The Reserve Bank of Australia (RBA) held its third meeting of 2024, leaving the official cash rate at 4.35%.
Economic data is mixed. Retail figures for the first quarter of the year were weak; however, March quarter inflation data was a stronger than anticipated 1.0%. The latter send the market into a little bit of a spin. Labour conditions remained strong.
The NAB Quarterly SME Business Survey - one which MCP contributes to - reported that business conditions fell this quarter and below the long-run average. The shift was driven by a decline in conditions for smaller SMEs. Both trading conditions and profitability slipped several points in the quarter.
Migration Continues
A classic challenge in economics is solving one problem (such as labour shortages) without materially impacting others (such as demand stimulants). This is a key discussion point as Australia's spike in immigration continues. The latest data from the ABS reports Australia’s population increased 2.5% over the year to September 2023, with migration a large component. In addition, there are around 2.8 million people on temporary visas, which places a further strain on housing and by reference increased rent and housing prices. This accounts for a large component of inflation measures.
Governments will need to continually consider annual immigration intake and with that, take action on developing infrastructure to support population growth.
RBA Stance Remains Vigilant
With a pause at the March 2024 meeting, and a cyclic market, the RBA commentary has been relatively silent. Annual underlying inflation is 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. It is clear that holding the line means remaining committed to getting inflation back to the target range.
The market to May showed red ink in the All Ordinaries, for the first time in a while as below:
The higher interest rate expectations would normally be a big negative for the market and in that context the results are more resilient than expected.
Investors are perhaps seeing a new normal, with higher interest rates reflecting that the overall economy is strong.
Bond yields went north this month. The market is saying it got it wrong about the likelihood of sudden falls in interest rates.
The big falls in rates this year are no longer priced in.
A downhill graph continues, but with a correction of 30-40 basis points upwards following a rise this month in the ASX Cash Rate Futures, wiping out the expectations for rate cuts in the short term. So a delayed and smaller fall as indicated by the ASX Cash Rate Futures below.
The market celebration of a peaking cash rate is on hold. The RBA must be amused with markets as it sits and waits to see what unfolds locally and overseas.
We are seeing divergence between central banks across Europe, the UK and Americas.
New Zealand's cash rate unchanged again at 5.50%. The market is fully priced for their central bank to ease in November, later than expected, as the central bank remains focused on inflation. The commitment to inflation control will trump the recessionary conditions.
The U.S. remains at 5.50% with no change expected at their next meeting. US inflation rose again in March, pushing the annual rate to 3.5% which was above expectations. Chairman Powell soothed markets with this comment, “It’s unlikely that the next policy rate move will be a hike”. Markets everywhere were looking for any guidance.
In the UK, the Bank of England are expected to keep rates on hold at 5.25% when it meets this week. Annual inflation has fallen below 4% and bond markets are pricing in cuts by end 2024. The central bank is consistent that policy settings will remain until inflation returns to 2% sustainability.
Canada holds at 5.00% and their next meeting in June will be an interesting one. Their central bank tone has changed. "We do see renewed downward momentum in underlying inflation. The message to Canadians is, we are getting closer. We are seeing what we need to see and we just need to be confident that it will be sustained", said Governor Tiff Macklem.
Before posting any changes today we compare central bank cash rates and their longer term 10-year bond yields. No movement anywhere at the short end of the curve.
|
Country |
Cash Rate | 10 Year Bond | Spread |
|
Australia
|
4.35% | 4.51% | 0.16% |
|
Canada
|
5.00% | 3.68% | -1.32% |
|
China
|
3.45% | 2.32% | -1.13% |
| Germany | 4.50% | 2.43% | -2.07% |
| India | 6.50% | 7.12% | 0.52% |
| Japan | 0.10% | 0.89% | 0.79% |
| New Zealand | 5.50% | 4.83% | -0.67% |
| Singapore | 3.42% | 3.31% | -0.11% |
| United Kingdom | 5.25% | 4.26% | -0.99% |
| United States | 5.50% | 4.50% | -1.00% |
Yield curves remain inverted, but it is starting to flatten out. Cash rates are showing a period of stability, meaning that the long term 10-year money is adjusting upwards to a "higher for longer" scenario.
Australian money markets led the world this period in terms of adjustment. Without an "I told you so", markets overshot the prospect of falling interest rates. Meaning what? Bond Yields at the mid (2-3 year) and long term (5-10 year) all fell well below shorter term rates, on the basis of expectations of aggressive drops in interest rates. The result was an inverted yield curve.
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 |
|
May 23
|
3.85% |
3.82% |
3.34% |
|
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% |
The market for 180-days increased a little as the short term outlook for interest rates changed. There was alignment in the 2,3,5 and 10-year which effectively wiped out two 25 point rate cuts.
The latest residential monthly property results from CoreLogic (see table below) showed a 0.6% increase during April.
| Location | Month | Quarter | Annual |
|
Adelaide
|
1.1% |
3.3% |
14.0% |
|
Brisbane
|
0.9% |
3.1% |
16.1% |
|
Hobart
|
0.3% |
0.8% |
-0.4% |
|
Melbourne
|
-0.1% |
0.0% |
2.8% |
|
Sydney
|
0.4% |
1.1% |
8.7% |
|
Perth
|
1.8% |
6.0% |
21.1% |
|
All Capitals
|
0.6% |
1.7% |
9.4% |
|
All Regionals
|
0.8% |
2.1% |
6.4% |
The run in Perth, Adelaide and Brisbane values is crazy and continues a new record month. No clear indicators on when that might settle down.
The shortfall of housing relative to demand means there is upward pressure on home values across most regions. The big question down south remains - is Melbourne looking like gaining value at some point?
The office sector had very low transaction activity last month and the consensus on fair value between buyers and vendors remains wide. There is evidence that more vendors will test the market and further falls in valuations are expected.
Currency Wrap-Up
The Australian dollar remains robust, even against a very strong USD.
Our comparably favourable position on interest rates is heightened especially with European rates expected to fall over the coming months.
Japan has been the story in currency markets. With their currency at new lows, The Bank of Japan has moved off its negative interest rates and increased them for the first time in over a decade. However it is coming from a long way back and the market has punished them for it.
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 days in 2024:
• 18 June
• 6 August
• 24 September
• 5 November
• 10 December
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