MOAR of the same! Producer prices fall...

Producer prices fall

More of the same today, as producer prices have actually begun to fall, with a few fresh charts from the Bloomberg.

Ocean freight rates fell another -1.5 per cent last month, as supply chains continue to gradually resurrect themselves. 

Take a look at the speed of the decline from the 2021 peaks...

PPI goods (at final demand) fell -1.8 per cent in July, which was a huge reversal and the biggest drop since April 2020.  

And so producer prices are rolling over, with the monthly index down by some -0.5 per cent, and the year-on-year result of +9.8 per cent thus way better than the expected +10.4 per cent. 

Excluding food and energy, producer prices were up +7.6 per cent over the year, well down from +8.2 per cent a month earlier. 

The wrap

An outright decline in producer prices for the month is an even more welcome surprise than the flat consumer prices figures reported yesterday. 

The Federal Reserve will still be delivering a few more rate hikes from here, of course, but the odds of pulling off a soft landing appear to have improved markedly. 

No doubt there will be some hiccups along the way, but it's getting steadily harder to believe than inflation won't be transitory now. 

Wage & inflation expectations drop substantially

Tightening impacts

New home sales fell 13.1 per cent in July, as a result of increases in the cash rate target, according to the HIA:

Inflation expectations fell sharply from 6.3 per cent to 5.9 per cent in the Melbourne Institute's August report, well down from the highs. 

Notably, wage expectations also fell substantially, thereby underscoring little indication of a wage price spiral, according to the MI. 

Yay...the inflation rate has peaked

Inflation flat in July

It's seemingly the first time in a long time that the inflation figures have surprised in a good way.

US headline inflation came in at zero for the month, and the annual inflation rate fell from 9.1 per cent to 8.5 per cent in July (better than the expected 8.7 per cent).

Core inflation also came in markedly better than expected at 0.3 per cent for the month. 

James Foster very quick off the mark with the key statistics:

Core inflation year-on-year has been in decline for 4 months on the bounce now. 

The decline in the annual rate of inflation was overwhelmingly driven by the ongoing decline in gas prices (which fell by -7.7 per cent in the month of July). 

Some welcome respite from the endless news of increases in inflationary pressures; and in turn good news for risk asset classes. 

Job ads fall sharply

Economy rolling over

Job ads fell -11,200 in July, led by a decline of -6,200 in Victoria, according to the National Skills Commission. 

The decline comes off the back of 6 consecutive monthly increases. 

The economy has clearly hit a turning point, with insolvencies soaring +46 per cent year-on-year according to CreditorWatch, and Roy Morgan Research already reporting a climb in their unemployment rate figure to 8.5 per cent.

A whole slew of data from the US points to declines in business price plans, declines in the Adobe online digital price index, and so on...suggesting that although inflation is painfully high now, eventually we'll be sliding merrily down the other side.

Back in Australia, household consumption is set to crater, according to CBA, with consumer sentiment now as low as we saw in the depths of the global financial crisis:

Source: CBA

It feels like Australia's slowdown is tracking a bit behind the US, though, with power price and rent hikes still to flow through, and capacity still stretched. 

Still, by next month the Reserve Bank will have delivered ~225 basis points of tightening since April...it'll surely soon be time to hold the nerves, take a pause, and let those hikes do their thing (while supply chains right themselves over time)!

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US inflation figures out tonight...to say these will be closely watched is an understatement!

Steve Sammartino: This is the future of Australian city living

Property Pod

This week on the Pod, Australia's leading futurist, best-selling author and and TV presenter Steve Sammartino joins us to discuss the future of city living Down Under.

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

You can also tune in at Spotify, Apple podcasts, and wherever else you get your podcasts.

And, also you can tune in at YouTube:

Consumer confidence plumbs GFC depths

Confidence plunges

ANZ-Roy Morgan sees consumer confidence down another -4.5 per cent, to the lowest level since April 2020. 

The Westpac-MI gauge has consumer confidence is now also at the same levels we saw in the depths of the global financial crisis. 

Partly for this reason, CBA's Gareth Aird sees the cash rate target peaking at around 2.6 per cent, before being dropped to around 2 per cent. 

Source: CBA

Financial markets beg to differ, seeing pressure on labour costs pushing the cash rate target to above 3 per cent by 2023 (a view supported by the data in the NAB Survey up to July). 

Lending buffers

With Australia's 3-year bond yield trading at under 3 per cent, this does call into question whether home loan borrowers still need to be assessed with a 3 percentage points buffer.

The Bank of England has scrapped its 3 percentage points buffer, partly on the basis that the tightening cycle is now well underway. 

Since October 2021, borrowers in Australia have also been assessed with a huge 3 percentage points buffer, but since there is no basically chance of the cash rate target rising by that amount from here, the buffers could/should be reduced from next month (when the cash rate target will be 2.35 per cent) to give more breathing space for refinancing. 

More here (or click on the image below):

Australia's has a 'cliff' of fixed rate borrowers rolling off low mortgage rates over the next 18 months.

Many of these borrowers will face an unexpectedly huge lift in mortgage repayments, and deserve a chance to refinance, instead of being trapped with poor terms with one lender.

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{h/t Ben Kingsley, Empower Wealth, PICA Board}

Rents accelerating

Rents up

Rents continue to climb, according to CoreLogic, up another +0.9 per cent for the month of July, and +9.8 per cent for the year.

Source: CoreLogic

Rental tenancy laws and Queensland's landlord taxes are likely to accentuate the rental shortage over the years ahead. 

Even the CBDs are seeing rental vacancy rates normalising now.

Charts for Sydney, Melbourne, and Brisbane respectively are below (via the excellent SQM Research):

Source: SQM Research

PropTrack reports that the housing market downturn is being led by the premium end of the housing market in Sydney (-6.3 per cent for the quarter in the upper quartile) and Melbourne (-4.5 per cent for the upper quartile). 

Source: PropTrack

It was often the more illiquid properties at the top end of the market which outperformed in recent years, so this makes logical sense.

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New York Fed 1-year and 3-year consumer inflation expectations fell significantly in July.

Gas prices also fell further, to be almost $1 below their highs, and to sit at the lowest level in 5 months. 

This is good news, which should further ease concerns about higher price expectations becoming baked in.

No Fed pivot any time soon

Jobs stunner

Whoops, a huge beat on consensus for US nonfarm payrolls!

Economists had expected +250,000 based on the reported consensus, but in July the result was a rip-snorting +528,000 plus further upwards revisions.

Employment has recovered to its pre-pandemic levels, in the greatest comeback since Man United beat Bayern Munich in the dying minutes of the 1999 final.  

The unemployment rate also fell to the lowest level since the onset of the virus at 3½ per cent. 

Average hourly earnings growth, meanwhile, ticked up to 5.2 per cent over the year.

Really, this was a stunning result, and way better than expected.

You can read the detailed analysis from from the king James Foster here. 

Rug pull

To be blunt this is bad news for stock markets, as the Fed will not be pivoting any time soon, and indeed may well now hike interest rates by 0.75 per cent next time around. 

On the plus side, for the first time in quite a while I've found a European stock I'm keen on buying, though it's probably illegal to blog about it now (I'll have to find a way to discuss indirectly, perhaps).