Hedge Clippings | 06 April 2023
Last week's Hedge Clippings correctly predicted that the RBA would hit the pause button on their combined rate rises of 3.5% since last May. However, the key word is "pause". As always, after all the preliminaries in the RBA's post meeting statement, check out the last paragraph, and particularly the final sentence:
"The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."
That target of course is the oft' quoted range of 2-3%, but the Governor's statement also noted that inflation, while moderating, is not expected to reach "around" 3% until mid 2025. As we also discussed last week, while the latest monthly inflation figures are improving, (no doubt helping the "cause for a pause") the tight labour market, as evidenced by unemployment at 3.5% and at around 50 year lows, coupled with calls for wage increases in some sectors of 6-7%, are a "cause for concern".
The RBA release noted that at the aggregate level wages growth is still consistent with their inflation target, (i.e.2-3%) but our best guess is that this is where the wheels may fall off the RBA's calculations. The RBA's statement referred to it in classic central bank-speak by saying the board will "pay close attention to both the evolution of labour costs and the price setting behavior of firms". By which they also presumably mean the public sector in the Labor controlled mainland.
Calls for Philip Lowe's head on a platter have (sensibly) diminished over the past couple of months, but going forward this will no doubt depend on him being able to navigate the narrow path between taming inflation with higher rates, and so slowing the economy, and at the same time achieving a soft landing.
That's a tough juggling act.
For the moment - at least for another month - the RBA is buying some time as they wait for clarity on both inflation, and the effect of their efforts to control it over the past 12 months. Thereafter, expect rates to rise by another 0.15 to 0.25%, while any reduction - barring a recession - seems a long way off.
Meanwhile, staying on the RBA, their latest Financial Stability Review, released this morning, looks at household budgets and associated financial stress, and confirms the bank's Baseline Economic Scenario; namely, that over the course of 2023 unemployment increases slightly to 3.75%, incomes will grow by 4.25%, expenditures will increase by 4.75%, and the cash rate will peak at 3.75%.
In that scenario, the RBA predicts that around 15% of households will have "negative spare cash flow" (aka mortgage and living expenses greater than income), which from the perspective of the overall economy, they expect to be manageable.
The Adverse Scenario - unemployment rising to 5.5%, under-employment 8%, and with wages growth and inflation dropping as a result, would see 17% of households with negative spare cashflow - as usual with the stress falling unevenly on lower income borrowers with low, or zero, savings buffer.
The Bank expects the broader financial stability implications (i.e. damage to lenders' balance sheets) to be limited. However, as Philip Lowe pointed out in his address to the National Press Club earlier in the week, one of his major concerns is the level of inflation and stress in the rental market, where the data and statistics are more difficult to assess.
This is dry subject matter for a Thursday, but we'd like to take this opportunity to wish everyone a safe and "Happy Easter" or whatever you may be celebrating.
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