Economics – Page 4 – Digital Finance Analytics (DFA) Blog

The Noise In The CPI Data Machine!

When you are totally data dependant, as the FED is, noise in the incoming data is always going to be an issue, because signal and noise might not be aligned. There was a classic case yesterday as we got the latest read on the Consumer Price Index for the US from the Bureau of Labor Statistics.

Superficially at least, underlying US inflation rose more than forecast in September, representing a pause in the recent progress toward moderating price pressures, boosted by housing and food, which accounted for over 75% of the advance. Goods prices rose as well after reliably falling over the past year.

I have discussed before the disconnect between real lived experience of inflation and the official figures before, but if we break down inflation into its four main components, we find that it’s substantially all about services at this point. That’s been true for a while. Goods prices are deflating, but helped cause some of the disappointment because that’s happening less quickly than earlier in the year. In fact, food prices and air fares rose more than expected, even as shelter costs eased. That would make continued jumbo interest rate cuts difficult.

While the great spike in price rises that came the year after the pandemic has run its course, what remains is grinding down the services inflation that followed the rest, and that tends to be driven by wages.

So whether the CPI data is really signalling a slowing in reductions to inflation is questionable, but it does suggest the FED might be reluctant to go 50 basis points next meeting. And actually, the latest bond pricing suggests markets are also changing tack.

When all you have is data dependence, expect more volatility as the data or noise shifts around.

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Too Late! Kiwis Get Another Large Rate Cut, With More To Come…

Poor Kiwi’s have been hit by some of the highest interest rates in the western world, thanks to the aggressive OCR hikes from their Central Bank, as high migration stoked inflation, but still saw a recession. Then the RBNZ turns turtle and started to cut rates, as migration started to fall, along with home prices, and now they have another rate cut to contend with, as the economy remains weak, and international factors could push inflation higher again.

All up New Zealand’s economy has stalled, unemployment is rising and house prices are falling as the prolonged period of high borrowing costs curbs demand. Economists say inflation is now slowing rapidly, and some have warned it may undershoot the 2% midpoint of the RBNZ’s 1-3% target range. It’s a mess, and an object lesson in the impacts of long and variable lags.

This week, New Zealand’s central bank cut interest rates by half a percentage point, stepping up the pace of easing as policymakers become more concerned about the economic slowdown.

The Reserve Bank’s Monetary Policy Committee lowered the Official Cash Rate to 4.75% from 5.25% Wednesday in Wellington. It is the RBNZ’s second straight reduction after it began its easing cycle with a quarter-point cut in August. The decision was a policy review, which is not accompanied by fresh economic forecasts or a press conference.

ASB’s inflation forecast suggests a risk that inflation undershoots the 2% midpoint of the 1% – 3% inflation target. The fallout of aggressive monetary policy will stay with Kiwi’s for a long time. And the road remains bumpy at best. No wonder the number of New Zealand citizens leaving is up significantly!

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Too Late! Kiwis Get Another Large Rate Cut, With More To Come...

00:00 / 00:10:33

Is The RBA About To Pivot On Interest Rates?

The RBA after the September monetary policy meeting suggested that the official cash rate would remain on hold for the foreseeable future, noting that the underlying inflation rate of 3.9% over the year to the June quarter “is still some way above the midpoint of the 2%–3% target range”.

The RBA has started to talk about scenarios, and this was reemphasised in the minutes of the meeting which was released Tuesday. As well as their current stance, the Minutes considered two scenarios that would justify financial conditions needing to be less restrictive than currently:

(i) if the economy proved to be significantly weaker than expected and this placed more downward pressure on underlying inflation than expected (due to higher household savings and/or if the labour market weakened more sharply than forecast); or

(ii) if inflation proved less persistent than assumed, even without weaker-than-expected activity.

So that begs the question, is the RBA about to pivot?

Well, CBA’s Gareth Aird who has been consistently forecasting rate cuts sooner for months now, than most of the other bank economists (I wonder why) suggests that We believe the introduction of these two scenarios that would justify less restrictive financial conditions provide an insight into the Board’s reaction function that could see the RBA commence an easing cycle this calendar year (in line with our base case).

Deputy Governor Andrew Hauser speaking at an event hosted by the Walkley Foundation said that despite the September minutes removing the line that “it was unlikely that the cash rate target would be reduced in the short term” the Bank had not change its tune arguing that its meeting minutes were not a particularly dovish message. The minutes also showed that board members discussed scenarios whereby interest rates risked remaining higher for longer or could be tightened further, conferring further pain on borrowers. It all boils back to the demand supply problem in the economy, where if demand remained stronger (perhaps thanks to tax cuts or government handouts – that’s my side-note) or stronger than expected performance of the jobs market. In this case the cash rate might need to be noticeably higher than the market path underpinning the August forecasts.

So bottom line, the RBA minutes does not change the game on quick rate cuts, and we must continue to wrestle with higher for longer.

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Is The RBA About To Pivot On Interest Rates?

00:00 / 00:09:06

DFA Live Q&A: Maxed Out – Latest Household And Post Code Analysis

This is an edited version of a live discussion about findings from my household surveys as we look at the financial impact of recent changes in tax, government support and costs. How are households coping, and where are the pressure points?

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DFA Live Q&A: Maxed Out - Latest Household And Post Code Analysis

00:00 / 01:38:07

Who’s Telling Porkies Now?

The unelected, neo-liberal biased International Monetary Fund, one among many technocrat groups which try to impose top-down advice based on their underlying philosophy, recently released their latest advice relating to Australia. Their concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country.

This time the IMF gave a mixed assessment of recent government budgets and whether Treasurer Jim Chalmers and his state counterparts were helping the RBA to tame Australia’s worst inflation outbreak in decades, because they warned the federal and state governments that any further unexpected rise in spending will force the Reserve Bank to keep interest rates high, and that future cost-of-living relief needs to be targeted.

We are certainly seeing some evidence of that in our household surveys, the findings of which I will discuss on Tuesday on my live show at 8pm Sydney time. Some are benefiting from the payments, despite having strong cash flow and savings, whereas for those under financial pressure, the rebates are hardly touching the sides, creating a more unequal story financially speaking. Indeed, One in four mortgage holders have had to skip paying for another expense to prioritise keeping a roof over their head, according to Finder.

This is an important point, because its Dr Chalmers and Finance Minister Katy Gallagher have hinted that they plan to announce another round of household subsidies before the next federal election, as Labor tries to placate voter anger over high inflation.

They also called for a complete overhaul of Australia’s tax system and suggested the government phase out $52 billion of superannuation tax concessions and the $19 billion capital gains tax discount to fund a reduction in personal income and company tax rates.

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Who’s Telling Porkies Now?

00:00 / 00:13:38

Home Lending Booms: But What Have They Got To Hide?

The ABS released their monthly lending indicators for September today, and it showed a strong uptick in new mortgage loans, in contrast to poor household spending trends and confidence overall, though as we will see there are questions about this dataset too. Significantly, we also note the ABS is about to terminate its monthly reporting of new loans data, saying the monthly Lending Indicators publication will transition to a quarterly release.

My observation is different because the monitoring of new loans for housing is an essential barometer for the economy, without the monthly data it will be easier for lenders to continue their push to reduce lending standards (something evidently being supported by the opposition party) and so drive home prices even higher.

So credit for home lending, especially investors is booming. Worth recalling here the RBA’s recent warning that falling interest rates could trigger a property price boom that encourages households to take on too much debt.

As you know my surveys highlight some households are under extreme financial pressure, and I will be discussing this in my live show next Tuesday, so official data on household spending, is also an important indicator. So conveniently, the ABS also released household spending data for August today. However, I have issues with these figures too as this data excludes, Rent and other dwelling services, Electricity, gas and other fuels, Communication Services, Education Services and Insurance and other financial services. IN other words, the spending data is partial and incomplete, and excludes more than half of a typical mortgaged or renting household.

So all up, the spending indicators are not really meaningful, yet the ABS will be enhancing the Monthly Household Spending Indicator and ceasing the Retail Trade publication after the June 2025 reference period. On the other hand, the data on lending will be only released four times a year.

This is another example of data not fit for purpose, and I assume the financial pressure the ABS is under. But it does beg the question. What have they got to hide – and who is pulling their strings?

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Home Lending Booms: But What Have They Got To Hide?

00:00 / 00:13:35

Don’t Be Misled By Vendor Discounting!

Are property markets morphing into buyers markets and vendor dropping their asking prices? Well, according to recent news corp articles, home seekers are bagging properties for an average of up to 15% below the list price in pockets of Sydney.

Vendor discounting tends to reflect price growth recorded a few months ago, rather than signalling the direction of future price growth. But its complex, Especially now.

Because of the over quoting and under quoting issue, I think it is really very hard to get a read on the true vendor discounting. The averages quoted are often misleading, there is considerable variation, even within the same areas.

Bottom line, is more than ever it is important to understand the granular data in the area you are looking at, rather than the averages, which mask what is really going on. In fact in my live show next Tuesday we will do another deep dive into my data at the post code level, so mark you diaries for that. Meantime, take vendor discounting with a truck load of salt.

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Don’t Be Misled By Vendor Discounting!

00:00 / 00:12:38

Will Kiwis Say “Hello” To Deflation?

Compared to the weak RBA rate of 4.35%, the Reserve Bank of New Zealand, lifted earlier and higher, and has begun to cut rates as the New Zealand economy slipped into recession. Next week we will get the next RBNZ rate decision, and a new survey has show that although New Zealand business sentiment is improving a window has opened to allow a cut interest rates of 50 basis points. The RBNZ has forecast around 2.5% of rate cuts over a 2.5 year period.

The contrast with Australia is interesting, because the RBA has left rates at a lower rate trying to preserve the gains in employment, whereas the RBNZ lifted more aggressively and tipped the New Zealand economy into a recession. Neither outcome is great, showing the problem with blunt monetary policy tools.

In addition, the latest New Zealand migration stats reveals a sharp moderation in net overseas migration, a critical factor working against economic growth. And worse, a large number of citizens are emigrating from New Zealand, replaced by poorer migrants from developing nations according to Stats NZ. As a result, annual New Zealand’s population growth is slowing, which will moderate demand. And of course New Zealand’s economy is stuck in a protracted per capita recession and unemployment is rising fast.

All up, clearly more rate cuts are coming, and a period of falling prices – deflation – could well be on the cards. As a result, the RBNZ will need to front load those future rate cuts, so 50 basis points next week are highly likely.

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Will Kiwis Say “Hello” To Deflation?

00:00 / 00:11:19

DFA Live Q&A HD Replay: Investing Now: With Damien Klassen

This is an edited version of a live discussion with Damien Klassen, Head of Investments at Nucleus Wealth and Walk The World Funds. Given the strength of the markets in recent days, and the China stimulus programme, what’s ahead, and how should you position given the level of volatility and uncertainty out there?

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DFA Live Q&A HD Replay: Investing Now: With Damien Klassen

00:00 / 01:25:51