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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate October 2019: Third Time Lucky?

Today Governor Lowe and the Reserve Board met for the first Tuesday of October and they’ve cut the cash rate.

 

Now, 75% of economists believed that this was going to be the case.  If you were listening to some of the commentary last week from Governor Phillip Lowe around his concerns in the market, it was pretty clear that he was signalling to the market that he was going to cut the cash rate… and that’s exactly what the RBA did. So, let’s take a look at the economic data in the readings to see exactly what’s happened in the economy over this past month.

Let’s look at the GDP numbers that came through for the June quarter. They weren’t necessarily great numbers, but that’s on the back of the uncertainty we had coming into the end of last year and moving through — so that’s all of our lag data that I’ve been talking about. GDP growth for the June quarter was only 0.5% — so the economy is still growing, but it has meant that the annualised rate of growth has moved from 1.7%, which we saw in the March quarter, now down to 1.4%. It is the slowest growth rate that we’ve seen in the economy for nearly 10 years. Obviously, work needs to be done.

 

Turning our attention to the global market, what we’re seeing is continued uncertainty in regards to what’s happening with the global growth story — and that, which we saw earlier, led to the Fed Reserve reducing their interest rates. We saw the European Bank also reduce their outlook, in terms of monetary policy easing. And we saw China also do some movements around easing some of their monetary policy levers to try and stimulate growth. So overall, the story for the RBA is around an easing policy — or an easing bias going through globally.

That obviously means that Australia is caught up in this global slowdown. And that was one of the reasons behind the thinking around the RBA’s decision today.

To the other big news of the moment… it’s still the impeachment or the potential impeachment of President Trump in regards to some of the comments that he’s made in negotiations. The other thing that is quite interesting from positive point of view is that there’s been some indications that the trade war that’s going on between the US and China may be coming closer to an end. So that could be “closer than we think” is what the commentary or saying there. So that would be a very, very positive sentiment story. If there was some type of settlement, I suspect you’d see some more optimistic commentary coming out and moving sentiment in terms of the global growth story. So that’s what’s happening globally and one of the big reasons for today’s decision!

 

In addition to that, the other big mover is really around the labour market.

So we’ve been talking about this for some time now, but the decision we saw today relates to the job number data that came out. With our unemployment rate, growth remains pretty strong. In terms of job growth, we had 34,700 jobs created for August — and the average jobs growth that we’ve seen since the start of 2019, has been 26,400 jobs being created every month. So that’s the good news story. The challenging part is really around the participation rate — so we’ve again seen a record-high level participation rate of 66.2%. So that is, in itself, the story of the greater population and more people arriving here and looking for work. So that has meant that the unemployment rate moved from 5.2% to 5.3% percent. So that’s not a great number and this has obviously been weighing on the RBA’s minds. In addition to that, job vacancy data — we did see that at the end of August, this being reported as falling 1.9% and it’s the second quarterly decline in terms of job ads annually. It’s 1.9%, which is the first annual decline that we’ve seen in five and a half years.

Expanding on that more, is still a little bit of a negative story — skilled labour; so skilled vacancies. So skilled vacancies edged down 0.1% in August, and that’s on the back of a negative number in July. So there’s eight straight months of decline in skilled job vacancies as well. So, again, this is where the challenge lives.

I mentioned earlier what Governor Lowe was talking about last week in the speech…  he was talking about further progress towards full employment and to achieve the inflation target over time is one of the catalysts for their decision today. So Governor Lowe does believe that the economy is on the way — it’s at a turning point, but in terms of how strong that growth is and how gentle it is —  he was referring to a gentle turning point of economic growth. So we’ll see how that plays out and what that does over the course of the next couple of months and then leading into the next couple of years.

 

To move on from the labour market where the story isn’t so great, let’s also look at the consumer confidence survey from Westpac and the Melbourne Institute. We again saw a decline of 1.7% — that’s now moved the margin down to 98.2, which is below the 100% mark; which separates expansion from contraction. So that’s where the tax offsets — the tax cuts, those bonuses that we saw, or the offset that we saw coming back in — hasn’t really materialised into some of the data just yet. So the economic data is not showing that come through now. It is materialising in some way, right? The money is going somewhere, so whether it’s going into consumer spending or paying debt off, it will come down through the numbers — because it’s obviously not being kept under the pillow because it’s paid into a bank account. It’s then up to the consumers what they do with it over time.

The positive reading in this part of the report was in regards to long-term expansion… over the course  of the next five years consumers are actually pretty confident that they’ll see prosperity and economic growth.

So that definitely moved up higher over the course of the month’s reading. In terms of short-term negative sentiment — this will probably persist throughout the remainder of this year and hopefully, we get out the other side, where consumer consumption starts to pick up and sentiment starts to move in that way as well in that direction.

 

Let’s move to business confidence — and the conditions there from the NAB survey in August.
So conditions…  there was a reading of the market there that was a 2.4 — to just being +1. So overall still some positive signs in confidence, but it is a fall so that’s not great. That was conditions — in terms of confidence, that also fell by 3 points and we saw that as only a +1. So the feedback, the message coming through in the business confidence and conditions survey, is really just around two thingsthe trading conditions, and the global uncertainty.

 

On a positive note — housing lending. So we did see a reasonable bounce in the data. Owner-occupier approvals up 4.2% in July — and that’s the fastest growth rate since June 2015. Investor lending also spiked, increasing by 4.7% as a monthly increase. And the other good news story here is really around the first home buyer. So the firsties are back in the market in a reasonable way. The percentage of the market that they currently have now is 19.6% — and that’s at a seven and a half year high. So good to see the first home buyers back in the marketplace trying to get their first home!

In terms of construction, there’s definitely also been some positive numbers. In regards to house and land — so we’re going to start seeing some of that moving through, in terms of construction jobs. But one of the biggest employers is really the medium and high-density apartment market, and that’s still struggling as we’ve well documented. The three problems with this particular market here is the poor valuations for the people who did buy Off The Plan — so some of them have been left with negative equity. That’s on the back of also some pretty ordinary construction and cladding issues around the quality of a construction work. That’s also now leading into financing any new projects that are coming through the wings— and that’s going to be a bit of a problem I suspect into 2020, in terms of the medium and high density apartment market. And this obviously is going to more broadly affect the jobs growth in that particular sector and we might see some job declines in the construction sector in that area.

 

In the past month, we also saw an update in regards to the Federal Budget — and really some positive news here…  we saw only a deficit of $0.7 billion — so very, very small deficit, almost a balanced budget in the latest figures that have come out from Treasury. So that’s obviously a positive news story considering the same time last year we had a $10.1 billion deficit. So this is where we are seeing a little bit of politics playing out in regards to what’s happening with economic activity. We are seeing the RBA calling on the Federal Government to do more in regards to their fiscal policy because we’ve almost gone to the bottom of the well with monetary policy, in terms of what the RBA can do to make money cheaper to stimulate the economy.

But this is the politics playing out. Because I wanted to spend some time on this and, yes, politics does play a role in terms of our economic prosperity and the Liberal Party are doing something here, which is really all about the Liberal Party and that’s disappointing, in regards to the broader economy. What I’m talking about here is the politics that they’re playing because we’re only just past the election and the Liberal Party has sworn to deliver the first surplus, which will give them greater economic credentials to the voting public. So they are holding out in regards to announcing any fiscal stimulus into the market until they deliver that surplus, which is probably in surplus now. So what we’re going to see is Treasury Frydenberg announce, I suspect in the May budget next year, some stimulus that is going to flow into the economy.

My tip on that stimulus is going to be some further tax cuts and potentially moving some of those tax cuts to happen earlier than what they are originally planned for.

Now, that is obviously great for people in the lower incomes because that pretty much flows straight through to the economy. And the other big announcement we would expect during that time is also that the Newstart will be increased when they announced their budget numbers in the May budget. So, unfortunately, we’re going to be holding out for that because the Liberal Party want to score political points in regards to being the political party that runs the economy better than the Labor Party. So the economy is going to suffer until such time as a Liberal Party makes some decisions around that and because an election still two years away they believe that they can hold out for that and get the economy moving when it needs to, when it leads into the next election. So unfortunately, that’s the politics of our economy at the moment. But that’s my read in regards to what that looks like.

So, in summary, what is supporting the Australian economy really is the lower Australian dollar — that’s doing its job in terms of going down to record lows, which is great for our exports and our miners and so forth; and they seem to be doing a bit of the heavy lifting at the moment.

Population growth is a real interesting story here, and I just got some numbers on that. We’ve got around 370,000 people over the past decade coming into Australia to call it their new home. Now, considering that the previous decade this averaged around 217,000, there’s no doubt that they are having a positive impact, in terms of consumption and moving the economy. But we need to do more in regards to obviously offering them jobs. And that’s why the RBA have signaled that full employment is their number one goal because that will also then correlate into some better inflation numbers, which is obviously their mandate of full employment for those who want it and also an economy that’s growing 2 – 3%  per annum in terms of the cycle. So I think the other positive stories are going to come out of house prices are continuing to grow around the nation so people will feel a little bit more calm talk about their spending, and low inflation and state infrastructure spending is also going to be positive to support the economy

… so we’re not going to be anywhere near a recession even though that is still talked about in the daily news spread.

 

… we’re not near that. The negative things, the headwinds that we’re going to have, is in is continuing the cautious and savvy consumer — they’re obviously still you know keeping their money in their pocket until they see better days. I also think, yes, the construction slowdown — certainly in that commercial and also large residential building projects — will have an impact in terms on our GDP numbers. So that will summarise the economy as it currently stands.

So as I close out this week’s announcement… … once again, it is a story of a 25 basis points cut from the RBA cash rate — 0.75 of 1%.

 

What are the banks going to do? What will they pass on there? Obviously, they banks have got a balancing act to play here. They have people who have savings and that’s going to impact them. So my view is that most of the banks will cut between 15 and 20 basis points for this particular cut. If we see further cash rate declines into the New Year, I suspect we might only see 10 basis to, maybe, 15 basis points if there’s another 25 basis points cut.

So don’t expect the full 25 basis points cut — it’s probably not going to come, but it’s still going to make the mortgage burden a little bit easier if it’s 15 or 20 basis points.

So it’s over to the banks now… in terms of what they’re going to do in regards to that.

So there it is! The RBA have made it very clear this is what they’re after — they’re going after lower employment — they want to see a four in front of unemployment — and they believe that that will then out the spare capacity in the labour market and also over time start to see inflation starting to flow back into the economy.

Until next month, make sure you’re looking at your mortgage— make you’ve got a great deal and you’re maximising it. Also, in the property space, the marketplace is moving. So if you’re looking to get into the property market, start doing more and more research around where you can find those best opportunities. If it’s owner-occupier, do your homework around the amenities in the area, and those types of things, and the supply in the area. Investors; the same story applies — be a borderless investor if you have to be in order to get the best opportunity over the short, medium and longer-term.

 

 

 

 

 

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