Inflation decelerates away from target

Rates heading to zero

Headline inflation came in 1.59 per cent for the year to June, with a surge in the price of auto fuel this quarter, but not a whole lot else. 

It's a sign of the times - and of how inflation targeting credibility has been stretched - that such a weak result was met with a chorus of headlines about strengthening inflation.

Looking at the core measures, trimmed mean inflation of 0.42 per cent for the quarter saw the annual result slow from 1.64 per cent to 1.61 per cent, while the weighted median inflation measure decelerated quite sharply from 1.37 per cent towards a record low at just 1.24 per cent. 

Lumping the two in together, here's that 'rising' inflation chart, with not too much sign of the 2 to 3 per cent target band being threatened since 2015, and the trend now weakening for five consecutive quarters:

Hmm!

If you were being generous and looking very closely, you might say that the deceleration happened from a marginally revised up base.

But, still. 

Low inflation was both imported and due to weak demand and wages growth domestically.

Non-tradables inflation was benign over the 2019 financial year at 1.8 per cent, and tradables inflation considerably slower still at 1.1 per cent. 

Rental CPI, meanwhile, has been tracking below income growth for half a decade.

The wrap

We're heading towards half a decade of inflation below target, risking talk of asymmetry. 

As noted yesterday residential construction is now dropping off at a worrisome pace, which will result in tens of thousands of job losses and, presumably, the unemployment rate rising away from NAIRU towards 5½ per cent.

Cement maker and supplier to the construction industry Adelaide Brighton (ASX: ABC) scrapped its interim dividend today amidst a swathe of impairments.

Meanwhile one of the largest private developers in the country, The Ralan Group, has announced its collapse.

Voluntary administration risks sending "billions of dollars of east coast apartment projects" (AFR), thousands of associated jobs, and several thousand apartments presently under construction hurtling towards the gurgler. 

Plenty of other developer groups are reportedly teetering on life support.

Lost decade

To hell in a hand basket?

If I’ve read one article about the end of Australia...I must have seen seven thousand of them.

Which, incidentally is where stocks are heading...

Source: ASX

All-time high.

Predicting the next recession seems to have become a sad national sport, but to not much avail.

—-

Iron ore spot price closed up 2.3% at US$121.75 per tonne.

CPI figures for the June quarter are out later this morning.

Approvals crunch continues

Approvals crunch continues

A look through the building approvals figures in 45 seconds.

Unit and townhouse approvals have crashed nearly 40 per cent lower year-on-year, driven by Sydney, Melbourne, and to a somewhat lesser extent, Brisbane. 

June was the lowest month for attached dwelling approvals in Sydney in more than six years. 

The annual total for house approvals was also well down across Sydney (-13 per cent), Melbourne (-12 per cent), and Brisbane (-21 per cent). 

And the month of June also rounded out the lowest ever year for public sector approvals, with the government effectively bowing out of providing new accommodation altogether, at least in terms of net additions. 

Piecing it all together dwelling approvals were down 26 per cent over the financial year to about 14,300 in June, in seasonally adjusted terms. 

Annual approvals have thus fallen from 239,000 in FY2016 to just 187,000 in FY2019. 

These things always work with a long lag time, but once the existing glut of dwellings is cleared down there will be shortage of rental accommodation in the major capitals. 

There's also much less stock on the market now in Sydney in particular, making life tricky for prospective buyers. 

Source: CoreLogic

Commute times blow out

Commuting from some place

Property investors take note.

Commute times have blown out by about by 23 per cent since 2002, and as such commuters will naturally flock to live in areas where there are excellent transport connections for the major employment hubs. 

The latest HILDA survey showed that by 2017 Sydneysiders spent some 71 minutes per day on average commuting, up from 60.6 minutes in 2002. 

The malaise in Sydney has been partly arrested when measured as a mean daily average as more apartments have been built close to train stations. 

But it's still a hellish commute for many suburban dwellers. 

The same holds true for Australia's other 'more mature' capital city, Melbourne. 

In Brisbane, there has been an apparently inexorable 45 per cent increase in mean daily commuting times since 2002, to an average of 66.7 minutes.

In fact, Brisbane now has the second longest mean daily commuting time after Sydney. 

This has put pressure on land prices in Brisbane's inner ring (less so apartment prices, due to a recent building boom). 

RMIT's Centre for Urban Research noted that infrastructure has failed to keep pace with population growth. 

Bonds yield the ghost

Yields down again

More records.

Markets are now fully pricing two further interest rate cuts by H2 2020.

And the 10-year government bond yield is now down to just 1.198 per cent (even the 15-year bond yield is at just 1.33 per cent). 

3-month bills are also at record lows.

Banks are jostling for market share, with fixed mortgage rates now available from just 2.79 per cent. 

That's a freakishly low rate with conditions attached, but looking at these charts there'll likely be many more mortgages available with a low 3-handle in the second half of the year. 

Auctions action

Sentiment shift

Auction clearance rates in Sydney and Melbourne continue to hit into the mid low-to-mid 70s.

A year ago Sydney had a clearance rate in the 40s, so it’s quite a turnaround, albeit on low volumes.

Source: Shane Oliver (AMP)

The clearance rate in both cities was higher for units than houses this week, at about 80 per cent.

There’s somethings of a mini-mortgage war getting underway.

Lenders are busy cutting fixed rates, and quite aggressively in some cases.

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Have a a great weekend!

The land to asset ratio

High land values

Every wondered how to pick outperforming property assets?

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Wharves & walkability

HSW and New Farm

Something a bit different: a look at the outstanding new Howard Smith Wharves just a short stroll along from Brisbane City's Riverside precinct. 

I managed to pick the one cloudy day of the past fortnight, but it didn't stop the midweek revellers from packing out the bars and al fresco eateries. 

It's a big project and tricky to capture in photos, there are plenty of places to drink, eat, drink more, have picnics, drink, or get married on the lawns. 

And, best of all if you live in New Farm or Teneriffe, you can wander home afterwards.

After a period of high supply in Brisbane the vacancy rate on the New Farm peninsula is tracking at around six-year lows at 1.7 per cent. 

Source: SQM Research

The additional walkability to the CBD is the icing on the cake for one of Brisbane's finest postcodes.

Smackdown

Misery loves company

For all the attempts to talk down the economy or describe it as dire, jobs growth has been surprisingly strong in recent years.

And it was excellent to see the Reserve Bank revive the old 'Misery Index' today, showing a reading at about half-century lows. 

It's a metric I still track monthly, though I rarely post it these days due to the vitriol it inevitably appears to elicit!

The truth is that at about 5 per cent the unemployment rate isn't all that far off four-decade lows, and inflation is also comfortably low.

But, of course, everyone would be a bit happier with the world if wages were growing faster!

Capacity expands

Today's detailed labour force figures shed some more interesting light on recent trends.

Take Greater Sydney, for example: total employment has thundered another 3 per cent higher across the 2019 financial year to 2.83 million, representing an ongoing flourish of jobs.

Yet, with Sydney's participation rate rising several percentage points over the past half decade, the labour force has expanded even faster lately in recording year-on-year growth of 3.1 per cent.

And so the unemployment rate in Sydney is no longer falling (in June the reading was 4.2 per cent).

Greater Melbourne's annual average unemployment rate did continue to tighten, to just 4.75 per cent. 

Elsewhere, there remains lots more slack. 

With the Aussie participation rate running at a record high as more females and older Aussies seek work the Federal Budget is zooming back to surplus.

But the number of unemployed persons has increased at the last seasonally adjusted count to 711,500.

Even on an annual average basis the number of unemployed persons is now rising. 

The median duration of job search improved across the 2019 financial year in Sydney and Melbourne (both at 15 weeks as at the month of June), but has deteriorated elsewhere, so this measure is no longer improving either.

Thus, it's a really interesting dynamic. 

We've been through a strong period of employment growth, yet it hasn't got the labour force down close to NAIRU.

For a variety of reasons, including technology and globalisation, inflation remains stubbornly low, and the outlook for employment growth now appears to be softening. 

Beatdown

There have been sporadic calls in the media for the inflation target to be moved lower, effectively discrediting the inflation targeting regime. 

To cut quite a long story short, the Reserve Bank Governor clubbed these contentions right out the park today.

Lowe affirmed in no uncertain terms that the bank is committed to hitting its inflation target, and rates will be cut lower if required until the 2 to 3 per cent target is achieved. 

As such, it's reasonable to expect "an extended period of low interest rates", which has implications for the fair value of asset prices. 

Speaking at the Anika Foundation, a charity supporting research into depression and suicide, Lowe again stated that 'we are not inflation nutters' (from memory a phrase popularised by Mervyn King (?), though moving forward perhaps it ought to be tweaked for something a little more sensitive e.g. zealots, fanatics etc.). 

Regardless of this admittedly personal minor gripe, today's speech was unambiguous in its tenor. 

The inflation target remains firmly in place, and the Reserve Bank stands ready to cut rates further as required. 

Source: ASX

Roll on next Wednesday and the inflation reading for the June quarter, for which Westpac economists have calculated the trimmed mean reading could be just 0.3 per cent. 

But let's see. 

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Hammer to fall

Stock shortage (?)

There's a lot of talk about there being very little stock on the market at the moment, especially in Sydney.

It's all a bit of a dichotomy, to be fair.

Take a look at the Hills District, for example, where there remains a mountain of stale and unsold inventory, in spite of a recent modest improvement. 

Source: SQM Research

Hardly much of a pressure cooker market out there just yet, and parts of Western and South West Sydney exhibit similar trends.

Where, then, are the stock levels tight?

Parts of the Eastern Suburbs, and especially the Northern Beaches, where stock listings are threatening to sink to multi-decade lows.

And don't forget Sydney is growing by close to 100,000 per annum too, so there are more potential buyers around, and thus stacks of pent-up demand. 

Increasingly, too, there is a dearth of good quality stock on the lower north shore. 

Source: SQM Research

Suburbs such North Sydney and Neutral Bay have seen stock levels tightening a bit of late. 

The lower north shore recorded a perfect 100 per cent clearance rate last weekend - at least in the preliminary figures - so where will there be a spurt of price growth next?

Take look at Wollstonecraft where, excluding properties under offer, there are just half a dozen properties listed for sale across a smattering of forthcoming auctions.

That could easily be the recipe for some 7-figure sales as buyers come surging back into the market with increasing levels of urgency. 

This also makes it an exceptionally tough environment for prospective buyers. 

In adjacent Waverton and Kirribilli there are even fewer listings.

I looked at exactly why there are so few new listings here. 

Rates to fall to 0.50pc

More cuts

There was a noteworthy flicker of lively action in RBA October 2019 Overnight Index Swaps for last night.

And, lo and behold, today Westpac is calling for a rate cut in October 2019, followed by another cut in February 2020.

This would take the cash rate down to just 0.50 per cent.

Source: Westpac

In today's note, Bill Evans of Westpac discussed other measures which might be taken to ensure that any rate cuts are passed on in full. 

The Aussie stock market may be set to nudge intraday highs at record levels today. 

The previous intraday peak for the All Ordinaries Index was hit on my birthday back all the way back in 2007, on November 1. 

Housing sentiment highest since 2015

Housing pulse rebounds

Westpac's Red Book for July 2019 revealed a mixed picture, with troubling consumer sentiment still stuck at below average levels. 

Housing sentiment has shown a much clearer response to lower interest rates. 

The 'time to buy a dwelling' index increased again in the 3 months to July and is now 36.8 per cent higher than the mid-2017 nadir to sit at above average levels, led by New South Wales and Victoria. 

But the biggest change in response to the election result and interest rate cuts has been to house price expectations.

The house price expectations index has jumped 33.5 per cent higher in only two months between May and July.

Westpac's composite housing sentiment index has historically been very good at picking turning points in housing market turnover.

There's some downwards pressure on the composite index due to modestly rising unemployment expectations, but overall sentiment is at the highest levels since 2015 and trending sharply higher. 

Source: Westpac

This foreshadows a likely recovery in the number of sales over the coming months.

New stock levels are presently very suppressed, with stock turnover plunging to 30-year lows earlier this year as election uncertainty abounded. 

At the state level the housing sentiment index has been driven by rising sentiment in New South Wales, and then Victoria. 

Gonna need a bigger truck

Back up the truck

The big scary news of the week is Australia's foreign debt bubble that will lead to...the end of life as we know it. 

Or something like that. 

It's certainly been an interesting couple of years, with the terms of trade holding up far better than almost anyone could've expected.

In SDR terms the Reserve Bank's index of commodity prices has stormed from a reading of 69 in early 2016 all the way up to 118 (in Aussie dollar terms the index has increased even more sharply). 

This trend has been helped along by Brazil's iron ore challenges, and also strength in the gold price. 

With labour force participation now at the highest level on record Australia is in the fairly remarkable situation of being on the brink of a twin surplus: both on the current account and for the Federal Budget.

Who'd have thought that just a few years ago?

Big scary numbers

Naturally, Australia's foreign liabilities have increased over time.

How else, after all, is a capital importing country supposed to grow?

Looked at as a share of nominal GDP, however, there hasn't been much change in net foreign liabilities over the past couple of decades, even if there has been a shift in the composition. 

There's more long term debt these days, with interest rates having fallen much lower. 

Of course banks manage their liabilities and risk through hedge accounting, using swaps, and other hedging facilities to minimise their exposure. 

Also noteworthy: in a few years Australia's gross foreign assets may well outstrip liabilities (not to mention on the income side), so there's more than one side of the ledger to be considered. 

Truckload of BS

There's nothing new about scaremongering on foreign debt, of course.

It's dead easy to do because you can always throw around big scary numbers.

John Howard literally clambered on board with the idea back in the mid-1990s, on a foreign debt truck with lots of digits on the side. 

And more or less ever since the idea of driving around placards emblazoned with big scary numbers has been considered effective campaigning. 

Thing is, the campaign trail scaremongering was just as much hyperbole then as it was now.

Now, it is true that Australia has taken on some government debt in recent years, with a surge in bond issuance since the financial crisis.

But overall gross debt isn't especially high in international terms, while the latest Budget forecast projects net debt drifting back towards zero over the next decade. 

Moreover, Australia's 10 year bond yield is now about 1.3 per cent, while even the 15-year bond yield is only at 1½ per cent. 

In fact, now it occurs to me: this is the best thing about debates surrounding foreign debt.

You don't need to rely on half-baked opinions or blogspot posts: just take a look at the collective wisdom of financial markets and that'll tell you everything you need to know about the shifting views on risk.