Huge net movements

Population reshuffle

A remarkable graphic which really grabbed by attention, with data from the US Census Bureau.

It shows net population movements over 2020-2021, with blue states such as California losing over 367,000 people on a net basis to internal migration, and New York losing over 350,000. 

The corresponding gains were seen in red states, such as Florida and Texas. 

Australia doesn't really have a direct equivalent, but there is a 'Florida' in Australia, it's represented by south-east Queensland.

South-east Queensland saw record net interstate migration in 2021, accelerated by retirees, downsizers, and flexible/remote workers seeking relative affordability and improved lifestyle choices.

As for a 'Texas'...far north Queensland? Perhaps not. 

Credit growth approaches zenith

Business lending strong

Credit growth juuust eked out a new post-financial crisis high at 9.1 per cent growth in June (May: 9.1 per cent), while broad money growth has already begun tits decline. 

There tends to be a lag in these figures, but going forward credit growth is likely to lose momentum.

Owner-occupiers are now sitting on the sidelines, and credit growth to homebuyers is now in decline.

Investors are still borrowing, however, seeking a hedge against inflation, and being tempted back by the prospect of lower prices and a sharp increase in rents in many markets (see paywalled AFR piece here). . 

Annual housing credit growth overall recorded its first year-on-year decline for this cycle in June. 

In turn, the housing credit impulse continues to fade, and is likely to do so for at least the remainder of 2022. 

Business credit growth has been very solid over the past few months, a timely boost from the Delta strain reopening, and hit 13.2 per cent year-on-year in June. 

Some of the business credit growth reflects higher prices, but much of the boom has been in the industrial space.

With housing credit growth slowing and personal credit growth still in decline, business credit now accounts for 34 per cent of outstanding credit, the highest share since 2013. 

The wrap

Overall, while investors are still active in the housing market, sales volumes are falling away sharply.

And with the Reserve Bank set to increase the cash rate target by (at least) 50 basis points next week, this can be expected to continue over the months ahead.

Looking further ahead some of wilder market expectations have now been tempered, with the 3-year bond yield now trading below 2¾ per cent, and futures markets winding back their expectations for the cash rate getting to above 3 per cent by next year. 

Retail rolls over; yields plunge

Retail slowdown

It's been a rollercoaster journey for retail sales over the past couple of years, spurred higher by the stimulus and the inability of Aussies to travel overseas, yet intermittently disturbed by lockdowns.

Online retail in particular has really been pumping. 

Anecdotally, a great many Aussies are currently travelling or visiting Europe, and the June retail figures were weak, recording only a 0.2 per cent increase in nominal terms.

Given prices have been rising, this was effectively a negative result, with food, department stores, and household goods retail turnover all dropping. 

The year-on-year figures still look strong, partly because of the base effect.

Overall, it seems that markets were fairly sanguine about this week's inflation figures - perhaps not quite as hot as markets secretly feared - and bond yields have eased all the way back down to where they came from in May, declining further on the latest news out of the U.S. 

The US economy recorded a second consecutive quarter of negative growth according to the preliminary data, which is what they used to refer to as a r....well, anyway.

Markets thing inflation will ultimately peak, and then eventually head lower, with interest rates following suit (potentially starting with a cut as soon as Q1 2023, which seems quite remarkable, all things considered).  

Commodities prices super-boom!

With the Fed moving to a meeting by meeting basis for the assessment of monetary policy, stock markets have been rather be enjoying this potential pivot over the past couple of days. 

And in Australia?

Commodity prices are having an absolutely monster run, with Australia's export price index soaring to unprecedented highs, and the June quarter set to awesome record highs for the terms of trade.

This is a tremendous boost for government tax take and Australia's domestic income. 

Iron ore export prices look to have peaked, but coal export prices continued to go vertical in the June quarter, while gas prices have also been running at extraordinarily high levels. 

The ASX 200 has recovered a little in sympathy to 6,889, having pulled back to 6,433 in June.

Pulling in the other direction banks are likely to come under some significant pressure as lending has slowed. 

Rewinding to early 2020, I'd previously felt on the balance of probabilities the ASX could be in for a tough time.

After the XJO first breached 7,000 I moved most of my liquid assets out of stocks (though obviously I still had some very long-term investments in index funds) and ended up buying a couple of investment properties in the 2020 panic instead. 

But after the initial COVID crunch when the Aussie stock market very briefly fell to under 5,000, overall the decline for Aussie stocks has proved to be pretty tame and modest to date, to be fair. 

[Podcast] How long will this property downturn last?

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No shocks in the inflation figures

Inflation just below expectations

Australia's inflation figures came in at 1.8 per cent for the June quarter, a little less than feared, below market expectations, and well below the 2.1 per cent reported for the March quarter. 

Over the year inflation came in at 6.1 per cent, some margin below market expectations for 6.3 per cent.

The trimmed mean (1.5 per cent) and weighted median figures (1.4 per cent) for the quarter also weren't too alarming. 

Australia's inflation profile is a little different from some other countries, and is set to peak at a lower level than in many of the other developed country economies. 

One of the reasons is that although housing construction costs have soared (new dwelling purchase costs were up by over 20 per cent year-on-year), rental price growth has been much lower. 

In fact, the ABS methodology is still picking up negative year-on-year growth for rental prices in Sydney and Melbourne, being the two cities which make up a significant weighting of the index. 

Looking at the rental price indices on a cumulative basis below, you can see why.

Part of this dynamic was the so-termed 'race for space', with many tenants fleeing the CBDs and heading to regional areas, or Brisbane and south-east Queensland.

This contrasts significantly with the U.S., for example, where nationally rental price inflation is much stronger, and accounts for the biggest component of the surging inflation figures. 

You can read the detailed inflation analysis with James Foster here, but overall, underlying inflation came in at around 4½ per cent over the financial year. 

It seems a while ago now that consumer prices actually fell by -1.9 per cent in the June 2020 quarter, before the big rebound. 

Bond yields in decline

Financial markets are taking some comfort in these figures.

Australia's 10-year bond yield is currently trading at around 3¼ per cent, way down from 4.1 per cent last month, while the 3-year bond yield is actually trading at under 3 per cent, having run up close to 3.8 per cent last month. 

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Rental trends

There is some suggestion that Aussies are returning to Sydney and Melbourne in more significant numbers now, with the latest total weekly rental listings figures from SQM Research showing a continuing decline in both cities. 

This should help to take some of the pressure of regional rental markets such as the Sunshine Coast, where rentals have been in chronically short supply.

Source: SQM Research

The wrap

Overall, there is decent evidence of inflation expectations remaining well anchored, and hopefully there should be no need for a panicked monetary policy response. 

Don't forget to download your free Investor Report for 2022-3 here. 

Alastair Lias: Where to invest in this cooling market?

Property Pod

The housing market is cooling, and will continue to do so for as long as borrowers remain cautious about increasing mortgage rates. 

Any bargains out there yet?

I discussed with Alastair Lias here (or click on the image below):

You can also tune in at Apple podcasts, Spotify, and elsewhere.

And, of course, you can listen at Youtube. 

US recession risks rise

Soft landing for the US?

A few choice charts via the Twittersphere to illustrate how market expectations have been evolving for interest rates (which is to say, they're most probably heading up, then fairly soon back down again). 

Firstly, US manufacturing is sinking into recessionary territory, and an interesting chart via Andreas Steno Larsen and Macrobond suggests that bond yields will accordingly be heading lower, and perhaps sharply lower. 

Secondly, 5-year inflation expectations have now slumped below the 2 per cent inflation target, suggesting that markets are becoming increasingly concerned interest rates may be tightened too far (hat tip to David Scutt, with the share). 

Markets are pricing for a 75 basis points hike at Wednesday's FOMC Meeting. 

And thirdly - and finally - financial markets expect the US Federal Reserve to hike rates towards 3½ per cent by the end of the calendar year, but then to be delivering a series of cuts in 2023 and 2024, to sink the Federal Funds Rate back below 2½ per cent by early 2025.

Source: Charlie Bilello

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Walking the tightrope

There's a similar tightrope to be walked in Australia, with policymakers aiming to ratchet up interest rates far enough to tame inflation over the remainder of 2022, but without going so far as to sink the economy back into recession next year.

The Reserve Bank of Australia's Governor Lowe noted in a speech last week that inflation expectations derived from indexed swaps suggest a high degree of confidence that inflation will average 2 point something over the decade ahead, but over the next year inflation is expected to be above the target range. 

The Governor's speech appeared to suggest that a combination of a salvo interest rate hikes to cool demand combined with easing disruptions to supply chains should bring inflation back down to the target range in a reasonably timely manner. 

Commodity prices have fallen sharply over the past month, which will help. 

On a related note, tomorrow will see the release of the June quarter inflation figures for Australia.

Markets are looking for the headline result to slow from 2.1 per cent in Q1 to 1.9 per cent in Q2.

But that would still be enough to see an annual figure of above 6 per cent, with consumer price increases largely driven by the housing component, food, and fuel prices in the June quarter. 

Core inflation is expected to come in at a similar level to Q1, when it printed at 1.4 per cent for the trimmed mean measure (and 1.2 per cent for the weighted median).

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Wealth leaves BRICs

High net worth movements

Henley's latest Global Citizens Report projects a large outflow of high net worth individuals from Russia, India, China, and now Hong Kong and Ukraine.

Source: Henley

The main  beneficiaries will be the UAE and Australia, forming part of a broader trend to shift wealth, once acquired, from Russia, China, and India. 

Over the next decade, Henley projects an increase of 80 per cent in India's high net worth individuals.

Australia currently has a wealth per capita of US$250,980, and around 400,000 US$ millionaires, with 38 billionaires. 

Source: Henley

Immigration visas to be fast-tracked

Visa processing speeds up

Some interested 'tidbits' in the Australian Financial Review today, where the top four lead articles this morning each concerned the immigration revamp.

Source: AFR

There are currently more than 960,000 visa applications currently stuck in a backlog, including over 560,000 from applicants based outside Australia, according to the interview in the AFR lead article. 

58,000 skilled worker visas and 14,000 temporary visa applications will immediately be fast-tracked to help alleviate the skills shortage. 

And a massive 623,000 visa applications have been processed over the past seven weeks since June 1, with the average processing time plunging from 11 months to four. 

This aligns with my thinking that the coming summer months are going to be extraordinarily busy in Australia (except, perhaps, for the Christmas period when many international students are typically overseas).

Rents on the rise

In related news, CoreLogic recorded another sharp -24 per cent year-on-year drop in rental market listings.

Source: CoreLogic

Rents continued to rise, to be up +2.9 per cent over the quarter, and +9.5 per cent over the year, with signs of an acceleration in June (+0.9 per cent). 

Source: CoreLogic

SQM Research reported a decline in regional asking rents last month, hinting at a potential reversal in the treechange/seachange pandemic shift. 

SQM recorded a total of 37,000 rental vacancies for June, suggesting major pressure on rental markets as visa processing is fast-tracked from here to reduce the massive backlog of applications. 

Spending rolling over

Confidence sinks

CBA's spending tracker appears to be rolling over, as a combination of price inflation and the prospect of rising interest rates bite into consumer confidence. 

Source: CBA

An overlay of Bloomberg's (declining) commodity price index versus headline US inflation suggests that the headline rate of inflation should soon be back on the way down.

Source: Bloomberg

Economists are now debating how far the Reserve Bank will need to take the cash rate target to get inflation back down on to the desired trajectory.

Consensus seems to land at around 2.6 per cent, though market pricing has been hinting at a higher terminal rate.

The Reserve Bank ran some scenario analysis today in a speech here to look at how households will fare if interest rates were to rise by 300 basis points from the market lows. 

Inflation expectations...easing?

Inflation 

The current tug-of-war dynamic neatly summarised in a single Friday Tweet. 

The most recent data releases are producing some remarkably high inflation numbers.

Today, New Zealand recorded 7.3 per cent inflation for Q2, for example, which was the highest print in the 32 years since 1990.

But looking further forward inflation expectations appear to remain well anchored. 

Indeed, long-term inflation expectations are now on their way back down.

This from the US:

Economists are expecting some punchy inflation figures for Australia for Q2 when the June quarter figures are released in 9 days time, mirroring the recently high headline inflation figures for New Zealand, the UK, and the US, for example. 

Westpac expects to see core inflation of 1.4 per cent again for Australia in the June quarter, matching the rise in the March quarter, and taking the annual pace up to 4.8 per cent year-on-year. 

But while further interest rate hikes this year are a certainty, benchmark bond yields have dropped by around 60 basis points from  their highs.

Hopefully by 1 February Aussie households and consumers should have more confidence that interest rates aren't going to keep rising on them.

A timely boost for sagging stock markets here too, you'd think. 

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Fuel prices...on the way down!

Source: CommSec

CBA updates interest rate forecasts

2022 hikes

After the strong employment numbers, CBA now sees the cash rate rising to 2.60 per cent by November - while also predicting a terminal cash rate for this cycle of 2.60 per cent. 

This trajectory means 50 basis points of hikes are coming in both August and September, before a probable pause in October. 

Source: CBA

CBA sees a 'neutral' cash rate as being around 1.50 per cent.

This is expected to be a significantly contractionary setting, then, to be followed by 50 basis points of cuts in the second half of 2023. 

In the short term, data is expected to keep running hot, while the forward-looking indicators continue to deteriorate sharply (consumer sentiment is already deeply pessimistic). 

Headline inflation is expected to peak at above 6 per cent, according to CBA Chief Economist Gareth Aird. 

Unemployment rate drops to 50-year lows

Jobs for all!

It looks like all those job vacancies are now being filled!

The June labour force figures saw an outstanding increase of 88,400 to employment, to a record high of 13.6 million, again driven by full-time roles.

The past year has been a real rollercoaster ride, but over the last 12 months the increase in employment has been a very solid 3¼ per cent. 

Queensland led the way with a massive +4.6 per cent increase in employed persons, equating to an increase in employment of +123,000, with New South Wales also looking very strong. 

The labour force, meanwhile, has only increased by 1.8 per cent over the past year, despite a record high participation rate of 66.8 per cent, driven by an increasing share of females seeking employment.

This sent the unemployment rate plummeting to just 3½ per cent. 

Zooming in the unemployment rate dropped sharply from 3.90 per cent to 3.50 per cent in June, which is the lowest figure since the monthly data series began in 1974.

This drop was correctly anticipated by the ABS job vacancies and labour force figures, and indeed it's possible that an ever lower result could yet be posted. 

In saying that, SEEK's job ads figures are now in decline, and building and construction firms are going bust left, right, and centre, so as some point we'll see these excellent figures going into reverse gear. 

Hours worked in June were only flat, in part due to staff absences. 

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Detailed analysis as always from James Foster here.