Pete Wargent blogspot


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Tuesday 31 January 2023

Retail turnover crashes to near-worst monthly decline

Retail party ends

Retail turnover got walloped in December as cost of living pressures began to bite, according to the ABS commentary, recording a far worse result than any of the expectations proffered by market economists.

Turnover was down -3.9 per cent for the month for one of the worst monthly declines on record. 

A surprisingly huge percentage decline for the month, then.

The retail volumes for the final quarter of 2022 will warrant watching with interest, as this may go some way to shaping the narrative for the Reserve Bank of Australia's February meeting. 

Credit slowing

In other news, credit growth also slumped to just 0.3 per cent in December. 

Housing credit growth decelerated to just 0.3 per cent for the month.

Housing credit growth to property investors was dismal at just 0.26 per cent over the month of December, sowing further seeds of a dire rental crisis in 2023.

And the housing credit impulse took a further leg lower, with capital city prices now down by around -9 per cent, driven by prices in the top quartile of the housing market. 

The wrap

Overall, these were extremely soft retail numbers as compared to market expectations, and this was the biggest percentage monthly decline on record, COVID lockdowns excepted. 

Even allowing for some pull forward from the Black Friday rush in November, this was more than 3x as large a decline as the lowest of the market forecasts. 

The party is over for retail, with anecdotal evidence also pointing to ongoing weakness in household goods in January. 

Temporary visa holders up 722,000 from last year

Visa rebound continues

Normally as we head into the summer months we see a surge in the number of visitors to Australia, and a decline in some of the other categories (student visas in particular). 

This year we got the expected surge in visitor visas...and student numbers also continued with their recovery.

There was, on the other hand, a significant drop in the number of bridging visas on issue (-166,000).

Still, overall temporary visa numbers have recovered to around their pre-pandemic highs of 2.4 million, increasing by an unprecedented +722,000 from a year earlier (and even more from their pandemic lows). 

Home Affairs can barely up with the rate of temporary and permanent applications at the moment.

Total student visa numbers at 456,000 are still around 200,000 below their pre-pandemic levels, but the recent edict from China compelling Chinese students to return to Australia immediately combined with the record rate of student applications will keep up the intense pressure on the visa system over the coming months.

The return of international students combined with a slowing in consumption will serve to take the pressure off wages in 2023.

SEEK's innovative Advertised Salary Index increased +0.3 per cent in December, which was the slowest monthly result since April 2022.

Source: SEEK

Recall, that property investors are currently being hampered from entering the market, being stress-tested with an abnormally large assessment buffer, leading us into a chronic rental shortage ahead. 

Monday 30 January 2023

Loan buffers still in place for now

Flexible buffers

Both the Fairfax newspapers and The Australian ran pieces on the prudential regulator and lending settings today, following a media interview with the APRA Chair.

The gist running through several media articles was that mortgage arrears remain low for now, and the 3 percentage points lending assessment buffer introduced in October 2021 remains in place for the time being.

Back in the distant olden days - 2019 and before - mortgages were typically stress-tested to ensure borrowers could comfortably absorb a 2 percentage points increase in interest rates.

But lending standards have continued to tighten, continuing an ongoing trend over the past dozen or more years. 

Mortgage prisoners in stress

APRA reported that there are "pockets of stress" but these aren't cause for undue concern - except for the borrowers themselves, I guess - although small businesses are increasingly falling into arrears. 

In reality mortgage stress is of course at decade highs and rising, and is already tracking at the highest levels since July 2013:

Source: Roy Morgan Research

Roy Morgan calculates that mortgage stress will increase significantly further by March due to rising interest rates.

Monitoring settings

The regulatory Chair John Lonsdale noted that "we are looking at the serviceability buffer very very closely" - and noted that it can be tweaked back down if necessary - but, for now "we are happy with where the prudential settings are."

These settings are self-evidently making it very difficult for many recent and existing borrowers to refinance, having been slugged with higher rates as the record surge in fixed rate mortgages resets to much onto much higher mortgage rates.

Essentially it's a softer echo of of the subprime reset in the US through the global financial crisis. 

The other pressing issue is that the extremely wide buffer has effectively choked off the supply of credit to landlords.

Metropolitan rental listings - having already halved from a year ago - are plummeting at warp speed towards zero.

I'm not sure if it's fully appreciated that there will be well over 100,000 international student arrivals in February - possibly more than 150,000 - with permanent migration also finally set to get moving again. 

We're now in the unusual situation where rents are rising by around 20 per cent per annum, but many prospective landlords aren't able to borrow. so there is no supply response. 

APRA said it will release an update paper on macroeconomic policy settings in February, but in my opinions settings needs to get back to normal.  

The 3 percentage points buffer made perfect sense when interest rates were at zero, but now the interest rate hiking cycle is almost complete, and stress-testing should simply go back to the usual settings. 

Sunday 29 January 2023

Beijing directive sparks panicked rush for visas

Back to school

China is no longer accepting degrees studied online or by correspondence.

Here is the (poorly translated, apologies) shock edict from the Ministry of Education:

Source: Ministry of Education, China

This is a huge and abrupt policy shift by China, and as such tens of thousands of Chinese students need to get to Australia immediately for the commencement of the February term. 

There were 40,000 Chinese students outside Australia late last year, and that figure doesn't include students who were waiting for their visas to be issued.

This is going to cause some significant logistical issues, due to the short availability of flights, accommodation, and visas.

Phil Honeywood, CEO of the IEAA noted:

Education Minister Jason Clare said he was working with Home Affairs with regards to the issuance of visas, with 35,000 Chinese students having arrived this month already, ahead of yesterday's surprise announcement.

Australia’s private rental market showed fewer than 32,000 rental vacancies in December. 

The rush of international students and the return of permanent migration will also likely kill off any risk of rapid wages growth. 


The below NAB/Macrobond chart shows how reduced borrowing capacity has led to double-digit price declines in the top quartile of the Aussie housing market.

Lower price points have generally been supported by the explosion in construction costs for new housing, as well as more buyers being pushed into units and lower price points. 

(h/t Tim Boyle, thanks for the share!)

Saturday 28 January 2023

Core PCE slowest since...

Inflation slows

This should be one of the key themes for 2023, as high inflation figures tumble back down to earth.

The Fed's preferred measure of US monthly inflation slowed from 4.7 per cent to 4.4 per cent last month. 

The 3-month annualised pace for Core PCE is down to 2.9 per cent, which is the lowest since January 2021.

The headline rate was actually only 0.1 per cent in December, and was running at an annualised pace of just 2.3 per cent in Q4. 

The Fed appears likely to deliver one more 25 basis points rate hike next month, which will take the Funds rate to above the Core PCE figure for the first time since 2019.

Like British Rail...we're getting there! 

Friday 27 January 2023

PPI slowest since June 2021

Pipeline pressures ease

Energy prices were easing in the fourth quarter, and roughly as expected growth in the producer price index slowed from 1.9 per cent to just 0.7 per cent in the fourth quarter.

That's the slowest growth since June 2021 as pipeline pressures began to ease late last year.

I haven't had time to update my chart packs today yet, but here's a Tweet from Shane Oliver, Chief Economist of AMP:

US and European gas prices have fallen by around three-quarters from their highs, overwhelming concerns about supply following the outbreak of the war in Ukraine.

Source: The Daily Shot

Wholesale electricity prices have followed a similar trajectory in Europe. 

Looking ahead, consumer price inflation from goods is leading the way down in the US and many other countries, with Australia likely set to follow this trend with a lag in 2023. 

Source: Shane Oliver, AMP

The big one for Australia has been construction costs, which absolutely exploded since mid-2020 and in turn drove a large chunk of our consumer price inflation.

However, in real time materials prices here are now easing significantly now. 

Thomas Devitt with the HIA chart:

Source: Tom Devitt, Twitter

The rise and decline has largely been a result of trends in supply pressures, rather than a direct impact from interest rates (the government stimulus packages in 2020 pumped a very large volume of demand for new housing, but have now been wound back). 

Rental pressure shifts to inner cities; students set to return en masse

City rental pressures

Rental pressures are now building in the inner cities according to PropTrack, as immigration gets set to return.

New rental listings have a seasonal flavour to them:

Total rental listings have now dropped to record lows across metropolitan areas. 

The most searched suburbs are all in the inner cities now, reported PropTrack.

Properties are renting almost twice as quickly as a year ago in inner Melbourne in particular. 

The outlook tightens

Pressures in the rental market are likely to intensify in 2023 due to a range of factors.

Notably there is now record demand for student visas from all across Asia, and India in particular, which will begin to have a major impact soon as the February term times commence.

And lending standards for landlords are extremely tight, with large assessment buffers of 3 percentage points now in place for well over a year. 

This suggests a major rental crisis may unfold in Sydney and Melbourne in 2023.

PropTrack only recorded modest declines for property prices in 2022, and early auction results this year have been surprisingly very strong, probably reflecting a lack of quality stock on the market.

However, markets are still looking for two further increases in the cash rate target in February and March, which will add further to buyer caution, including from landlords...despite the sharply rising rents. 

You can find PropTrack's latest rental report here

Thursday 26 January 2023

Bank of Canada reaches peak; set to pause rates

Canada peaks: one and done

There had been some thinking today the Bank of Canada might possibly pause interest rates, although markets still expected - and were positioned for - a hike.

In the event, we got a bit of both.

The Bank hiked the overnight rate by 25 basis points to 4½ per cent, but also signaled a pause ahead to assess the impact of rate hikes to date.

Source: Bank of Canada

Obviously there could yet be further tightening if deemed necessary, but it sounds very much like that's the peak of the cycle for Canada.

Certainly that's how markets have read it.

PM Trudeau will be relieved if so!


There should be more and more reports like this over the weeks and months ahead. 

In the UK wholesale electricity prices are trading -34 per cent lower than a month ago, and are now below pre-Ukraine war levels.

The warm winter weather in Europe has been a remarkable and rather unexpected boost, and markets now even expect the Bank of England to be easing interest rates before the year is out.

Wednesday 25 January 2023

HIA spitting chips as new home sales crash

New home sales crash

I think it's fair to say the Housing Industry Association (HIA) is not-so-quietly seething at market commentary calling for further rate hikes, as new home sales had already crashed by October last year.

New home sales dropped by a further -27 per cent overall in the fourth quarter of 2022.

Quarterly sales were down -67 per cent from the prior year in New South Wales, -50 per cent lower in Queensland, -36 per cent in Victoria, and -31 per cent in Western Australia...even before the latest salvo of rate hikes have begun to take hold. 

Hence the HIA sees interest rate cuts as being required later in 2023:

Source: HIA

There's no question that last year's inflation figures were too hot, as the country reopened into the face of some chronic supply issues.

Thomas Devitt argues, however, that home building cost inflation has plummeted, and will continue to do so as new dwelling construction slows, and as materials and tradies become more and more readily available in 2023. 

The HIA also reported that some developers are now recording what they have ominously termed "negative sales", as sales contracts are torn up and cancelled.

This doesn't bode well for new dwelling supply or developer insolvencies. 

Tim Reardon adds some texture on where and how the trend is underway:

Essentially the challenge here is that there remained a large pipeline of dwellings under construction in Q3 last year, but building approvals and new dwelling commencements are rapidly drying up.

Middle ground view

Some commentators are calling for no further rate hikes, then, while many others expect several further increases.

When there are such competing forces, the safest best is normally somewhere amidst the middle ground, which quite possibly means 25 basis points interest rate increases in February and March apiece, with a pause for breath then more likely to possible in April. 


Somewhat old news here, but the Aussie government's Labour Market Insights report notched further (modest) declines in job advertisements in December.

Source: LMI, Aus Gov

Inflation rises to 7.8pc

Headline inflation peaks at 7.8 per cent

I've previously noted we had one more hyperbolic round of inflation hysteria to go through in Australia, and, was that lucky day!

Let's take a deep breath and have a good ol' Captain Cook at it all in four short parts...

1 - Headline inflation peaks at 7.8 per cent

Last month the Reserve Bank Governor reported that inflation was expected to peak at around 8 per cent in the fourth quarter of 2022, before declining again in 2023 as global supply issues are now largely being resolved. 

As it turned out, inflation rose 1.9 per cent to Q4 to hit 7.8 per cent in for the year, which was a bit below the RBA's expected peak, but rather closer to Treasury's estimate of 73⁄4 per cent. 

The quarterly result was nevertheless a little above market and economist expectations, however. 

For the next quarter, preliminary estimates for Q1 2023 appear to be looking for quarterly inflation of around 1 per cent, and with a very large 2.1 per cent prior year figure to drop off the annual figure.

Therefore, the headline result will at last begin to fall.

As such, Australia's inflation trajectory continues to track a few months behind other developed countries, such as the US, Canada, UK, Germany, Spain, Portugal, and a slew of other emerging markets countries where the nasty global inflationary spike is already receding (Brazil, Mexico, Chile, Thailand, Poland, etc.).

2 - Underlying inflation also increased

The underlying measures of inflation in Q4 were up by 1.6 per cent (trimmed mean) and 1.7 per cent (weighted median), leading to annual increases of 6.9 per cent and 5.8 per cent respectively. 

After six years of undershooting the 2-3 per cent target band, the cost of extended lockdowns and border closures was thus underlying inflation rising to above 6 per cent in 2022. 

Annual tradables inflation was flat, while non-tradables inflation increased, largely due to domestic travel costs and electricity prices as rebates were unwound.

3 - The drivers of inflation

One of the critical drivers of inflation in 2022 was housing costs.

Rental price inflation was one small part of it, and this inflation is likely to continue in 2023 as immigration gathers pace.

Moreover, inflation has been rampant across the housing group, with new dwelling purchase by owner-occupiers ballooning nearly 30 per cent higher since June 2020, in part due to the HomeBuilder package and other stimulus programs. 

Indeed, the housing group of inflation measures has Federal and State Government fingerprints smeared all over it.

Source: ABS, highlights by @88888s account

Electricity prices were also up by a 'shocking' (sorry) 8.6 per cent, as discounts and concessions ended in some states. 

The good news is that new dwelling costs and electricity prices should now ease in 2023, as expertly explained by James Foster here.

The other key part of the inflation overshoot in the December quarter was a 10.9 per cent increase in holiday, travel, and accommodation costs. 

It's normal to see a seasonal increase in recreation, but this year's surge in demand was especially pronounced as the borders reopened and both domestic and international travel was sparked back to life. 

Airfares and hotel prices have been very high of late, as anyone who's flown just about anywhere for a holiday will testify!

4 - What next?

This has already been the most dramatic interest rate hiking cycle in living memory, so the question from here is how much further the Reserve Bank looks to hike before taking a breather to assess the impacts of very significant policy tightening to date. 

Source: CBA

Before today's inflation figures financial markets were fairly well split on whether there would be a pause in two week's time.

That no longer looks to be on the table, with a 25 basis points rate hike now mostly priced in for February. 

OIS pricing by meeting date was nudged modestly higher immediately after today's inflation print, suggesting that the cash rate target by the time of the July and August meetings could be peaking out at 3.60 per cent (i.e. effectively two further interest rate hikes of 25 basis points each). 

Source: Martin Whetton, CBA

The wrap

Overall, inflation was a bit higher than markets had expected in Q4, the overshoot being mainly due to travel and holiday accommodation costs, although thankfully the peak for headline inflation appears to have landed just a little lower than where the RBA expected. 

The hysteria today was predictable and to be expected, and it often takes a day or so for commentary and markets to calm down and look ahead with a more rational view.

New home sales have already been obliterated, and there's no doubt that price pressures will begin to fall in the construction and housing sector in 2023, as well as other parts of the economy in time.

It's largely question now of how long it takes for the economy to turn sour. 

Key releases will be the labour force figures for January and the wage price index for the December quarter, to be released on the 16th and 22nd of February respectively. 


You can take in an excellent read on price pressures in the services sector, and how housing costs will be a disinflationary force in 2023 from James Foster here.


The Aussie dollar has increased all the way back to where it was in August last year at 71 US cents, which won't hurt from an inflation perspective.