It looks like double trouble for the economy with inflation over 6% and the economy set to slow.
Yesterday we saw inflation hit 6.1%, which was better than the expected 6.3% economists tipped. However underlying inflation was a little higher than the Reserve Bank wanted.
Meanwhile, Treasurer Jim Chalmers addresses the nation today and will tell us the economy, which was growing at a solid 3.75%, will slow to 3% this financial year and 2% next year. But there’s no talk of a recession that kills jobs and businesses, so we should contain our fear and loathing.
2. Talk of plunge in property prices
The not-so-great hip pocket news continues if you own a home and you’re paying higher interest rates, with another forecaster tipping a big fall in house prices.
Proptrack is the research business of real estate website business REA and its economics team predicts that house prices will fall by 15% nationally by the end of 2023. And while it sounds like bad news, this is lower than the 20% and 30% calls from other forecasters. This follows a whopping 34% rise in property prices since February 2020, when the pandemic was declared.
3. US market up, expect Aussie market to rise today
But it’s not all bad news, with local stocks expected to surge today with the US borrower copping another 0.75% rise in interest rates but share prices went sky high. Our stock market plays follow the leader with the USstock market and we saw share prices spike, with the tech-heavy Nasdaq Index up over 3% following the US central bank raising interest rates by a big 0.75%. Why did that happen? Well, central bank boss Jerome Powell hinted that he’d slow interest rate rises. And investors, who’ve been expecting more big rate rises, liked what they heard.
4. Dreamworld spends taxpayer millions for koala research on rollercoaster
Environmentalists are outraged after it was revealed $2.7 million in Queensland state funding, originally meant for a koala research facility, was instead redirected to build a theme park rollercoaster. The funding was originally allocated to increase the population of the endangered Australian marsupial after they faced bushfire, drought, and habitat loss that decimated their numbers in the wild.
5. Market overview
ASX futures were up 60 points or 0.9 per cent to 6783, with AUD down 0.2% to 69.26 US cents
Investment markets & key developments: Reliable indicators yet to signal imminent recession
Share markets tumbled again over the last week as markets moved to anticipate even more aggressive rate hikes from central banks after the release of higher-than-expected US inflation data.
For the week (so far) global shares are down about 6% and Australian shares are down about 7%. The fall in the Australian share market was led by IT stocks which have been under pressure all year, but also resources, retailers and financials as worries increased about the economic outlook. The rising risk of global recession also led to falls in oil, metal and iron ore prices. Bond yields generally rose to new highs with the Australian 10-year bond yield rising above 4% for the first time since 2014. While the AUD initially plunged below $US0.69, it clawed back above $US0.70 as the USD fell.
From their all-time highs last year or early this year US shares have now fallen 24%, global shares have fallen 21% and Australian shares have fallen 15.5%.
As always the most speculative “assets” are getting hit the hardest including the pandemic winners of tech stocks (with the Nasdaq down 34%) and cryptocurrencies (with Bitcoin down 70% from its high last year). Cryptocurrencies surged with semi-religious fervour around the marvels of blockchain, decentralised finance, NFTs, freedom from government, promises that it's an inflation hedge, etc, only to become a bandwagon fuelled by speculative extrapolation on the back of easy money and low interest rates. Trying to disentangle its true fundamental value from the speculative mania becomes next to impossible. And now that the easy money and low rates are reversing, the rug is being pulled out from under the mania.
We remain of the view that a global recession can be avoided but with central banks now hiking rates aggressively the risks have increased to the point that its now close to 50/50. Either way, it’s still too early to say that shares have bottomed.
First, the bad news:
Despite widespread expectations to the contrary, US inflation has gone to a new high and other countries including Australia (with its partly home-grown electricity crisis) are still likely to see higher inflation ahead too. Energy prices – particularly for oil - are yet to put in a decisive top and it's hard to be confident that the worst is over for inflation until they decisively stop rising.
The Fed has now stepped up rate hikes to 0.75%. While Fed Chair Powell said he doesn’t expect 0.75% hikes to be “common” and that the Fed will be “flexible”, the Fed is now signalling (via its so-called dot plot of Fed officials’ rate hike expectations) more than 1% higher rates this year and next than it was just 3 months ago and still needs to see “clear and convincing” evidence of falling inflation.
Source: US Federal Reserve, Bloomberg, AMP
Ever more Fed tightening is boosting the risk of a US recession with parts of its yield curve flirting with inverting (ie short-term rates above 10-year bond yields) again.
Source: Bloomberg, AMP
While the ECB has announced measures to combat “fragmentation” (or a blowout in bond yields in countries like Italy relative to Germany as we saw in the Eurozone debt crisis) – with the flexible reinvestment of funds from maturing bonds and the development of a mechanism to combat spread blowout – this really just clears the way for more aggressive ECB rate hikes.
The Bank of England raised its policy rate by another 0.25% to 1.25% and now expects inflation to peak slightly above 11% this year and remained hawkish, indicating it's prepared to act more forcefully if necessary, despite expecting the economy to contract this quarter.
The Swiss National Bank hiked rates by an unexpected 0.5% taking them to -0.25%. Taiwan’s central bank also raised its policy rate albeit by less than expected.
RBA Governor Lowe in a TV interview indicated that the Bank now sees inflation rising to 7%, that it “will do what is necessary” to bring it back to 2-3% and reiterated that “it's reasonable … the cash rate gets to 2.5%”. Taken together with another strong jobs report for May it leaves the RBA on track to hike again at its July meeting by another 0.5%.
While the move by the Fed to hike by 0.75% at its June meeting suggests a risk that the RBA may do the same as it faces similar pressures, we lean toward the view that it will stick to 0.5% moves given the RBA meets monthly whereas the Fed meets 6-weekly, with inflation and wages pressures not as strong here as they are in the US.
We continue to see the peak in the cash rate being about 2.5%, but it could come earlier given the RBA’s shift towards a more aggressive approach.
Market expectations for the cash rate to rise to nearly 4% by year-end and above 4% next year still look too hawkish though.
A rise to 4% for the cash rate would see average discounted variable mortgage rates rise to about 7.5% (from about 3.5% in April). When combined with the surge in fixed mortgage rates (which have already gone from about 2% to about 5%) it would likely cause real problems for consumer spending, a big spike in mortgage stress (as debt interest payments will more than double from earlier this year) and push property prices down by 20-30%. This indicates it's unlikely to happen as it would crash the economy and ultimately push inflation back well below the RBA’s target.
On the positive side though:
Major central banks are serious about controlling inflation and while this comes with short-term risks, given the 1970s experience it's arguably positive for the longer-term both from an economic perspective (as high inflation is ultimately bad for productivity and unemployment) and for investment markets.
There are more indications that the US jobs market may be starting to cool a bit – with jobless claims drifting up and indications that wages growth may have peaked. This may take pressure off services inflation which has been picking up.
Our Pipeline Inflation Indicator continues to point to a peaking in US inflation. Of course, the process of peaking can always be messy and drawn out.
The Inflation Pipeline Indicator is based on commodity prices, shipping rates and PMI price components. Source: Macrobond, AMP
Reliable indicators of recession have yet to signal one is on the way – e.g. the gap between the 10-year bond yield and Fed Funds rate (which has always preceded recessions since 1970) is yet to come close to inverting. See the second chart in this report above. And the Fed Funds rate is still less than nominal GDP growth. It’s the same in Australia.
Source: Bloomberg, AMP
Some leading economic indicators like consumer confidence including in Australia are now weak suggesting that central banks shouldn’t have to raise rates too far to get a desired slowing in demand and hence inflation. (Of course, this also brings with it the risk that they miscalculate and overtighten).
Forward price to earnings multiples have fallen sharply since the start of the year – down from 22 times to 16 times now in the US and down from 19 times to 14 times in global and Australian shares – making shares cheaper. This has been due to falling share prices and still rising earnings.
Signs of capitulation are becoming more evident, e.g. more indiscriminate selling of shares, and this is positive from a contrarian perspective.
While the bottom line remains that shares are likely to be higher on a 6-12 month horizon, it's still too early to be confident that we have seen the highs for bond yields and the lows for shares in the near term.
Australian minimum wages to rise 5.2%, with minimum award wages to rise 4.6% from 1 July.
Given this will directly impact about 22% of the workforce it will add about 0.5% to wages growth compared to the last financial year. The risk is that this will add to broader wage claims in the economy, hence to inflation expectations and the risk of a wage-price spiral putting even more pressure on the RBA to raise rates further. However, there is a danger in exaggerating the impact as the tight labour market – with labour market underutilisation (unemployment plus underemployment) now back to levels last seen in 1982 – suggests that wages will go up anyway including for many of those on minimum rates.
What to watch over the next week?
Monetary policy in the US and Australia is likely to dominate in the week ahead. The US Fed Chair Powell's Congressional testimony (Wednesday and Thursday) is likely to be hawkish, reiterating the Fed's commitment to continue tightening until there is “clear and convincing” evidence that inflation is falling. This is unlikely to reduce market expectations for a rise in the Fed Funds rate to 3.5% by year-end and to well above 4% by mid-next year.
Similarly in Australia, the minutes from the RBA's last meeting (Tuesday), a speech by RBA Governor Lowe (also Tuesday) and his participation in a panel discussion (Friday) are all likely to be hawkish, reiterating the RBA's desire to keep inflation expectations down and commitment to bring inflation back to target. The focus is likely to be on any indications as to how high the RBA thinks it may need to raise interest rates.
Business conditions PMIs (Thursday) for the US, Europe, Japan and Australia will provide a guide as to how much global monetary tightening and supply constraints are impacting the growth outlook and price and cost components will be watched for further evidence of peaking.
US existing home sales data (Tuesday) are likely to fall but new home sales (Friday) are likely to rebound.
Japanese core inflation for May (Friday) is likely to edge slightly higher to 0.9%yoy.
The NSW State budget (Tuesday) may contain measures on housing affordability and stamp duty reform.
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5 things you need to know today
1.Former NSW Premier Gladys will not contest the federal election
Former NSW Premier Gladys Berejiklian has confirmed she will not contest the federal election. She announced on 2GB radio that “I won’t be contesting the federal seat of Warringah or any other seat for that matter. I’m going in a different direction.”
2.Beautiful LEGO installations have sprung up in time for Christmas
Lego have teamed up with Sydney Opera House to Rebuild The World, and four giant LEGO Christmas baubles have sprung up overnight at the forecourt of one of Australia’s most famous landmarks.
3.Largest Latin American financial group after IPO
A Brazilian financial technology company backed by Tencent and Warren Buffett, has become the largest Latin American financial group after IPO. Nubank made its market debut Thursday on the New York Stock Exchange and is now trading under the ticker symbol “NU”. The company raised $2.6 billion at an implied valuation of $41.4 billion.
4.Amazon has been fined $1.7 billion AUD
Italy’s competition authority has fined Amazon 1.13 billion Euros or or roughly $1.7 billion AUD at today's exchange rate. The ecommerce giant was accused of giving preferential treatment to merchants who also use its logistics service.
5.Nasdaq moves lower once again
ASX futures down 12 points or 0.2 per cent to 7366 near 7.10am AEDT. AUD -0.4% to 71.46 US cents and Wall St: Dow +0.01% S&P 500 -0.4% Nasdaq -1.6%
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5 things you need to know today
Stock market fears subside
Stock market fears about the debts of China-based property group, Evergrande, creating a crash have subsided, for now. Our stock market rose yesterday on reports Evergrande would make interest payments on its $400 billion worth of loans, as the Bank of China increased the supply of money to hose down fears of the company’s collapse that could lead to financial markets crashing. Overnight, Wall Street was optimistic on the news, with the Dow Jones up strongly before the close. Let’s hope it lasts.
Ouch! That’s so hot!
The Reserve Bank is now starting to worry that surging household debt linked to booming property prices could hurt our financial system. Our central bank is starting to worry about how its low interest rates policy has caused Sydney home prices to rise by 26%, 20% in Brisbane and Melbourne 15.6%. However, the Bank isn’t planning to raise rates but it could force banks to lend less and say ‘no’ more often to borrowers!
China policy hits our coal
After hitting our exports of wine, seafood, barley and lately iron ore, reports say China is now going after our coal producers, again. China had decided to stop funding the building of coal-fired power stations in other countries, which it was thought would hurt our coal producers, which added $40 billion in exports to our economy last year. However, economist Saul Eslake says our coal goes to Japan, South Korea and India. This China action to stop funding coal-fired power stations is to improve the country’s green credentials ahead of the climate change conference in Glasgow in November.
The Dow is up 1% overnight
The Dow Jones rose 333.48 or 1% to 34,258.32, the S&P 500 gained 41.45 or 0.95% to 4,395.64 and the Nasdaq Composite rose 150.45 or 1.02% to 14,896.85
National Gallery of Australia purchases $14 million sculpture
With it's most expensive purchase yet, the National Gallery of Australia has acquired Australian artist Lindy Lee’s Ouroboros, which the Sydney Morning Herald has described as a '13 tonne, 4 metre-high torus of reflective recycled metal that will be installed in the gallery’s garden in 2024.'
5 things you need to know today
1. Biden says that Australia is the closest ally of the US
US President Joe Biden said that the US "has no closer or more reliable ally than Australia" during a meeting with Prime Minister Scott Morrison in New York. "The United States and Australia are working in lockstep on the challenges that I laid out today in my speech to the United Nations: ending COVID, addressing the climate crisis, defending democracy, shaping the rules of the road for the 21st century," Biden said.
2. Daniel Andrews calls construction worker protests "appalling"
Victorian Premier Daniel Andrews has criticised the violent protests by construction workers and anti-vaxxers in Melbourne this week as "appalling" and "unlawful" ahead of further protests expected today. "What we saw yesterday was an insult to the vast majority of people who are not about wrecking, they're about building," Andrews said.
3. Australia and Austria set to sign strategic partnership
Prime Minister Scott Morrison will sign a new strategic partnership with Austrian Chancellor Sebastian Kurz during his time in New York according to The Australian, which reported that the deal includes a commitment for the two countries to work together on negotiations for a free trade agreement between Australia and the EU, along with "a raft of trade, industry, education and security agreements".
4. UK soft drink manufacturers running out of fizz
The effects of Brexit have continued to effect the UK's food and drink industry with the British Soft Drinks Association warning that some manufacturers "only have a few days of CO2 supply left in reserve". The carbon dioxide shortage is also affecting the UK's meat industry, where the gas is used to stun pigs and chickens prior to slaughter.
5. Nasdaq rises 0.2% on Tuesday
The Nasdaq rose by 32.49 points or 0.22% to 14,746.40 on Tuesday while both the Dow Jones and S&P 500 moved lower. The Dow was down 50.63 points or 0.15% to 33,919.84 and the S&P lost 3.54 points or 0.08% to 4,354.19.
5 things you need to know today
1. Victoria's construction industry shut down for two weeks
The Victorian state government has ordered a shut down of construction in metropolitan Melbourne as well as the City of Ballarat, the City of Greater Geelong, Surf Coast Shire and Mitchell Shire after at least 500 people attended violent protests outside the headquarters of the CFMEU yesterday. "The immediate shut down action is being taken to reduce movement, minimise transmission and allow for the entire industry to appropriately adapt to the Chief Health Officer Directions, including increasing vaccination rates," the government said in a statement.
2. European Union calls Australia's treatment of France "not acceptable"
Following the cancellation of Australia's $90 billion submarine deal with France last week, European Commission President Ursula von der Leyen commented that "one of our member states has been treated in a way that is not acceptable, so we want to know what happened and why". On the negotiations for a free trade agreement between Australia and the EU scheduled for next month, a European Commission spokesperson said it was "analysing the impact of the AUKUS announcement and what this impact would be on this schedule".
3. Premiers lose support for handling of pandemic
56% of voters surveyed in a recent Newspoll by The Australian said NSW premier Gladys Berejiklian was handling the pandemic well compared to a peak of 79% in June last year. 63% said Victorian premier Daniel Andrews was managing the pandemic well, down from a high of 85% in April 2020, while 67% showed support for Queensland premier Annastacia Palaszczuk's handling compared to a peak of 81% in July 2020.
4. Two thirds of millionaires worried about leaving too much inheritance
67% of high net worth individuals are concerned about leaving too much money to their kids according to a survey by The Motley Fool. 59% of the millionaires surveyed said they were worried about money and assets being used irresponsibly.
5. S&P 500 falls 1.7% on Monday
The S&P 500 closed 75.26 points or 1.70% lower to 4,357.73 at the start of the trading week in the US, while the Dow Jones fell 614.41 points or 1.78% to 33,970.47 and the Nasdaq lost 330.06 points or 2.19% to 14,713.90.
5 things you need to know today
1. Do not enter unless you’re jabbed
The
country’s top retailers want the Morrison Government to provide laws that can
make it easy to bar unvaccinated shoppers. Retailers want to protect their
staff, their shoppers and their business profits and stopping unvaccinated
customers tops their shopping list. As restrictions ease, businesses such as Nick
Scali, Rebel Sport, Supercheap Auto and others want legal clarity on how they
can stop unvaccinated shoppers entering their premises.
2. Taxpayer to pay travel testing charges
The Morrison Government will use taxpayer money to facilitate overseas travel by Christmas. International travel will gradually resume once Australia reaches fully vaccinated thresholds of 70% and 80%. And at 80%, unrestricted travel to designated countries will recommence. To make aviation possible, any charges overseas airports impose on travellers for security or medical testing reasons, will be paid by the Morrison Government and you, the taxpayer.
3. Why is our iron price in the pits?
The iron ore price has been cut in half recently and China is the cause, for green and get-even reasons! The falling iron ore price has sent the stock prices of BHP, Rio and Fortescue down ‘big time’ and the cause is China cutting back steel production. But why? First, it’s to cut air pollution and look greener before the Climate Change Conference in November in Scotland and the Winter Olympics in February. And second, to stick it to us for joining the US and the UK in a security deal to curb Beijing’s military muscle flexing in the region.
4. 3-metre wide Boston home sells for $1.7 million
A Civil War era house in the US city of Boston measuring just over 3 metres at its widest point and less than 2 metres in some parts has sold for US$1.25 million ($1.72 million). The 'Skinny House' was apparently built after a feud between two brothers who inherited the land. One built a property while the other was fighting in the Civil War, and when he returned, he built the house to block his brothers's views and sunlight.
5. US indexes end the week in the red
At the close on Friday in the US, the S&P 500 fell 0.57% for the week to 4,432.99 and the Nasdaq fell 0.47% to 15,043.97. The Dow was down 0.07% on a weekly basis to 34,584.88.
5 things you need to know today
1. Other countries fill the gap over Australia's restricted exports to China
After China placed trade restrictions on a wide range of exports from Australia, countries including the US and Canada have reaped the benefits. China Customs data published by the AFR reveal that while imports of Australia barley to China fell from US$264 million to nothing in the first half of 2021 while imports from Canada increased from US$200 million to US$400 million. Furthermore imports from France rose from U$S55 million to US$322 million.
2. 43 superfunds submit over 60,000 data revisions in the lead up to APRA test
The AFR reported that 43 superfunds resubmitted data 60,101 times, 27 times more than a typical quarter, in the four months leading up to the Australian Prudential Regulation Authority's inaugural performance test for MySuper products. 13 superfunds failed the test back in August.
3. Business leaders call for vaccine passports as guidelines
The head of Australian Chamber of Commerce Industry, Andrew McKellar, has shared the frustrations of the business community surrounding confusion about vaccine passports. “Business is looking for National Cabinet to stand up today, to provide some clear guidelines, to get agreement across all levels of government and to stick to the plan,” McKellar told the ABC.
4. Dog and cat duo achieve Guinness World Record
Sashimi the 7 years old Bengal cat and Lollipop the 5 years old Boston Terrier, have set a new Guinness World Record for thefastest 5m on a scooter by a dog and cat (pair) with a time of 4.37 seconds.
5. Both the Dow and S&P 500 close lower
In the US on Thursday, the Dow fell 0.18% or 63.07 points to 34,751.32. The S&P 500 dropped 0.16% or 6.95 to 4,473.75. The Nasdaq Composite rose 0.13% or 20.39 to 15,181.92.
5 things you need to know today
1. Online Aussie business worth more than Telstra!
A
local online design firm, Canva, started by three friends is now worth more
than Telstra, valued at $55 billion. We know this because Canva
co-founders Cameron Adams, Cliff Obrecht and Melanie Perkins are set to raise
$200 million from investors and only in April the company was valued at $20
billion. But with 60 million active users a month, the business’s value has hit
a staggering $55 billion valuation, which has to be one of the greatest local
business success stories ever.
2. Future for Aussie coal looks cooked
Australia
has lost the support of its ally, the USA over our heavy involvement in coal,
ahead of a meeting between President Joe Biden and Prime Minister Scott
Morrison. “The US has isolated Australia over climate change
by siding with the EU and Canada in seeking to end rich country support for
coal-fired power stations”. The Australian reports that this puts
pressure on Australia to do more to cut carbon dioxide emissions in the lead-up
to the UN climate change conference in November. The future for
coal looks cooked!
3. No jab, no job
Big and even smaller firms are set to be vaccination centres soon, but how will employers deal with the medically-exempt worker? Companies such as Telstra and SPC told The SMH that they will be working with employees who have a medical exemption preventing a vaccination. A Telstra spokesman said its vulnerable employees will be found alternative roles out of harm’s way, either on a temporary or permanent basis. However, not all firms are promising to be as flexible, especially for those who won’t be jabbed for other reasons.
4. TikTok COVID case predictor contracts the Coronavirus
Sydney man Jon-Bernard Kairouz who famously 'predicted' NSW COVID case numbers, has ended up catching the virus himself. Kairouz was recently charged after his participation in a anti-lockdown protest in July.
5. The Dow closes up 0.7% overnight
The Dow Jones rose almost 0.7% or 236.82 points to 34,814.39. The S&P rose 0.8% or 37.65 points to 4,480.70. The Nasdaq Composite gained 0.8% or 123.77 points to 15,161.53.
5 things you need to know today
1. OECD calls for tax reform
The Organisation for Economic Co-operation and Development has recommended a range of changes to taxes in Australia "to reduce Australia’s reliance on taxing personal incomes, which leaves public finances vulnerable to an ageing population". The changes put forward by the OECD include an increase to GST and reductions to the capital gains tax discount and private pension concessions.
2. $41 billion in dividends set to be paid out
CommSec has estimated that a total of $41 billion will be paid to Australian shareholders from mid-August, compared to the $21.6 billion paid out in reporting season last year and $25.8 billion in the interim reporting season earlier this year. About $5.5 billion will have already been paid by the end of this week and payouts are set to increase further in the coming weeks.
3. Canva's valuation more than doubles to $55 billion
Australian design platform Canva's valuation has reached US$40 billion ($55 billion) after a US$200 million ($273 million) capital raising led by investment firm T. Rowe Price. The company was valued at US$15 billion ($20 billion) during another capital raising only five months ago.
4. Farmer makes 25,000 jars of jam with surplus strawberries
Strawberry farmer Anthony Sarks from Blackmans Point in NSW has decided to turn the fruit from his 140,000 strawberry plants that is usually picked by tourists into jam. The ABC reported that local jam maker Eric Robinson ramped up production to make 25,000 jars in less than two weeks, compared to the 30,000 jars he usually makes for Sarks each year.
5. US indexes close lower on Tuesday
On Wall Street overnight, the Dow Jones dropped 292.06 points or 0.84% to 34,577.57, the S&P 500 fell 25.68 points or 0.57% to 4,443.05 and the Nasdaq moved 67.82 points or 0.45% lower to 15,037.76.
