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9 Jun 2023 - Hedge Clippings | 09 June 2023
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Hedge Clippings | 09 June 2023 As previously suggested, it looks like inflation, and thus higher rates, are going to be more persistent, even if RBA Governor Philip Lowe suggested this week that it has "passed its peak". Having made that statement, he then went on to say that: ''Recent data indicate that upside risks to the inflation outlook have increased," which made it sound like he is having two-bob-each-way on the outcome. And who can blame him (apart from the Treasurer) as he increased rates by 0.25% yet again, given the issues he outlined in the statement released following the RBA's meeting on Tuesday? Against the background of a tight labour market, wages growth - not helped by an increase in award wages - is expected to pick up. Meanwhile, while there's been no improvement in labour productivity, resulting in a worrying increase in unit labour costs. Lowe's path to a soft landing - or in other words slowing the economy whilst avoiding a recession, is looking increasingly difficult to achieve with the latest GDP for Q1 just 0.2%, down from 0.6% in Q's 3 and 4, 2022. In the US a recession followed the last five instances when inflation peaked above 5%, in 1970, 1974, 1980, 1990, and 2008. Indeed, the US economy recorded two consecutive quarters of negative GDP growth in Q1 and Q2 of 2022, technically qualifying as a recession, before recording a growth of 3.2% in Q3, 2.4% in Q4, and 1.3% in Q1, 2023. Covid aside, the last recession in Australia was in 1990/91. With the median age in Australia currently just over 38, a large proportion of the population has never experienced a recession, which is maybe why the threat of an impending one is not yet biting into consumer spending. While the media is currently full of anecdotal evidence of economic hardship and mortgage/rental stress, this is unevenly spread across the population. A report from PEXA released this week shows that over 25% of all property purchases in Australia's eastern states were funded without a mortgage in 2022. Inflation is real, but the RBA's efforts to curb it are only changing the spending habits of a minority, and generally those with less or limited discretionary spending capacity. Mortgage rates are only high by historical standards, magnified by the size of loans taken out to afford sharply higher property prices. In 2021, 35% of households had a mortgage, while 32% did not, and 28.4% were renters from private or other landlords. All the focus is on mortgage repayments and mortgage stress, and only more recently rental stress, resulting in interest rates (and to a degree inflation) not impacting a significant portion of the population. For the RBA this creates an issue, as the "enemy" - inflation - comes from all and many quarters, only some of which are homegrown or under domestic control. If Philip Lowe's rate increases to date have had limited effect on consumer spending and demand, then there's no doubt that "some further tightening of monetary policy may be required" along with an increased risk of recession. However with multiple inputs, and only interest rates as a tool, the RBA's "narrow path" is looking narrower - and decidedly slippery. |
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2 Jun 2023 - Hedge Clippings | 02 June 2023
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Hedge Clippings | 02 June 2023 Phillip Lowe had a subtle shot at politicians this week, and Treasurer Jim Chalmers in particular, when fronting a Senate Estimates hearing in Canberra, asking the Senators to consider whether fighting inflation should only be left to the RBA? "In a perfect world, you'd have a different set of arrangements," Lowe proposed. "The other way you could reduce aggregate demand at the moment is to increase taxes or reduce government spending." Of course that might involve some of the senators in question losing their jobs, which they'd rather not do. He could also have added something about the government not supporting wage rises, but sensibly kept away from that, even going so far as saying he didn't think the budget was adding to inflation, but actually reducing it. It's still unknown if Lowe will keep his job when his term (or time) is up in September, and Chalmers has given no hint of support, suggesting that he won't. Whether he does or not is unlikely to change his successor's focus on inflation, and therefore the upward direction of interest rates, even though Lowe's claims that the 11 rate rises over the past year are working. The Fair Work Commission's 5.75% increase in minimum wages awarded to 2.6 million workers, and 8.6% for 180,000 on the lowest rate, won't be helping when the RBA announces the outcome of next Tuesday's board meeting. As a result, a bevy of bank economists are forecasting a further 0.25% rise, with some now suggesting that a peak of 4.6% - or three more increases - is not out of the question. Not only are interest rates a blunt instrument with which to manage inflation, their effect on the economy is a lagging one. As a consequence, when the results show up in the statistics the RBA use in their monthly determinations, the tipping point in the economy has already occurred. Hence rates inevitably rise (and fall) too far. For many people - those under mortgage or rental stress, or minimum wages - that tipping point has already occurred, so if a cash rate of 4.6% is on the cards there'll be some serious pain, and certainly Lowe's increases will have worked. Even if he's not going to be there to take the credit - or the blame - when or if inflation returns to the 2-3% target, and rates gradually follow suit. On Tuesday afternoon next week at 4.15 we are holding the next in our series of Fund Manager Round Table Webinars, this time focusing on the Hybrid Credit sector. Register here to join Ben Harrison from Altor Capital, Nick Thomson from AquAsia Funds Management, and Patrick William from Rixon Capital for their take on the opportunities and risks for the sector. |
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News & Insights Market Update April | Australian Secure Capital Fund The golden opportunities for infrastructure in a challenging environment | 4D Infrastructure April 2023 Performance News Insync Global Capital Aware Fund |
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26 May 2023 - Hedge Clippings | 26 May 2023
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Hedge Clippings | 26 May 2023 It seems that much in the World is poised on a knife edge, although Australia would appear to be better positioned than most: The war in Ukraine has no clear victor at this stage, at least on the battlefield, although one would have to say that Putin has lost in every other way. Putin's miscalculation has helped unleash inflation, which thanks to years of government intervention post GFC, plus COVID, was probably always headed for a breakout. We presume (hope) that the impasse between Biden and the Republicans who control Congress will be resolved, with current reports suggesting the $31.4 trillion US debt ceiling will be raised for 2 years. If so the sticking point is now over how the extra will be spent - military and defense, or social programs. Either way, Biden's looking a little lame, potentially leaving the way open for the unthinkable - the return of Donald Trump. The UK's economy (in fact most things in the UK) is a mess, everyone seems to distrust China (including a fair number of Chinese), inflation looks like staying high for longer, both globally and in Australia, and as a result, economists are divided on the RBA's next move. As a result investors and markets can't work out if the worst is over, or a recession is around the corner. From a perspective of the performance of managed funds, the worst would seem to be over. Most managers, although by no means all, found 2022 one of the most difficult they had experienced, but since the start of this year (4 months to the end of April) just over 90% of managers have provided their investors with positive returns, compared with just 48% who have done so over the past 12 months. Even the unloved and underperforming Equity Small Cap Peer Group has shown some green shoots, returning 3.54% over 6 months to April, and recovering some of the 6.97% negative performance of the past 12 months. Over the longer term - 7 years - which is generally accepted as the recommended time-frame for investments in most managed funds, ALL peer groups are in positive territory. Over 3 years, including 2022, Australian Equity small cap funds averaged 12.71% pa, and large caps 13.99%. Hidden among the 3 year Small Cap averages, the top 3 were: Altor's Alpha Fund (33.96%), Spheria Micro Cap (30.49%), and Glenmore (26.76%). Large Caps were headed by Ausbil's Geared Equity (35.62%), Datt Capital (21.74%) and Collins St Value Fund (21.0%). For full details and data on over 700 funds, visit www.fundmonitors.com. |
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News & Insights Market Commentary - April | Glenmore Asset Management Investment Perspectives: The housing market's turning - and not just in Australia April 2023 Performance News Digital Asset Fund (Digital Opportunities Class) |
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19 May 2023 - Hedge Clippings | 19 May 2023
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Hedge Clippings | 19 May 2023 This week's labour market figures showed a surprise monthly increase in unemployment from 3.5% in March to 3.7%, having reached an all time low of 3.4% last October. It has taken over 12 months of increased inflation, and as a consequence 13 months of interest rate increases, to flow through to the economy, and specifically to the labour market. To date, in spite of all the anecdotal evidence in the media, and reports from NAB and others that a combination of inflation and interest rates were causing severe stress to household budgets, there was little statistical evidence for the RBA to show for their efforts when setting monetary policy. (The possible exception to this has been the building industry, where a number of well publicised failures have been reported, no doubt as a result of fixed price contracts, supply chain delays and rapid increases in material costs in the interim.) Looking behind the headline unemployment rate of 3.7% (i.e. those actually looking for a job), the underlying numbers confirm the change in trend: According to Trading Economics, with data from the ABS, the total number of unemployed people in April increased by 18,400 to 528,010, while labour costs increased, with Average Weekly Wages rising over the quarter to $1,378.60 from $1,344.70, and Manufacturing Wages increasing to $1,545.60 from $1,464.50. Where this leaves the RBA's June decision will be the subject of much debate: Obviously, the 11 rate increases totaling 3.75% over 13 months are starting to have some effect, which may lead to a further pause in June, but while the RBA's forecasting unemployment to reach 4% by the end of this year - a rate they may have to adjust upwards - they won't be taking their eyes off the inflationary effect of higher wage costs recently awarded or announced. The RBA's nirvana is a soft landing, but just as Nirvana is difficult to achieve for a Buddhist, so will be the economic equivalent for Philip Lowe (or his successor!). |
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News & Insights Collins St Special Situation Fund No.2 (Global Gold & Precious Metals) Webinar Update / Round 2 Investment | Collins St Asset Management Airlie Quarterly Update | Airlie Funds Management 10k Words | May Edition | Equitable Investors April 2023 Performance News Argonaut Natural Resources Fund Bennelong Concentrated Australian Equities Fund Bennelong Emerging Companies Fund Glenmore Australian Equities Fund |
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5 May 2023 - Hedge Clippings | 12 May 2023
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Hedge Clippings | 12 May 2023 Treasurer Jim Chalmers was understandably pleased to be able to hand down a budget forecasting a surprise surplus, but according to more than a few economists the real surprise will be whether it eventuates or not. As has been widely questioned, the risk is that the selected spending initiatives will be inflationary, leaving the RBA with no alternative but to either increase interest rates further or keep them higher for longer. Meanwhile, on the revenue side, there is still no appetite from either the government nor the opposition to fix or address the reliance on personal income tax. The opportunity has been lost for another year, as it has every year since the Henry Tax Review in 2010, and no doubt will be put in the too hard basket again next year as well. Hedge Clippings is not going to dwell on the budget too long - it is covered more than enough elsewhere. However, it was interesting, if not alarming, that a research paper out of the RBA this week estimates the chance of a recession next year at 80%. If inflation does continue at an elevated level as many believe it will, and the RBA sticks to its determination to address it, a recession, whether with a "hard" or "soft" landing, is likely to be the outcome. It's going to be a delicate balance, or as Philip Lowe describes it, a "narrow road". Turning to markets and managed funds. Market shocks, such as the '87 crash, the tech wreck of 2000, or the GFC, tend to create opportunity - particularly for the brave - after extended periods of investor exuberance, which when coupled with excessive leverage lead to stretched valuations. The past two to three years however have been different, but according to many managers we have spoken to, could be considered one of the most challenging periods in recent memory. Certainly there were stretched valuations, particularly in the tech and growth sectors, post GFC thanks to QE and central bank intervention, but little could have prepared markets for the combined effects of COVID, Russia's invasion of Ukraine, and the resultant outbreak of global inflation. The small cap sector always takes the brunt when investors switch from risk on to risk off - having paved the way and outperformed in the first place. Over the year to December 2022, the average performance of the 86 funds which make up the Australian Mid and Small Cap Peer Group fell by 19% compared with the Australian Large Cap Peer Group, which fell on average only 4%. By contrast they topped the performance tables three years before. This cycle is not unusual given the lack of liquidity often accompanying stocks outside the ASX200 (and sometimes within it) but there's little doubt that as a result the lack of interest, or appetite for risk accentuates the losses, and in turn creates opportunity. The key of course comes in the timing, so earlier this week we hosted a webinar discussion with three "small cap" fund managers, namely Dean Fergie from Cyan Investment Management, Steven Johnson from Forager Funds Management, and Gary Rollo from Montgomery Investment Management, to ask them the sometimes difficult question about their experiences over the past two years or so, but more importantly, if the worst of the current market was behind them? You can watch a recording of the discussion below, but there were some key take-aways from each of them. None of them shied away from the difficult questions but were all consistent in their view that trying to time the bottom or turning point in the market was an impossible exercise. Each gave examples of oversold companies or markets, and each reiterated that holding profitable, successful businesses, with strong balance sheets (sometimes trading at or below asset, or even cash backing) will provide outsized future returns, rather than selling them at current depressed valuations. Of interest is the fact that while the small cap sector has still underperformed the ASX200 in the six months to the end of April (+3.83% to +8.71%) at least it is positive, while over the past three months while marginally negative, the small cap peer group has just outperformed (-0.70% to the ASX200 at -0.80%). Maybe the tide is about to turn? |
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5 May 2023 - Hedge Clippings | 05 May 2023
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Hedge Clippings | 05 May 2023 "This budget will be handed down in the context of an uncertain and volatile global economy which is precariously placed." Thus Treasurer Jim Chalmers summed up his view of the challenge facing him next Tuesday following his visit to the US to meet his offshore counterparts, and things would seem to have become even more volatile and precarious since then. That was back in mid April when he returned with the message that the IMF was forecasting "an incredibly weak five years of economic growth." Since then the US banking system has gone from bad to worse following the collapse of Silicon Valley, Signature, and now First Republic Bank, with others likely to follow as investor confidence tumbles. Bank failures are not that uncommon in the US, as shown by this list from the FIDC, with some analysts estimating that over 50% of the 4,800+ US banks could be under threat. While in Australia we have a well capitalised, and much more concentrated banking landscape, we too rely on the market's - and in particular depositors' - confidence that their funds are secure, irrespective of government guarantees. While Australia's economy and budget may be insulated to a degree by record low unemployment, bracket creep, and high commodity prices, they are not immune to the stubbornly high inflation which is spreading to the services sector, and increased labour costs. Basic wage demands, along with calls for improved welfare, are likely to feature heavily in Tuesday's budget, even if any increases will be insufficient for those unable to offset the increases in their basic living costs. What is almost certain to be missing on Tuesday is any serious attempt to fix the outdated, inefficient and broken taxation system on which the welfare system relies. Meanwhile, given this week's further tightening both here and the US, seemingly the only remedy to the current inflation is higher interest rates - with the outlook for a prolonged period of both, and the risk that the desire to dampen inflation will damage the economy to the point of recession. The RBA's March quarterly Statement on Monetary Policy, released earlier today, claims at the outset that inflation has passed its peak, and expects the current level of 7% to decline to 4.5% by the end of the year, before returning to 3% by mid 2025. That's dependent on GDP growth of just 1.25% as inflation and interest rates take effect, and with recent declines in retail sales, and the post COVID slump in the Household Savings Ratio, and a 3% decline in Household Disposable Income Growth, that may well be the case. The Statement is careful to add the caveat that the "outlook is subject to a range of uncertainties," but what is certain is the Board's focus on inflation, which in the Statement's Overview gets mentioned no less than 49 times, more than interest rates, wages, labour and the economy combined. If that's not enough, it is worth taking notice of the last paragraph, and the final sentence: "The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that." The RBA's intentions are one uncertainty Jim Chalmers won't have to deal with next Tuesday. Meanwhile, it's no secret that the small cap equity sector, having returned on average 17.42% p.a. over the past three years to be the best performing peer group in AFM's database, has struggled over the past year, falling 11.63%. There's been some recovery over the past six months, so next Tuesday at 4:15 AEST we will be hosting a "round table" webinar featuring three fund managers from the Small Cap sector.
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28 Apr 2023 - Hedge Clippings | 28 April 2023
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Hedge Clippings | 28 April 2023 |
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Economic Cross Winds Following last week's release of the Review of the Reserve Bank, which targeted the RBA's culture, management and performance, the focus now returns to next week's board meeting, and the potential for an extension of the policy pause announced in March. Supporters of this view - by no means unanimous - were encouraged by this week's inflation figure which saw annual inflation to the end of March fall to 7.0%, down from December's 30 year peak of 7.8%. Others saw it differently, particularly those who pointed out that inflation at 7% is still at least 4% above the top of the RBA's target range of 2-3%, and are wary of the inflationary effects of wages policy, plus any inflationary impact from the Government's first budget, due on Tuesday week. Thereafter it is going to be more difficult for Chalmers to blame Scomo (a.k.a. Minister for Everything) and Josh Frydenburg for Australia's inflationary and economic woes, when the root cause of the current situation was global or external. Our call is for a continuation of the pause, even if only for a month until the budget is out of the way and the picture is clearer. However, barring a recession, expectations are for inflation to remain elevated for longer than the RBA expects, so it is likely to be well into 2024 or beyond before Australia's inflation rate starts with a "2", by which time, if Jim Chalmers has anything to do with it, Philip Lowe will be long gone. Turning to the US, there is also a Fed meeting scheduled for next week, with the Federal Reserve chairman Jerome Powell facing further economic cross winds as core inflation picked up in the March quarter, while growth was just 1.1%, well under the median forecast of 1.9%. Higher inflation, coupled with lower growth, is not a positive formula, particularly while the Fed is also grappling with falling confidence in the banking system as San Francisco based First Republic Bank suffered withdrawals of 40% of its deposits in the first three months of the year. Coming on the back of the collapse of US banks Silicon Valley and Signature, and the Swiss National Bank's emergency liquidity of US $120 billion to support the UBS absorption of Credit Suisse the risk of contagion in the US and the global banking system is heightened. This article from the Economist Intelligence Unit - although a few weeks old - argues that financial contagion is unlikely. However, if consumers or depositors' confidence is shaken by the chance of their loss of capital, this could change very rapidly. |
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News & Insights Australian Secure Capital Fund - Market Update March | Australian Secure Capital Fund Investment Perspectives: Banks, balance sheets and bailouts | Quay Global Investors March 2023 Performance News Bennelong Concentrated Australian Equities Fund Emit Capital Climate Finance Equity Fund Insync Global Quality Equity Fund Insync Global Capital Aware Fund |
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21 Apr 2023 - Hedge Clippings | 21 April 2023
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Hedge Clippings | 21 April 2023 This week Treasurer Jim Chalmers released his "independent" Review of the Reserve Bank of Australia and by all accounts he intends to accept all recommendations of the Review's three person expert panel. By and large the panel was broadly critical of the Bank board's structure and governance, with most of that criticism, implied or otherwise, and rightly or wrongly, falling on the shoulders of the RBA's embattled governor, Dr. Philip Lowe. Lowe's been a convenient punching bag for a while now, but in particular, he's copped criticism from those who took as gospel his mid Covid forecast that the then cash rate of 0.1% wouldn't rise before 2024. History of course tells a different story, and hindsight is easy, but Lowe was only echoing what most central bankers were saying at the time at the height of the COVID panic, and before Putin invaded Ukraine. However the expert panel's Review of the RBA went much further than that, and the ramifications will be significant, with the change in the Bank's mandate to take into account both managing inflation and, or while maintaining full employment. In future there will be dual boards, one responsible for governance, and another, whose members will have greater economic expertise, responsible for setting monetary policy. The external Monetary Policy Board will meet 8 times a year, with policy decisions to be more transparent, including a press conference after each meeting. Board members should speak publicly "occasionally" about the work of the Board. Chalmers has wasted no time in appointing two new members of the Board, Iain Ross and Elana Ruben. This is in spite of the Review's recommendation that "External Monetary Policy Board members should be appointed through a transparent process. Positions should be advertised for expressions of interest, drawing on a matrix of required skills and experience. A panel comprising the Treasury Secretary, the Governor and a third party should recommend options for suitable candidates to the Treasurer." We're not doubting Ross or Ruben's skills and experience, but we're not too sure about the transparency, or the positions being advertised for expressions of interest. As for Philip Lowe's reaction to the criticism, implied or otherwise, he was his usual measured self, albeit no doubt through gritted teeth. In the RBA's official release when defending the organisation he heads up, he included this quote: 'The Review Panel rightly acknowledged the substantial contribution the Bank has made to Australia's economic success and the skills and dedication of the staff. It also acknowledged the RBA is highly regarded and respected in Australia and overseas.' He was even more defensive at a press conference later, describing the overall review's finding as "kind of excellent" and saying the panel's comments about the workings of the board "didn't really resonate with me". Lowe's term as RBA Governor is up in September, and although he's offered to continue (if asked), we suspect the writing's on the wall. Meanwhile, tucked into the appendices at the back of the 282 page Review was a list of the 137 people who contacted, or were contacted by, the expert panel. Fourteen were members of parliament, including understandably both the Treasurer and Shadow Treasurer. Of the remaining twelve, two (Costello and Frydenberg) were former Treasurers, leaving eight of the final ten being Independents, including Jacqui Lambie. We're not sure if it's relevant that Pauline Hanson wasn't on the list, but her absence probably didn't affect the outcome of the final report! Overall (Philip Lowe excepted) the Review's findings have been well received, but particularly by Treasurer Jim Chalmers, who having initiated it, accepted 100% of its recommendations. It's a shame he won't take the same approach to the more important reform of Australia's taxation system, starting with his budget due next Tuesday week. |
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News & Insights The Lipstick Effect | Insync Fund Managers Quay podcast: FORA - fear of renting again | Quay Global Investors Why quality matters? | Magellan Asset Management March 2023 Performance News |
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14 Apr 2023 - Hedge Clippings | 14 April 2023
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Hedge Clippings | 14 April 2023 Jim Chalmers headed off to Washington this week for meetings with the G20, the World Bank, and the International Monetary Fund (IMF) among others, and ahead of his first full federal budget in May. The Treasurer's visit coincided with the IMF's release of their latest economic outlook, which to say the least, was not rosy, predicting an uncertain global outlook driven by financial sector turmoil, high inflation, the ongoing effect of Russia's invasion of Ukraine, and three years of COVID. |
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News & Insights Market Commentary - February | Glenmore Asset Management March 2023 Performance News Skerryvore Global Emerging Markets All-Cap Equity Fund Bennelong Emerging Companies Fund Delft Partners Global High Conviction Strategy Bennelong Twenty20 Australian Equities Fund |
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6 Apr 2023 - Hedge Clippings | 06 April 2023
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Hedge Clippings | 06 April 2023 Last week's Hedge Clippings correctly predicted that the RBA would hit the pause button on their combined rate rises of 3.5% since last May. However, the key word is "pause". As always, after all the preliminaries in the RBA's post meeting statement, check out the last paragraph, and particularly the final sentence: "The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that." That target of course is the oft' quoted range of 2-3%, but the Governor's statement also noted that inflation, while moderating, is not expected to reach "around" 3% until mid 2025. As we also discussed last week, while the latest monthly inflation figures are improving, (no doubt helping the "cause for a pause") the tight labour market, as evidenced by unemployment at 3.5% and at around 50 year lows, coupled with calls for wage increases in some sectors of 6-7%, are a "cause for concern". The RBA release noted that at the aggregate level wages growth is still consistent with their inflation target, (i.e.2-3%) but our best guess is that this is where the wheels may fall off the RBA's calculations. The RBA's statement referred to it in classic central bank-speak by saying the board will "pay close attention to both the evolution of labour costs and the price setting behavior of firms". By which they also presumably mean the public sector in the Labor controlled mainland. Calls for Philip Lowe's head on a platter have (sensibly) diminished over the past couple of months, but going forward this will no doubt depend on him being able to navigate the narrow path between taming inflation with higher rates, and so slowing the economy, and at the same time achieving a soft landing. That's a tough juggling act. For the moment - at least for another month - the RBA is buying some time as they wait for clarity on both inflation, and the effect of their efforts to control it over the past 12 months. Thereafter, expect rates to rise by another 0.15 to 0.25%, while any reduction - barring a recession - seems a long way off. Meanwhile, staying on the RBA, their latest Financial Stability Review, released this morning, looks at household budgets and associated financial stress, and confirms the bank's Baseline Economic Scenario; namely, that over the course of 2023 unemployment increases slightly to 3.75%, incomes will grow by 4.25%, expenditures will increase by 4.75%, and the cash rate will peak at 3.75%. In that scenario, the RBA predicts that around 15% of households will have "negative spare cash flow" (aka mortgage and living expenses greater than income), which from the perspective of the overall economy, they expect to be manageable. The Adverse Scenario - unemployment rising to 5.5%, under-employment 8%, and with wages growth and inflation dropping as a result, would see 17% of households with negative spare cashflow - as usual with the stress falling unevenly on lower income borrowers with low, or zero, savings buffer. The Bank expects the broader financial stability implications (i.e. damage to lenders' balance sheets) to be limited. However, as Philip Lowe pointed out in his address to the National Press Club earlier in the week, one of his major concerns is the level of inflation and stress in the rental market, where the data and statistics are more difficult to assess. This is dry subject matter for a Thursday, but we'd like to take this opportunity to wish everyone a safe and "Happy Easter" or whatever you may be celebrating. |
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