Jacqueline Barton

Teaching Kids About Money

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Shaping solid financial habits in youngsters isn’t just about numbers. It’s a crucial part of their education that equips them with skills that will serve them well into adulthood. We’ve listed some simple ways that you can involve kids in the learning process and build a foundation for financial responsibility.

Lead by Example

As we know, children pick up a lot of habits by observing the behaviour of the adults around them (some we really wish they wouldn’t!). You can demonstrate responsible spending habits by avoiding impulse purchases, paying bills on time and saving. Don’t hesitate to share stories of your own experiences with money, both successes and challenges, as this provides transparency and real-world context.

Play Money Games

Engaging in educational games centered around money can making the learning process fun for children. Board games like Monopoly or The Game of Life that simulate financial scenarios can teach them valuable lessons about budgeting, investing, and making strategic financial decisions.

Encourage Saving

Piggy banks are a great way for children to learn the importance of saving, and although money is becoming increasingly virtual, having physical coins and notes can help them see their money as it grows. Assisting them to set saving goals for a new toy or experience they’d like also teaches patience and discipline to achieve what they set their minds to.

Involve them in Budgeting

As children get older, involving them in family budget discussions can provide them with insights into financial responsibility. Sharing age-appropriate information about income, expenses, and the importance of budgeting, can allow them to contribute ideas on cost-cutting measures or ways to allocate funds for an upcoming family holiday or house project. This involvement not only educates them about financial planning but also instils a sense of ownership and responsibility.

Open a Kids Bank Account

Many banks offer special savings accounts designed for children. Opening an account in their name, with their involvement, can be an exciting step toward financial independence. Teach them how to monitor their account balance, understand statements, and set savings goals. Some banks even offer rewards or incentives for regular savings deposits, reinforcing positive financial habits.

Teach the power of giving back

Encouraging children to allocate a portion of their money to charity helps foster empathy, generosity and a sense of social responsibility. Discuss the impact their contributions can make towards helping those in need or supporting a cause they’re passionate about.

Teaching kids about money early can help them to navigate the complex financial landscape with confidence. By starting simple, incorporating practical experiences and leading by example, parents can assist in shaping their children’s financial values and behaviours.

Economic Update: February 2024

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In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

  • The US Federal Reserve has pivoted from a tightening interest rate policy to an easing one
  • Markets are looking at growth and inflation data points to estimate first interest rate cuts
  • Economic indicators are softening but inflation is still at risk from the Middle East conflict

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

The US Federal Reserve (Fed) chairman, Jerome Powell, started last December by pronouncing it was ‘premature to talk about rate cuts’. By the end of December, the Fed ‘pivot’ was locked in (and the Fed had changed from a tightening interest rate policy bias to an easing one). Even the Fed then expected three cuts in 2024 but the market wanted more, forecasting up to 6!

During January 2024 opinions settled into less diverse scenarios. Cuts are still very much on the table but the 31 January meeting was considered ‘dead’, i.e. no change to interest rates throughout the month. However, the market had ascribed about a 50% chance of a cut in March and an 85% chance of at least two cuts by June.

Powell did not disappoint by keeping rates on hold but he did upset the market by saying that ‘he didn’t see a cut in March’. He said he was confident that inflation has been on track over the last six months but that he was not sufficiently confident to start cutting interest rates by March.

After these comments by Powell, the market priced in a 35% change of an interest rate cut in March. But the market is still pricing in two or more cuts by June at around a 90% chance. The bond market is still pricing in six cuts this year but the S&P 500 lost steam after Powell’s post Fed meeting press conference losing -1.6% on the day.

Interestingly, a survey conducted by media company CNBC just prior to the January Fed meeting reported that only 9% of respondents expected a cut by March and 70% said the first cut would be in June! Economists and traders often disagree. Usually only the latter has real skin in the game.

Depending on how one looks at the data – in the US and Australia – one can see a serious slow down or, at the other extreme, a gentle ‘soft landing’. The deciding factor, as we see it, relates to how one interprets the factors that caused the recent slow-down in inflation across the major economies. Those who think it was the deft response of central banks harnessing demand-side inflation with rate cuts, fear letting monetary policy ease – in case inflation then consequently re-emerges. This is Powell’s stated position.

Those who think the source of the inflation, starting in 2020 from the Covid pandemic, largely resulted from the supply side (i.e. global production slowed because of lockdowns, likewise transportation of goods largely stopped and the price of available goods rose materially due to lack of local supply during, and after the Covid restrictions eased, this being further exacerbated by the Ukraine war) are of the view that interest rates could be cut without inflation being reignited because the supply side issues have ceased. This group includes some eminent people – bankers and academics and a Nobel Laureate.

While we subscribe to this view more recently, we agree that rates could be cut without material consequence at this juncture. Failure to cut interest rates from the current restrictive levels could see them rapidly start to bite and cause economies to slow more than anticipated or intended by Central Banks. However, we do not as yet advocate the respective interest rates should move to below the neutral rate of about 2.5% to 3% in this easing cycle and certainly, they should not reduce back to emergency levels.

It has only been a little over a year since monetary policy in Australia and the US has been tightened (above the neutral rate). With the long and variable lags (say, 12 to 18 months) of effect of monetary policy settings, we are only just starting to witness some slowing effects from the interest rate hikes. Fed chair Powell acknowledged this in his January press release.

Of course, the pandemic added its own idiosyncrasies into the mix. People were forced to save because of lack of opportunities to spend under lock downs and governments added stimulus payments to ease the crisis. Those excess savings sheltered economies from monetary policy tightening – for a while. This time was indeed different but those excess savings have now largely been depleted. We are back to normal conditions for assessing monetary policy effects.

The latest Australian labour force data (for December) revealed an apparent massive crack in the economy. Total employment went down by 65,100 but the full-time position loss was even worse. 106.600 full-time jobs were lost in a month while the population grew by 48,200.

The monthly data does jump around somewhat but we have only had six months of decreases in the last 24 and the next worst result was less than half of the December outcome.

The unemployment rate held up at 3.9% but only because of the discouraged-worker effect. People who left jobs and didn’t bother joining the unemployment queues!

Before we jump to a disturbing conclusion, it is important to note that data have regular seasonal patterns (e.g. temperature related demand). The ABS uses averaging techniques to remove the regular seasonal component so that month-to-month or quarter-to-quarter changes better reflect new directions rather than predictable seasonal patterns.

For many data series, the ABS also smooths the seasonal data to produce ‘trend data’ so that longer-run trends become more apparent. While these are useful for a cursory glance, we tend not to rely on trend data in research houses and create our own opinions of underlying movement.

So, in relation to employment the actual number of jobs (original data) went up by 18,400 and not down sharply in December by the seasonally-adjusted 65,100. It was the statistical process designed to smooth out the data that did the damage. What if the seasonal patterns have changed since last year? We have had a year of record immigration and December is a month when lots of students start to enter the workforce. The large loss could be due to a statistical anomaly.

Furthermore, the monthly official data are prone to bounce around as the figure for the population are extrapolated from a very small sample. In addition to the sampling issue, it has been noted in various countries that telephone surveys are becoming less reliable because younger folk are less likely to ‘pick up’ the phone call from a number not familiar to them.

We are not unnecessarily concerned over these employment data but we are on alert to look for more clues when the January data are released in mid-February.

The US jobs data seemed somewhat stronger. 216,000 jobs were created compared to the expected 170,000. The expected range of forecasts was quite wide: 100,000 to 250,000. Importantly, digging deeper, reflected new jobs yet again largely being created in less productive sectors. The three-month average of new jobs was 165,000 compared to 284,000 in the same period a year earlier. And these data have a strong tendency to be revised downwards in subsequent months.

The US labour market is slowing and possibly a little more quickly than the headline data appear to convey.

It seems to be generally agreed that inflation in the US and Australia is returning to target levels more quickly than many had anticipated. Our own calculations based on more timely measures indeed suggest inflation is all but back to target.

However, the big issue on the sidelines might be events starting to cause a second-round oil-price inflation problem like that at the onset of the Ukraine conflict.

We are not experts in analysing military conflicts and their evolution but a simple reading of respectable news sources leads us to note that the Israel-Palestine conflict has involved more countries and groups over the last couple of months.

Some oil tankers and container ships are reportedly being diverted away from the Red Sea route to Europe and the US (and the reverse) because of drone and other attacks. The route via the Cape of Good Hope adds much time and, hence, cost to traded goods.

Brent oil prices declined to about US$75 per barrel before the Middle East conflict after having been US$95 slightly earlier in 2023. Brent oil bounced back to US$85 and has settled to just below that level – so some new inflation pressures must be building.

We have no insight into how, or indeed if, the conflict will be resolved but it is apparent that some of the hard-fought gains in inflation control will be eroded. However, it is equally obvious that keeping interest rates higher for longer will do nothing to reduce oil-price inflation pressure.

Markets have largely performed well in January. The S&P 500 and the ASX 200 reached all-time highs during the month. Bond yields have retraced a little from the late 2023 fall but not alarmingly so.

With the December quarter reporting season in the US and second half reporting season in Australia getting underway, we have a great opportunity to understand better what 2024 has in store for us. Our analysis of LSEG (formerly Thomson Reuters) company earnings expectations suggests that the outlook for 2024 has, if anything, improved over January as brokers update their forecasts.

The early reporting results on Wall Street have produced a bit of a mixed bag of success and failure in the big tech space. United Parcel Service (UPS) is laying off lots of workers because it doesn’t see internet-created demand sustaining the old system. Big Tech might not perform anywhere are strongly as it did in 2023 but we are expecting above average gains in the broad index.

But with recent all-time highs on the US S&P 500 and the local ASX 200, and stable bond markets, 2024 does not look bad! We think the Fed will do what we expected and cut interest rates as it does not want to alarm markets by changing their monetary policy direction and settings too much and too quickly despite it now being characterised as a ‘pivot’.

Asset Classes

Australian Equities

The ASX 200 was modestly up in January (+1.2%), largely because the index started the month at an elevated level following the December rally, but that was not so for the individual sectors. Energy and Financials each grew about +5.0% but Materials (‑4.8%) fell by a largely offsetting amount. The broader index closed January at an all-time high.

January and July often witness bigger changes in broker expectations about earnings as the new half-yearly reporting season sets to get underway (for February and August). We did not see much change this January but, if anything, expectations point to a slightly stronger year than we saw for 2024 at the end of 2023.

However, the consensus end of year (eoy) 2024 forecast we have gleaned from published reports (made at January 1st) from reputable houses was, for the ASX 200, 7,600 points or just below the closing value on 31 January (7,681). While we are not expecting a bumper 2024, our analysis suggests that this consensus forecast could be a little too pessimistic. Our expected capital gains in the ASX 200 look reasonable but when dividends and franking credits are factored in, this asset is worthy of serious consideration for 2024.

International Equities

Japan’s share market index, the Nikkei, had a particularly strong month (+8.4%) but the US S&P 500 (+1.6%) was only moderately strong – largely because of the big sell-off on the last day of January following the Fed’s press conference. China (‑6.3%) and Emerging Markets (‑3.1%) went backwards.

A lot might depend on whether the Artificial Intelligence (AI)-led rally of 2023 continues or, indeed, retraces. Without the so-called Magnificent Seven (big technology stocks), the S&P 500 index would not have been impressive at all in 2023.

However, the consensus eoy 2024 forecast we have gleaned for the S&P 500 from published reports (made at 1 January) was 5,000 points or just above the closing value on 31 January (4,846). While we are not expecting a bumper 2024, our analysis of broker forecasts suggests that this consensus is somewhat pessimistic.

Bonds and Interest Rates

At the end of January the Fed funds interest rate was on hold at a range 5.25% to 5.5%. The CME Fedwatch tool is pricing in about a 35% chance of a 0.25% interest rate cut at the Fed’s March meeting. The same source is predicting that there is only about a 10% chance of the Fed funds interest rate being unchanged by June. The prospect of two or three 0.25% interest rate cuts by June being about the same and collectively by far the most likely outcome.

The European Central Banks (ECB) and the Bank of England (BoE) also kept interest rates on hold in January in spite of their slightly improving inflation outlooks.

The RBA kept our interest rates ‘on hold’ on their meeting on the first Tuesday in February. In our opinion, there is evidence that the Australia economy is in need of some rate relief, as the surging immigration levels are masking the cost-of-living pressures on the average household.

Since company earnings from selling to Australians are determined by aggregate demand – and not by per capita (household) demand – the ASX 200 can grow while a per capita recession takes place.

The 10-year Treasury yield in the US fell from just on 5% in October to a recent low of 3.8%, since then it drifted up a fraction to 4.1%. After the latest Fed meeting this yield retraced to just under 4.0%. The Australian 10-year yield ended January at 4.01%.

We expect some more visibility on Australian monetary policy from the RBA from here onwards, as the new committee appears to be charged with the task of improving communications.

Other Assets

The price of oil bounced back sharply from December’s lows. Both West Texas Intermediate (WTI) and Brent Crude oil were up by about +8% largely on the impact of the Middle East conflict and more recently issues with shipping in the Red Sea.

The prices copper and gold were largely flat over January. The price of iron ore fell by ‑6.3%.

The Australian dollar – against the US dollar – depreciated by ‑3.9% which will not help our inflation cause through import prices increases.

Regional Review

Australia

Australian November retail sales (in value terms) published at the start of January surprised at +2.0% for the month – but they grew only +2.2% for the year. This growth becomes negative when inflation is taken into account. In addition, population growth running at about +2.5% p.a. suggests the average citizen was consuming a lot less in inflation and population-adjusted terms.

The monthly retail value data for December were published at the end of January. The seasonally adjusted monthly growth for December was ‑2.3% (not annualised) wiping out the November gain. But, just as with the change in employment data, retail sales as collected by the ABS were up +14.3% on the month in ‘original terms’. It was the seasonal adjustment process that converted +14.3% into ‑2.3%.

Non-specialists might ask if the ABS is competent at performing the task at hand. While we think the ABS is world class, their task is very difficult when seasonal patterns are changing. In due course, we believe that the data will be revised. They will still likely not be good but not as bad as we see at first sight.

There were also two reads on the monthly Consumer Price Index (CPI) inflation gauge published in January owing to the delay in reporting November data because of our holiday season.

Both the headline and the core monthly variants for November were +0.3%. The 12-month gains were +4.3% for the headline and +4.8% for the core variant that excludes volatile energy, food and holiday travel. Our rolling quarterly estimates which we produce each month was +3.0% p.a. for both the headline and core variants. That puts these inflation estimates at the top of the RBA target range.

At the end of January, quarterly CPI data were released. The monthly data, in order to be more timely, has only about 70% coverage of the quarterly basket of goods and services.

The official read for the Quarterly index series was +0.6% for the quarter and +4.1% for the year (expected +4.3%). Note that +0.6% for the quarter, if annualised, becomes +2.4% p.a. and is within the RBA target range.

The monthly series official reads over the year for December were +3.4% from +4.3% for the headline and +4.0% from +4.6% for the core. Our in-house rolling quarterly estimates (annualised) were +1.3% p.a. for the headline and +2.4% p.a. for the core. The RBA has over-achieved! +1.3% is below the target range.

The core measures over the last five months have been +5.5%, +5.1%, +4.1%, +2.7% and +2.4%. We think that is a stable downward trend and indicative of the RBA may have gone too far, and at a minimum, far enough, given the lags in the system for interest rate hikes to work through. With the RBA target range being 2-3% the RBA needs to act in a timely manner with rate cuts to prevent overshooting on core inflation.

The jobs data for December showed that the participation rate had fallen from 67.3% to 66.8% reflecting a strong discouraged worker effect. In essence, 41,400 full-time jobs were converted to part-time while, in addition, 65,100 full-time jobs were lost from the workforce. The unemployment rate remained at 3.9%.

China

China’s GDP growth came in at +5.2% against an expected +5.3% but the market seemed to interpret this result as being very weak. Retail sales also missed at +7.4% compared to +8.0% expected but industrial output at +6.8% beat the +6.6% forecast.

The Purchasing Managers Index (PMI) a measure of industrial demand was 49.0 for December which was down from the 49.4 read in November. At the end of January the PMI for January rose slightly to 49.2.

The big problem in China still relates to the debt burden mainly of property developers. The Hong Kong government recently ruled that Evergrande the formally very large mainland property developer should be placed into liquidation. The government is reportedly trying to ring-fence a few of the big developers to stop a spread of the problem. At the end of the January, China noted that it had merged ‘hundreds of rural banks’ to reduce risks of failure.

US

US CPI inflation came in at +0.3% for both the headline and the core variants of the measure.

Over the year, headline inflation has come down to +3.4% and the core to +3.9%. While these numbers are far from the Fed target of 2% the market seemed to breathe a sigh of relief that substantial progress had been made.

Our rolling quarterly estimates (annualised) were +1.8% p.a. and +3.3% p.a. for the headline and core variants, respectively. The headline rate was below the Fed target of 2%! There should be two more releases of the US CPI before the next Fed meeting to make the next interest rate call.

The Fed’s preferred Personal Consumption Expenditure (PCE) inflation data painted an even better picture. The monthly core and headline rates were each +0.2% while for the year they were +2.9% and +2.6% respectively.

The Fed fears a resurgence in inflation if it starts to cut too soon. Supply-side shocks such as higher oil prices and disrupted supply chains due to restricted access to the Suez Canal due to the conflict in the Middle East, are almost unpredictable and inflation expectations data do not support a demand-side surge in inflation.

The US consumer appeared to be somewhat resilient in January. Retail sales (for December) grew by +0.6% – well ahead of inflation. The December quarter GDP growth was +3.3% when only +2.0% had been expected. The household savings ratio fell to +4.0% from +4.2% indicating some pressure on budgets.

Over 2023, economic growth was +2.5% following +1.9% for the previous year. The University of Michigan consumer sentiment survey showed that 28% of Americans thought the economy is in excellent or good shape. The corresponding figure for April 2022 was only 19% but, in January 2020, just prior to the onset of the pandemic, the Michigan figure was 57%.

While some reported that the current 28% figure showed some resilience, we think it would at least be equally plausible to state that the consumer is not as pessimistic as they were but nowhere near as optimistic as they were before the interest rate-hiking cycle began.

Existing home sales were the lowest since 1995 but, that is to be expected when mortgage rates are historically high and expected to fall in the coming months.

Europe

German inflation rose to +3.8% while, for the eurozone, it was +2.9%. The UK recorded +4.6% inflation and its retail sales fell -3.2% when a fall of only -0.5% had been expected.

The Europe economy is clearly in a worse position than the US and it has been paying the price for once becoming so dependent on energy/fuel from Russia.

Rest of the World

The conflict in the Middle East has certainly escalated and the deaths of US soldiers has seen a retaliatory military action against specific targets in the region, in particular to stem the terrorist attacks from inside Yemen on ships in and around the Red Sea and other military targets. To date, the economic consequences of the conflict seem less than that from the Ukraine war as there is a simple, but costlier, option to avoid the Red Sea shipping lanes by diverting round the Cape of Good Hope in southern Africa to access Europe and the US particularly with crude oil sourced from the Middle East.

SMART Goals for the New Year

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Have you made any new year’s resolutions for 2024? Resolutions offer a fresh start to the year and initially spark excitement that holds strong for a month or two. However, they can easily slip away when life throws its curveballs.

It will come as no surprise that the most common resolutions amongst Australians are fitness and diet related*, but financial goals closely follow with many eager to improve their saving and spending habits.

Creating and sticking to the goals we set is challenging, but following the SMART method may just be what you need to see them through. SMART stands for Specific, Measurable, Achievable, Relevant and Time-bound, providing a structured framework to turn vague intentions into actionable plans. So, how does it work?

1. Specific: Define Clear Objectives

To get started, identify precisely what you want to achieve. Instead of a broad goal like “save more money”, make it specific. For example, “save $5,000 in the holiday fund” or “pay off $3,000 of credit card debt”.

2. Measurable: Quantify Your Progress

Establish criteria to measure your progress. If your goal is to save money for a holiday, determine how much and by when. Tracking your progress holds you accountable while providing a sense of accomplishment as your reach milestones along the way.

3. Achievable: Set Realistic Targets

Setting the goal of becoming a millionaire by the end of the year isn’t achievable for most of us, so while it’s great to aim high, be realistic about what you can achieve and by when. Consider your income, expenses and any other factors that may impact your targets.

4. Relevant: Align Goals with Your Values

Aligning your financial goals with your values creates a sense of purpose and makes it easier to stay committed. If homeownership is a long-term aspiration, saving for a deposit might be more relevant than short-term investments.

5. Time-bound: Establish a Deadline

Attaching a timeframe to your goals creates a sense of urgency, adds structure to your plan and prevents procrastination. For example, instead of saying “save for a holiday”, say “save $3,000 for a summer holiday by September 30th”.

When setting your SMART goals for the year ahead, remember that flexibility and adaptability are key. Our lives can change constantly, so your financial goals should evolve too. Good luck!

January 2024 Economic Update

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In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

  • US Fed pivots its interest rate policy
  • Current estimates are for between three and eight interest rate cuts in the US in 2024
  • The RBA while most unlikely to raise rates again does not appear to be in a hurry to start cutting
  • Share markets respond positively to the Fed pivot and finish 2023 well into positive territory

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

Given how markets finished up in 2023, there was a lot of pain endured in getting there.

The US 10-year Government Bond yield went from 3.8% to 3.8% via just above 5.0%

ASX 200 screamed up in January 2023 only to shed all those gains, and more, as the US regional bank crisis shook confidence. But the ASX 200 rallied back and gained 7.8% on the year (without dividends and franking credits)!

The S&P 500 was dominated by the so-called ‘Magnificent 7’ – 7 mega cap tech stocks like Apple, Amazon and Nvidia. The ‘other 493’ did not fare so well but they did finish the year with a little bit of a flourish. The index gained 24.2% on the year.

The Dow Jones reached an all-time high in the last week of 2023. The S&P 500 and the ASX 200 each came very close to all-time highs in the final week of the year.

There were plenty of obstacles along the way in 2023 that prevented markets moving in a straight line. US Regional banks’ crises, Israel-Gaza conflict, Red Sea drone attacks and the rest. But the big one was trying to second-guess central banks as they bobbed and weaved in their battle with inflation. The US Federal Reserve (Fed) stuck to its guns of reiterating higher for longer until mid-December. It even stated on December 2nd that it was ‘premature’ to talk about interest rates cuts. Then a slew of favourable data on US inflation convinced it to ‘pivot’ (change its mind) at its last meeting and press conference for the year – just two weeks after the ‘premature’ statement! The Fed dot plot forecasts for cash rates at various intervals for the coming few years (from 19 Fed members) suggested there might be three 0.25% interest rate cuts in 2024.

While the above is the view of the Fed board members, the US Government bond market is taking a different view with current interest rates implying a 96% chance that the Fed will cut interest rates between five and eight times in 2024. Needless to say, the Fed ‘pivot’ in December has seen the US bond prices rally strongly (interest rates falling).

Surprisingly, the RBA minutes revealed that Australia’s central bank was still considering a rate increase at its December 5th board meeting, this approach puts it at odds will all other developed world central banks. Despite this, in Australia, for four of the last five quarters, per capita GDP went backwards, the household savings ratio nearly fell to zero and retail sales showed lots of weakness.

While the RBA clearly has some concerns regarding the stubbornness of inflation there is growing evidence that the economy is slowing and interest rate policy has done enough to contain inflation. The concern now is that unless the RBA joins in with its developed world peers and begins easing monetary policy (reducing interest rates) then it risks sending the economy into a more sever slowdown than is otherwise anticipated.

The RBA interest rate tracker app on the ASX website assigns an 8% chance of a rate hike at its next meeting in February. The predominant outcome currently predicted is ‘no change’ to the RBA cash interest rate.

Media reports have possibly led many astray as they portrayed the Fed increasing interest rates from 0% to 5.5% in less than two years as being aggressive and strongly contractionary and will ultimately result in an economic recession, which hasn’t happened yet.  This narrative is ignoring the whole point of monetary policy.

There is an economic concept of a ‘neutral’ central bank interest rate that neither causes the economy to slow down, nor is it accommodative. Most economists would agree that the neutral rate for the US and Australia – among others – is about 2.5% to 3.0%. That means the first set of Fed hikes shouldn’t have slowed down the economy until 3% was exceeded in September 2022! They’ve only had 2.5% points of tightening and not 5.5%! The first 3% of hikes were simply being less accommodative.

The other key insight is that at least from the late 1960s, it has been widely thought that the implementation of this sort of monetary policy acts with ‘long and variable lags’. Conventional wisdom is that this time frame is around 12 – 18 months. Even central bankers have agreed on occasion!

Putting these two concepts together and applying it to our current cycle, the first interest rate tightening that started in September 2022 shouldn’t have had any material impact until September 2023 to March 2024. So, the media tell us economists ‘got it wrong’ by stating that the anticipated recession never happened, when the more considered statement is ‘it hasn’t happened yet’. From an economic perspective it is just too early to say ‘it didn’t happen’, notwithstanding that it may not. Some reasons for this are that, US consumers were awash with Covid stimulus cheques and a student loan moratorium until October 2023. And fourth quarter US GDP data, even its preliminary form, is not available until late January 2024 so we don’t yet know how the US economy is travelling in late 2023.

There is likely to be plenty of pain in the pipeline for 2024 from rate hikes not yet felt. By reasonable definitions, Australia has been in recession for most of 2023 but massive immigration – running at about 2.6% of population – has distorted the headline data from revealing the hardship facing many.

The US economy is doing better than ours but there seems to be cracks appearing in the data picture. There has been solid job growth but increasingly this growth has not been in those sectors usually associated with a strong economy. Both the US and UK official statistics agencies have had to change their data collection methods to get normal response rates to survey methods. It is very difficult to measure what the unemployment rate really is!

It’s not obvious that recent labour force data can usefully be interpreted in the traditional manner. Moreover, with the growth in options to work in casual food and ride delivery, it is much easier for those who want to work to do so. The definition of work has changed.

With regard to market forecasts – particularly for the ASX 200 and S&P 500 – earnings forecasts are quite strong. LSEG (formerly Thomson Reuters) collects broker-forecasts of earnings for the relevant companies in the indices. Companies are required to report material changes in their expectations and they share their view of their futures with the brokers.

We have found over nearly two decades that these earnings expectations give useful guides to market direction. Of course, there is always the possibility of a ‘black swan’ event or some geopolitical upheaval.

Asset Classes

Australian Equities

The ASX 200 had a very strong December (+7.1%) to back up a strong November (+4.5%) to make a two-month total of near 12%.

The Materials sector did well at +8.8% in line with strong iron ore prices (+7.3%).

Total returns for the year were 12.4% making it a well-above average year. By our metrics we have the market overpriced by +3.3% making that a bit of a headwind for 2024. However, news of actual interest rate cuts might still spur on the market to new highs. Markets usually lead the real economy!

International Equities

The S&P 500 gained +4.4% for the month or 24.2% for the year. The London FTSE and the German DAX were similarly strong for the month but Japan’s Nikkei was flat. China’s Shanghai Composite fell by ‑1.8%.

We have the S&P 500 overpriced by +4.6% so, by our estimation, that index also faces a modest headwind starting the year.

Bonds and Interest Rates

It seems that almost every economist and commentator is expecting cuts by the Fed during 2024. 75 bps of cuts seems to be the smallest number being predicted. There is an 11% chance of eight cuts to a range of 3.00% to 3.25%.

We think the Fed might start at the March meeting and then go again in June taking the rate down to a range 4.75% to 5.0%. What happens thereafter would seem to be highly dependent on whether inflation and unemployment stay down and GDP growth remains solid.

US CPI inflation over the last six months was below target at 1.9% pa.

The 10-yr US Treasurys yield fell from just over 5% on October 23rd to 3.88% at the end of the year.

The RBA minutes stated that the board considered a hike at their last board meeting. The newly constructed committee to deal with rate movements is expected to meet on the first Tuesday in February.

The ECB and the Bank of England appear to be on hold. EU inflation fell to 2.4% from 2.9% when 2.7% was expected with the core rate falling to 3.6% from 4.2%. Both economies are flirting with recessions.

Other Assets

The price of oil dropped sharply again in December with – West Texas Intermediate Crude (WTI) by ‑5.7% and Brent Crude by ‑7.0%. Brent ended the year at US$77 per barrel having traded in a range of $72 to $97 over 2023. OPEC+ appears to be losing its grip over controlling oil supply which they have historically used to influence the market price for oil.

The price of iron ore again rose very strongly – at 7.3% in December or +20.7% for the year. Copper and gold prices each rose in December by just under 2%.

The Australian dollar – against the US dollar – appreciated by 2.9% which will further help reduce import prices and, hence, domestic inflation in Australia.

Regional Review

Australia

Australian GDP growth for the September quarter disappointed at 0.2% being less than the expected +0.4%. The growth for the year was 2.1%.

But the really disappointing news was that per capita growth for the quarter was ‑0.5% and ‑0.3% for the year. The average resident went backwards in 2023.

The last three quarters of growth were all negative and four of the last five were negative. That should define a recession in anybody’s analysis.

GDP per hour also went backwards for the year at ‑2.1%. Importantly, the household savings ratio fell to 1.1% from 2.8% in the previous quarter and from 3.5% in the one prior.

These statistics do not mean that households are spending more than they earn – at least not yet – but they are saving less than they did before the pandemic – at around 5%. We interpret these data as meaning households are having trouble maintaining their lifestyle in the face of cost-of-living pressures. They are not saving enough for a ‘rainy day’ or retirement. At 1.1% as a savings ratio, there’s not much room left before households have to start going into debt.

While it is true that (the rate of) inflation has been falling – prices keep rising and wage increases have been insufficient to keep pace with price inflation.

The latest inflation print from the Australian Bureau of Statistics has been held over for a couple of weeks – as has the data for retail sales – owing to the Christmas and summer holidays.

The Labour Force Survey data looked good for November. There were 61,500 new jobs of which 57,000 were full-time positions. The unemployment rate rose to 3.9% from 3.8%. But, with immigration surging, how many jobs constitute a good number?

The Westpac and NAB consumer and business confidence indices were all weak and consistent with being in a recession.

Hopefully the RBA will see past the immigration flows distorting traditional economic statistics and not only not increase interest rates but give serious consideration to cutting them sooner rather than later.

China

China’s inflation data showed that it is experiencing deflation. CPI inflation came in as expected at ‑0.5% and wholesale price inflation as measured by the Producer Price Index (PPI) was ‑3.0% against and expected ‑2.8%.

While there is much speculation that China’s economy is struggling, the strength in iron ore prices gives us some comfort that China will not be adding to our economic woes.

US

US CPI inflation came in at 0.0% for the month and 3.1% for the year. The core inflation variant that strips out volatile fuel and food prices was 0.3% for the month and 3.4% for the year. PPI inflation was 0.0% for the month.

Our method of calculating CPI inflation, based on sound statistical principles, produced estimates of 2.2% for the headline rate and 3.4% for the core variant.

It is worth pointing out that a major component of CPI inflation is derived from Shelter (housing) estimates. A survey is conducted among owner-occupied housing to ask what they think the rent might be if it were rented out. We see this as a difficult estimate to produce at the best of times but, in a post-pandemic falling market we wonder whether there is inertia in owner’s assessment about what their properties are worth in a rental market. This component is running at around an inflation rate of 6% which could upwardly bias CPI estimates if, indeed, we are correct.

The Fed’s preferred core PCE (Personal Consumption Expenditure) inflation read was 0.1% for the month or 3.2% for the year. Headline inflation was ‑0.1% for the month and 2.6% for the year. PCE inflation over the last six months was 1.9% which is below the Fed target of 2%.

The second revision to the September quarter GDP growth reverted to 4.9% from the first revision of 5.2%. It should be recalled that the data appeared to be distorted by government infrastructure spending and a possibly unintended build-up in inventories.

Europe

The Bank of England (BoE) and European Central Bank (ECB) are claiming some success in fighting inflation. For both economies, inflation has fallen rapidly. For the European Union (EU), inflation is now only 2.4% and core inflation is 3.6%

We maintain that much of these and other economies success in inflation might be due to the winding back of supply conditions. The long and variable lags effect might bite in 2024.

Rest of the World

There is much being said and written about the Israel-Gaza conflict. We acknowledge the human tragedy and hope for a speedy resolution.

The Ukraine war with Russia continues with no apparent end in sight. Escalation of either or both of these conflicts presents a level of risk to the global economy.

It is reported that some terrorists based in Yemen have been using drones to intimidate or damage ships passing through the Red Sea in their quest to pass through the Suez Canal. It is said that this behaviour is related to the situation in Israel.

A number of ship owners have said that they will divert ships via the Cape of Good Hope which might add 10 – 15 days in travel time.

In unrelated reports, the Panama Canal has been very affected by drought limiting the traffic in this waterway potentially up to 50% by February.

A reduction in freight volumes through these two iconic waterways are putting renewed supply pressures on freight costs which in turn will feedback into inflationary pressures.

Canada’s latest GDP growth came in at ‑1.1% and New Zealand’s at ‑0.6%. The start of the global recession might be underway.

ChatGPT for beginners

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Have you given ChatGPT a try? If you’ve ever found yourself frustrated with writing, needed a creative spark, or simply wanted to reclaim some time in your life, this software might be the solution for you.

ChatGPT is a language model that generates human-like responses by scraping the internet for data. As a beginner user, integrating this software into your daily tasks doesn’t require any technical expertise. Think of it as a tool that adapts to your needs, offering real-time support and responses with endless possibilities.

Here are some simple ways you can get started.

Writing Support

Stuck on how to phrase something or need help structuring a sentence? Sometimes when we’ve stared at the same paragraph for too long, it can become frustrating if we can’t improve how it sounds. Copy and paste your text into ChatGPT with a prompt such as “make this flow better”, or “improve this sentence structure” to help you enhance your writing. Not happy with the output? Simply putting in a phrase such as “try again” will make it generate more responses. The idea is to not auto-generate entire pieces, but rather use it to help when you’re stuck or need a nudge in the right direction.

Brainstorming

If you’re in need of a boost of inspiration, ask ChatGPT to generate some ideas, writing prompts or to offer creative solutions to a problem you’ve been facing. For example, it can suggest topics for a blog, propose unique business ideas or opportunities and even generate recipes if you’re keen to get experimental in the kitchen. Using ChatGPT as your brainstorming partner may be just what you need to get started on a project.

Research

Need an answer quickly? Instead of sifting through overwhelming search results, you can ask ChatGPT to save some time and effort. This could be for factual questions, explanations or to generate a summary of a story or article. However, be sure to use your judgement as it can still get answers wrong from time to time!

Learn Something New

You can utilise ChatGPT as a learning resource by asking it questions and seeking explanations for complex topics. For example, you could ask “explain the concept of quantum mechanics”, or “tell me what significant world events happened in 1989?” and it will provide detailed responses.

Tips and tricks

  • Talk to it like an employee: ask questions in the same way you’d ask a human.
  • Experiment with different prompts: it also helps to be clear and concise with your prompts and break down queries into smaller, easier to understand sentences.
  • Formatting: specify the format and style you’d like answers given.
  • Fact-check: make sure to check the data for authenticity.

Although ChatGPT isn’t perfect, it can be a very useful tool to help us with every day tasks. Human expertise is essential for it to work successfully, so have a go at experimenting with prompts and work out how you can use it to your advantage.

Budget-friendly travel tips

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If you’re heading away this holiday season, or are starting to plan a getaway for next year, there are plenty of ways that you can make your journey both memorable and budget-friendly.

Choose your spot wisely

One of the trickiest parts of planning a holiday, especially when travelling with children, is picking the destination. Will you be driving or flying? Domestic or international? How many people will be joining you? Take the time to research what is most viable for your needs, and factor in any budget constraints. For example, if you’ve got little ones tagging along, you may opt for accommodation in all-inclusive family-friendly holiday parks, or if heading overseas, choosing places with favourable exchange rates can help keep budget costs low.

Pack Smart

It can be difficult to do but packing as light as possible and only bringing the essentials can make your travels that little bit smoother. Taking only carry-on, especially on budget airlines, means you not only save money on baggage costs, but save time that you’d typically spend waiting for luggage after your flight. To help keep things light, pack clothing that can be easily mixed and matched and avoid packing too many pairs of shoes (you’ll likely be wearing the same pair each day!)

Avoid Tourist Traps

Once you’ve reached your beautiful holiday destination, it can be tempting to stick close to the hustle and bustle when in search of a meal. Skip the tourist traps when you can, as they’re often overpriced (and underwhelming), and instead try and “eat like a local” by venturing out to food markets or eateries tucked away from tourist-heavy areas.

Explore Low-Cost or Free Experiences

Museums, national parks, beaches, and markets can all offer free or low-cost fun. Research the area and make a list of spots you can explore – you may even discover hidden gems that typically only the locals know about. For families, popular destinations typically offer school holiday activities for the kids so take a look at local council websites or Facebook pages for updates.

Use Loyalty Programs

Take advantage of loyalty programs or travel rewards offered by airlines, banks, hotels and credit card companies. Accumulating points or miles can lead to heavily discounted flights and accommodation, and it’s also worth looking into promotions or sign-up bonuses that can decrease your travel expenses.

Plan Ahead

It’s been said many times before but planning ahead well in advance can give you enough time to secure the best deals. Combining this with some flexibility on your travel dates can also lead to significant savings, particularly if you’re able to lock in an off-peak getaway.

In the pursuit of a memorable, yet budget-friendly holiday, strategic planning can make a world of difference.

Navigating Financial Challenges in Times of Crisis

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Unexpected financial crises can emerge suddenly, disrupting the stability of even the most well-prepared among us. Whether it’s a health pandemic, natural disaster, economic recession, or personal crisis, having a strategy to navigate sudden financial challenges can help safeguard your financial wellbeing.

Your financial safety net

Building up an emergency fund can help you prepare for financial challenges, acting as a safety net to cover essential bills and provide you with a small reprieve as you tackle other issues. It’s often recommended that this fund cover at least three to six months’ worth of living expenses.

Communicate with creditors

If you, or a loved one, is unable to make payments on debts such as mortgages, loans, or credit cards, the first port of call should be to communicate directly with creditors. Many institutions offer hardship programs during crises, which could allow for temporarily reduced or deferred payments.

Visit your budget

Priorities can shift quickly during challenging times, so by visiting your budget, you can focus on ensuring you’ve allocated enough for essential expenses and can identify if you need to cut back on non-essentials. This practice can also help you allocate more to your emergency fund if needed.

Diversify income streams

This option may not be viable for all, but having multiple income streams can provide some added security. This could be through part-time work such as freelancing or consulting in order to supplement your income.

Seek professional advice

Financial advisers are there to provide their clients with tailored advice for their unique circumstances. Consulting them in times of crisis can help you make more informed decisions with how to plan and manage your money.

Stay informed

Keeping up to date with financial news means you’re likely to stay informed about government assistance programs and tax relief initiatives that may be available.

Look after yourself

Financial crises can cause a lot of stress and anxiety. Take care of your wellbeing by seeking support from your family, friends or a mental health professional.

Navigating unexpected financial challenges requires a combination of preparedness, adaptability, and resilience. By implementing these principles and seeking professional advice when needed, you’ll be better equipped to overcome them as they arise.

Plan Ahead This Christmas

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We don’t want to alarm you but… Christmas is next month! If the decorations popping up in stores left, right, and centre are filling you with anticipatory dread, it might be a good time to start planning for the silly season before the chaos ensues in December.

Budget

We’re all feeling the pinch of the high costs of living, so try and plan out a realistic budget to follow throughout the holiday season and stick to it the best you can. It might be beneficial to do your grocery shopping at markets or smaller grocers to save some money, buy in bulk where possible and keep an eye out for any bargains.

Postage

Take a look at the estimated delivery times for postage for any mail you’re sending to loved ones to make sure they arrive in time for Christmas day, particularly if they’re living overseas. The cut off dates for international postage to arrive in time are typically in mid-November, so be sure to organise it ASAP.

Secret Santa

Secret Santa is a great option to take the pressure off buying gifts for ALL your loved ones (especially those in big families). There are a number of free Secret Santa generator websites (draw names,  Elfster) that organise it for you by randomising your list and sending all participants their gift buddy via email.

Start early

If you’re hosting friends and family at your house this year, get in extra early and start stocking up the cupboard with non-perishable items like canned goods, food containers, and any festive decorations. This means you’re more likely to avoid the crowds, have extra time to shop the specials and can ease your way into the planning process.

Menu planning

How many people need to be fed? Are there any dietary requirements? If you’re going to someone else’s house, what do you need to bring them? Planning out your menu will show you exactly what items you’ll need, help keep your budget on track and reduce unnecessary food waste.

Travel arrangements

Travelling can be stressful, so if you’re planning to head away over the holidays, figuring out all the logistics in advance will save you a lot of time and energy. This could include any flights, transfers, accommodation or scheduling activities with others you’re travelling with.

So, as the holiday season approaches, it’s time to get an early jump on preparations and help ensure a stress-free time with your loved ones.

Economic update: November 2023

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In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

  • The new RBA Governor, Michelle Bullock, increases the RBA Cash rate to 4.35%
  • US Fed chooses not to increase the US Cash rate as data indicates some economic softening
  • European and UK central banks hold interest rates steady as inflation and growth both ease

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

We entered October with an air of positive expectancy about the outcome at the Melbourne Cup Day RBA Board meeting. Earlier in November, the market was flirting with a 14% chance of a possible rate cut in October. A cut did not eventuate and, by mid-October, the mood had shifted to being on hold with only a slight chance of a hike in November. On the back of the latest inflation read in late October, the odds turned the mood swiftly to a 50:50 split between the chance of a pause or a 0.25% interest rate rise according to the RBA Rate Tracker tool on the ASX website.

There is no doubt that the quarterly CPI read did jump from a modest 0.8% for the June quarter to 1.2% for the latest quarter resulting in a reading of 5.4% for the latest 12 months.

It is of extreme importance to recall that oil prices rose from just $72 / barrel earlier in the year to $97 largely based on supply changes orchestrated by OPEC+. That input-price-inflation ‘passed through’ to automotive fuel prices around the globe.

Oil prices swiftly fell to $84 in October before retracing to $87 by the end of the month. The fall was too late for the latest month or quarter’s inflation being measured. OPEC+ does not respond to RBA interest rates and it would be foolish to try to quell that component in the CPI with a rate hike in November.

The Australian Bureau of Statistics (ABS) also produces a monthly CPI series, albeit based on a slightly narrower coverage of goods and services. Our analysis of that data shows that the monthly CPI data peaked in August at 6.4% (following a succession of readings in the target range) before retreating to 5.8% for September – both months being within the September quarter.

It is most probably the case that several factors are at work in affecting our CPI inflation. Our $A depreciated from about $US0.70 to below $US0.63 over 2023. Such a depreciation causes import prices of many goods and services to rise. In response, CPI inflation is likely to have increased. Of course, oil prices, supply-chain disruptions and the rest are also in the mix.

It is difficult to point to the precise factors that caused the depreciation of our dollar but weakness in the China economy and rate movements in the US and here are likely to have been important. However, it is doubtful if a 0.25% increase in the RBA cash interest rate would redress a significant part of the depreciation.

Dr Luci Ellis, who only recently left the hierarchy of the RBA to become chief economist at Westpac, has been arguing that a rate hike is likely in November.

While Australia appears to be moving towards a renewed rate-hiking policy, the US has moved in the opposite direction. The November 1st Federal Open Markets Committee (FOMC) meeting had been thought to be leaning towards a pause but with a significant chance of a hike. However, by the time of the meeting markets were pricing in a 1.6% chance of a rate cut and a 0% chance of a hike hence the overwhelming expectation was for a pause, which is what was announced. At the time of writing, the fixed intertest market, as assessed through the CME Fedwatch tool, still has a 10% chance that the Fed could increase the cash interest rate again at its December 13th meeting. That said, what we have observed in past months is that the CME FedWatch tool varies in a wide range for the probabilities appended to the Feds next interest rate move and are very data dependent.

Across the Atlantic, the European Central Bank (ECB), Bank of England (BoE) and the Swiss National Bank (SNB) all kept their respective cash rates ‘on hold’ at their last meetings.

There is little doubt that the Australian economy is weaking: we have experienced two consecutive quarters of negative growth when expressed on a per capita basis; and the last three quarters of retail sales growth, when adjusted for inflation, have been negative. The last jobs report showed only 6,700 new jobs but there was an accompanying fall of 39,900 full-time jobs with the difference made up from new part-time jobs (replacing the full-time?). Eight million hours of work were reported as lost in the latest month (September) and nine million hours were lost in the month before. Those lost hours each equate to around 50,000 lost full-time jobs.

It is true that our unemployment rate is historically low at 3.6% – as is that of the US at 3.9%. In a revealing announcement at the end of October, Britain has abandoned its data collection survey method to compute unemployment because, reportedly, millennials and generation Z are reluctant to answer their phones, which impacts on the accuracy of the report!

Are US and Australian data also similarly affected? We do not know but serious questions about labour force data should be asked given how critical the assessment of the structure of the labour force is in the formation of both monetary (RBA) and fiscal (government) policy. There may well need to be changes in either the calculation of the rate or its interpretation following the social upheaval of the pandemic. When there are so many other signals of a weakening economy, it would be foolish to rely on a single part of the economy to guide the direction of monetary policy.

The US, however, reported an extremely strong labour market – at least at first glance. Two separate sources said the 336,000 new jobs reported in September – compared to an expected range of 90,000 to 250,000 – did not reflect that most of the new jobs were for lower paid, part-time positions. The sources proffered that it was more likely that these jobs were for second jobs to cope with the cost-of-living crisis rather than as an indicator of a strong market.

Some cite that there is ‘a strong US consumer’, particularly after the block-buster GDP growth of 4.9% for Q3. However, retail sales over the year – after adjusting for inflation – were flat. Recent data have been unduly affected by Covid related stimulus payments and people living off accumulated excess household savings.

The three-year US student debt forgiveness programme has just ended and excess savings are reportedly all but exhausted. So, from now on we will get to see how the economy fares when consumers now need to fund their lifestyles from their current earnings.

The savings ratio in the latest quarter fell from 5.2% to a low 3.8%. Households are saving less per quarter than their historical average which does not bode well for the future.

Because most US home mortgages have fixed interest rates for 30 years, many have not yet been affected by recent rate rises – unless they chose to, or needed to, move home. Many were smart enough to have locked in low rates for their fixed rate mortgages during the pandemic years.

The US 30-year fixed term mortgage rate just exceeded 8% – the highest since the year 2000 after climbing from a recent low of about 4% during the pandemic. That’s about double the interest repayments so it will obviously affect decisions of many to move. However, when rates do fall, people borrowing at 8% can typically refinance at the lower rate without penalty. The US is different from Australia in so many ways.

In mid-2023, many were calling no US recession – or, at most, a mild one. The majority now seem to be accepting of the notion that the US is heading towards a recession of some degree. But there is hope that any recession would be short-lived, providing that the Fed reacts quickly.

The third quarter US company earnings’ reporting season is now underway and many companies have posted strong earnings and have positive views of their earnings prospects in the quarters to come. With share markets having retreated substantially (of the order of 2% to 8% since the end of June) having bounced back from correction territory for some, markets could rally quickly if the central banks soon choose to make statements of likely cuts to interest rates to support their flagging economies.

Interest rate cuts are being priced into the US Fed funds rate in the first half of 2024 as assessed by the CME Fedwatch tool. Some central bankers, with the ‘higher for longer’ mantra, are still talking of no cuts in 2024 or even 2025. We find it difficult to see that happening.

While there has rightfully been much attention on equity markets, bond markets require some serious consideration. The yield of the US 10-year Government bond broke through 5% in the second half of October – the highest since 2007. When the price of a Bond falls the yield rises, and the longer the maturity of the bond, the larger the price impact. The mounting problem with the US is that the appetite to hold US debt was waned in recent times. Some bond auctions held by the US Treasury have not gone as well as expected which has caused some instability/volatility in the US bond market. In the long run, the US will have to address its significant level of Government debt.

As bond yields go up, they become more attractive – especially if they are held to maturity. Higher yields typically have a depressing impact on equity returns because the alternative to holding equities becomes more appealing as a result the relative attractiveness of equities declines

Of course, the Israel-Gaza conflict could adversely affect markets if the conflict escalates across the Middle East and beyond. From an economic perspective the risk to global oil supplies is particularly high.

Asset Classes

Australian Equities

The ASX 200 had another bad month at ‑3.8% following the ‑3.2% it fell in September. Much of the action seemed to flow from volatile bond yields in the US and swirling news about interest rate increases or the changes in the likelihood of interest rate increases. Of course, the Israel-Gaza conflict cannot be ruled out as a source of angst in markets but news from the Ukraine seems now to be more muted.

If it were not for the materials and utilities sectors, the ASX 200 would have been in much worse shape in October.

While a rally into Christmas is still possible, it seems doubtful unless there is good news coming from the RBA or US Fed. So far this year, the ASX 200 index is down ‑3.7% but LSEG (formerly Refinitiv, which was formerly Thomson Reuters) forecasts for earnings growth are quite positive with an above-average year ahead. Indeed, our analysis of these data show that the prospects for the following 12 months has risen from 3.6% at the beginning of 2023, to 9.0% today.

International Equities

The S&P 500 was down by slightly more than the ASX 200. However, its performance-to-date over 2023 is well up at +9.2%.

There have been some spectacular winners and losers in the Q3 reporting season – particularly among the so-called ‘magnificent 7’ mega-cap tech stocks.

There are many stocks – including some of the magnificent 7 – that may be largely unaffected by any recession in the US however, regulation is more of an issue with some of these companies.

Bonds and Interest Rates

We found it particularly interesting that the Fed suddenly came out ‘dovish’ (more likely to be supportive of the economy than inflation fighting hence more likely to be easier with monetary policy implementation) the day before the FOMC minutes (from a meeting two weeks prior) landed on the news wires with a distinctly ‘hawkish’ (opposite of dovish) tone.

Europe’s ECB, too, has suddenly taken a more dovish tone with their monetary policy settings being ‘on hold’ in October.

Australia is the odd-man-out in the change of direction of central bank policy settings. The new Governor, Michelle Bullock, at her first real test, has increased the RBA Cash rate to 4.35%. Despite the market being evenly divided between her pausing or raising the Cash rate, she has determined to increase the rate on the basis that, at its current trajectory, inflation would not return to the target level ‘within a reasonable timeframe’ hence the need for her to ‘use the whip’ on Melbourne Cup Day.

Other Assets

The price of oil and copper were down in October, iron ore was flat but gold prices – owing to heightened degree of uncertainty – strengthened. Unsurprisingly, the VIX (a measure of US equity market volatility) rose. The $A against the greenback lost ‑1.7%.

Regional Review

Australia

We raised concerns last month about the state of the Australian labour market in part because most of the new jobs were for part-time positions. This month we find that trend is even more pronounced. 39,900 full-time jobs were lost and 46,500 part-time jobs were created leaving a positive balance of +6,700 total jobs. That is not really a positive swap! Eight million hours of work were lost – a similar amount to the previous month.

The Westpac consumer sentiment index remained well into the pessimistic zone (below 100) at 82. That level is like that found in previous recessions. The NAB business confidence and conditions indexes hovered just into the optimistic zone.

Retail sales – unadjusted for inflation – were up 0.9% for the latest month or 2.0% for the year which was well behind inflation for the year at 5.4%. Therefore, in CPI-adjusted terms, retail sales went backwards by ‑3.4% in the last 12 months. That the 0.9% reading was above the expected 0.3% is cold comfort for the state of the consumer.

The last four quarters of CPI inflation over the corresponding period in the previous year were 7.8%, 7.0%, 6.0% and now 5.4%. It is encouraging that inflation has been steadily falling but not at a fast-enough pace for many and new RBA Governor Michelle Bullock who increase the RBA cash rate to 4.35% on Melbourne Cup Day.

Our calculations based on the monthly CPI data series on rolling quarters (annualised) for the last three months have been 3.1%, 6.5% and 5.8% (for September). The spike can largely be attributed to auto fuel price inflation but other categories did stand out too. The core inflation data, that strips out auto fuel, fruit and vegetables, and holiday travel using the same methodology produced 4.8%, 5.2% and 5.5% for the last three months. The trend prior to that sequence seemed comfortably heading soon to the 2% to 3% target range.

Core inflation does not strip out auto fuel for that part of it which is used as inputs to other sectors. Electricity was up 18.0% on the year while gas and other household fuels were up 12.7%. Rents were up 7.6% possibly due to rate increases! The Cup Day rate rise will not help bring down inflation in these sectors.

With oil prices having pulled back from their peaks, and if the Gaza conflict does not escalate to result in major oil shortages, there is the prospect of a return to the previous trend of a fall in inflation rates.

China

China’s PMI (Purchasing Managers’ Index) for manufacturing returned to above the ‘expansionary’ measure of 50 for the first time in four months.

China GDP surprised the market with a reading of 4.9% when only 4.5% had been expected.

Woes in the property market continue and some significant defaults on property developer bond repayments were reported.

US

US CPI inflation statistics came in a little above expectations at 0.4% for the month and 3.7% for the year. The core variant was 0.3% for the month.

The Fed’s preferred Personal Consumption Expenditure ‘PCE’ measure came in at 0.4% for the month and 3.4% for the year. The core variant was 0.3% for the month and 3.7% for the year.

Despite the stubbornness of inflation to return quickly to the target 2%, increasing fears of a recession are causing the market and the Fed to pull back a little from expecting interest rate hikes.

Retail sales came in at 3.8% for the year which is only just above the inflation rate of 3.7%. In ‘real terms’ sales have been static. Industrial output did beat expectations with a growth of 0.3% against an expected 0.1% in the latest month.

The non-farm payrolls (jobs) data massively beat expectations. There were 336,000 new jobs created against an expected range of 90,000 to 250,000. However, it has been reported that most of these jobs were part-time positions and of lower pay than average. Some observers believe that the apparent resilience in non-farm payrolls more likely indicates people needing to get a second job to supplement their earnings in the face of the cost-of-living crisis rather than the strength of the US economy.

The unemployment rate was marginally above expectations at 3.8% and wage increases were up 4.3%.

There are early signs that the US Auto Workers Union is coming to an agreement with two of the three auto manufacturers.

The House of Representatives finally appointed a Speaker of the House of Representatives – at the fourth attempt. The next deadline of the US debt ceiling vote might now be averted on November 17th.

US GDP growth came in very high – as expected – at 4.9% (annualised) for the September quarter but the household savings ratio fell to 3.8% from 5.2%. A portion of this economic activity was due to government infrastructure spending and a big build-up in inventories. It is not yet clear whether the build-up in inventories is in anticipation of future demand or failure to sell as much as expected in the September quarter. Based on the more dovish attitude of the Fed recently it may be the latter.

Europe

The BoE, ECB and SNB paused their tightening cycles. House prices in Britain – adjusted for inflation – have fallen 13.4% from their peak.

Germany’s GDP growth came in at ‑0.1% for the September quarter. German inflation fell to 3.0% in October – the lowest since August 2021.

EU growth was also ‑0.1% and its inflation rate of 2.9% was well down on the previous estimate of 4.3% Core inflation in the eurozone was 4.2%, down from 4.5%.

Rest of the World

Japan’s CPI inflation came in at 3.0% while its core variant was 2.7% against an expected 2.8%.

The anticipated Bank of Japan shake up on rates had little impact. The prime interest rate stays at ‑0.1% and the change to the Yield Curve Control (YCC) for longer dated Japanese government bonds was minor.

The Israel-Gaza conflict remains a human tragedy with the prospect of the conflict escalating to involve other forces remaining a real threat to the region and potentially to oil prices.