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.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
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/
Digital Finance Analytics (DFA) Blog
Are Equities Toast In The Higher For Longer World?
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.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants.
Digital Finance Analytics (DFA) Blog
Will The Inflation Shock Lead To An Interest Rate Hike?
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/
Go to the Walk The World Universe at https://walktheworld.com.au/
This is an edited version of a live discussion with Research Director from The Australian Citizens Party, Robbie Barwick as we look at the contemporary issues surrounding the battle to keep cash in the economy, branch closures, the current financial settings, and the broader political and economic background.
The imperative for change has rarely been stronger, and we literally stand on the brink….
Go to the Walk The World Universe at https://walktheworld.com.au/
More from our property insider Edwin Almeida, as we discuss the migration question, granny flats, risks from above 4 story high-rise, and the rental crisis. Plus we look at the latest from the WeeChat universe.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants.
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/
There is a critical issue now on the table, and it relates to what the right level of migration should be. In recent times, the taps have been open more than ever before, and there are significant consequences for households, and housing affordability. Some are now calling for a significant cut in migration, others are celebrating the potential for more home prices rises, as demand outstrips supply across the country.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
As I have warned, October can be a fickle month on the markets, and is proving to be so again. Growing volatility in U.S. stocks is driving a search for defensive assets, though investors may have fewer places to hide this time around.
On Friday, global stock markets, including those in the US and Europe, experienced declines due to rising US treasury yields which reached a 16-year high and the potential escalation of the Israel-Hamas conflict. The pan-European STOXX 600 index lost 1.36% and MSCI’s gauge of stocks across the globe shed 1.10%. Emerging market stocks lost 0.53%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.6% lower, while Japan’s Nikkei lost 0.54%. So, losses everywhere.
On Friday, US President Biden said he plans to ask Congress for another $US74 billion ($117.2 billion) to fund the wars in Ukraine and the Middle East.
Fed Speak is not helping either, while other Fed officials have hinted that the tightening cycle could be at an end, Federal Reserve Chairman Jerome Powell’s comments on Thursday underscored possible further interest rate hikes, driven by the robust US economy, strong retails sales and tight labor market.
In a Bloomberg TV interview, Mohamed El-Erian took Federal Reserve policymakers to task, saying the US economy is seeing a period of “greater uncertainty” because of a lack of vision from Fed officials.
“You cannot drive a car without some understanding of what the road ahead looks like. You can’t just look at the rear-view mirror and try to adjust to every curve you just had,” El-Erian, the chief economic adviser at Allianz, said. “That is not how you drive policy and it’s certainly not how you drive policy when the impact of policy happens with a lag,” he said. “This is the first Fed I know that has not gotten it.”
In a note, a Bank of America’s team led by Michael Gapen said the Fed could done lifting rates. “Fed commentary has all but confirmed that the Fed will stay on hold in November. We shift the last rate hike in our forecast out to December. We think the strong September data keep another hike in play. But it is a close call. There are meaningful risks that the Fed will either delay the last hike into 2024 or not hike again.”
“Investor sentiment is quite negative, and we believe it’s important to zoom out and focus on the long term – even the intermediate term – and a lot of this will fall by the wayside,” said Ross Mayfield, investment strategy analyst at Baird.
“There’s not enough attention being paid to company earnings, which have been coming in strong, and guidance has been solid,” Mayfield added. “Investors would be wise to pay attention to that as much as the macro events, the geopolitical tensions.”
On Thursday the yield on 10-year U.S. Treasury notes, the bedrock of the global financial system, was briefly bid above the 5% barrier for the first time since July 2007, touching 5.001%. While the benchmark yield eased back from that level, it posted its largest weekly surge since April 2022. The 30-year bond last rose in price to yield 5.078%, from 5.102% late on Thursday. With the 2 year in similar territory, such a flat yield curve is a sign of uncertainty, with some questioning whether the bond market has become unanchored, or whether the big US bond issuance has moved markets, or whether it simply reflects a risk premium. The MOVE index, which measures expected volatility in U.S. Treasuries, stands near a four-month high.
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Another Friday chat with Tarric Brooker, complete with charts on the housing market. We look at what is really driving the disequilibrium in the sector, and what the consequences are for people trying to access the market.
You can follow the charts here: https://avidcom.substack.com/p/dfa-chart-pack-20th-october-2023
And read Tarric’s article on housing here: https://avidcom.substack.com/p/in-australia-housing-is-the-economy
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Digital Finance Analytics (DFA) Blog
The Great Property Paperchase... With Tarric Brooker
