The Reserve Bank of Australia (RBA) held its fourth meeting of 2024, leaving the official cash rate at 4.35%.
Economic data is now diverging between weaker front end data (such as retail sales and GDP), against a relatively strong macro economic and longer term metrics (share market and property prices) which remain largely resilient. Labour conditions also remain strong.
As an example, consumer confidence is down in Queensland where property prices are at record levels (see below). So short versus long can be very different and people are impacted in different ways.
Looming Recession or Not?
Sentiment or reality? There is much noise, but is it real and what does it actually mean? The National Bureau of Economic Research defines a recession as a significant decline in economic activity that lasts more than a few months. This result typically shows up in our Gross Domestic Product (GDP) along with employment and productivity data, real income, consumption and trade.
A technical recession is two consecutive quarters of negative growth in GDP. With the ongoing softness in spending, our annual GDP growth slowed to around 1.0% - 1.2%, so we are not there yet.
The ANZ Roy Morgan Australian Consumer Confidence continued to report a weak consumer sentiment - with confidence falling again (77 points) well below the neutral level of 100 points. That said, in the weaker GDP result was still a strong core of consumer spending, probably more than the RBA would like.
Spending is expected to decline as households accelerate the cut back on non-essential items. In short though, most are still spending more (reality) relative to how they say they are feeling (sentiment).
RBA Stance Remains Vigilant
With a pause at the May 2024 meeting, and a cyclic market, the RBA commentary has been more expansive in its commentary. They are tying in employment conditions as a shorter term metric with comments around “testing” how low unemployment can sustainably be, especially in carrying a lower cash rate than other economies to combat inflation.
With underlying inflation running at 1% quarterly (4% in annual terms) at the end of the March quarter – still above the RBA’s 2-3% annual inflation target - the status quo remains. Therefore the impact of the pending tax cuts will be watched closely.
The market to June showed red ink in the All Ordinaries, continuing the weaker outlook from last month as below:
We have seen a reversal of last month, where the stable interest rate expectations would normally be a positive for the market. This time, concerns of the weaker economic outlook contributed to the slide. There is more talk globally that share markets "look expensive". A close eye on corporate earnings will see if this is sentiment or reality.
For context, despite this reversal, markets are still higher than 6 and 12 months ago.
The market has broadly accepted the 'higher for longer' scenario. The fall in rates for 2024 are no longer priced in, now pushing out well into 2025 and at much lower levels.
As a result, the graph is flatter, with an adjustment of 10 basis points downwards following a fall this month in the ASX Cash Rate Futures, bringing expectations slightly forward for rate cuts over the next term. So a "smooth" graph as indicated by the ASX Cash Rate Futures below.
The RBA will now sit and wait to see what unfolds overseas.
We are seeing a little action for the first time in a while. Some central banks are easing rates as inflationary pressures start to moderate across most economies. Though there is still a very cautious sentiment and central banks remain worried about a rebound in inflation.
New Zealand's cash rate is at 5.50%. Their minutes after their May meetings were a big surprise to markets as they revealed they actually considered raising interest rates. Bond yields rose based on this, along with comments that any likely easing was still a way off based on current data. Reality check or a bluff?
The U.S. remained at 5.50% at their June meeting. Like NZ, they surprised markets but delaying their expectations about any easing to interest rates. Yields jumped up but have subsequently dropped back again on the back of softening demand and weaker employment data. This one will be a rollercoaster.
In the UK, there is lots happening with their election in early July. The Bank of England is expected to keep rates at 5.25% at its June 20 meeting. Annual inflation has fallen towards 2% and more data comes this week before the call. It will be a tight one, especially as the European Central Bank cut to 3.75% and is actually running a higher inflation number right now.
Canada made the news with a cut of 25 points to 4.75% and clear direction from its central bank. “If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2 per cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate”. A clear message.
Before posting any changes today we compare central bank cash rates and their longer term 10-year bond yields. There was not much overall movement in this period, as shown below.
|
Country |
Cash Rate | 10 Year Bond | Spread |
|
Australia
|
4.35% | 4.28% | -0.07% |
|
Canada
|
4.75% | 3.30% | -1.45% |
|
China
|
3.45% | 2.30% | -1.15% |
| Germany | 4.25% | 2.35% | -1.90% |
| India | 6.50% | 6.98% | 0.48% |
| Japan | 0.10% | 0.91% | 0.81% |
| New Zealand | 5.50% | 4.66% | -0.84% |
| Singapore | 3.42% | 3.18% | -0.24% |
| UK | 5.25% | 4.05% | -1.20% |
| USA | 5.50% | 4.22% | -1.28% |
| Average | 4.31% | 3.62% | -0.69% |
Yield curves remain inverted and on the whole they widened this period. Though this is in part around anticipation that short term rates are expected to fall in the medium term and the 10-year rate is adjusting for that change.
Australian money markets were busy during the month. Yields were volatile up and down, though the end result was largely unchanged other than at the longer end.
As the prospect of downward momentum in interest rates diminished, mid and long term yields shot back up. Australia now has a flat yield curve as the market adjusts quickly to another new outlook.
| Month | Cash Rate | 180 Day | 10 Year |
|
Jun 23
|
4.10% |
4.21% |
3.65% |
|
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% |
|
Annual Trend |
+0.25% |
+0.39% |
+0.63% |
The market for 180-days decreased a little as the short term outlook for interest rates continued to evolve. There was further alignment in the 10-year rate as previously discussed.
It is also dangerous to predict money and bond markets, but it is possible that yields have already peaked. "Peak Yields" refer to the level that rates get to before leveling off or declining. This of course, like equity market investors, has a significant impact for cash investors.
The latest residential monthly property results from CoreLogic (see table below) showed a 0.8% and 0.6% increase to Capitals and Regionals during May respectively.
| Location | Month | Quarter | Annual |
|
Adelaide
|
1.8% |
4.3% |
14.4% |
|
Brisbane
|
1.4% |
3.9% |
16.3% |
|
Hobart
|
-0.5% |
0.3% |
-0.1% |
|
Melbourne
|
0.1% |
-0.2% |
1.8% |
|
Sydney
|
0.6% |
1.2% |
7.4% |
|
Perth
|
1.8% |
6.1% |
22.0% |
|
All Capitals
|
0.8% |
1.9% |
8.8% |
|
All Regionals
|
0.6% |
2.0% |
6.8% |
The run in Perth, Adelaide and Brisbane values continues with yet another new record month. Rising rents have provided support for price growth.
Anecdotally, there is evidence that Victorian landlords are more motivated sellers, with the new state tax changes beginning to bite.
Core Logic data shows that Australian home values have risen 35.6% since the COVID-19 start in March 2020. There was a short-but-sharp drop in prices with interest rate tightening, but it recovered by November 2023, and now sits at its peak.
In a world where commercial data is largely focused on listed REITs or larger scale property, a recent report from Opteon/Real Investment Analytics and their Annual Data Review was refreshing. This report focused on the sub $40M commercial property markets.
It showed a softening but relatively resistant market over 2023. Industrial assets performed best as we are aware, with a shift to alternative assets such as large format neighbourhood, convenience retail, petrol stations, etc., becoming more desirable.
Broadly, there is cautious expectation that this sub-$40m commercial property market will experience a soft rebound in 2025. This is aligned generally with our anecdotal experiences in working with SMEs in Australia, along with an increased number of owner-occupiers taking the step into commercial property ownership.
Currency Wrap-Up
The Australian dollar was weaker this month, perhaps a little surprisingly with the prospects of lower interest rates around the world.
With weaker commodity prices, there are ongoing concerns about the mid-term health of the Chinese economy that hit the AUD outlook. The currency weakened against the NZD on the basis of their higher interest rate forecast.
Japan's currency continued to new lows, and how and if it uses its monetary policy settings as a handbrake will a fascinating watch. Especially as Japanese public debt is estimated to be approximately 13 Trillion AUD which is circa 263% of their GDP, the highest of any developed nation.
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 four days left in 2024:
• 6 August
• 24 September
• 5 November
• 10 December
We hope you enjoyed our June Economy & Property post.
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