The Reserve Bank of Australia (RBA) held its fifth meeting of 2024, leaving the official cash rate at 4.35%.
With markets moving significantly as we speak, there has never been so much interest in economic data like inflation, with a range of stakeholders looking for local direction. We started with US Fed chairman Jerome Powell's comments around interest rates; stating cuts would be delivered if inflation declines and growth remains stable. Bond yields fell on this statement.
In recent days, equity markets and bond yields fell (crashed in some markets) on global concerns around the growing likelihood of a recession. The economic game changes if these movements are sustained.
We have often talked about sensitivity to data, and the US employment data (see below) whilst well below expectations, didn't seem wildly out of line. Though the data sent fears of an imminent economic slowdown through global markets. They have either got this wrong, or if they are right, there is a hard landing for the global economy.
For the record, and depending on how you measure inflation, the local annual rate fell to 3.9% from 4.0%, which is the lowest for 2 years. There was mixed news in the headline result, obviously housing and related costs still remain hard to shift. Rising or fall rates have divergent benefits and risks for the economy.
The local share market was initially excited by the actual inflation result, climbing to new highs until last week's global behaviours.
Low unemployment, a solid local share market and a strong property market should have us feeling pretty good. Right?
Actually no. The ANZ Roy Morgan Australian Consumer Confidence continued to report weak consumer sentiment with confidence well below the neutral level of 100 points, despite the recent tax cuts that delivered a spike in confidence.
The NAB SME Quarterly Business Survey showed that business conditions held steady but remained below their long-run average. Anecdotally, we hear SMEs talking about a sudden fall in demand, especially for any business connected to the years of wasteful Government spending.
With a pause at the June 2024 meeting, the RBA commentary has been acknowledging variable economic data. "The recent data have been mixed but, overall, they reinforced the need to remain vigilant to the upside risks to inflation", said Governor Bullock and ended with, "The Board does need to be confident that inflation is moving sustainably toward target and it will do what is necessary to achieve that outcome."
With underlying inflation still running at 1% quarterly (near 4% in annual terms) and still above the RBA’s 2-3% annual inflation target, the next Statement of Monetary Policy (SMP) will be relevant. The SMP includes an assessment of current economic and financial conditions, and the outlook and risks for the period ahead. We will get a good gauge of their thinking then. Bond markets take note.
The All Ordinaries market showed black ink initially, then was part of the significant global falls ending the last month in the red.
There was selling after US data showed the economy gained only 114,000 jobs last month – against an expectation of 175,000 and the unemployment rate rose to 4.3% as a result. Markets reacted swiftly and Australia ended up around 3% lower on the month. As we speak, looks like that is stabilising.
Sanity for many will be how the coming reporting season plays out. Sentiment or real?
Keeping the macro-economic trends going, we compare our equity markets index to other markets internationally. Looking for arbitrage between markets and the impact of other local drivers including interest rates. The periods of time hide the ups and downs and some of the aligned long term growth challenges for both the UK and Australia. Noted, an interesting month to kick this off.
|
Country |
Mark |
1 Month |
6 Months |
1 Year |
5 Years |
|
Australia |
All Ords |
-2.6% |
4.0% | 4.5% | 17.9% |
|
Germany |
Dax |
-7.5% |
1.0% | 7.1% | 46.1% |
|
Japan |
Nikkei Dow |
-23.1% |
-13.4% | -2.4% | 52.8% |
|
UK |
FTSE |
-3.3% |
4.2% | 5.0% | 9.4% |
|
USA |
Dow Jones |
0.4% | 3.5% | 12.0% | 51.6% |
|
Average |
-7.2% | -0.1% | 5.2% | 35.6% |
Concerns of the weaker global economic outlook contributed to a drastic slump, with markets now concerned in a hurry about the state of the US economy. Japan (crashed 23% from its record high last month), is very volatile at a time when monetary policies settings are changing and their currency strengthens, causing the music to stop for their exporters.
The market has swung wildly and quickly last week, and totally against media street's talk of the direction of rates. All of a sudden, a big fall in rates is now priced in over the next year.
As a result, the graph is a downhill one, with an adjustment of a massive 70 basis point downward adjustment in the ASX Cash Rate Futures, bringing rate cut expectations forward. We have seen this story before though.
The RBA will now wait to see what unfolds overseas and locally too.
Before the action of the last few days, we already saw several central banks easing rates. This was led by the UK, as inflationary pressures start to moderate across economies. There is still a very cautious sentiment with central banks but markets are in a hurry again to price in interest rate falls. The latest bond market results will test things quickly.
New Zealand's cash rate remained at 5.50%. Their meeting minutes were another surprise to markets, with no mention of a rate increase in the comments, but rather confidence that inflation would return to target band this year. This was a big shift from the last meeting.
The U.S. remained at 5.50% at their July meeting but Chairman Powell was highly directive around the direction of rates, barring surprises they will be cut. Yields tumbled on the back of the comments, and now further again. Their yield curve is widely inverted. The market will go crazy if cuts don't eventuate.
In the UK, there is a lot happening, especially for the cynics, as The Bank of England is delivered a rate cut by 25 points to 5.00% at its July meeting. Right after the election was done and dusted too. Annual inflation has fallen towards 2% and despite the markets seeing it as a certainty - it was a tight 5-4 vote to cut.
Canada made the news again with another cut of 25 points to 4.50%. The Bank of Canada said more reductions in borrowing costs were likely if inflation continued to reduce in line with expectations. Unemployment climbing over 6% also forced their hand.
Before posting any changes today we compare central bank cash rates and their longer term 10-year bond yields. Yields fell suddenly or the prices of bond went up.
So despite the falls in some short-term rates (Canada, China, UK) the dramatic change in the long-term outlook, meant that yields on the 10-year fell by more. There is red ink everywhere.
|
Country |
Cash Rate | 10 Year Bond | Spread |
|
Australia
|
4.35% | 3.90% | -0.45% |
|
Canada
|
4.50% | 3.04% | -1.46% |
|
China
|
3.35% | 2.11% | -1.24% |
| Germany | 4.25% | 2.11% | -2.14% |
| India | 6.50% | 6.86% | 0.36% |
| Japan | 0.25% | 0.75% | 0.50% |
| New Zealand | 5.50% | 4.15% | -1.35% |
| Singapore | 3.42% | 2.86% | -0.56% |
| UK | 5.00% | 3.78% | -1.22% |
| USA | 5.50% | 3.70% | -1.80% |
| Average | 4.26% | 3.33% | -0.94% |
In the US, markets are now pricing a 70% chance of a 0.5% rate cut in September, with around 1.50% in total easing priced in over the next year. Wow!
Yield curves therefore are heavily inverted, again the battle begins between markets and central banks. Oh, and a little thing called inflation.
A shout out for Japan, which finally increased its interest rates from emergency settings. For me, along with being a wonderful country to visit, its economic blueprint and history is the most fascinating in the world. Japan's system of economic management is probably without parallel and their government's influence over the economy is strong. So their decision to plan to halve bond purchases, underscores the determination to normalise monetary policy. But markets don't like surprises.
Australian money markets went crazy first on the local inflation result and the US central bank comments, then the yield fall in the US. The yield on the 10-year dropped around 40 basis points and the yield on the 3-year fell 25 basis points back to where it was a little while ago at 3.75%
Australia is back to an inverted yield curve as the market adjusts quickly to another new thing. Overreaction? Time will tell.
| Month | Cash Rate | 180 Day | 10 Year |
|
Jul 23
|
4.10% |
4.67% |
4.03% |
|
Aug 23
|
4.10% |
4.70% |
4.06% |
|
Sep 23
|
4.10% |
4.37% |
4.02% |
|
Oct 23
|
4.10% |
4.41% |
4.48% |
|
Nov 23
|
4.35% |
4.73% |
4.72% |
|
Dec 23
|
4.35% |
4.58% |
4.49% |
|
Feb 24
|
4.35% |
4.43% |
4.02% |
|
Mar 24
|
4.35% |
4.49% |
4.02% |
|
May 24
|
4.35% |
4.68% |
4.51% |
|
June 24
|
4.35% |
4.60% |
4.28% |
|
August 24
|
4.35% |
4.58% |
3.90% |
|
Annual Trend |
+0.25% |
-0.09% |
-0.13% |
The market for 180-days was up and then down as the outlook for interest rates changed. There was dramatic fall in the 10-year rate as previously discussed. The fall in yield was significant right along the curve. The 3 year bond yield fell 60 points to 3.40% in a week, which is a big move. As we go to air, yields are heading north from these numbers suggesting an over reaction.
Again, it is dangerous and in fact stupid, to predict money and bond markets, but our earlier call that yields had already peaked is looking a sound one. It will be interesting to see how asset classes that are sensitive to rate settings (property) react going forward.
The latest residential monthly property results from CoreLogic (see table below) showed a 0.5% and 0.4% increase to Capitals and Regionals during July respectively.
| Location | Month | Quarter | Annual |
|
Adelaide
|
1.8% |
5.0% |
15.5% |
|
Brisbane
|
1.1% |
3.8% |
16.0% |
|
Hobart
|
-0.5% |
-0.5% |
-0.1% |
|
Melbourne
|
-0.4% |
-0.9% |
0.2% |
|
Sydney
|
0.3% |
1.1% |
5.6% |
|
Perth
|
2.0% |
6.2% |
24.7% |
|
All Capitals
|
0.5% |
1.9% |
7.9% |
|
All Regionals
|
0.4% |
2.0% |
6.9% |
The run in Perth, Adelaide and Brisbane values continues. We are now at a stage where the median value of housing in Adelaide and Perth are about to join Brisbane and go past Melbourne. Median values can be misleading and it depends on the depth and type of stock for example. Though it is still a significant macro insight.
There is evidence that Victorian landlords remain motivated sellers, with the new state tax changes, migration and other "issues" causing a growth in the number of listings.
No-one is an expert in forecasting real estate trends, though there is a growing chorus of commentary suggesting Melbourne looks like good value when this all settles down and the next economic cycle kicks into gear.
There are macro trends in the economy in commercial property where the overall vacancy rate has fallen to 14.6%. This Property Council of Australia (PCA) data still means vacancy is 4% above the historical average but there are signs of stabilisation.
CBD vacancy rate was at 13.6% nationally, while non-CBD is falling but still at 17.2%. Sydney and Brisbane have the lowest vacancy rates. Melbourne is a weak story in office, but surprisingly retail is performing relatively well.
The PCA noted that lower-grade office buildings are being withdrawn from the market, to be repurposed through refurbishments or converted into residential spaces or hotels. Time will tell.
A fall in interest rates could quickly get some enquiry again and scoop up some liquidity for the commercial property market.
The Australian dollar was weaker this month, with red ink everywhere except NZ.
It is a similar theme to last month following weaker commodity prices and ongoing concerns about the mid-term health of the Chinese economy, plus the recessionary concerns globally.
The story of the world economy was Japan's currency bounce back, significant. Though there is divergent data everywhere in their market. Crashing stocks, booming property. Expect volatility ahead.
A reminder that the schedule of RBA meetings has changed from 11 in a year to 8, held 5-7 weeks apart. Monetary Policy Announcements will be made at 2.30pm on the following three days left in 2024:
• 24 September
• 5 November
• 10 December
We hope you enjoyed our latest Economy & Property post.
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