Market Commentary - October

Glenmore Asset Management

November 2023

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Glenmore Australian Equities Fund

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Hedge Clippings | 10 November 2023

Maybe Hedge Clippings' punt last week that Tuesday's RBA board meeting would result in another pause was wishful thinking. It was certainly out of step with the majority of well respected economists, even if Mark Bouris agreed with our view, which perhaps should have been a warning in itself. The RBA's November Statement on Monetary Policy, released earlier today, was pretty clear on their thinking: A continuation of the bank's determination that the current level of inflation is not only too high, but the reduction to the Board's target of 2-3% must be hastened.

At this stage, the bank's forecast is that inflation (currently 5.4%) will be around 3.5% in a year's time, and "a little below" 3% by the end of 2025. Assuming - possibly incorrectly - that monetary policy is being set to meet the forecasts - in other words that the forecast is also the RBA's target - then the question is when or if the economic "tipping point" will occur? At what point will higher interest rates have a sufficient impact on consumer spending to reduce inflation? And at what risk to the economy in the form of a recession?

While nearly everyone with a mortgage - at least those on variable rates or about to come off a fixed rate - will be affected by Tuesday's decision, it's only about 35% of the total housing market of 10.3 million homes, with a further 30% of homes rented, presumably with a fair proportion of the latter also impacted by higher rates.

Much is written about the "mortgage cliff" but only 30% of those mortgages are fixed, and although well up on the levels of 30 years ago, it is still only going to affect a minority of the total. Added to the fact that only more recent loan limits are "maxed out" and it emphasises the blunt instrument that the RBA has in monetary policy when tackling inflation, and its many and varied causes - all out of the RBA's control.

Retired RBA governor Philip Lowe was fond of using the "narrow path" analogy in his post meeting statements, but Michele Bullock studiously avoided the phrase, although sticking to the central message that inflation is too high, too persistent, and therefore falling too slowly. Bullock's preferred theme - if repetition of a single word is a guide - is "uncertainty", mentioned four times in the penultimate paragraph of her post meeting (pre-cup) statement. Multiple uncertainties regarding the lags in the effect of the previous 12 rate rises on business and the economy in general, and wages and employment in particular. Uncertainty over the outlook for household consumption, uncertainty over the implications of the conflict in Gaza, and uncertainty over the outlook for the Chinese economy.

Even with all that uncertainty, the Board remains certain about one thing: "A determination to return inflation to target, and to do whatever is necessary to achieve that outcome." Which means that if the tipping point has not yet been reached, there could be further rate rises around the corner.

Over in the US, while the Trump circus is playing out in a New York courtroom, the Fed's Jerome Powell is also indicating a willingness to hike rates beyond their current 22 year high at their next meeting due in December. This is in spite of the fact that US inflation came in at 3.7% year on year in September, well down from its recent high of 9.06% in June 2022, and with forecasts of further reductions to come, thanks to falling oil prices when October's figure is released next Tuesday.

Meanwhile in China, CPI fell by 0.2%, mainly on the back of food prices falling 4%, particularly pork, the price of which has fallen over 30% y-o-y. Good on "handsome boy" Albo for his efforts and in helping Aussie lobsters and wine back on the menu, but we suspect while it will help our exports, they're not a sufficiently staple item on the shopping list of most of the population of 1.425 billion to impact China's inflation.

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