 0.3% growth. The uptick in wage growth, which risks boosting inflation, muddied the optimism for rate cuts, pushing Treasury yields higher, though some economists were quick to downplay the strength of report attributed to the return of employers that were on strike.

“Were it not for the strike, November would have been somewhere around 170k and October would have been around 180,000,” Jefferies said in a Friday note.

Interest rate futures show traders widely expect the Federal Reserve to hold interest rates steady at its meeting next week. However, futures prices now imply traders mostly expect the Fed to start cutting rates in May, two months later than the March meeting many investors had been betting on in recent days.

Treasurer Jim Chalmers confirmed the Reserve Bank of Australia board should aim to return inflation to the middle of the 2 to 3 per cent target band, or 2.5 per cent. Treasurer Jim Chalmers has axed a controversial proposal requiring the Reserve Bank of Australia to give “equal consideration” to full employment and inflation as part of a new agreement that may mean interest rates stay higher for longer.

The backdown followed warnings by the likes of former RBA governor Ian Macfarlane and former treasurer Peter Costello, who said the proposed wording was vague and would make the RBA less accountable for fighting inflation.

IFM Investors chief economist Alex Joiner said targeting the middle of the band made the prospect of a rate cut unlikely until late 2024, given the RBA’s current inflation forecasts do not show it achieving 2.5 per cent inflation at any point in the next couple of years.

Digital Finance Analytics (DFA) Blog

Market Optimism Continues Thanks To US Soft Landing Hopes...

00:00 / 00:20:52

Household Financial Pressures And RBA Propaganda…

Next Tuesday I will be running my live show on Household Financial Stress, which continues to worsen. However, what constitutes “stress” is being debated widely – its a matter of definition.

The RBA has joined the debate, but I will argue in today’s show they conveniently presented a lop-sided story, which understates the true picture.

Andrea Brischetto, Head of Financial Stability gave a speech at the Sydney Banking and Financial Stability Conference, University of Sydney, titled Financial Stability and the Financial Health of Australian Mortgagors.

There has understandably been a lot of focus on this issue of late, with many households facing substantial financial pressures from high inflation and higher interest rates. Some of the households feeling these pressures most acutely are those with lower incomes, including many renters.

But the focus was on households with mortgages and how their financial health relates to financial stability.

There has been a lot said and written about the issue of household financial stress in recent times, using a multitude of data sources and reporting on many different individual experiences. Wednesday’s national accounts showed how inflation, tax and interest rates have weighed on real household disposable income. And as RBA Governor Michele Bullock said when discussing the challenge of inflation following the RBA Board meeting this week: High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. The Governor emphasised that the effect of all of this is that many households are experiencing a painful squeeze on their finances.

So she presented an overall picture of the situation, drawing on the RBA’s extensive work in this area, which is published in detail in our regular Financial Stability Review.

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

Digital Finance Analytics (DFA) Blog

Household Financial Pressures And RBA Propaganda…

00:00 / 00:32:01

Households Taken To The Cleaners: With Tarric Brooker…

Another Friday afternoon chat with Tarric Brooker, as we look at the status of households, as monetary policy continues to run, and as the tax take accelerates significantly.

Via the charts we look at the trends across the country, invent a new TV game series, and also pick apart the political agenda.

Tarric’s charts are here: https://avidcom.substack.com/p/dfa-chart-pack-8th-december-2023

http://www.martinnorth.com/

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

Digital Finance Analytics (DFA) Blog

Households Taken To The Cleaners: With Tarric Brooker...

00:00 / 01:17:22