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Hedge Clippings | 26 April 2024
The "stronger for longer" inflationary thesis gained further strength this week both locally and in the US, with the added problem that growth is slowing while inflation refuses to do so.
In Australia YoY CPI fell in March to 3.6%, down from 4.1% in December, but the March quarter figure of 1% was up from the previous quarterly number of 0.6%. That in itself may well be down from the quarterly peak of 2.1% in December 2022, but it's still a long way north of where the RBA would like to see it, or the average during the Halcyon inflationary days between 2014 and early 2020 when the annual figure averaged less than 2%. Back then the RBA's challenge was how to stimulate growth, with the result that rates, both in Australia and around the world, effectively dropped to zero.
Fast forward and the RBA is also faced with a growth problem. 12 month GDP growth was 1.5% to December, but only +0.2% in the December quarter, on top of which per capita GDP fell 1%, and GDP per hours worked fell 0.4%, while real unit labour costs rose 3.7%. Unemployment is at historically low levels at 3.8% and with wage increases still flowing through the system there doesn't seem to be good news on the horizon.
With GDP slowing to a snail's pace, the concern as the RBA defers any rate cut until inflation is tamed will be negative GDP - possibly only saved by high levels of net migration keeping the economy from a recession.
In the US the issue sounds the same - expectations for rate cuts, which were widely forecast for May or June, are now being pushed out until November or even December. US GDP unexpectedly fell to 1.6% in the March quarter, down from 3.6% in December, while inflation was higher than expected. The US economy appears resilient, and company profitability appears equally strong, but how long that scenario remains under the "higher for longer" interest rate environment remains to be seen.
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