Jobs market passing the peak

Jobs ads decclining

Still plenty of hiring to be done, but looking further ahead, job advertisements are now on the way back down.

ANZ's monthly data series:

ANZ still expects the unemployment rate to fall to below 3 per cent by early 2023. 

Fuel prices at 2-month lows

Fuel prices dropping

Governor Lowe highlighted in a speech a month ago how inflation will eventually fall back to target.

One example he highlighted was fuel prices having soared 37 per cent over the year to June, adding a full percentage point to inflation. 

Lowe pointed out that even if oil prices stay high, the annual rate of inflation for oil will eventually fall from 66 per cent to 0 per cent. 

Some related good news this week, with the average cost of unleaded fuel in Brissie pulling back to $1.64/litre.

It wasn't so long ago we were forking out $2.30 in Noosa, so this is some improvement! 

The 6-month fuel excise cut is due to expire at the end of September, so Albanese and Chalmers could do a lot worse than rolling it over if they're serious about tackling living costs (I guess they won't though). 

Internationally, there's a similar dynamic at play for freight costs, which are still 4x the level they were at pre-pandemic, but have now been falling for 10 weeks on the bounce.

Over the past 20 weeks the freight index has fallen by 45 per cent. 

The price of semi-conductors are also well off their recent highs, which should help to kick-start car production.  

Some of the supply-side problems in the global economy related to the pandemic are now being resolved. 

The balancing act for Governor Lowe over the coming months will be to tighten monetary policy to bring supply and demand back into balance, and reduce inflationary pressures, without going so far as to tip households dealing with higher living costs into financial distress. 

Markets are looking for a 50 basis points hike this week (to a cash rate target of 1.85 per cent), and there will almost certainly be another hike beyond that, before any potential pause. 

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CoreLogic will release the July housing index figures today, with significant drops for Sydney (-2.2 per cent), Melbourne (-1.5 per cent), Brisbane (-0.8 per cent), and regional Australia (-0.8 per cent).

Property investors have been somewhat compensated, with rents up a further 0.9 per centin July, and up 10 per cent over the year. 

The housing finance approvals figures are due out on Tuesday, and should also show a sharp reversal from May's gains. 

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?

Big Picture podcast

I joined Michael Yardney on the Big Picture podcast to discuss how long the property podcast will go for.

Tune in here (or click on the image below):

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.