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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate September 2019

G’day and welcome to September and on the first Tuesday of this month Governor Lowe and the RBA Board met and they kept the cash rate on hold at 1%.

Now, some punters might have been thinking, “Well are we going another 25% lower?”, but really most economist believe that’s going to be next month.

So I suspect the board decided not to spook the market when the market is already being spooked by what’s happening offshore.

That’s right — the biggest game in town at the moment is happening in our global economies. And we saw throughout the month of August some volatility in our share markets, all on the back of a couple of big events going on.

The biggest game in town is the US and China trade war now this is high-stakes poker and that’s the way Trump likes to play it. Effectively, what he’s trying to do is get as much revenue — or tariff revenue— that he can ahead of the Chinese before he cools his jets. And he’s gonna have to cool his jets at some point because it could actually impact on the US domestic economy if he keeps going. So he did announce a new suite of tariffs throughout August and that put panic through the markets, of which he then retracted from. Now, his challenge here is that he effectively has a window until probably the end of this year for his tough talk on China before he might need to make sure that the US economy is in good shape. Because in 2020 — that’s right in November of next year — is the presidential elections, and if Trump wants to be re-elected then he needs to make sure that he’s good on the promises of keeping the economy strong and jobs growth in that market. Now if the economy starts faltering over there because of these tariff wars then he’s got a problem — he doesn’t have a good story to tell in being re-elected. So that’s the high stakes poker over there. And who’s going to have to mop it up? It’s probably going to be Jerome Powell — so if the conditions continue to worsen over there then it’s going to be Jerome Powell to the rescue. Donald Trump is also… I suppose… bullying him into lowering the cash rate over there because he wants to see the cash rate be the means for which the Economy can pick up. So it’s an interesting game of poker that’s being played in US and China politics at the moment.

Let’s switch our attention also to the UK where we see what’s going on over there. Boris Johnson, well, he’s definitely also playing high-stakes poker with his “No Deal Brexit” that’s going on over there. So I just wanted to highlight, in terms of our point of view, the June quarter.

We saw -2% percent GDP decline — so is the UK going to be in recession when we get the September numbers?

Because I tell you, this type of political turmoil doesn’t create the level of certainty that businesses want in regards to making investment. And when they don’t make that investment economies suffer, jobs suffer. So will the UK go immediately into recession if they don’t get that Brexit deal they’re looking for?

The other big economy that I also like to look at is Japan. They’ve doing all right Japan — they’re bucking a bit of the trend. What’s going on over there? So, GDP in the June quarter was point for growth, and that was on expectations of only 0.1% growth — so it was a very, very good number for them. And that was also on a revised March quarter GDP where they had 0.6% moving to 0.7% growth over that time. So they’re building a bit of momentum in the Japanese economy — and being one of the largest economies in the world, that’s a good news story.

 

Now, let’s focus our attention in regards to the Australian economy.

There’s a few things we want to talk about. The stuff I’ve been going on about for the last couple of months is, I’m not interested in the lag data, right? There was complete uncertainty coming into the election with potentially big taxes from the Labour Party — we’ve now got that certainty. So a lot of the data we’re still seeing is being recorded quarterly data and data back in June and July — I’m not so interested in that.

I’m really interested in the big amounts of data coming in now that’s telling me what’s happened last month and what’s going to be happening moving forward.

We’ll go to business confidence — positive story here. And I think this is what we need to play out — I’m sick of the 24-hour/ 7 day news cycle just talking about negative sentiment. Business confidence is showing us some positive signs. So the reading moved from 2 points to 4 points in July — this reading is still below the long-term average, but it’s a positive reading. So business confidence — businesses are saying, We’re starting to get some more momentum and we’re feeling a little bit more confident about the future as opposed to the past. Again, the reading is still below the long-term average — so cogs are turning but there’s still a risk a downside risk, in terms of that business investment and what that means for jobs moving forward. And that’s the stuff we’re seeing going on in the 24-hour news cycle— a lot of the sentiment and conversation. So that’s business confidence.

Let’s move to business sentiment. Following two months of declines post-election, guess what? Consumer sentiment bounced and we’re now back into positive territory for the August data. So this is the stuff that I thought would happen — and I still think that’s on the back of housing, but I’ll come back to housing later in this presentation. The other thing which also surprised on the upside was stronger wage growth than expected. For the quarter we had 0.6% growth for the previous quarter, and that still keeps the annual rate of growth at 2.3%. But when we keep talking about “We’re seeing no wage growth” — if inflation is running at 1.6% and wage growth is running at 2.3% that is real terms wages growth. Now, earlier last month, Governor Lowe did appear before the politicians and he was very clear in terms of his rhetoric — he did want to see a three in front of that number. So he wants to see wage growth growing at 3% or above. And don’t we all. I mean, we do want stronger wage growth because that will obviously lead to stronger employment. And that means our employment situation’s really good, and that will lead to a better inflation outcome. And remember the RBA’s two objectives is basically full employment — so get everyone gainfully employed who want to be employed — and also to move the inflation dial to where it needs to be for a comfortable growing economy.

The other good news story I’m about to get to, is also the unemployment rate. So when it comes to unemployment, what we did see is that the July data surprised most analysts. We created 41,100 jobs, unemployment rate held firm at 5.2%. Again, most economists are thinking that the unemployment rate is going to deteriorate, and they may be right. But I’m also saying, “Let’s wait and see what happens as property prices start to stabilise, and people feel that the economy is in a better spot, and those tax bonuses start to flow through. I think we’ve got to make sure that we’re looking at the forward data. The other great thing was the participation rate — so we’re seeing the participation rate will increase by 0.1%, and it’s the highest on record. It now sits at 66.1%, which means that, basically, the people who want employment are getting out there and basically participating. And that’s why the unemployment rate isn’t going down — more people are moving into the employment market.

What am I going to be watching over the next couple of months? I’m going to be looking at the forward indicators, and those are jobs growth — so job ads growth from ANZ and also job vacancies.

They are going to tell us some early indications, in terms of have we turned the corner or are we looking a little bit more sluggish?

 

Let’s turn our attention now to housing we saw some positive numbers again. Auction Clearance Rates are up. That’s been reflected in terms of the capital gains that have been occurring. So that’s a positive sign. Also on the lending front … so we’re looking back at June data — so it’s still a little bit sort of lag data — but we did  see home loans for owner-occupiers 0.4% and also investment loans at 0.6%. Now, that’s the first increase in credit growth — in terms of credit lending for housing — for over a year. So as you might know, we called it early. We said to you that that we thought prices will start to grow in August — well, they started growing in July — and now we’re going to see the Spring Selling Season. And the reason why we might see even stronger price growth not — not crazy price growth, but stronger price growth — is because the level stock is still low. So that is the challenge for most people who want to go out and buy property now — who feel confident that the market has bottomed out and prices are starting to move and they want to get into the market — is they don’t have the choices So the Spring Selling Season, and watching the stock available to market — the new listings coming to market — is going to be an important indicator … just to see how well we go through the spring and summer selling season. So that’s an important thing.

I also noted from Woolworths results. Listening to their results, they had a good result reporting season. Now, why am I thinking of Woolworths? Well, Woolworths is obviously a good measure of the economy in terms of how much we’re spending, and they’re on staple goods. The CEO there also reported that the tax bonuses have started to flow through so that’s also a positive indicator for GDP as well. So we’ll see that starting to show up potentially in our September, and certainly in our December, GDP numbers as well.

So, overall… the cash rate remains on hold but I would suspect, given that the RBA’s been very clear around their rhetoric as to what they’re trying to achieve, that the market’s anticipating another rate cut in October. So, unless we see a really surprised bounce in employment numbers for this month, we’ll lock in that rate cut for October at 25 basis points.

We still don’t know what the banks are going to do in terms of passing on that full amount — we’ve got to be realistic about them keeping alive a certain margin for profitability, so we’re not going to see all that pass on, but we’re certainly going to see home loans be a little bit cheaper than what they are today.

And that’s a wrap for the September RBA report.

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