Economics – Page 16 – Digital Finance Analytics (DFA) Blog

Retail Sales Scream Recessionary – If You Look Under The Hood!

We got the January 2024 retail data from the ABS today, and they reported that Australian retail turnover rose 1.1 per cent (seasonally adjusted) in January 2024. This follows a fall of 2.1 per cent in December 2023 and a rise of 1.5 per cent in November 2023.

Economists were divided on what to expect, with some looking for 1.5% monthly rebound, while others like Westpac were expected just a 0.3% rise.

The National Retail Association said the latest trade figures reveal the uphill struggle retailers face in 2024 if consumer sentiment remains low and trade continues to slow, despite Australia’s population boom. While data reveals that retail turnover has stalled, population growth and increasing costs of doing business show retail growth has actually fallen in real terms.

The ABS said “The rebound in January follows a sharp fall in December when consumers pulled back on spending after taking advantage of Black Friday sales in November. Retail turnover is now back at a similar level to September 2023.

But as Westpac notes, the pattern reflects difficulties the ABS is having adjusting for shift in seasonal patterns associated with the increasingly popular ‘Black Friday’ sales. Pinpointing these shifts is difficult and typically requires the accumulation of more months of observations. Volatility is progressively smoothed as this happens – notably today’s release again saw a softer profile through November (initially estimated as a 2% surge) and December (initially reported as a 2.7% drop).

However, this volatility has concealed a material slowing over the three months. On a 3mth basis, nominal retail sales growth has slowed to just 0.5%qtr, 1.4%yr, neither keeping pace with price inflation.

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Retail Sales Scream Recessionary - If You Look Under The Hood!

00:00 / 00:07:21

Inflation Drifts Lower For Now, But…

The CPI data out today was meaningless, in terms of guiding a rate cut decision. So today I will explain why this is the case, as we go over the numbers. Alongside the main release, there was a second report on revised weights which were applied.

The Australian Bureau of Statistics (ABS) released its monthly inflation indicator for January, which were based on revised weights to the index, and we should also highlight that the first month of the quarter data is at best partial, as while it does provide us with an update on household durable goods the services data apart from garments repairs, hire and maintenance and repairs to dwellings.

Or in other words, the Numberwangers are at it again, despite the rather triumphant tones in some of the media about the prospect of rate cuts.
While the RBA still considers the quarterly CPI as the best gauge of inflationary pressures, the new monthly indicator factors into the central bank’s interest rate decisions when it delivers an unexpected outcome.

The result was a 3.4% rise over the year, below economists’ expectations of a 3.5% rise. 3.4% in the year to January, is in line with the outcome recorded in December to remain the equal softest print for monthly inflation estimate since November 2021.

When excluding volatile items from the monthly CPI indicator, the annual rise in January was 4.1%, down from 4.2% in December” and annual inflation when excluding volatile items has been declining since the peak of 7.2% in December 2022.

The Trimmed mean (core) inflation also fell to 3.8% in the year to January (prior 4.0%).

The RBA does not expect inflation to return within its 2 per cent-to-3 per cent target band until December 2025. And there is not enough here, in my view to lead the RBA one way or the other, though the door remains open, possibly for a rate cut towards the end of the year, unless we see a second surge in good prices due to higher transport costs, and higher wages pushing though to higher goods and services costs.

The bottom line is while the figures were a little lower than market expectations for inflation to increase to 3.6 per cent, they are unlikely to alter the outlook for monetary policy due to the volatility of the monthly consumer price index.

And by the way, the Aussie Dollar dropped a bit – but only after the Reserve Bank of New Zealand held the cash rate there, and signalled rate cuts, eventually.

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Inflation Drifts Lower For Now, But...

00:00 / 00:11:27

AI Feeding Frenzy Creates A Headache But The Stock Market Is Not The Economy!

Sparked by Nvidia’s latest blowout earnings report, stock surge and general excitement about a “tipping point” in generative artificial intelligence, Thursday was the best day in more than a year for Wall St’s main stock indexes. And the S&P 500 and Dow Jones Industrial Average eked out another closing record high on Friday, with all three Wall Street benchmarks scoring weekly gains, with the S&P 500 up 1.7%, the Dow up 1.3% and the Nasdaq 1.4% higher, as AI stocks had enough steam to keep the rally chugging along.

Nvidia advanced again on Friday, rising a further 0.4%, and briefly traded above $2 trillion in market valuation for the first time and by the ways Nvidia’s gains on Thursday, the session after its blowout earnings, the chipmaker added $277 billion in stock market value, which is Wall Street’s largest ever daily gain. Despite a smaller advance on the final trading day of the week, its performance still dominated the market’s attention.

Yet the performance of Nvidia and other Big Tech has pushed Fed worries into the background even though investors have been walking back expectations for Federal Reserve interest rate cuts.

Recent Federal Reserve speakers echoed the content of the FOMC minutes since those were published. Communication has been understandably cautious on the inflation outlook considering the recent higher-than-expected CPI, particularly stressing the risks of cutting too early or too fast. The 29 February PCE release may well come in stronger than expected, and push rate cut expectations further away.

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AI Feeding Frenzy Creates A Headache But The Stock Market Is Not The Economy!

00:00 / 00:24:01

A Question Of Democracy!

This week the Senate held hearings into the proposed changes to the way the RBA works. The original review was led by three Technocrats included a recommendation to remove the overrule power. This power specifically, section 11 of the Reserve Bank Act 1959 enables the federal treasurer to “overrule” an action taken by the Reserve Bank in extreme situations, via a clear and determined process, and even though no Australian government had used it in the more than 60 years it is important. It’s supposed to be a democratic fail-safe.

The Technocrats recommended the overrule power should be removed from the act. Their reasoning was that there was a risk that the federal treasurer, and by extension the federal government, might abuse that power. But what if the RBA abuses their power? The proposed change was not supported by the bulk of those who appeared in the Senate hearings, so today we look at the evidence provided.

At the heart of the issue is this. How accountable should the RBA be? And if there is no democratic override from the section 11 power, what happens if the Economists at the RBA set monetary policy in a way that badly impacts ordinary people, bearing in mind that another recommendation was to strike safeguarding the “welfare of all Australians” from their objectives. The focus will be on inflation and employment, only.

Central bankers are not infallible, sometimes makes mistakes, and frankly are already not accountable for their decisions, right or wrong. It’s a question of democracy.

So standing back, it seems it was the Technocrats and Economists who wanted to remove the section 11 power, but those with real lived experience, from both the Central Bank, and Government, as well as many respected observers, all agree.

Democracy would be sacrificed, and the Central Bank would be even less accountable if the power was removed. In other words, it is a question of democracy. And more broadly the idea of unelected Central Banks, being able to impose monetary policy decisions without question should terrify us all.

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A Question Of Democracy!

00:00 / 00:28:53

Winners And Losers: AI Versus PMI

It was a confusing day on the markets on Thursday as AI related Stocks drove higher on Nvida results, while weak purchasing managers index (PMI) readings from Australia and Japan, together with FED signals for higher rates for longer saw Asian traders favour the dollar, as business activity in both countries slowed through February.

NVIDIA Corporation rose as much as 10% in U.S. aftermarket trade after clocking stronger-than-expected fourth quarter earnings, while its revenue guidance for the current quarter was also above street estimates.

Gains in tech also saw the Nikkei reach an intraday record high, crossing levels last seen in 1989 before the unwinding of a massive speculative bubble through the 1990’s and 2000’s.

However, elsewhere most Asian currencies retreated on Thursday, while the dollar stemmed recent losses as a slew of signals from the Federal Reserve showed that the central bank was likely to keep interest rates high in the near-term.

The Australian dollar was flat as preliminary PMI data for February showed sustained weakness in business activity. The Judo Bank Flash Australia Composite PMI® Output Index* posted 51.8 in February, up from 49.0 in January. The latest reading signalled that private sector activity returned to growth for the first time in five months and at the fastest rate since April 2023. However, while Australia’s private sector activity improved midway into the first quarter, growth was driven solely by the service sector where service providers reported increased enquires from a widening of customer bases, supporting an expansion in output and employment.

However, in contrast, manufacturing new orders fell again, sending production down at the fastest rate since the worst of the COVID-19 pandemic in 2020. Manufacturers continued to see high interest rates and soft conditions dampening demand.

And combined with recent stronger-than-expected wage price index data, driven by a raft of negotiated settlements across both the private and public sectors, which were released on Wednesday, drove traders to pricing in a greater chance that the Reserve Bank of Australia will keep interest rates higher for longer.

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Winners And Losers: AI Versus PMI

00:00 / 00:11:21

The RBA Is Trapped: With Tarric Brooker…

Journalist Tarric Brooker joins me for a Friday review, and this week we look at the RBA and how it is trapped thanks to conflicting data.

He also walks through some important slides on property and China. Here is the link to the slides: https://avidcom.substack.com/p/dfa-chart-pack-16th-february-2024

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The RBA Is Trapped: With Tarric Brooker...

00:00 / 01:07:27

Unemployment Wobbles Higher In January, But Don’t Expect Quick Rate Cuts!

Last month Australian employment surprisingly tumbled in December, snapping four months of gains and sending the currency lower as traders boosted wagers on the Reserve Bank switching to policy easing this year. The economy had shed 65,100 roles, led by the biggest monthly drop in full-time employment since the height of pandemic, but unemployment held at 3.9%, cushioned by a sharp fall in the number of workers seeking jobs.

Now we got the next update from the ABS which showed that the economy added just 500 roles in January, confounding expectations for a 25,000 gain and well shy of numbers needed to hold down the jobless rate.

Unemployment advanced to 4.1% from 3.9% while the participation rate was steady. The number of people considered officially unemployed increased by 22,000.

“This is another sign of moderation in jobs demand,” said Diana Mousina, deputy chief economist at AMP Ltd. “I still don’t think that you can justify a near-term rate cut right now because the labor market still looks tighter than before the pandemic. It’s loosened, but not enough to get worried about.”

NAB’s Tapas Strickland noted the labour market was still tight and said the central bank would likely wait for next month’s data before drawing any firm conclusions. “If the lift in the unemployment rate is sustained, then that would suggest a softening in the labour market is occurring faster than the RBA’s track, which could give the RBA greater confidence in their forecasts of inflation heading back to the mid-point of the band,” said Mr Strickland.

But frankly, the numberwanging is all over the shop.

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Unemployment Wobbles Higher In January, But Don’t Expect Quick Rate Cuts!

00:00 / 00:12:27

First Time Buyers Are At The Pinnacle Of The Building Defects Boom!

I have been covering the disgusting story of construction defects across Australia for some time. In January we published a post titled “Wanted: More High-Rise Purchasers Willing To Play Russian Roulette! First Time Buyers are the biggest victims!

And lets be clear, while the problem is Australia-wide, New South Wales does appear to be at the epi-centre thanks to the privatisation of building inspections, the drive for quick construction at low cost, and unprecedented demand to meet supply. And of course recent proposed planning changes means more high-rise more quickly built. The disaster continues.

There are no real guarantees on current new construction, despite recent changes. So my message to first time buyers who are already under the pump financially, is to be very careful. Make sure you do your own due diligence. Caveat Emptor!

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First Time Buyers Are At The Pinnacle Of The Building Defects Boom!

00:00 / 00:06:11

Is Negative Gearing The Next Target?

Interesting to see the momentum now turning to discussion of whether the Government intends to tackle negative gearing having U-turned on the tax cuts.

As The Conversation put it, there are two things the prime minister needs to get into his head about tax. One is that saying he won’t make any further changes no longer works. The other is that negative gearing doesn’t do much to get people into homes.

Australia’s Treasury has begun publishing estimates of the cost of the present unfocused system of negative gearing. Its latest, released last week, puts the cost at $2.7 billion per year, to which should probably be added a chunk of the $19 billion per year lost as a result of the capital gains concession.

Albanese is normally cautious. But as he is showing us right now with his rejigged Stage 3 tax cuts, there are times when he is not. If he really wants to throw everything he has got at building more homes, he knows what to do.

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Is Negative Gearing The Next Target?

00:00 / 00:08:09