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Saturday, 22 July 2017

No tightening bias in evidence

Waiting for tonight

With its burgeoning tourism boom, gosh aren't Sydney hotels becoming rather expensive these days?

This week we looked into booking an 8-night stay in the harbour city for the first week of October and received one quote back from the Four Seasons at a somewhat ambitiously priced A$43,000.

One assumes that was for the penthouse suite.

As a mildly amusing aside my wife once encountered Latino pop diva Jennifer "J. Lo" Lopez in the elevator during one of our stays at Sydney's Sheraton on the Park (two young girl fans asked her for a hug, but alas Jenny from the block politely declined).

Like most people that aren't pop empresses, I will not be shelling out 43 grand for my short stay, although the website being perused still came back with a surprisingly punchy $4,000 quote for the Novotel at Darling Harbour.

Since virtually nobody pays hotel rack rates these days, I reckon the sojourn will end up being about three quarters of that price, but it's another indicator of a state capital economy that is humming along right now.

Housing markets firm

Following the introduction of new incentives there have been some early signs of a first home buyer reawakening in Sydney and Melbourne, thereby confirming that there are no meaningful price falls on the immediate horizon.

Indeed, the preliminary auction clearance rates reported on Saturday evening pitched in at the highest level in six weeks. 

There has also been a good deal of premature arousal about rising mortgage rates.

It's true that investor loans have seen rates tweaked higher, but generally speaking commentary has focused too much on standard variable rates and not enough on discounted rates.

The fact remains that - for all the talk or rising funding costs - depending on the loan-to-value ratio home loans can still be secured from 3.69 per cent.

Just like with hotel stays in Sydney, while some unassuming people will pay the advertised headline rate on mortgages, most will shop around and get considerably better deals. 

In the absence of much housing market excitement to write home about, all eyes will be turning to Wednesday's inflation figures, and in turn the trajectory of the official cash rate.

Despite some speculation about imminent rate hikes, the Reserve Bank Minutes certainly did not indicate a tightening bias.

In any case as residential construction starts to turn down this will likely act as a material headwind to growth in 2018.

Improving jobs figures

There has been a marked improvement in the jobs figures since late last year, but even now youth unemployment remains fairly elevated at about 13 per cent.

Youth unemployment can sometimes be quite a useful indicator of economic strength - younger employees are often the first to have their wings clipped when times are tough, but may be hired again when conditions and the outlook improve. 

In New South Wales the trend unemployment rate has declined to just 4.75 per cent, with strong jobs growth in Sydney across recent years pushing the unemployment rate in the capital down as low as 4.4 per cent. 

Although Sydney's strong economy is attracting immigrants from overseas in droves, the latest internal migration figures show that thousands of residents are using their boosted equity to retire from the Sydney workforce to the regional south coast and to the Hunter Valley.

Sydneysiders are also increasingly migrating to Queensland for a cheaper cost of living, as tends to happen at this stage in the cycle. 

With such a low unemployment rate, upwards pressure on Sydney wages should now be returning in due course. 

Melbourne's record population growth is being driven by internal and overseas migration, and the unemployment rate sits some way higher

Slack ahoy

Despite the improvement in labour force figures, there are few signs of significant inflationary pressures and it's far too early to be talking about rate hikes in earnest.

The Reserve Bank Board appears confident that forward-looking indicators suggest further improvements are in the post for the labour market, but also recognises that the rate of under-employment remains elevated.

Even in New South Wales the underutilisation rate is still some way above where it was before the financial crisis shock, and all of the other major states sit some way higher again. 

Inflation still benign

With wages growth generally soft, it should be no surprise that core inflation has been consistently missing the target range to the downside.

Although the CPI figures are rarely weaker in the second quarter of the calendar year, Bloomberg's survey of economists suggests that this trend of core annual inflation missing the bottom end of the target range may well have continued in the June quarter. 

While there will be a post-Cyclone spike in fruit prices pushing the headline rate of inflation well above 2 per cent, this will to some extent be offset by falling automotive fuel prices at the bowser.

Finally, a rarely recognised potential twist in the tail is that the inflation figures are known to be upwardly biased, since the measures are fixed for a number of years. 

And with the expenditure classes set to be re-weighted for the December quarter, this could add even further downwards pressure on inflation in due course.

Some observers therefore believe that if interest rates do move next year then it's more likely to be down than up.

On balance, though, the most likely outcome seems to be rates on hold for the foreseeable future.

Roll on Wednesday...