Retail volumes shrink for 18 months
I'm in Greece this week, so may spare you too much of the detailed graphs and charts analysis, to instead provide but a few thoughts on today's news.
The quarterly retail trade figures showed that
retail volumes contracted by -0.3 per cent, notching up a 6th consecutive quarterly decline.
Given the very
weak building approvals figures, you'd be forgiven for wondering why so many people have been talking about interest rates needing to go further
up, rather than down!
But these are not normal times, and Australia has seen a large increase in consumer prices following the lockdowns and massive stimulus that was applied through the border closures.
As such, today's inflation figures were arguably the most tensely awaited in years.
Inflation lags the cycle
Inflation came in at 1 per cent for the June 2024 quarter, and 3.8 per cent for the year.
Most importantly, the keenly scrutinised trimmed mean inflation figure came in at just 0.8 per cent (actually 0.84 per cent to two decimal places).
This was lower than markets expected, and you could almost feel the collective relief as the 3-year bond yield dropped by more than 20 basis points today, OIS pricing removed the likelihood of any further interest rate hikes, the air came out of the Aussie dollar, and markets moved to price in interest rate cuts from the first quarter of 2025.
The dark blue line maps the trajectory of trimmed mean inflation, which slowed to 3.9 per cent over the year, and continues to trend lower.
Source: ABS
There was still some pain around in terms of price increases, notably for rents (+2 per cent in the quarter) and new housing costs (+1.1 per cent), and insurance, for example.
But as Richard Yetsenga of ANZ noted: "inflation lags the cycle", and the economy has been slowing for around 18 months now.
Food price inflation has been exacerbated by poor fruit growing conditions but will fall away now, and looking ahead rents and construction cost inflation will not contribute to the inflation pulse as they have been.
The government is also quietly hacking away at inflation figures with subsidies, while the large fuel price increases over the year to June 2024 probably won't be repeated either.
What next for investors?
There's never a perfect time for investors - when all the stars align - and there always reasons not to invest,
But looking at today's figures, I'm pretty sure that property investors will begin to come back into the market now, for the following reasons:
-interest rates are likely to fall over the next few years
-building approvals are exceptionally low, and so there will be a chronic shortage of housing over the next 2few years
-high population growth continues at one persons every 47 seconds (about 500,000 extra persons per annum)
-tax cuts from 1 July will boost incomes, while employment is at a record high
-there's little justification for a 3 percentage points lending assessment buffer now that the interest rate cycle has peaked, so presumably this will be normalised at some point - at this stage it's constraining new apartment sales and supply, and locking out first homebuyers
There's a lot of heated debate (and argument) in this space, and it's been a devilishly tricky time for policymakers, but overall they do seem to be winning the battle now.
But if you're aiming to be rational, you need to take a step back away from the noise and take a decade view.
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