The Reserve Bank of Australia (RBA) held its seventh meeting of 2024, leaving the official cash rate at 4.35%.
Momentum changes quickly: Inflation is subsiding but inconsistent. Employment numbers jumped by circa 64,000 in September from August – higher than the expected gain of 25,000 keeping the unemployment rate at a lower than expected 4.1%.
Consumer confidence is showing signs of life and balance sheets are pretty strong overall. People are saving and electing not to spend, which is good (resilience) and bad (low growth) for the broader economy.
For those leading a chorus for lower interest rates, Governments worldwide are not helping with their excessive spending. With the amount of debt they will need to issue and roll over, this has and will put upward pressure on market interest rates - see below.
Locally, many do not appreciate that higher global borrowing costs impact on the RBA's ability to cut rates.
Inflation Taming?
September quarter inflation was up by 0.2% or annualised 2.8%. This means headline price growth back in the RBA’s 2-3% inflation target range, where we haven't been since early 2021. More detail on this number shows services as the biggest contributor to inflation (domestic holiday travel, residential rents and medical services being the top contributors to this figure.
However, the RBA’s preferred measure of underlying inflation is still above target at around 3.5%. This measure cuts out temporary price movements such as government subsidies. So still some work to do.
The International Monetary Fund (IMF) wrapped up a 'world tour' of economic health with its October Concluding Statement for Australia, "Near-term policies should continue to focus on reducing inflation while nurturing economic growth. The Reserve Bank of Australia's continued restrictive monetary policy stance aimed at combating persistent inflation is appropriate."
With a pause at the September 2024 meeting, the RBA commentary again highlights its commitment to the cause. "In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year."
And on the wider world; "There also remains a high level of uncertainty about the outlook abroad. Some central banks have eased policy, although they note that they are removing only some restrictiveness and remain alert to risks on both sides, namely weaker labour markets and stronger inflation."
It is not likely that the US decision to drop interest rates by 50 points will influence the RBA’s policy direction. Whilst the US was influenced by employment trends, the RBA message emphasises that a different path to achieving strong employment is via price stability. The Government is not happy.
The All Ordinaries market showed red ink, yet was probably better than expected given the sudden rise in bond yields.
With earnings and posted results not overly strong, along with bonds spiking, many are surprised that the Australian market has held up so well. Valuations are trading on a much higher multiple than long term averages, some are concerned there is little room to absorb any unexpected shocks.
Our equity market index was largely reflective of other markets internationally over the last month.
|
Country |
Mark |
1 Month |
6 Months |
1 Year |
5 Years |
|
Australia |
All Ords |
-1.1% |
6.1% | 16.8% | 23.6% |
|
Germany |
Dax |
1.3% |
6.7% | 26.8% | 48.6% |
|
Japan |
Nikkei Dow |
-1.3% |
-2.0% | 16.3% | 66.5% |
|
UK |
FTSE |
-1.3% |
-0.4% | 10.2% | 11.9% |
|
USA |
Dow Jones |
0.1% | 8.7% | 23.4% | 53.8% |
|
Average |
-0.5% | 3.8% | 18.7% | 40.9% |
There is a lot of discussions about the impact of the U.S. election on markets generally. Over time, it is worthwhile to contextualise any impact of shorter term Government policies. Markets are generally more driven by economic variables like monetary policy settings, inflation and global events. While an emotional campaign can impact in the short term, fundamentals over the longer term are generally the primary drivers of performance.
Did we say markets settled last month? The market has almost totally wiped out the expected big fall in rates priced in over the next year.
As a result, the graph remains a higher for longer one for the ASX Cash Rate Futures.
Ironic that markets have been up and down despite a year of no movement in the official cash rate. However, watch this space after the US elections are wrapped up.
The story of central banks worldwide is mainly on easing rates. This was led by NZ and Canada with strong moves. These economies are trying to deliver a "soft landing" and Australia is looking like an outlier in some respects. Perhaps time will judge them favourably.
New Zealand's cash rate was crunched another 50 points down to 4.75%. The baseball bat approach of policy makers continues on an economy that looks a little fragile quite quickly. It is possible that we'll see another 50 points when they meet again this month.
The U.S. are expecting a cut of 0.25% at the pending November meeting but the market and election is clouding things. Headline inflation is drifting down though employment data is still strong. Bond Yields are active on the back of election fever, and the yield curve is looking more normal as short-term rates fall, and yields rise over the longer terms out to 10 years.
In the UK, The Bank of England is at 5.00% and meets this week after holding last time round. A steady flow of cuts had been anticipated from here, but a high spending Government budget has the potential to complicate the path for the Bank of England to cut interest rates.
Canada delivered a 50-point rate cut in October to 3.75%, stating that its fight with inflation is almost over. The easing is a proactive effort to provide a softer landing for a Canadian economy that is feeling vulnerable.
Before posting any changes today we compare central bank cash rates and their longer term 10-year bond yields.
Yield curves are becoming more normal as cash rates fall, but long term rates increase. There is still red ink but the spread is now much narrower.
|
Country |
Cash Rate | 10 Year Bond | Spread |
|
Australia
|
4.35% | 4.56% | 0.21% |
|
Canada
|
3.75% | 3.29% | -0.46% |
|
China
|
3.10% | 2.13% | -0.97% |
| Germany | 3.40% | 2.41% | -0.99% |
| India | 6.50% | 6.84% | 0.34% |
| Japan | 0.25% | 0.95% | 0.70% |
| New Zealand | 4.75% | 4.49% | -0.26% |
| Singapore | 3.16% | 2.86% | -0.30% |
| UK | 5.00% | 4.39% | -0.61% |
| USA | 5.00% | 4.46% | -0.54% |
| Average | 3.93% | 3.64% | -0.29% |
In the US, yields on 10-year US Treasuries have risen by 70 basis points since their first 50-point interest rate cut in September. What is going on? It's election time and investors are growing increasingly concerned that a Trump win will deliver his policies that are seen as inflationary. Tax cuts & tariffs can push up prices.
Australia’s longer-term interest rates have a strong correlation with equivalent US yields, so it was no surprise to see our yields up dramatically. Australia wipes out its inverted yield curve with the reality of the market deferring the likelihood of near term rate drops.
| Month | Cash Rate | 180 Day | 10 Year |
|
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% |
|
Aug 24
|
4.35% |
4.58% |
3.90% |
|
Sep 24
|
4.35% |
4.58% |
3.87% |
|
Nov 24
|
4.35% |
4.64% |
4.55% |
|
Annual Trend |
+0.00% |
-0.09% |
-0.17% |
A month or so is along time in markets. Did we say last time that yields peaked in this cycle? Well that was a false dawn as the 10-year rate climbed dramatically.
The latest residential monthly property results from CoreLogic (see table below) showed a small increase to both Capitals and Regionals during October respectively.
| Location | Month | Quarter | Annual |
|
Adelaide
|
1.1% |
3.7% |
15.0% |
|
Brisbane
|
0.7% |
2.4% |
13.0% |
|
Hobart
|
0.8% |
-0.1% |
-1.2% |
|
Melbourne
|
-0.2% |
-0.8% |
-1.9% |
|
Sydney
|
-0.1% |
0.1% |
3.7% |
|
Perth
|
1.4% |
4.1% |
22.6% |
|
All Capitals
|
0.2% |
0.8% |
5.9% |
|
All Regionals
|
0.6% |
1.1% |
6.3% |
Slowing Momentum
The number of listings has increased materially since the end of winter across all the combined capitals. Seasonal yes, but a sign of vendors looking to take some profits or otherwise exit high holding costs.
Gross rental yields are down a little at 3.47% across the combined capitals.
Commercial Property
Other property categories need a much deeper dive. At the top end, we are seeing the impact of the last few years flow through to valuations. For example, the value of Walker Group’s investment portfolio fell around 8% over the 2024 financial year along with other comparable property groups.
At the lower end, there is still a lot of activity. One of the opportunities for buyers is in the acquisition of office or retail properties, where the building value as a proportion of total valuation is high. The option creates itself as the opportunity cost of building and developing is so high.
The Australian dollar was much weaker this month, with red ink everywhere except Japan & NZ.
There is some surprise to this, but with the sell-off in US bond markets, along with the prospects of higher interest rates for longer there was a flight to stronger currencies.
The Aussie has declined despite a higher for longer interest rate environment in Australia.
A reminder that the schedule of RBA meetings has changed from 11 in a year to 8, held 5-7 weeks apart. The last Monetary Policy Announcement for the 2024 year will be made at 2.30pm on 10 December.
We hope you enjoyed our latest Economy & Property post.
Follow us on Linked in for more insights.