Monthly inflation indicator 7.3pc

Inflation still hot in November

Having tipped 7.3 per cent in September - and then dipped to 6.9 per cent in October - the newly minted ABS monthly inflation indicator was back up at 7.3 per cent in November. 

Westpac had anticipated 7.4 per cent, and the median market forecast was 7.2 per cent...so this result split the difference, and - after the initial excitement - in the end didn't change market expectations much. 

Source: ABS

Inflation is thought to be set to peak in the fourth quarter, but most likely some way below the 8 per cent level that the Reserve Bank had previously predicted. 

Source: ABS

Overall, this was a somewhat hotter result than expected, but likely won't much change the view that headline inflation will peak at around 7½ per cent in the fourth quarter, with the trimmed mean reading peaking somewhere in the 6s.

Dr. Joiner on the Twitter with the relevant graphs:

Looking further ahead, there are many global indicators pointing to a forthcoming decline in inflation, from fertiliser and food prices, to fuel and freight rates. 

The US December CPI figures are due out tomorrow, and may show show a flat (or possibly slightly negative) headline result for the month, with annual inflation expected by markets to drop from 7.1 per cent to around 6½ per cent. 

Walking the tightrope

The Reserve Bank of Australia is walking a tightrope from here, likely continuing to hike interest rates in 25 basis points increments until the data conclusively show that inflation is falling.

In real time, we can already see this beginning to happen in housing construction.

Indeed, the Housing Industry Association has already stated more than once that interest rates have gone too high too quickly, and this is set to cripple new housing supply, seeing building approvals heading towards decade lows, while rising mortgage rates for landlords are wreaking havoc in the rental market.

In Noosa our community notice boards are now dominated by new arrivals into the country trying in vain to find a room to rent (ironically tight lending policies for landlords are now contributing to rapid rental price inflation). 

Economist Tom Devitt also highlights how it wasn't low interest rates which drive inflation higher in the first place, and as such interest rates won't be the sole cure either. 

The spike in inflation was largely driven by stimulus packages such as the giant HomeBuilder and major renovation packages, in concert with major supply chain congestion...both of which are now easing. 

Retail turnover was up by 1.4 per cent in November - also hotter than expected - but it looks as though the seasonal adjustment is grappling to contend with the growing population of Black Friday sales, and retail trade volumes are likely to soften considerably in 2023. 

Source: ABS, Alex Joiner Twitter

At first blush, then, a somewhat ugly inflation report, but in the event it wasn't market moving and in fact bond yields have declined a little over the day and overnight, with Australia's 3-year bond yield trading back down at 3.24 per cent. 

The Aussie dollar was broadly unchanged at 69.1 US cents.

Inflation expectations tumble

Inflation set to freefall

Inflation expectations tumbled dramatically to kick off the new year, falling suddenly and significantly from 5.9 per cent to 5 per cent. 

Source: Roy Morgan Research

It's worth noting that core CPI was tracking below the target range when inflation expectations were running at around 4½ per cent. 

The ABS will release the latest monthly inflation data on Wednesday, although it only runs to November.

Building approvals sinking into the dirt

Approvals to 2-year low

Only 849 units were approved in Sydney in November, and a somewhat healthier 1,922 in Melbourne.

Annual approvals for attached dwellings are running at around decade lows in the major cities, and are sinking fast again in Brisbane. 

Detached house approvals are falling away fast in all of the capital cities except for Adelaide, in the post-HomeBuilder stimulus environment. 

Overall, there were just 13,898 dwellings approved in November on a seasonally adjusted basis, down 9 per cent from a month earlier, and down 15 per cent from a year earlier. 

Annual approvals fell to 189,000 - the lowest level in 23 months, with the latest monthly figures suggesting that annual approvals are heading much lower. 

The Housing Industry Association reported that interest rates have been lifted too quickly, and are now too high to allow the dwelling supply to respond to the growing population.

Meanwhile, population growth is set to hit a record high of more than 450,000 in 2023, driven by a strong rebound in Sydney and Melbourne.

A Goldilocks jobs report

Unemployment stays low

A remarkable trifecta of good news in the US payrolls report.

Jobs growth continued, with nonfarm payrolls increasing by +223,000 in December (though revisions to previous months knocked -28,000 away from the headline figure). 

There's been plenty of banter about whether the US economy is in recession, yet the unemployment rate ticked back down from 3.7 per cent to 3.5 per cent...so, clearly not. 

Paradoxically, perhaps the most heartening part of the release was that growth in average hourly earnings continued to decline. dropping from a recent high of 5.6 per cent in March, to 4.8 per cent in October, and now down to 4.59 per cent in December. 

Growth in earnings in the month of December was just 0.27 per cent - and the annual result far lower than the market expectations of 5 per cent - notching the slowest year-on-year growth since August 2021. 

This isn't the 1970s, and there's evidently no risk of a wages price spiral here. 

Overall, given the important of the wages figures, this is a 'risk on' signal for markets. 

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If you wanted to take a more pessimistic view, then the ISM survey did show a dramatic drop in new orders. 

Thus although inflation is likely going into freefall this year, there may still remain a risk of a 'hard landing' for the US economy. 

Bond yields dropped on the news, with US 2-year Treasuries down by 20 basis points to 4.25 per cent. 

20-video series #10

20-video series

The latest instalment in my 20-video series is here (or click on the image below):

Rental pressures shift to inner-suburban areas

Rental shifts

Rental listings are now trending higher in outer locations, such as the Blue Mountains, south-western Sydney and Wollongong.

A couple of charts from SQM Research...here's the Blue Mountains. 

And here's Wollongong. 

Rental vacancies are also generally trending higher from chronically low levels in South-Western Sydney, and - to some extent - Western Sydney. 

On the other hand, rental vacancies in the Eastern Suburbs are at all-time lows. 

The same holds true on the lower north shore, while the inner west isn't far off record low rental listings. 

With international travel reopening and record high student visa applications over recent months, the inner-suburban rental pressures are set to intensify in 2023. 

Rental shortages are being exacerbated by a surge in Airbnb usage. 

Population heading inexorably to 50 million...

Population statement

There's been plenty of media reporting through the week on the 2022 population statement from the Aussie government (via the Centre for Population), so there's not too much to add here. 

Firstly, labour shortages should no longer be such a pressing issue, with the number of temporary visa holders absolutely rocking back in late 2022. 

Looking forward, the population statement effectively makes the case for a high immigration scenario to reduce the median age, and to tackle the dependency ratio. 

The baseline migration scenario would see Australia's population increasing to 39.2 million by 2060.

However, the high migration scenario would see Australia's population almost doubling to close to 50 million by 2060, resulting in a much lower median age and dependency ratio in 2060.

Every Intergenerational Report makes this point: migrants bring skills, lower the median age (at least initially, before ageing themselves), increase the participation rate, pay taxes for a very long time, and reduce the dependency ratio. 

Which I guess is why successive governments tend to lean consistently towards faster immigration policy settings. 

Australia's capital cities lost population through the pandemic, with a dramatic loss of temporary visa holders out of the country, while many Aussies moved to the regions.

This is now reversing and the bulk of population growth is expected to be in the capital cities over the coming decades.

The capital cities have lower median ages, notes to the statement, and as such sees more births than regional Australia. 

Melbourne's population is projected to grow by 1.1 million to 6.1 million over the next 10 years.

Greater Sydney is also expected to grow to just shy of 6.1 million, while Brisbane is projected to grow from 3.7 million to 4.1 million over the coming decade.  

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New vehicle sales are floundering a bit, with only 87,920 sales in December. 

20-video series #10

20-video series

The next instalment in my 20-video series is on compounding...tune in here (or click on the image below):