RBA Cash Rate – December 2019

Today Governor Lowe and the reserve board met for the final time in 2019 and they kept the cash rate on hold at 0.75%.

Now, in 2019 we saw three rate cuts. And for all of those people who love the data, what’s interesting about that is between August 2016 and May 2019 — 34 months — the cash rate was on a hold at 1.5%. So they’ve definitely tried to stimulate the economy, but haven’t seen the bounce that they were looking for yet. And so there’s still potentially more work to do. In 2020 most economists and forecasters are thinking maybe one, possibly two, rate cuts next year. And I’ll talk a little bit more about quantitative easing, or some other unconventional monetary policy measures that the RBA are looking at when I get into our own backyard. But first, because there are lots to get through today, let’s talk about global markets.

 

So obviously the US and China trade deal continues to dominate, in regards to economic activity and economic sentiment. There’s still a hell of a lot of posturing going on; not helped by President Trump’s recent signing of the pro-democracy protestors is in Hong Kong. So that’s put a little bit of spanner in the works.

But again, I’m confident that we will see a deal very, very soon because the president needs his US economy to be firing for his reelection chances next year.

Speaking of the US economy, GDP was upgraded from 1.9% to 2.1% for the September quarter. That’s a positive story. Personal incomes were flat in October, and that is the weakest result over the course of the year. Interestingly in business spending on the back of the pending US trade deal, which Trump says We’ve got a deal, sorta haven’t got a deal. We’ve got a deal, there’s going to be a deal, has seen a spike. And that’s good. So, basically, non-defence capital goods orders are up 1.2%, and that’s the strongest increase in business spending since January of this year. Also, we saw during the month of November that Jerome Powell confirmed the guidance from their Fed Reserve in regards to a pause on any further easing on monetary policy there in the United States. So that’s where their story starts and ends. So not a bad story for the US at the moment, but could be better if we see a trade deal get over the line.

Turning our attention to the world’s second biggest economy China. They’re manufacturing PMI rose to above 50. We were the rating of 50.2 in November. It’s the first reading above the neutral setting since April of this year. And also non-manufacturing confidence also rose to 54.4 — and that’s the highest rating since March. Now that obviously tells us that the stimulus that the government introduced several months back in China is doing something to lift the Chinese economy. It’s not doing a huge amount, but it’s still positive news there in terms of when we talk about China.

Turning our attention to the Eurozone; the Euro inflation data came out and expanded faster, in terms of rising 1% over the year to November. Now that’s a positive result considering it’s up from 0.7% in October. So it still remains below the ECB, which is the European Central Banks forecast where they’d like to see it was just under 2% — but it’s heading in the right direction. Sothat’s not a bad news story, uh, for the Eurozone. In terms of Eurozones unemployment, again, and as a positive new story here — the unemployment rate fell to 5.7% in October; and that’s the best results since July of 2008. So hopefully more good news story. Finishing off the good news story of the Eurozone —

They’re still not smashing it over there, but still positive stories — GDP growth grew by 0.2% in the third quarter. Key surprise here was actually Germany’s expansion. I grew by 0.01% for the third quarter, but that meant that it avoided because I had a negative quarter of growth the previous quarter. So that meant that they narrowly avoided a technical recession of two negative quarters of GDP. Rounding out our global trip, UK is going to the polls on the 12th of December. It looks like Boris Johnson will get reelected and will have his mandate for them to exit the EU. So time will tell, in terms of what plays out there when we look at the global story and the story in the UK.

 

Now let’s turn our attention back home — and we’ll start with probably some of the biggest news stories of the month. And that was around the statement of monetary policy there. And now this confirmed that the RBA had, once again, downgraded it’s near-term outlook for the economy. So we’ll get through some of the numbers. (Click here to listen/read RBA’s Governor, Philip Lowe speech)

Now, the RBA expected GDP growth to be 2.25% in 2019 and 2.75% in 2020. It expects inflation to remain below its 2 – 3% target band until December 2021. Turning the attentions of monetary policy forecast for the labor market — they now expect unemployment rates to remain steady at around 5.2% until it begins to drift lower in mid-2021 — not next year; mid-2021. So that’s important to know where its then forecast, in their view, to reach an unemployment rate of 4.9% by December 2021. So, obviously, a bit of work to do there in regards to stimulating the Australian economy. And I think the Liberal party have some work to do federally, in terms of also playing their role in getting some stimulus out there in the market.

The other big news came last week and that was when we heard from Dr. Philip Lowe in regards to unconventional monetary policy speech that he delivered last week.

And this speech was very interesting; in terms of he shared his views in regards to the observations of what quantitative easing and different sorts of unconventional monetary policy stimulus that has occurred globally since the GFC. And so we’ve got some really interesting insights in regards to that. And then he was pretty transparent in the in which he talked about how quantitative easing and what sort of opportunities he saw for the Australian market. And so he stressed — and I want to stress this point — that he sees no need for any type of unconventional monetary policies until the cash rate gets to 0.25%. Now, remembering we’re currently at 0.75% — so that’s potentially two further rate cuts that we might see next year. Now he also said that there would be need to be any sort of unconventional monetary policy or quantitative easing, or anything like that, in the near future. So he’s basically trying to signal to the market with these forward guidance around the fact that the economy is still going okay. And when you do look at our numbers compared to other performance of established and developed economies, our economy’s ticking along well; but we are definitely recognising that their situation of low growth environment and low interest rates are here to stay. And you saw that in what I just mentioned in terms of the statement of monetary policy and our forecast for growth.

The other important things that he also talked about was when the economy is persistently moving away from the target objectives of low inflation and low unemployment. So he’s basically saying that these are measures that he doesn’t necessarily want to introduce unless they foresee that they absolutely needed to do so.

Now in terms of the stimulus that he would like to introduce, he was very clear in regards to what that seamless should be. And that was around buying government bonds. Okay. So instead of doing negative interest rates, which there has been a lot of talk about negative interest rates — printing cash; those types of things — he’s going to avoid those types of policies and focus on buying government bonds, which has a flow on effect in terms of asset stabilisation and then also decreasing interest rates in terms of the cost of money another means to do that other than just touching the cash. So we were pretty clear in terms of the agenda from the RBA and the thinking from Dr. Lowe in regards to his position around how we might further stimulate the economy through monetary policy, in the event that we need to do so.

But again, he also stressed only in the event that we need to do so. So that’s the sort of two big stories from the RBA in regards to their positioning and posturing for the last four weeks.

 

The Aussie dollar — I want to start with that — continues to slide against the US. So, obviously good news for our businesses that are exporting and those who get paid in US dollars such as our great businesses like CSL, some of our mining and, and I think even Cochlear also wins a lot of their money in terms of U S dollars. So that’s good for the economy. I’d also like to think that it would encourage the Aussies to actually holiday at home and spend some of their money here andthe domestic economy would also boost our GDP and also employment opportunities. So go on holiday in Queensland everyone, or wherever to holiday and so forth; Western Australia, great places to visit. And also why not take a couple of domestic holidays over the Christmas and festive season and get involved in that. Now in terms of the equity markets; the  good news here is we’ve hit a record high in our equity markets; combination of, obviously, our money needs to be deployed some way when we’re getting very, very low bank returns in terms of our interest that we earn on savings. So some of that money has flowed into the equity market, so we’ve now surpassed our record highs of 2007. So the equity market remains strong in Australia, as in the US and some other developed nations around the world.

I’m now turning my attention into business sentiment. It did improve in October, but still remains below its long-term averages. So the NAB monthly business confidence means that rebounded from a zero rating in September to a rating of plus two in October. Conditions, in terms of confidence and conditions, so registered a 1% point increase to record three. So that’s in terms of current conditions.

I’m now turning our attentions to unemployment. We saw there that it wasn’t necessarily a great result for our October numbers. We did actually have job losses of 19,000 jobs in October. Now this is interesting— it followed a revised 12,500 increase in job numbers in September, which basically meant that our job number in unemployment number in September moved from 5.3 down to 5.2, based on this revise number from the ABS. But obviously these job losses also then move that unemployment number back to 5.3%. Now, this is the worst result since August of 2016. Full time jobs fell by 10.3000 — and there were 8,700 fewer part time positions. Skilled vacancies also fell in October to 10th consecutive month of decline. So we need to do something there. And we just saw yesterday that the I ANZ job ads were released and it showed the Australian job advertising on newspapers and internet decline by 1.7 month on month in November compared to market sentiment. So the market consensus was the job numbers were going to fall by 2.2%. So although, not a good numbe; not as bad as what, uh, what the economists were thinking, and that was obviously after a fall of 1% from the previous month. So that’s our unemployment story. So that would be playing on the minds of the RBA, but in this particular case, not enough to change their rate, terms of keeping the cash right on hold in December.

Now, wages growth. So wages grew at a rate of 0.5% in the September quarter, and that was the same as the June quarter, which brings our annual rate of growth down to 2.2%. And that’s the lowest since June of 2019. Now, I do have a message here, however.

We have been focusing on the slow wage growth —and, yes, it is low considering our long-term trends of three plus percen — but we also need to be reminded that inflation is considerably lower and it’s also historical long-term, uh, of three to three and a half. So if our inflation rate is 1.5 to 1.6 and our wage growth is 2.2; we’re technically still NET better off, in terms of the costs of living on going up.

Now obviously you can argue — and it’s a fair argument — in regards to energy costs and certainly health costs have gone up and food costs through the drought, so we’re not necessarily seeing that play out week to week, month to month, but it will play out over time even and remains lower than wages costs, so we’re still technically in a better position. Hopefully the drought will break and hopefully our governments will organise our energy policies and introduce nuclear and make our energy costs cheaper, in my view, and that should flow through the economy over the coming decades, which also be a good thing.

Now, I wanted to just finish out before I talk about the property story about the MYEFO — which is basically the media economic and fiscal outlook — that will be available last year. It was available in December, but that’s not coming out until January. So certainly the RBA and all economists will be interested in terms of how the economy has performed in the first half of last year. And this basically checks in on the budget. So this is when we will see a surplus being recorded, and that the economy’s back in surplus. So the Liberal party will score their political points, which will annoy us all, but it will happen. And then hopefully we’ll then see them being sensible around bringing some further stimulus into the economy, which we absolutely need from a fiscal standpoint. Some of that stimulus absolutely needs to be things like New Start allowances need to increase. So hopefully we’ll see a bit more stimulus coming in from the fiscal side of the fence as opposed to all of the effort being on monetary policy at the moment. So that rounds out the economic outlook.

 

I’m now going to talk about the property story…

In regards to the property story, I’ll start with credit and lending. So private sector credit slowed in October to just a 1% growth. It’s the weakness reading for four months. Business credit also contracted 0.1 — first decline since January 2017 — and it’s does correspond to a little bit of a weakness in terms of business confidence and business investment. So we need to do more there. In terms of housing credit — this is a positive news story. So it picked up a touch to be up 0.2% growth in September to a 0.3 in October. I do suspect that this number will increase given the results I’m about to share with you in regards to what’s happening in the housing space in terms of prices. So I think that that data number will pick up. In terms of building approvals, we did see those those results come out yesterday and we saw a decline in approvals of 0.8% in October. Now that represents 23 months of declines after peaking from our last property boom. So that is standard in terms of how the cycle moves. Obviously, the headwind’s there and still remain in the medium and high density construction and the confidence that — the lack of confidence — playing out in that particular space. So that’s something to watch. But I do expect House and Land Packages and freestanding construction to improve —now and also into 2020 as property prices continued to move up and first time buyers start to enter the market with some of the stimulus that’s also coming out in regards to federal government and also the state government incentives. So that sort of plays that story.

Finally, CoreLogic released their results for November. (Click here to download the chart pack)

 

Again, very, very positive property price results. Five months now of national price growth after bottoming out. Sydney, an incredible 2.7% growth for the month. Melbourne, not far behind, with a 2.2% growth for the month. So over the quarter Sydney is 6.2% up and Melbourne then Trump’s Sydney at being 6.4% up for the quarter. Now you can get all those great results from CoreLogic. I just want to read out the quarterly numbers. I’m not so wedded to monthly ups and downs. It’s the quarterly results that I’m keen to look at. So Sydney, again, Sydney quarter, 6.2% up. Melbourne quarter, 6.4% up. Brisbane quarter, 1.8% up. Adelaide, 0.9% up. Perth, negative 0.9% for the quarter, but a positive new story for Perth. We saw a positive growth a 0.4 for the month, so good story there. Hobart still going up at 2.8%. Darwin, negative 1.1% for the quarter. Canberra, also having good result, being 3.2% up for the quarter. So combined capitals: 4.6% up. Combined regionals: 1.1% up. The national overall price growth at 3.8%.

 

So some of the highlights…

• Best performer — Melbourne at 6.4.
• Weakest performer: Darwin at negative 1.1.
• Highest rental yields still remain in Darwin — with the obviously very low valuations are up in, 5.9% yields
• Lowest yield is Sydney at the moment at 3.1%.

So some interesting numbers plying out there.

 

So my final message for the year as I round out 2019 is… it very clear that economic sentiment is now weighing in regards to the negative side. The news and the media cycle is on the back of that, which I do think is fair enough. The economy is underperforming in regards and the consumers are more broadly concerned in regards to these historical low interest rates and what that means for them. So I think that’s a valid message. But I also want to remind people that, in terms of that message… that the money’s not coming out of the economy. By that I mean, if you’re employed and you’re receiving your money, what’s happening to that money? It’s hitting the balance sheet somewhere. And so if people aren’t spending; effectively what it’s doing is reducing household debt. And if you don’t have any debt, it’s actually increasing household savings.

So I think we can’t lose sight of the fact that money is still flowing in the economy — it’s just not flowing in the spending side.

GDP is made up of 60% of consumption, okay? And that’s where we’re seeing less consumption. But what it does mean is that if we’ve got record household debt, okay, and we are paying some of that down, it actually means we’re paying less interest. And so if that continues over the course of the next 12 months, and our hassle debt levels start to decline, or a household saving levels improve, at some point into the future, consumers will come back out and they will spend. And so if the government can stimulate that after we consolidate a bit of debt — and it might take 12 months or more — then the economy’s going to do a fairly good job of rebounding. Because again, the money is not going nowhere. All right? It’s going into paying debt down or going into savings if consumers aren’t spending. So it’s my view that we may still see historically low interest rates for the long-term? That’s true. But I still think we will see a more uplift when it comes to the economy after these flattening periods. So I’m still quietly optimistic in terms of what’s going to happen into the new decade. And as we turn that ticket over… well, we know that obviously the Reserve Bank will take a break, as I do, in January — and they will look at the data — so how well the Black Friday Sales went at the end of November and then what sort of consumer consumption’s happening throughout the course of the festive season and into the Boxing Day Sales and the travel and also the expenditure that’s going on in the economy — we’ll regroup and have a look at the data in February and then basically make their points.

 

So what does that mean?

It does mean we’re probably going to see at least one more rate cut — possibly a second rate cut —before the middle of next year. Most economists are tipping that. That first rate cut will come in February. That’s okay. In terms of my understanding of this — I still think longer term — as I said, the economy’s growing, population is growing. If we’re not spending that money, we’re saving it for a rainy day and that rainy day will come and we will spend it. So as I send the final message, I hope you have a great Christmas and festive season. Stay safe, stay happy, and remember…

… Knowledge is empowering, but only if you act on it.

Until next year, I’m signing out.