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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate December 2020: The Big Turn Around!?!

Today, Governor Lowe and the reserve board met for the last time in 2020, and it’s been an interesting year, and they did keep the cash rate on hold, and did no tweaking to the current buying program that they’ve got in place.

They’ve done pretty much all of their heavy lifting, so the focus for this economic update is going to be more around some of the themes we’ve seen, because it has been a huge November in terms of what has transpired. 

Firstly, let’s talk about the health crisis — that is obviously what has caused the global economic slowdown, and has seriously impacted our movement and mobility in life. I wanted to focus in on those particular bits of news.

Firstly, the not so great news, and that is as the Northern Hemisphere is entering into its winter period, we have seen an increased spread of the virus throughout Europe and also the U.S., the UK, and that has led to further quarantining and lockdown during that time, so that is definitely going to impact some of the economic growth. We’ll see those coming up in the data that we look at shortly.

On the positive front, we’re talking about Pfizer-BioNTech results and also Moderna’s results in terms of their vaccine and the efficacy that they’ve achieved, which is around that 95% mark. Now, that is incredible considering that normal efficacy in these areas for these types of vaccine is only 60 to 70%. This new technology and the way in which they’re looking at treating these types of diseases is very encouraging. The final vaccine that also went through stage three trials was the AstraZeneca drug as well, and that achieved a 70% efficacy, or higher, if you also look at the preliminary findings on the different uses of dosages that they put out there. That is a positive news story.

Now, it’s still important to note that we still have a long way to go for these vaccines to be made available, to be able to quash the virus globally. There will be at least one or two years for that to occur, but what’s really positive here is if obviously people can get a vaccine and then we will see increased mobility. We’ll also see the world start to open up a little bit more. We’ll start to see international travel start taking shape. We saw some of that news come through from Qantas and other airlines talking about how you may need to have some type of visa or proof of vaccine, and that will allow you to then potentially start to travel as we see the world economy opening up. That is the good news on the health front, but there’s still some challenges, as I said to you before, about winter in those particular marketplaces.

Now, let’s turn our attention to The United States of America, and we did see the election run and won.

It took a week or two before we found a clear winner, and that obviously, winner, has been Joe Biden successfully defeating Donald Trump. I think that is more broadly speaking, excellent news for the next four years, in terms of more predictable politics, more engagement with the world rather than the America First or the America Only rhetoric that we saw from the Trump administration. Let’s start to see how that plays out. I think also, geopolitically, it’s probably not bad news as well, because what we’re going to see is more diplomacy as opposed to the us versus them rhetoric, and it probably doesn’t give China the same opportunity to take advantage of a pretty ordinary run administration, let’s be honest, so we can see Russia and potentially China, now, not necessarily having that same sort of ability to take advantage of that poorly led administration.

Turning to the U.S. economic news, what we did see in the data for the U.S. economy is certainly a struggling or a stumbling in terms of their current situation. We saw initial jobless claims rise 30,000 to 778,000 in the third week of November, and many weren’t expecting that. They were expecting a decline rather than a rise in jobless numbers, and this is the first back-to-back weekly rise since July. We were seeing jobs starting to be absorbed, and taken back up, but we didn’t actually see that during those last couple of weeks, because of obviously, the rise in COVID, the lockdowns that are going on, and also, probably a little bit of uncertainty around the economy. If people think that Trump was pro the economy and pro-jobs and potentially a Biden administration might not be that, but I don’t think that’s going to be a case. We’re starting to see Joe Biden line up his cabinet and the people looking after the economy, so I think we’ll see a little bit more prosperity comes in regards to that moving forward.

What we also saw, was personal incomes fell by 0.7 in October from the previous month. This is reflecting a decrease in the stop gap wages assistance scheme that was introduced, and consumer confidence across the U.S. slipped on the virus concerns with the Conference Board Index falling from 100.9 in October, to 96.1 in November, so still some difficult news in there. On the positive news front for the U.S., the U.S. Census Bureau confirmed the U.S. economy rebounded, an annualized rate of 33.1% in the third quarter, or rose 7.4% compared to the previous quarter. That just says to us they obviously had that first bounce, but they’re obviously challenged by this third wave of the virus going through America at the moment.

Personal spending has held up for the six straight months, rising by 0.5 in October. Again, lockdowns might put a further short term pain in regards to that spending, but it was there. The core personal consumption expenditure, the PCE deflator, which is wildly watched measured by the US Fed Reserve was also seeing some positive news in terms of consumption spending. The PMI results were stronger than expected. Manufacturing PMI rose to 53.4 in October, to 56.7 in November, while the Services PMI Index rose 0.8 to 57.7. Positive results reflect further strengthening of demand, even though those infections are there. It really is a little bit of a mixed bag in the U.S. at the moment.

Turning our attention to China; the second biggest economy in the world; we did see their economy continue to take strides forward.

Retail sales were up 4.3% year-on-year in October, following a 3.3% lift in September. The main contributors, including clothing, jewelry, and automobiles. Industrial production rose 6.9% in October from a year earlier, remaining at the same pace as September, so still strong growth there. Investment in fixed assets increased 1.8% in October, year-on-year after a 0.8% lift in September. Investment by state owned enterprises was the main driver, rising 4.9% while private company investment did decline by 0.7 of 1%.

Trade surplus; it’s an incredible story this trade surplus. Widened in October to 58.4 billion from U.S. 37 billion amid a surge in exports and a dip in imports. Exports unexpectedly spiked 11.4% in the year to October after annualised growth of 9.9% in September. Imports grew by 4.7% over the year to October after a record annual import bill in September. Starting to balance out, but we can see more of that exports going out.

The Purchasers Managers Index, the PMI index for October rose two points to 56.8. The Manufacturing PMI rose to 53.6. This result suggests continued recovery in the smaller firms and strengths in the exports that we just talked about. In terms of finishing that off, in terms of industrial profits, soared 28.2% in the year to October, the sharpest rise since December of 2011, so they’re rebounding in industrial activity, and stronger exports underpinned that very, very solid result.

Now, we can’t leave China without talking about what occurred last week in regards to China imposing a temporary anti-dumping duties of 107%, right up to 212% on the Australian wine sector. Now, the wine sector, Chinese exports are worth about $1.2 billion year to date into China, so that is obviously very, very disappointing, and it sort of highlights these trade tensions between Australia and China have escalated. There was a report in the Chinese state run, China Daily, the editorial warned the Australian Government that it would pay tremendously for its misjudgment if it continued to back the U.S. Government’s efforts to contain China.

Now, this comes back to what I was saying before about how Joe Biden handles these relationships. Hopefully with a little bit more diplomacy, as opposed to an iron fist approach that Trump was using. Let’s hope we see a cooling of the jets in terms of egos, and chest beating starting to slow down in that particular space. There is speculation further that Australia in regards to sugar, lobster, copper, copper concentrate, and also, some timbers will be banned in China, so it may get a little bit worse, and that is on reportedly instructed by the communist party officials to halt these imports.

We’re seeing the big boys starting to flex their muscle, and Australia is caught in those crosshairs. It really is disappointing to see how that plays out. We are seeing the Australian government take a firm line, which they should, in regards to heading over to the World Trade Organization and starting to say, “Hey, we’ve got a free trade agreement with you guys. It all needs to be fair in love and war.” That doesn’t seem to be the case as China continues to push the envelope there.

Turning to the Eurozone….

The recent lockdown restrictions are starting to take a toll on the European economy. The Markit Composite Purchases Managers Index, that’s a mouthful, in November declined to 45.1 from 50 in October. Remember that a reading below 50 means that there is economic contraction. The Services PMI Index declined from 46.9 in October to 41.3 in November, and rounding out the three indexes, the Manufacturing PMI will also drop 1.2% in November to 53.6%. Finally, the… zone from a negative 15.5 in October to a negative 17.6 in November. This was obviously the second straight fall on the back of the lockdown measures being experienced through Germany, France, and those other European countries.

Commodity markets; we are starting to see the oil price trend higher, and that is on the back of the vaccine story, which means, hopefully, mobility and economic expansion as people can go about their day-to-day activities, and we can get back to some more normality. We did see the oil price in New York reach their highest level since early September. Gold prices continue to trace downwards, and that’s on the back of obviously money exiting the safe-haven holdings, as people look to get their money back into better return markets, and probably more comfort in the fact that there’s not necessarily going to be a more severe economic downturn. Iron ore prices are definitely holding up in strong demand from China and obviously Brazil supply chains challenges there around managing their outbreak of the coronavirus.

In terms of the equity markets, put simply November was a cracker month for the equity markets. We saw both the U.S. and Australian equity markets enjoy bumper returns for the month. In a lot of cases, double digit returns, and given the paltry returns that people are getting in savings accounts and money in banks, and bonds… definitely a flood of money coming into the equity markets, and that has resulted in the Australian market returning to where it was at the start of the year, and the U.S. market consistently pushing its record high levels as well.

I want to also, finish off our conversation around the global activity. Talking about a big development also, for Australia, and this was that Australia had signed a new 14 nations trade agreement, called the Regional Comprehensive Economic Partnership. Those negotiations first began way back in 2012 when Australia and 14 other nations, including the second biggest economy in the world in terms of China, and the third biggest economy in terms of Japan, Singapore, and other nations in that area. That was a good news story. Now, the whole idea of this Comprehensive Economic Partnership, because it will be the biggest and largest trade pact in the world, is to cut tariffs, listening China, set common rules on of origin and codify e-commerce, so we can get digital technologies working better. The agreement definitely does put pressure on the U.S. President Elect, Joe Biden to rejoin the Trans-Pacific Partnership, which Donald Trump exited in 2017 saying it wasn’t a good deal for his nation.

Now let’s turn our attention back to our Australian economy and the local economy.

Really, I mean, the big news today is not so much about what the RBA is doing, because all of that, hopefully, monetary and fiscal policy work we’ve seen both the federal and state governments do, and now, the monetary policy, which the RBA did last month, is not the biggest story in town. The biggest story in town at the moment is the Queensland Government finally opening up its borders to both Victoria and New South Wales travelers. That means that we will have an East Coast open marketplace. Those border reopenings will see people spending millions and millions, tens of millions of dollars on holidays and transport, and that bodes well. For when people do go on holidays, they spend more, so we’re definitely seeing that will help with not only economic spending, and activity, and recovery, but also jobs in those desperately needed tourism and travel sectors. That is probably the biggest news today in terms of those flights starting to open up and those markets opening up.

Turning our attention now to jobs and the unemployment story, we did see the labor market resume its recovery in October with the creation of 178,000 new jobs. That’s excellent. That’s the fourth month since March in which we saw a hundred thousand new jobs being created. Now, despite that, we did see the unemployment rate increase from 6.9 to 7%. Now, that was on the back of a sharp rise in the participation rate, which rose to 65.8% in October from the 64.9% in September. Good news, though. That means people are looking for work. The level of unemployment in Australia is now just 1.7% below its pre-COVID levels, and this represents still, 200,000 new jobs that we still need to find to get back to where we were pre-COVID.

Now in October, hours worked reached 1,711 million hours, and that’s 3% below the pre-pandemic levels, but it’s trending in the right direction. The underemployment rate fell to 11.2% in October from 11.7% in September, so the reopening of the borders also gives the economy a real fighting chance to do even better in the fourth quarter. That’s also good news. Now, staying on the jobs and wages front, we did see that the WPI slowed again in September quarter. This is the wage index with growth of just 0.1. This is the slowest pace in history since the series began back in 1997. On an annualised basis wage growth slowed to 1.4% in the September quarter, and it’s the weakest annual pace, again, since 1997. We need to do more there, and there obviously is a focusing on that. You’re hearing the Reserve Governor and most economists focusing in on how we get unemployment sub-4%, because that’s when we’ll start to see a better story in terms of wages growth.

Then we look at the New South Wales budget for a moment. Obviously the biggest budget in our nation. We did see last month, they released their budget, and we did have a projection of a deficit of 16 billion in 2020-’21, following the deficit of a 6.9 billion in ’19-’20, so that is the projected deficit coming through there.

Major policy measures; just summarising those $2.8 billion in temporary payroll tax, all state governments listening, payroll tax, it’s a shocker, get rid of it. That was also helpful over the next two years. A hundred dollars digital voucher to be used to stimulate people going outside and spending. Visitor sites and cultural attraction, so getting people out and spending money to a total of 500 million there. 472 million in small and medium sized enterprise relief from government fees and charges, that’s helpful to keep small and medium size enterprises operating. 337 million for school student tutoring, and preschool fees abolished up until ’21 at a cost of $120 million for those preschools as well.

Now, that’s the largest economy. Second largest economy; Victorian budget. They also had a real jobs focus. They are forecasting a budget deficit next year of circa $23 billion following an 11% fall in state tax revenues, and a 21% increase in expenditure. Net debt is expected to rise to 44.3 billion or 10% of gross state product in financial year ’20. That will build it up, or the peak debt, to about $155 billion. Circa 29% of gross state production by financial year 2024. That’s also interesting.

Now, they have a jobs focus, which is great. What do we see in that? We saw a billion dollars in TAFE for training, including 631 million to address increased demand. That’s 80,000 new places in TAFE for trades, and some free tuition in certain areas. We saw 836 million for small to medium size enterprise tax credits worth 10% of every dollar of wages paid. Good, keep them down. Again, payroll tax doesn’t do any favors for people wanting to employ staff. We did see also, $500 million Victorian Homebuyer Fund to contribute to the purchase price of both new and existing homes by the government taking a proportionate equity interest in the properties. That’s going to be great for single household incomes looking to get into the property market.

… Stamp duty waiver of 50% for new properties, 25% for existing properties.

That is going to stimulate purchases, certainly up to $1 million being provided for contracts entered into before 30 June ’21, so that’s going to be a real demand driver there. Also, the other good news was around a big housing build spend for social housing. 12,000 new social and community housing projects, spending $5.3 billion to provide for that social housing in Victoria.

The other big news today, as I said, we’re now no longer in a recession.

We did see the GDP results coming out today. Now, at the time of this recording, I didn’t have those results available to me, so I’m just going to say the estimates were around three to 3.5%. That says that we’ve bounced back quite nicely, and I suspect the fourth quarter, given the indications of what’s happening in terms of Black Friday sales, and also, Cyber Monday sales, and leading into Christmas. That we do believe that this could be a record year of spending, because we can’t go overseas and we want to spend it locally, which is a great news story.

The other exciting news for the economy was the change in the forecast that we saw through the RBA’s statement of monetary policy. They released that in November, and I’m just going to summarise a couple of the findings there. GDP forecast; now, they released the previous statement of monetary policy in August, and that statement show GDP was expected to decline by 6% in the year to December 2020. The decline is now expected to be 4% on the back of stronger household consumption and public demand.

Now, the slowing population was also mentioned in there, and that will be a drag on the economy in the near-term. It is exciting to see that we’ve got some trial programs, including some of thoseinternational students coming into Darwin earlier this week. Let’s hope that program works well. We did see the state premier of New South Wales saying, “Happy to carry some of the load in terms of Australians returning home, but there’s going to be a trade off in terms of starting to bring some of those international students back in.” That’s the first sign and the important sign that will also help the economy move forward in that respect.

In terms of business investment, staying on the statement of monetary policy, the RBA expects a gradual recovery in non-mining business investment to be underway in the first half of 2021, as the domestic economy continues, led by investment in machinery and equipment. On this point, last week, Treasurer Josh Frydenberg announced the expansion of the instant asset write-off scheme. Businesses with a turn over up to $5 billion will be eligible regardless of how much money they make globally. That is also a good sign, because there was probably indications there, that that spending isn’t where we want it to be in terms of future investment from businesses.

In terms of the unemployment story, in their statement of monetary policy. Under the previous baseline scenario in August, the unemployment rate had been anticipated to peak at around 10%. The peak has now been pared back a little under 8%. That’s excellent, and obviously that’s on the back of people movements are playing a positive role in being able to create more jobs. Inflation; well, there’s really nothing to see here in terms of having an inflation target of 1.5% by the December quarter of 2022. That’s not going to do anything, but certainly wage growth is expected to remain below 2% over the next few years. That’s what they’re going after in that. That was the sort of the wrap up of what I took out of The Statement of Monetary Policy news. There was a bit more in it, but that’s the main themes there.

Turning our attention to the Australian dollar, at the time of recording this, the Aussie dollar was closing in on a three months high of around 74 cents US, and that is near the highest it’s been for the year. That peak at the start of the year was 74.14, so we’re climbing back up to those levels. Now, that is on the back of the US dollar really coming under selling pressure as their economy is struggling with COVID. Third wave of the COVID virus over there, and continuing money printing in propping up the economy, so the US dollar is on the nose a little bit there. Now, sentiment; consumer sentiment, some good news here, right? Consumer sentiment rose 2.5% in November to a reading of 107.7, so a lot more optimism when you get over a hundred versus pessimism, and that is a sharp increase, in September, 18%; in October, 11.9. The results suggest that consumers are becoming more optimistic despite the ongoing pandemic. Indeed, the index is now above the pre-pandemic levels.

Let me say that again… the Consumer Confidence Index is now above the pre-pandemic level, so that’s a good news story.

What’s been the motivation? Well, definitely, Victoria had experienced one of the most stringent lockdowns in the history of our nation. In fact, the history of the world. It probably rates up there as certainly one of the most draconian measures to try and get on top of the virus, which has been effective. Those easing of restrictions, the reopening of borders between New South Wales, Victoria, and now Queensland. Certainly a fall in mortgage rate cuts and the cash flash that’s going on by governments is also helping to move the dial in terms of consumer confidence. Consumers remain optimistic.

Also, about the housing market — time to buy a dwelling. Incredible. The subindex rose a further 8% in November after a 10.6% rise in October. Now, the results highlight a significant recovery and confidence around the property market, and that’s why property prices didn’t fall off a cliff. That obviously, as well as the supply side falling off a cliff. That has led to literally less than 5% falls in house prices across the country. Also, on the back of the vaccine news is also getting a positive impact in terms of where we are in regards to consumer sentiment and consumer confidence.

In terms of retail spending, we did see a decline of 1.1% in September after a 4% fall in August. This contraction suggests that sales are still fragile in face of the pandemic, however, retail volumes have risen by 6.5% in the September quarter, after a sharp 3.5% fall in the June quarter. Now, that was obviously September quarter data, and we were seeing those results. Yet, how things can turn around quickly, data that was being coming in, so the preliminary estimates of retail sales in October were up 1.6% on September, and were up 7.3%, October 2019, so big numbers. Led by cafes, restaurants, takeaway food outlets led the rise, and the latest reports on Black Friday and Cyber Monday sales, a strong consumer spending leading into Christmas. That also bodes well for increased consumption.

Business confidence; the NAB business confidence and condition survey in October, business conditions increased by 1.5% in October. Business confidence rose 8.5% in October to a reading of 4.7, which is above the long-term average. It’s also the first positive reading since February. First positive reading since February. No wonder we’ve got a spring in our step. Okay. Moving into private sector, business spending, private capital expenditure. CapEx did fall 3% in the September quarter. The declines in CapEx occurred across all assets, industries, and states. Heightened uncertainty caused by the impact of the COVID-19 has contributed to the falls in CapEx. The data included marginally stronger estimates of intended investment spending over this financial year, and looking forward ’20-’21, CapEx plans increased to 105 billion. That’s a 6.5% increase on the last estimates. That needs to be double digit, people, so keep thinking about investing in your business if you’ve got one, if your conditions look good, as we continue to move out of this COVID pandemic.

Turning our attention to construction and property side of things.

The construction sector showed a sign of expansion in October. Something not seen in nearly two years, the AIG Performance of Construction Index rose 7.5 points to 52.7. Now, remember a figure larger than 50 indicates expansion in the sector, so that’s positive. Let’s look at the services. The AIG services index, Performance of Services jumped 15.2% to 51.4 in October. It is the highest reading since November of last year, and also the first reading above 50 since late last year. That also indicates expansion in the services area, and finally, rounding out the October AIG Performance of Manufacturing Index revealed Australian companies are more optimistic with the index rising 9.6 points to 56.3. Our expansion of services, our construction, and manufacturing all pointing to positive expansion in that area. That’s a positive sign.

In terms of the housing finance, we did see the overall data coming in for October housing credit grew by 0.3% for the month, and overall year-on-year is now sitting at 3.3% higher, so that’s some positive signs. We’ll see more data coming out around planning approvals, and construction, and commitments, and all of that later in the month, but going to press on the first day of the month, we don’t have that data for you. I want to turn my attentions now, to also the latest property news update. Again, CoreLogic at the time of recording this, we didn’t have the numbers for November, but I can tell you based on the hedonic index reading of last week, that every capital city was in positive territory, as well as every regional area. This would be the first month, that also includes Melbourne now, showing positive price growth throughout the month of November. That is a very good news story as we move into Christmas, and that whole wealth effect in terms of people’s confidence around spending money. Now, we’ve said it before, but we’ll say it again. That has been on the back of incredible levels of strong demand in the sector outside of medium and high density units. That is the one market that is definitely struggling, but it’s on the back of strong government stimulus. Record low interest rates have been driving demand higher, and also, supply has been very constrained. People aren’t willing to sell their homes, because they didn’t know what was going to be happening around the corner. It does tell us a very, very interesting story for 2021.

The property market in 2021 could go quite strong. It could be double digit growth….

I know that sounds unusual, but in these types of situation where you’ve got record low interest rates, and you’ve got pent up demand and low supply, we will potentially see people acting somewhat irrationally, and they may push property prices even higher than would be anticipated in what we call a balanced market. That’s important to note.

If you haven’t already got your ducks lined up, and if 2021 is your year, remember this message to all of you in the Empower Wealth community… make sure that you are talk to us about your options into the new year, and so we can get you set up if you are looking to acquire property into 2021.

As I summarise the month, and also look at the year itself, it has been obviously a very challenging year. It’s been unpredictable in terms of what’s happening, and that unpredictability could also lead to further outbreaks as we get more arrivals into hotel quarantine, but it also allows us to probably say that as the RBA takes a break for January, we’ll be taking a break as well, in terms of that, but we’ll be back next year, where I do my opinion read on where I see the economy and the property market heading.

But I just wanted to remind you, as you do come into Christmas and the festive season that it has been that unpredictable and challenging year, so it is time to make sure that you are making those connections, and enjoying yourself with family and friends, and people that you have been away from throughout the course of the last 12 months, really. Get out there and enjoy yourself, make it a festive season to remember, appreciate the things that you have got, have lots of fun, be safe, practice appropriate social distancing, all the things we need to do, so we can remain open. Spend a little bit of money if you’ve got some money to spend, because that also helps the small businesses and the community out there, and obviously will generate the jobs that we need into 2021.

Until next February, I want to wish you all a Merry Christmas, a safe and happy New Year, and also, remember that Knowledge is empowering, but only if you act on it.

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