Unemployment now rising steadily

Employment market cooling

Employment declined by -14,600 in December, while the November figure was also revised lower.

This leaves total employment some way lower than previously had been expected at 13.74 million.

The participation rate dropped back from 66.8 per cent to 66.6 per cent in December, effectively keeping a lid on the unemployment rate figure reported. 

Still, the revised unemployment rate has increased a little since October, with the number of unemployed persons creeping higher to around 500,000 by the end of the 2022 calendar year. 

A zoomed out graph shows that the unemployment rate essentially bottomed out at around 3½ per cent in July last year. 

Each of the most populous states saw modest employment declines over the month, but nevertheless New South Wales has been the standout economy of late.

New South Wales still has a remarkably low unemployment rate of just 3.1 per cent, perhaps accounting for record low mortgage delinquencies. 

Monthly hours worked also declined in December, so it was a soft result overall.

A part of the shortage of labour has been due to workforce illness, with more than 600,000 persons still working reduced hours in December, although the latest COVID wave seems to have since passed by now.  

The soft result saw bond yields aplenty plummeting below the cash rate target, with the important 3-year yield dropping to well below 3 per cent. 

Cash rate futures markets also dialed back interest rate hike expectations on the release, with the terminal cash rate for this cycle now expected to be around 3½ per cent. 

Inflation...it's over

PPI sinks

A big decline in the headline producer price index from the US, dropping -0.5 per cent in December (the previous month's result was also revised down to +0.2 per cent). 

It was the biggest drop in the headline result since April 2020. 

Bloomberg with the charts:

Source: Bloomberg

Disinflation is gathering pace now, the annual result for PPI dropping far further than expected last month from 7.3 per cent to 6.2 per cent (the core reading was 5.5 per cent). 

Source: Bloomberg

The index has dropped very sharply over the past six months, and with retail sales and other indicators turning deeply negative, it may not be too long before rate cuts are being discussed. 

Australia reports its inflation data both quarterly and late, so alas we'll still have one more round of reporting hysteria to go through next week.

But it's clear that the inflationary spike will soon be over. 

The top podcast episodes of 2022

Property Pod

I got my download update for 2022 podcasts.

Here were the most listened to episodes over the year (follow the links for a listen):

1 - Dave Gow: financial independent, retired early - comfortably the most popular episode

2 - Louis Christopher: 2023 property market forecasts - SQM founder predicts where and when the property market recovery begins 

3 - Steve McKnight: From survival to significance: how to build wealth that matters - top author and investor Steve McKnight returns to discuss his new book Money Magnet

4 - Michael Bevan: To finish first, you must first finish - Australia's greatest one-day cricketer talks about winning the Cricket World Cup and property investment 

5 - Michael Yardney: This is what will drive property prices over the short, medium, and long term - a big picture look at Aussie property market dynamics

6 - Evan Lucas: why your money personality matters - Evan Lucas from InvestSMART discusses his new book Mind Over Money

Housing starts crashed in 2022

Dwelling starts crashing

Dwelling construction was significantly delayed in mid-2022 due to the combined shortages of labour and materials, and the number of new dwellings under construction remained resolutely high until September at around 243,500.

Although attached dwellings under construction eased in the two most heavily populated states, south-east Queensland did see in an increase in much-needed supply due for completion. 

New dwellings starts are another matter entirely, plunging to 45,000 in the third quarter of 2022, down by more than 21 per cent from a year ago and a long way down from the stimulus peak of 67,000. 

This is going to fall way short of the record high supply of housing needed over the next decade. 

Dwellings approved but not yet commenced were essentially flat at around 30,000. 

The wrap

Overall, building activity was set to remain strong for some time to come back in September last year, with a very large supply of dwellings under construction.

The bigger picture is that housing starts were already beginning to crash even before interest rates were hikes in July, August, September, October, November, and December. 

As immigration hits a record high this year there's gotta be some serious questions asked about the lack of housing supply. 

The 3-year bond yield dropped all the way back down to just 3.05 per cent tonight - now lower than the current cash rate target.

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The Aussie dollar has soared higher to touch 70.6 US cents (up from lows of around 62 cents in October), killing the narrative about imported inflation from a plunging currency once and for all. 

Net migration to exceed 300,000 in 2022-3

Festive travels

The November 2022 figures for arrivals and departures suggested a smaller net population inflow over the course of the month.

Source: ABS

The preliminary estimates show that we should expect there to be a large seasonal outflow from Australia in December as students and holidaymakers jet off overseas.

Indeed, this has already been evidenced by the seasonal increase in rental vacancies last month. 

What an amazing chart, by the way, from the ABS:

Importantly for labour market dynamics, however, the number of temporary work visa holders has continued along its way with a strong recovery.

Australia's staff shortages in industries such as retail and hospitality were driven by the massive net loss of temporary work visa holders through the pandemic; but it's great to see that things are now on the mend. 

Source: Westpac

Looking through the seasonal noise of travellers, transients, and temporary residents, monthly net permanent and long-term immigration into Australia has already returned to pre-pandemic levels, and will soon be breaking new highs. 

Macquarie Macro Strategy chimes in below with one of their favourite monthly charts, which shows that net immigration will almost certainly top 300,000 this year:

Treasurer Chalmers actually conceded this week that net immigration in 2022-3 could well top 300,000, far ahead of the assumptions previously keyed into Budget papers.

This would take total annual population growth close to record highs of about 450,000 this year. 

The latest bargaining trends data from the EBA showed annual wages increases remained stuck at around 3 per cent over the year, confirming that there's very little risk of a rapid acceleration in wages growth in Australia...especially now given the rapid acceleration in the size of the labour force. 

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Inflation victory in sight

While financial markets certainly haven't got everything right over the past year or two (!), there are some increasingly promising signs emerging from the US.

This week, the 2-year breakeven inflation rate has fallen all the way back down close to the Federal Reserve's 2 per cent target. 

Source: Bloomberg, Reuters

That's the lowest figure for 2-year breakevens since all the way back in 2020, and a far cry from the cyclical peak of almost 5 per cent less than a year ago. 

While the Fed will be understandably cautious about setting off on a victory lap too soon, these are some really encouraging signs, and indeed futures markets are already looking ahead to interest rate cuts in the US later in 2023. 

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Canada saw inflation of -0.6 per cent recorded in December, adding to the wider theme of inflation having peaked in late 2022. 

Sydney rents rise 30pc

City rents soaring

There was the usual seasonal spike in rental vacancies in December - from 1.0 per cent 1.3 per cent nationally - as international students headed off for their summer break.

The general trend remains down, however, and this is expected to continue over the coming months as students return, and as the visa application backlog for new arrivals is cleared down. 

Despite this, it does look as though rental markets have been easing in recent months in Canberra, Darwin, and in a number of regional markets. 

The main rental pressures in 2023 are likely to be experienced in the capital cities, where new migrants will pour in.  

Louis Christopher of SQM Research warned that historic seasonal trends suggest rental markets will become extremely tight in the early months of the new year.

Asking rents in the capital cities increased another +2.2 per cent over the month of December, to be a thumping +24.6 per cent higher over the year. 

Source: SQM Research

Although rental yields are rising, it's pretty obvious that this market dynamic isn't healthy and that the lending settings are simply too tight for landlords at present, with the 300 basis points lending assessment buffer now far too wide. 

The annual increase in asking rents in Sydney has powered to above +30 per cent, with the median asking rent for a house in Sydney rising to a record high of $900 per week. 

While this may not be fully reflected in median rental price indices just yet, it's nevertheless the case that there is rampant competition for quality rental stock, and policy settings need to calm down a bit to allow the market to function more freely.

Inflation drops in December

Core inflation falls in December

The Melbourne Institute inflation gauge slowed to just +0.2 per cent in December, thus looking to have recorded a cyclical peak of +5.9 per cent over the calendar year.

The core measure of inflation has reached a clear turning point, and is now dropping.

The trimmed mean measure plunged from 4.9 per cent to 4.2 per cent over the year to December. 

Source: Alex Joiner

Construction and new dwelling costs are still soaring according to the official ABS figures, but those indices are likely turning negative in real time.

The rate hikes delivered to date won't be fully reflected until towards the end of this year, with the HIA now consistently sounding the alarm on housing supply. 

It increasingly looks as though inflation will drop away just as quickly as it spiked, with the exception of rents, which are now soaring on low rental vacancies. 

Source: Alan Kohler, ABC News

Supply drying up; lending for new housing at decade lows

Lending cools

Lending for housing continued to fall back towards pre-pandemic norms, declining to a monthly total of $25 billion (excluding the record high surge in refinancing).

Source: ABS

Average loan sizes for owner-occupier purchases peaked at just shy of $618k in January 2022.

Having declined to $588k, loan sizes have been rising again since September last year, and were back up to $602k by November. 

Source: ABS

Two of the most pressing housing market issues include the number of borrowers trapped in a mortgage 'prison' by unnecessarily wide lending assessment buffers, and the crippling impact of interest rate hikes on new housing supply. 

The HIA has previously noted that mortgage rates have increased too far and too quickly, and now highlights that by November the new number of loans for the purchase or construction of new homes was already at decade lows. 

Source: HIA

These figures were posted before interest rates were hiked further in December, so clearly they will deteriorate further over the months ahead. 

Reported the HIA:

Source: HIA

Population growth is set to hit record highs in 2023, so there's a huge shortfall of available housing looming.

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In other news, card activity dropped away sharply through late December and into early January. 

Source: Westpac

Although the Q4 2022 peak in inflation won't be formally reported until January 25, it's clear that the Reserve Bank has likely done enough on interest rates already, and should be looking to pause soon.