The Reserve Bank of Australia (RBA) held its sixth meeting of 2024, leaving the official cash rate at 4.35%.
The markets were active last time around, so a recent period of relatively stability is a welcome sight for many as they look for guidance on where the economy is heading. There is growing economic fear in the world and we should expect all markets to be very fragile and responsive to data.
This month, money news has centered around the 0.50% (50 basis point) reduction to the U.S. Cash Rate equivalent on the back of slowing employment growth. This surprised economists but not markets.
Locally, employment results were solid enough, inflation seems to be finding a level and our dollar is strengthening. Although...
There are some good bits, although the economy only grew 0.2% in the June quarter 2024 for a 1.5% result for the FY24 financial year. This is measured by Gross Domestic Product or GDP, which is a measure of final goods and services produced. While this was another quarter of GDP growth, a more common measure is "GDP per Capita" which adjusts this output divided by total population. On that measure Australia's performance has been declining.
The Federal Government has directed pressure on the RBA's direction for action on monetary policy. The RBA has inferred that Government spending is contributing materially to inflationary pressures. The data tells the story, as state and federal government spending will hit a record 28% of GDP.
The challenge for Government will be to manage spending, but continue to stimulate a slowing economy in a responsible way.
With a pause at the August 2024 meeting, the RBA commentary highlights its commitment to the cause, despite political pressure. "The economic outlook is uncertain and recent data have demonstrated that the process of returning inflation to target has been slow and bumpy." Though to balance this out; "On the other hand, momentum in economic activity has been weak, as evidenced by slow growth in GDP, a rise in the unemployment rate and reports that many businesses are under pressure."
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 the strong employment is via price stability. The Government is not happy.
After the wild ride of markets worldwide early last month, the All Ordinaries market showed black ink as part of a relative recovery.
There was a material fall in dividends during the recent earnings season as companies declared the lowest amount since COVID-19. This was led by mining and energy companies on the back of falling commodity prices, with more widespread conservation of cash or debt reduction. Overall, this implies a dimmer view of future earnings prospects.
Our equity markets index compared favourably to other markets internationally over the last month.
|
Country |
Mark |
1 Month |
6 Months |
1 Year |
5 Years |
|
Australia |
All Ords |
1.6% |
3.7% | 15.2% | 22.9% |
|
Germany |
Dax |
0.5% |
2.5% | 21.5% | 51.2% |
|
Japan |
Nikkei Dow |
-1.6% |
-6.7% | 15.4% | 72.4% |
|
UK |
FTSE |
-1.1% |
3.9% | 7.9% | 10.8% |
|
USA |
Dow Jones |
2.1% | 7.0% | 23.4% | 56.9% |
|
Average |
0.3% | 2.1% | 16.6% | 42.8% |
Concerns of the weaker global economic outlook have led to much commentary, with many investors concerned about risks in local and international equity markets.
The market has settled over recent weeks, which in this cycle is unusual. A big fall in rates is still priced in over the next year.
As a result, the graph remains a downhill one for the ASX Cash Rate Futures, leaving rate cut expectations in place.
The RBA will now wait to see what unfolds overseas and locally.
Before the action of the last few days, we already saw several central banks easing rates. This was led by the US, NZ, Canada and other economies in Europe. Many of these economies are trying to engineer a "soft landing" with focus turning to employment trends as much as inflation data.
New Zealand's cash rate fell for the first time since early 2020 to 5.25%. There was a continued shift from the recent meetings around inflation control, and that if data continues to trend as expected more cuts will follow.
The U.S. cut by 0.50% to 5.00% at their September meeting and Chairman Powell was highly directive around the decision, largely driven on lower trend growth in jobs added. Yields didn't go too crazy on the back of the decision. Their yield curve is still inverted and the market got the first decision right.
In the UK, The Bank of England held firm at 5.00% at the August meeting after the 25 point drop last time. The direction from policy makers is that they should fall again if inflation expectations are met. Consumer confidence is now very low, even with cut expectations after the new PM warned of a very tough budget.
Canada made steady progress again with another cut of 25 points to 4.25%. The US 50 point drop potentially gives Canada an opportunity to go harder at their next October meeting with a more aggressive cut of a similar amount.
Before posting any changes today we compare central bank cash rates and their longer term 10-year bond yields.
More falls in some short-term rates and the pause in panic for the long-term outlook, meant that yields on the 10-year fell by less. There is still red ink but the average spread is narrower.
|
Country |
Cash Rate | 10 Year Bond | Spread |
|
Australia
|
4.35% | 3.97% | -0.38% |
|
Canada
|
4.25% | 2.95% | -1.30% |
|
China
|
3.35% | 2.04% | -1.31% |
| Germany | 3.65% | 2.15% | -1.50% |
| India | 6.50% | 6.86% | 0.36% |
| Japan | 0.25% | 0.84% | 0.59% |
| New Zealand | 5.25% | 4.27% | -0.98% |
| Singapore | 3.57% | 2.55% | -1.02% |
| UK | 5.00% | 3.91% | -1.09% |
| USA | 5.00% | 3.73% | -1.27% |
| Average | 4.11% | 3.33% | -0.78% |
In the US, markets anticipated the 0.5% rate cut in September, with still more than 1.00% in total reductions expected over the next year.
Along with the US; Germany, France and Greece all had significant cuts (60 points) to their central interest rates which highlighted some of the challenges in those regions.
After a wild ride last month, Australian money markets were more settled this month in relative terms. The yield on the 10-year was steady while the yield on the 3-year fell sharply but bounced back on the back of better than expected local employment data.
Australia remains on an inverted yield curve but this is heavily "front ended" with a slim but upward yield line between 2 and 10 years.
| Month | Cash Rate | 180 Day | 10 Year |
|
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% |
|
Aug 24
|
4.35% |
4.58% |
3.90% |
|
Sep 24
|
4.35% |
4.58% |
3.87% |
|
Annual Trend |
+0.25% |
0.17% |
-0.61% |
The market for 90, 180-days was more steady as the outlook for interest rates seems to have found a centered view. There was volatility in the 10-year rate and the 3-year bond yield has fallen 60 points over the past two months.
So have yields peaked in this cycle? With growth numbers where they are it seems a strong likelihood.
The latest residential monthly property results from CoreLogic (see table below) showed a 0.5% increase to both Capitals and Regionals during August respectively.
| Location | Month | Quarter | Annual |
|
Adelaide
|
1.4% |
4.0% |
14.9% |
|
Brisbane
|
1.1% |
2.9% |
15.0% |
|
Hobart
|
-0.1% |
-0.4% |
-1.2% |
|
Melbourne
|
-0.2% |
-1.2% |
-1.0% |
|
Sydney
|
0.3% |
0.8% |
5.0% |
|
Perth
|
2.0% |
5.7% |
24.4% |
|
All Capitals
|
0.5% |
1.3% |
7.1% |
|
All Regionals
|
0.5% |
1.1% |
7.0% |
The Slide of Melbourne Property
Melbourne’s comparative fall down the property value ladder became official this month. Its median dwelling value is now ranked sixth across the eight capital cities, only ahead of Darwin and Hobart. The gap between Sydney and Melbourne’s median dwelling value is now over 50%.
Anecdotally and through the numbers, it is clear that Victorian landlords are motivated sellers, with the new state tax changes and other issues causing a growth in both listings and softer sales results.
Some context for Melbourne Property
Median data can be misleading. A positive in a sense is that Melbourne has densified substantially and quicker than other capitals. CoreLogic and ABS data shows that around 33% of housing stock in Melbourne is unit stock, compared with 25% in Brisbane and 16% in both Adelaide and Perth.
So Melbourne has been "successful" in creating more stock and the other states have created more scarcity. In addition, when we look at average as opposed to median prices, Melbourne is still second on the national ladder.
With sentiment in Victoria being generally negative, other states are beneficiaries of the outbound flows of capital.
The Australian dollar was much stronger this month, with black ink everywhere except NZ. The long term trend (1 year) is also largely positive.
There is some surprise to this, with the price of iron ore falling more than 35% this year to $US90.80 a tonne. That has coincided with big falls in oil, lithium and copper prices in recent months.
The offset is complex, as broadly there is a view that the Aussie was oversold. Though as world interest rates fall and ours don't, that creates an obvious arbitrage. China data being a little more optimistic also helps.
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 two days left in 2024:
• 5 November
• 10 December
We hope you enjoyed our latest Economy & Property post.
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