The Reserve Bank of Australia (RBA) held its last meeting of 2024, leaving the official cash rate at 4.35%.
As far as economic data goes it is a very mixed bag. Some of the media/commentary can sound like self-interest at times if data is isolated and not viewed collectively. Inflation is still persistent which news cycles translate into slow growth and weak productivity levels. The offset is that Share Markets are at record highs and employment remains strong.
Consumer confidence continues to grow. The ANZ-Roy Morgan Consumer Confidence increased to its highest level (88.4) since May 2022. This is 12 points above the same week a year ago.
Perhaps consumers are feeling better as they trend to saving more. Governments are the ones spending heavily at the moment and that has to stop at some point. We have talked previously about the amount of debt they will need to issue and roll over, which in part, will keep interest rates higher for longer.
Slow Going on Growth, Inflation Sticky
A less than ideal set of numbers for economists is persistent inflation and below trend growth. ABS data shows that inflation increased to 3.5% in October, up from 3.2% last month. This was the result of price pressures across a range of consumer goods and services, coupled with the backdrop of a pending trade war next year between the US and China.
Growth has slowed to a 30-year low at an annualised 0.8% year-on-year, with the more common GDP per Capita measure in the red.
RBA Positioning
With a pause at the November 2024 meeting, the RBA commentary talked about its focus on inflation and that its "trimmed mean" was still out of range.
There was mention of China and the wider world this time; "There remains a high level of uncertainty about the outlook abroad. Most central banks have eased monetary policy as they become more confident that inflation is moving sustainably back towards their respective targets. Public authorities in China have responded to the weak outlook for economic activity by implementing more expansionary policies, although the impact (and in some cases the specific details) of these measures remains to be seen. Geopolitical uncertainties remain pronounced."
It is not likely that the US decision to drop interest rates by another 25 points will influence the RBA’s policy materially. Meanwhile, the Government remains unhappy.
The All Ordinaries market showed black ink, and was in part expected given the fall in bond yields.
Earnings and posted results are mixed while valuations are trading on a much higher multiple than long term averages as mentioned. For example, the CBA dividend yield is under 3% and trading at nearly 30 times earnings, wow!
Again, our equity market index was largely reflective of international markets over the last month.
|
Country |
Mark |
1 Month |
6 Months |
1 Year |
5 Years |
|
Australia |
All Ords |
2.5% |
8.5% | 17.3% | 27.5% |
|
Germany |
Dax |
6.1% |
10.2% | 21.6% | 54.8% |
|
Japan |
Nikkei Dow |
-1.0% |
-0.1% | 21.0% | 67.5% |
|
UK |
FTSE |
2.9% |
0.9% | 10.0% | 14.8% |
|
USA |
Dow Jones |
2.1% | 15.1% | 23.6% | 59.3% |
|
Average |
2.5% | 6.9% | 18.7% | 44.8% |
The record run in the US continues, supported by a seemingly healthy employment market, stable inflation and expectation that the US Fed will continue to cut rates. The thinking is that these conditions will mean a strong market to finish the year and will continue into early next year. After that, who knows.
The 5-year trend shows the relatively dire state of the UK market as capital flows go elsewhere around Europe in particular.
At the risk of sounding nerdy, this is the best graph for some time with signs of stability. There is a settling of expectations with the downward trend mirrored by the fall in the longer term 10-year yield.
As a result, the graph has softened a little with stronger falls priced in for the ASX Cash Rate Futures.
Markets overreacted last month and this looks more in line with expectations.
The story of central banks worldwide is still mainly on easing rates. This was led by NZ, the UK and US with expected moves. Further falls in Australia and NZ may also be tempered with what happens on the exchange rate (see below).
New Zealand's cash rate was crunched another 50 points down to 4.25% which believe or not was less than some expected. This brings the reduction total to 125 basis points since this cycle started in August and markets expect there is more to come for their weakening economy. In time, it will be a fascinating case study on monetary policy strategies between Australia and NZ.
The U.S. are pricing in a good chance of a further cut of 25 points in the meeting this month, though with the economy robust on most measures, there is no certainty that there will be a pattern of further easing.
In the UK, The Bank of England is at 4.75% after a 25 point reduction last time. The Bank of England governor indicated that any further cuts were likely to be gradual with a strong eye to inflation.
Canada delivered a 50-point rate cut last time to 3.75%, and another 50 points reduction is expected when the central bank meets this week. The easing is a proactive effort but many are concerned this is a sign of panic, with adverse results including on their currency.
Before posting any changes today, we compare central bank cash rates and their longer term 10-year bond yields.
Yield curves are becoming more diverse with economies like NZ moving toward a more normal looking yield curve. Canada, China and Germany have low long-term yields in part in anticipation of further strong cuts in their local cash rates.
|
Country |
Cash Rate | 10 Year Bond | Spread |
|
Australia
|
4.35% | 4.25% | -0.10% |
|
Canada
|
3.75% | 2.98% | -0.77% |
|
China
|
3.10% | 1.96% | -1.14% |
| Germany | 3.40% | 2.10% | -1.30% |
| India | 6.50% | 6.74% | 0.24% |
| Japan | 0.25% | 1.05% | 0.80% |
| New Zealand | 4.25% | 4.46% | 0.21% |
| Singapore | 2.77% | 2.70% | -0.07% |
| UK | 4.75% | 4.28% | -0.47% |
| USA | 4.75% | 4.15% | -0.60% |
| Average | 3.93% | 3.64% | -0.03% |
Yields on 10-year US Treasuries fell by 30 basis points over the month which was a welcome sign for markets of things settling a little.
Australia’s longer-term interest rates continue to be in lockstep with the US, so our yields fell by a similar amount. This means that Australia's inverted yield curve returned.
| Month | Cash Rate | 180 Day | 10 Year |
|
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% |
|
Aug 24
|
4.35% |
4.58% |
3.90% |
|
Sep 24
|
4.35% |
4.58% |
3.87% |
|
Nov 24
|
4.35% |
4.64% |
4.55% |
|
Dec 24
|
4.35% |
4.65% |
4.25% |
|
Annual Trend |
+0.00% |
+0.07% |
-0.24% |
This says that the markets overreacted post US election on fears of higher inflation monetary policy settings.
The latest residential monthly property results from CoreLogic (see table below) rose by just 0.1% in November, the weakest result since January 2023. The softening indicates that the 22 consecutive months of growth could be coming to an end.
| Location | Month | Quarter | Annual |
|
Adelaide
|
0.8% |
2.8% |
14.0% |
|
Brisbane
|
0.6% |
2.4% |
12.1% |
|
Hobart
|
-0.1% |
0.4% |
-1.0% |
|
Melbourne
|
-0.4% |
-1.0% |
-2.3% |
|
Sydney
|
-0.2% |
-0.5% |
3.3% |
|
Perth
|
1.1% |
3.0% |
21.0% |
|
All Capitals
|
0.1% |
0.3% |
5.4% |
|
All Regionals
|
0.3% |
1.1% |
6.0% |
Property Trends
NAB & Core Logic's Megatrends Report highlighted a number of longer term property trends. Not surprisingly, the percentage of homeowners has become consistently lower over the last 20 years, with the overall rate of home ownership drifting down to 66%. Limited new supply and increased demand is causing upward pressure on prices and some disengagement with the property market.
This also means a further disconnect between income and mortgage levels. Australia has the second highest Debt to Income Ratio in the world behind only Switzerland - which ironically has one of the lowest levels of home ownership in developed economies.
Asset Rich, Cash Poor?
Whilst income levels and productivity remain stagnant in Australia, the NAB Megatrends Report & ABS data confirmed we are wealthier overall. Combined household wealth reach $16.5 Trillion, which is up from 10.5 Trillion five years ago. The risk of a stronger "Balance Sheet" than a "Profit & Loss" is exposure to any corrections in asset values.
Property remains at the heart of this wealth, with property holdings represented 11.2 trillion of this total household wealth, or 68% of total, up considerably from 6.7 trillion in 2019 or 64% of total.
The nexus between income and assets may deteriorate more materially, with an estimated $5.4 Trillion of wealth estimated to transfer over the next twenty years.
The Australian dollar had a really tough month, with red ink everywhere.
Along with the ongoing concerns around China, the potential higher tariffs threatened by the US will cause more demand for the local currency.
The Aussie dollar has declined again even though our interest rate environment has shifted to a more competitive position.
Hard to believe it, but that is the last Monetary Policy Announcement for the 2024 year. We hope you enjoyed our last Economy & Property post.
Thanks for reading this year and look forward to welcoming in 2025. The first announcement for the new year is set for February 18th.
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