Melbourne unemployment under 4pc

Desperately seeking NAIRU

Greater Sydney recorded an unemployment rate of just 4 per cent for the month of December 2018.

But, as indicated elsewhere, Greater Melbourne is now surging to the fore, with an unemployment rate for the month of just 3.95 per cent, increasingly reflecting an extraordinary rate of improvement.

On an annual average basis both cities continue to see their respective unemployment rates falling, and very quickly so in Melbourne's case. 

Nominal GDP growth looks set to remain at levels commensurate with stronger income growth.

The terms of trade surged in Q4, with the export price index now up 43 per cent since the lows of early 2016.

Export price indices for the bulks have almost never been so favourable.

Will the wage price index for Q4 2018 begin to reflect rising wages at last, at least in Sydney and Melbourne?

Still oodles of slack elsewhere. 

Lowest ever investor credit growth

Slower money growth

Annual credit growth continued to meander lower to just 4.33 per cent in December 2018, according the latest Reserve Bank financial aggregates. 

Housing credit growth also continued to slow quite sharply, to 4.66 per cent from 4.86 per cent a month earlier. 

The annual growth in credit for investment housing was the lowest on record at just 1.08 per cent.

That said, the moderately positive monthly figure suggested that the bottom may just about now be in for investor credit growth.

CoreLogic will report 5 capital city aggregate housing prices as being about 7.25 per cent lower over the year to January 2019. 

Overlaying a credit impulse model seemingly implies that the house price slowdown should moderate in 2019. 

However, there are a number of potential challenges or shortcomings with this model.

The unprecedented boom and bust in Chinese investment could throw the relationship between the housing credit impulse and prices out of kilter, for example.

Moreover, there are so many apartments under construction in Australia - more than ever before through this cycle - that there are off-the-plan buyers trying to rescind contracts all over the shop, meaning that buyers of new apartments are quickly seeing the rug pulled out from underneath them.

Budget surplus hoves into view

Surplus in plain sight

There's been a bit of speculation that the Coalition won't be able to deliver a Budget surplus on a weakening economy. 

Well, try again!

The main driver of the looming surplus will be ongoing employment growth and the unemployment rates falling to the lowest level in at least four decades in New South Wales and Victoria.

That means more tax receipts from employees, and fewer unemployed persons claiming benefits. 

But an unexpected turn of events will also drive record mining profits in the period ahead. 

A recent and tragic tailings dam failure at the Córrego do Feijão mine in Brazil means that major producer Vale is set to report production cuts of around 40 million tonnes as upstream tailings dams are decommissioned. 

Meanwhile as China gets set to stimulate its own slowing economy the Fe 62% benchmark spot price has blazed to its highest level since March 2017 at US$82.53/dry tonne.

Analysts have variously predicted a triple digit spot price in the months ahead, with the spot price possibly set to spike as high as as ~US$120/tonne according to more bullish analysts. 

Either way in Aussie dollar terms this is going to deliver rivers of gold to Australia in the form of royalties, record mining profits, and company tax receipts. 

Origin Energy reported this morning that Australia Pacific LNG also recorded its highest ever quarterly revenue of $745 million, up 45 per cent on the prior corresponding quarter, while Beach Energy also upgraded its production guidance for FY2019. 

Nominal GDP growth should accordingly continue to track at 5 per cent or above over the year to December 2019. 

We might even see a bit more sprightly wages growth, but let's see. 

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Yes...inflation is SLOWING

Inflation misses target on downside

Inflation missed yet again for the December 2018 quarter, to sit at 1.8 per cent for the year at the headline level.

The analytical measures also slowed, with trimmed mean inflation of 1.84 per cent, and the weighted median reading slowing to just 1.70 per cent. 

This is the slowest rate of underlying inflation for 7 quarters, with the two-quarter annualised pace slowing even further still. 

Inflation excluding volatile items was only 1.6 per cent.

Rental price inflation slowed to the lowest level since 1993 at 0.5 per cent.

In Perth the rental CPI index is down by more than 21 per cent since 2014, and is still falling.

The wrap

For three years now inflation has been at or below the bottom of the target 2 to 3 per cent range.

Further, there doesn't seem to be much prospect of the target being hit any time soon, although forecasts always seem to have CPI getting back there eventually.

In short, there was another leap in the price of tobacco, and some fruit prices were up due to the drought. 

But there was weakness across a wide range of household goods, computing equipment, clothing and footwear, telco services, health costs, petrol, and more.

Fuel prices will drag further in the first quarter of 2019. 

Overall, inflation is both slow and slowing, and there is plenty of headroom for interest rates to be cut if deemed necessary in 2019 (which financial markets believe to be increasingly likely). 

NAB survey crippled

Credit dries up

A disastrous NAB survey, partly as a consequence of credit drying up.

Oh dear.

Source: NAB

The Reserve Bank's Harper surfaced to opine that the domestic economy in general and indeed 'everything' he has seen is still strong, and that the next move in interest rates is likely to be up.

Uh huh.

Survey says...bom bom!

Source: ASX

In all fairness, the RBA can point to strong jobs data to justify its position, but things may be set to deteriorate. 

Inflation figures out tomorrow!

Inflation set to slow further

Benign inflation setting in

A quiet couple of days all told, with the Australia Day public holiday taking out Monday from the economic calendar this week, and nothing too exciting of domestic note due until Wednesday morning, when the inflation figures are due to be released for the fourth quarter. 

Although the Reserve Bank has indicated zero appetite for seeing a lower cash rate, financial markets became even more dovish last week, with a rate cut now all but priced in by June 2020. 

The inflation figures will be a closely-watched piece of this puzzle, not least because underlying inflation has bumbled along either at or below the bottom end of the target 2 to 3 per cent range since the end of 2015. 

The market median forecast is for headline consumer price inflation (CPI) of just 0.4 per cent for the fourth quarter, but forecasts have been consistently over-egged for a couple of years now, and there's every chance the result could be softer still. 

Westpac thinks core inflation will print at just 0.3 per cent, bringing the annual pace even further below the target range (and the two-quarter annualised pace down to near stall speed just 1.3 per cent). 

There's apparently little prospect of this changing much any time soon. 

Certainly there will be little contribution from rental price growth, with rental inflation tracking at close to two-decade lows. 

There's been a bit of a bounce in tradables inflation, but if tobacco price hikes are excluded inflationary pressures are more benign still. 

Tobacco will again be the main contributor in Q4, as it is all but mandated to be, while food, fruit, and veg will add a little inflation on drought-related shortages.

But outside of that it's hard to see any other significant positive contributions at all. 

What's more fuel price inflation is due to ease in the figures for the first quarter of 2019, and housing cost inflation will at some point presumably turn flat to negative.

Missing: one inflation target!

---

Later in the week key figures will be released on private sector credit, while brokers and bankers will await the final Royal Commission recommendations with bated breath as the month draws to a close. 

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Total recall

Total returns

A bit of context on the recent stock market downturn in Australia.

The S&P/ASX 200 total return index adjusted for franking credits now shows 10-year annual returns in double-digit territory as the global financial crisis crunch recedes out of view.

On 21 October 2008 Aussie shares plunged more than 8 per cent for the weakest day's trade in 21 years - in fact it was the biggest day's drop in the history of the S&P/ASX 200 index - but these figures are now outside the 10-year benchmark. 

And, since that time, total returns have been very sound. 

Which just goes to show the importance of returns from dividends, especially where those dividends are franked. 

This franking credit adjusted index was first created by S&P in 2014, and back-tested accordingly.

Average mortgage size leaps in Queensland

Points north

The average mortgage size in Queensland in the final quarter of 2018 took a leap from $424,000 to above $450,000 according to AFG's latest mortgage index.

Evidently more southern state types are taking their borrowing capacity north to the Sunshine State. 

Overall lending volumes through AFG brokers were way down on a year earlier at a shade over $13 billion for the quarter.

The prior year comparative figure was $14.8 billion, some 12 per cent higher.

Major lenders continue to leak market share at under 58 per cent of lodgement volumes, down from 78 per cent in 2013. 

With the share of investors in the market well down - and the share of interest-only lending also at the lowest level across the data series - a natural consequence of this is borrowers redirecting their borrowing capacity at larger home loans. 

Thanks to Queensland borrowers the average loan size nationally hit a fresh high level in the fourth quarter of 2018 at $509,162, up from $499,193 a year earlier.

The ABS has noted it has discontinued its figures on implied average loan sizes due to loan-splitting potentially understating the results. 

According to Reserve Bank of Australia (RBA) research only around 1 in 10 borrowers use their maximum borrowing capacity or something close to it, helping to explain how the average loan size can now be at a record high. 

In the RBA's own words "tighter lending standards do not constrain most borrowers, but do affect some". 

Lowest NSW & VIC unemployment rates on record

Job gains continue

Employment growth continued to reflect elevated job vacancies in the two most populous states in December 2018, with seasonally adjusted employment up another +21,600 in the month.

And after a minor upwards revision to the preceding month's figures employment gains for the final quarter of calendar year 2018 were very solid at +87,000. 

Looking at the smoother trend figures, over the year employment grew +285,000 or +2.3 per cent, comfortably a strong enough level of growth to push down the unemployment rate, even if part-time employment was a fair chunk of the increase.

You can click to expand the 6 charts below. 

If you've been listening to many of the podcasts I've recorded lately and through 2018, you'd know that I was confident Melbourne would take pole position for jobs for the foreseeable future, largely thanks to its 'everything' construction boom. 

Right on cue the strongest quarterly growth in employment was seen in Victoria (+38,000), followed by Queensland (+30,000), and then New South Wales (+11,000). 

Over the year employment grew strongly in Victoria (+120,000), New South Wales (+94,000), and Queensland (+55,000).

You could just about throw a wet Captain Cook replica tarp over the rest, with Tasmania surprisingly recording negative employment growth over 2018, which I believe may prove in time to be an anomalous reading.

Unemployment falls below 5pc

Upbeat news, then, and enough to push the trend unemployment rate down to 5 per cent, the lowest level in the 91 months since May 2011. 

Indeed, zooming in the chart to a 5-year timeframe the seasonally adjusted unemployment rate actually printed at under 5 per cent (notionally 'full employment') at just 4.98 per cent for the first time in 6½ years. 

With an election coming right up come commentators appear keen to downplay the result, but a bit of credit here where it's due. 

The seasonally adjusted unemployment rate in New South Wales is now as low as we've ever seen - at least since comparable records began more than 40 years ago in the 1970s - at just 4.34 per cent.

And look at Victoria go with an unemployment rate of only 4.15 per cent (as anticipated on this blog, by the way). 

The smoother trend figures below confirm that more sprightly wages growth is in the post in Sydney and Melbourne. 

Finally, to temper some of the excitement, although hours worked grew reasonably solidly at the end of the year, across 2018 the trend growth was far more muted at 1½ per cent, and there's clearly still slack aplenty away from the big two states. 

Tightrope time

Another good result here, and the Reserve Bank almost appears to be on the cusp of pulling off an economic masterstroke when you look at the factors that will reduce debt to disposable income ratios henceforth. 

These factors include wages that are set to rise in Sydney and Melbourne, hundreds of billions of dollars of interest-only mortgages switched or switching to principal repayment, markedly reduced monthly mortgage lending flows since 2016, and forthcoming tax cuts to be announced by the Coalition (though, granted, Labor has some slightly different plans). 

That's about where the good news ends, though, since through over-regulation the Royal Commission has utterly crippled confidence in the banking, financial services, and real estate sectors, and most all of the forward-looking indicators are considerably more fragile than what's visible in the rear-view mirror. 

Westpac expects to see that inflation sunk to just 1½ per cent in Q4, meaning that the 'target' will have been missed on the downside for three years consecutively.

NAB also announced earlier today that it was hiking its mortgage rates out of cycle, while the window for central bank hikes is quickly being slammed shut (in Australia, and quite probably globally). 

The Royal Commission final report is due out a week from now, and the government will be desperately keen to manage the key messages as deftly as possible. 

Sign of the times

Tightening everywhere, man

Fewer homebuyers and more tenants...and fewer landlords. 

Expecting to see a lot more of this in Victoria over the next two or three months, with agents reporting multiple lease applications for investment grade properties. 

Not so likely for generic new apartments, though. 

Rental vacancy rates have historically tended to tighten sharply in Melbourne in the early months of the year, especially over the past eight years or so. 

Vacancy rates have tightened sharply in Geelong since 2015, while Geelong West had a vacancy rate of only 0.6 per cent, even in the seasonally quiet month of December. 

Vacancy rates have also already fallen to about 1 per cent or below before the onset of the busiest period of the year for leasing in Ballarat, Wodonga, Mildura, Warrnambool, Traralgon, Bacchus Marsh, Horsham, Wangaratta, Western Victoria...

In Hobart vacancies are practically as close to zero as you'll ever see for a December figure. 

Challenging times

1-year challenge

A painful blunder for the stock tippers today as last year's hot pick Challenger (ASX: CGF) crashed another 17.12 per cent during trade on market declines and lower performance fees. 

Source: ASX

A second profit warning for the month threatens to wipe out almost all of the profits for the half.

Still, I guess if you liked it at $14 you'd love it at $7.65.

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How to increase income

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Highest UK wages growth since 2008

UK wages lift to decade high

Goodness knows the Brits could use some good news right now, with all the ongoing political wranglings and what-not. 

Total pay growth increased to the highest level in more than ten years at +3.4 per cent for the September to November 2018 period. 

Anecdotally I've heard of the reduced supply of EU labour leading to a spike in construction and trades remuneration. 

Total employment was up by some +328,000 from a year earlier (3m/YoY) to a record high of 32½ million.

The unemployment rate in the UK fell from 4.1 per cent to just 4 per cent, the lowest level since 1973. 

The 16-64 employment rate came in at 75.8 per cent, well up from 75.3 per cent a year earlier, to be at the highest since 1971.

Jolly nice surprise.  

Back to the Brexit stuff.