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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate – November 2019

On this Melbourne Cup Tuesday in November, the Reserve Board met and they’ve kept the cash rate on hold at 0.75% — and that’s on the back of stable unemployment.

So we haven’t seen unemployment deteriorate — in fact, it improved — but more about that later. And we’ve also had some commentary coming out of the Reserve Bank, in regards to some signs of growth in the economy. So they’re gentle, very subtle signs, but ultimately there are still signs there.

So, let’s take a look at what did transpire through the course of last month, and what data showed up.

 

Let’s start with a global story first.

Obviously, the US economy — last month we saw the Fed Reserve cut the cash rate by another 25 basis points and that brings their cash rate down to 1.5 to 1.75. It’s the third — and I would suspect possibly the last — rate cut that we’re going to see from the Fed Reserve, unless the whole China deal crashes … the US-china trade deal — more about that in a minute.  Because the economy is going pretty strongly, just some indications there — so unemployment was higher than expected in October. That was also on the back of revised data coming out in August and September. So their unemployment rate currently sits at 3.6% —so very, very low. They do have an increasing participation rate and that was why it moved up from 3.5 up to 3.6% during that time. The US consumer remains positive. Spending equity markets are looking good. The US bond yield curve is going back to a more normal setting, so there’s no real dangers that we’re seeing showing up there. And obviously the biggest news story was in regards to a US-China trade deal — Phase One they’re calling it. So we saw that announced and now we’re seeing that agreement potentially being signed this month.

So what does that mean? It’s what I’ve always said it was going to mean. The US have done their hard negotiating; they’ve got a position, now they obviously need their economy and the global economy to start picking up because they’ve got an election — well, Trump has got an election to win come next November. So that’s going to give that enough time to flow through to the economy.

So Phase One of the deal to be done, and that should also see a global sentiment improve.

In fact, we did see at the g20 summit last month that the commentary around the global economy was looking to improve — that’s a good sign on the back of this US trade deal. We did see in China that they recorded upbeat manufacturing sentiment as well, potentially on the back of that.

So the only other problem child we’ve got at the moment, in terms of the developed nations, is the UK — and they’re going to the polls next month to work out what they’re going to do in their general election and obviously for Brexit.

 

What I did want to talk about is… I’ve got the IMF global forecast for 2020 for all the big nations around the world. So we’re sort of seeing global growth in the United States easing from currently 2.3% in 2019 21.9%, the Euro area was 1.6 going down to 1.5%. Germany: 1.2% in 2019 staying stable at 1.2% in 2020. France: 1.3%, 2019 growing by .01% to 1.45%. Italy: 0.5%. Currently the forecast for this year are growing to 0.9 %. Spain: 2.1% growth this year, slowing down to 1.9%. Japan: 0.2% last year to 1.4%. United Kingdom: 1.2% to 1.6%. Canada: 1.8% to 1.7%. Russia: 2% down to 1%. And the other ones that I really wanted to focus in on were China — currently growing at 6.1%  easing to 5.9%. In India it’s growing very rapidly at 7.7% this year, also growing at 7.1% next year. And then developing Asia, which is going to be a big story over the course the next decade — also for Australia — grew around 6.3% will grow up around 6.1%.

Putting that in context… we’re talking about the Australian economy growing at over 2%. And so we’re still growing better than some of these other larger and more developed nations.

 

Let’s turn our attention now to the Australian economic news.

And what I want to start with is the inflation data… trimmed mean inflation — which is to preferred RBA measure — rose by .4 in the September quarter. Underlying inflation was steady at 1.6. That continues to fall outside of the RBA range — and it has been there for almost four years. So we’re starting to see that range — two to three percent is what we’re talking about. What we also know today is that the Federal Treasury Josh Frydenberg is going to be meeting with the Reserve Board to talk about that measure; in terms of whether that’s still appropriate. I think from Governor Lowe’s point of view, he would say that it is still an appropriate means — two to three percent. He, like all Federal Reserve’s around the world, is very, very scared of deflation and the impacts of what deflation can do for an economy. So to lower that expectation down to say a 1.5 to 3 would also mean that he’s worried about that deflationary element. So let’s see how that comes out — we’ll know in the next couple of days, in terms of what that decision was and whether that target range will be adjusted accordingly.

 

I want to move on to the housing market.

This is obviously the biggest news story at the moment, in terms of what’s happening. We saw the CoreLogic data come out, so I’m going to spend a bit of time talking about the CoreLogic data.

Overall across all capital cities we saw growth in the month of 1.4%.

That’s the fastest month growth rate in ten years. On the back, really, of tight supply and it’s the fourth consecutive month of growth since we bottomed out across the eight capital cities in June of this year.

Sydney was up 1.7% for the month — up 5% for the last quarter. Sydney still is 10.4% below its previous peaks that we saw hit in mid-2017. Melbourne was up a staggering 2.3% for the month, which is the best return since 2009 post the GFC. Now they are also up 5.5% for the quarter. Melbourne remains 5.8% below its previous peaks, which were sort of coming in the end of 2017 also. So that’s the wrap-up of our two biggest capital cities. I moved to Brisbane: up 0.8% for the month and 1.1% for the quarter. Adelaide: up 0.4% and up 0.1% for the quarter. Perth: a -0.4% to be down 1.7% for the quarter. Hobart: up 0.9% and 1% overall for the quarter. Darwin: up 0.3% but still -0.2% for the quarter. In Canberra: 0.6% up and to be 2.4% up for the quarter.

Of all of those — if we go to the annualised return — it leads like this…

  1. Hobart, annually up 7.8.
  2. Canberra up 6.6.
  3. Adelaide up— 3.6
  4. Brisbane — 3.3
  5. Melbourne — 2.1
  6. Sydney — 1

And obviously we’ve got the two negative markets… Darwin down 2.3 and Perth for the annualised return of 4.7%.

So that’s where we sit if I take a view of what I see for 2020

With my crystal ball, I think we’re going to see an improvement in regards to construction around the housing marketsbut I think it’s going to be a two-tier market. I think what’s going to happen is in the apartment market we still got a bit of a crisis of confidence in regards to valuations and construction and quality and all of the other things that come into the apartment market (see this episode on The Property Couch for more). But a still quite a lot of apartments to come online after their completions over the course the next year or two. So I suspect the housing market is going to do very well; freestanding, detached housing townhouses are probably going to outperform the unit market as we move into 2020, and that’s a concern for some.

Speaking of which, however, the building approvals data that came in last month… we did see a rise of 7.6% in September, which ended three months of consecutive declines. Now that hasn’t turned the overall market around — we are still down 19% from the peak of where we were twelve months ago. That’s the annualized basis and so we’re certainly not out of the woods yet when it comes to that — we need a few more good months of approvals coming through and I suspect we will get that.

There’s no doubt that the first home buyers are in the space. We do know that the federal government’s deposit incentive will also play an important role there and getting them out and buying properties as well. I do expect some spike there. I do expect we will start to see with the easing around APRA’s controls and a little bit better borrowing power going on. At the moment we’ll probably see a bit more improvement in medium-density and high-density construction stuff going forward — but not the peak levels that we did see in 2017-2018.

 

Housing credit — new lending for housing is back in the black. So what we’re talking about there — the RBA has definitely made some stimulus moves there. And the data for June to August saw 12% rebound, which reversed the 6% decline that we saw in housing credit for the first five months of the year. That’s in response to the uncertainty around the political environment at that time leading into the May election, and also what’s also unfolding around responsible lending post Royal Commission, and also, again, coming back to the  APRA movements that we saw there.

In terms of unemployment — it did tick lower down to 5.2% in September, driven by a fall in the participation rate. So we created 14,700 jobs to the economy in September — and that’s following on the 37,900 gain that we saw in August.

Now that said, yesterday we saw ANZ jobs data come in — and there was another fall in October by 1%. That was following the 0.3% gain in September — but the trend is definitely down.

Job ads have been down, in trend terms by 0.3% month on month and 10.9% year on year — so that hasn’t flowed into the unemployment rate, but that would be concerning to the Reserve Governor and his board, as well as obviously the broader economic outlook for the economy moving.

 

Into the consumer spending side of things and consumer sentimentWestpac Melbourne Institute Consumer Sentiment Index fell 5.5% to a reading of 92.8 —and that’s the lowest since July of 2015, so that’s not good. Obviously, there remains more pessimistic people on the back of the negative news cycles we’re getting and why are we dropping interest rates if the economy’s in an okay position? So the mixed messages that we’re seeing there, so that’s obviously never good; it’s good news for the borrowers out there because obviously they’re getting a lower interest rates—but for those baby boomers who have got money stored in bank accounts and looking for interest returns, it’s not very good for them. So we haven’t seen any strong bounce in consumer sentiment but I am keen to see what happens over the next six months, in regards to the wealth effect coming back in.

I’ve talked about how the wealth effect basically made everyone put their hands in their pockets when house prices were falling. Now that those house prices are gaining momentum, what’s going to happen over that Christmas/New Year period … so the next 3 -6 months is going to be a good indication in terms of what we see consumer sentiment doing. And we’ll see that play out in terms of retail spending we did see — the latest data came out yesterday and we saw a rise of 0.2 in September to August over the year. The September trend terms retail sales with 2.4% higher than they were from 2018 September and now most economists were expecting a bigger bounce here — a bigger figure. That didn’t come. Now, they were expecting that obviously on the back of the rate cuts and also the tax cuts and stimulus that was put in there. So that would be concerning again for the RBA.

In terms of business confidence — the NAB monthly business survey showed the business sentiment remains soft in September — business confidence fell 1 to 0%; the lowest since March of last year. Positive news inside here … we did see the Business Condition Index rising 1 point to be +2. Now, we want to see that more around + 4 + 5 — that’s when we start to see some good activity, in terms of business in the economy.

 

More broadly speaking, in terms of my view in closing, it’s likely that we will see another rate cut in February on the back of the current economic climate that we’ve got here.

That’s well known. Most economists are predicting that there is still a question mark around December and whether we will see something there — obviously, the data that was released yesterday, in regards to retail sales, so we’ve still got to turn our attention more to the unemployment story and those ANZ job ads weren’t great. So from that point of view, we’ll see whether that starts the flow into the unemployment, which could mean there’s an outside chance of the rate cut happening in December … which is a little Christmas bonus for those people who have borrowings — not so great, again, for our Baby Boomers who rely on that income coming from that.

What I would be saying is …  the other big news that we want to be looking at in the big data story that will transpire in December is going to be the month the half-year budget summary and whether we are in surplus or not. So my story there is once we see that surplus coming in, then we know the federal government will score their political points that they want to score in terms of returning the budget to surplus. But then they can get on with the job of organising a stimulus package that will be rolled out in the early part of 2020. My view on what that stimulus package will include rate cuts — more personal rate cuts is going to be in there; the Newstart allowance will also be given an increase during that time, and in terms of a crazy idea, I’d also love to see them announce something along the lines of building a couple of nuclear power plants. Sorry to bring our energy prices down, we need to go nuclear. It’s a joke how much energy cost us in this country. I know that’s wishful thinking, but I’ll speak to you on that wishful thinking note next month.

 

 

 

 

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