Jacqueline Barton

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.

The Psychology of Money

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Money is often one of the most stressful factors in our lives and is deeply influenced by our emotions. Whether it’s the thrill of a successful investment or the anxiety of a mounting credit card bill… the way we feel plays a significant role in the financial decisions we make. Understanding this psychology can help us to make more rational financial choices, so here are some of the key aspects to look out for.

Emotions and money

Fear, pride, greed, envy… no matter how in control we feel, these complex emotions are often what drive our financial decisions. Fear can make us overly cautious, preventing us from taking calculated risks that may lead to growth, greed may push us into ventures without first undertaking proper research, and envy can result in spending money we can’t afford to on material items we don’t need. Recognising these emotional triggers when they arise is the first step towards making better decisions.

Impulse Purchases

Sometimes the power of temptation can take over in the form of impulse spending, providing instant gratification or a rush of emotion. Retailers put a lot of work into product placement to encourage this, often through enticing displays, placing products in your direct eye line or through strategic advertising. Try and pause before making a purchase and ask yourself if what you’re about to buy is really needed or aligns with your financial goals.

Fear of Missing Out (FOMO)

FOMO can be particularly harmful when it comes to investing. It may prompt you to jump on the bandwagon of the latest investment trends without researching it first, or prompt you to withdraw money from an investment prematurely. To avoid this, take a step back and remember that investing should be a well-thought-out, long-term strategy, rather than a reaction to short-term changes in the market.

Self-Worth

Many people tie their self-worth to their financial status which can lead to overspending in order to try and keep up appearances. It’s important to remember that the value of a person is not defined by their financial success.

Education and Planning

To help combat emotional spending, improving our financial literacy can help us to better understand the implications of our choices, about different investment options, savings strategies, retirement planning and more. Part of your financial advisers role is to ensure you understand what is involved with your strategy, so if you require further clarification, it’s best to get in touch with them. Having a clear understanding can provide you with the confidence to make decisions that will benefit you in the long run.

Emotions and money are intertwined, but with more awareness and recognition of the emotional aspects of your finances, you can navigate your financial journey with confidence and clarity.

Lending and property update: October

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Interest rates have sat still for yet another month as the incoming RBA treasurer made little change from the previous modus operandi. This stagnation is welcome news for mortgage holders and renters alike, and competition amongst lenders on the pricing front is heating up as they vie for attention from borrowers without the sugar-hit allure of cash-back promotions to bring customers in the door.

Years ago, lenders jostled with their Standard Variable Rate, or Headline Interest Rate, and many media outlets used to publish these rates in their finance editorials as a quick comparison particularly between the major banks. Lenders have now evolved to provide instant changes to their interest rate, that do not raise the attention of the general public, by offering a multitude of different discounts off this Standard Variable Rate based on their own objectives of the day/week/month. The discount has to be requested on an individual client basis and is often based on volume of lending or LVR, but can extend to other indicators such as postcode, property type and even employment type. The result is that many borrowers have a different discount off the headline rate. As the Standard Variable Rate might move around, the discount remains fixed in the loan contract.

In order to attract more clients, banks and lenders are offering more and more attractive interest rates to drag clients in the door. Via these interest rate discounts, more desirable low-risk clients are taken off the market with discounts that could end up locking the client in for life.  These discounts are now in the range of 2.5% to 3.5% and as the competition heats up, so does the disparity between lenders with many clients observing at least a half of a percentage point difference between lenders. On Australia’s average home loan balance of around $590,000, that can mean savings of more than $2,500 per year in interest alone.

Spring Clean your Finances

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As the chill of winter leaves the air, and the days grow gradually longer, it’s the perfect time to do some spring cleaning for not only your home, but your finances too. A refresh can bring a sense of clarity and control in your life, helping you get back on track with your financial goals, or even help set some new ones in the months ahead.

Budget Review

Start off by revisiting your budget to make sure it still reflects your current financial situation and goals. You may need to adjust areas where you’ve been overspending, or simply take the time to figure out exactly where your money is going each month.

Examine your Debt

Outstanding credit card bills, car loans, mortgages… it may help to create a plan to pay down high-interest debts more aggressively, or consider refinancing options to try and reduce your monthly payments.

Track your Savings

Are you saving as much as you’d like to? On track to go on that overseas holiday next year? Have enough in your emergency fund? Take a look at how you’re progressing toward your savings goals and find out where you can make adjustments if needed.

Assess your Insurance Coverage

Check to see if your insurance policies such as home, health and life still have adequate coverage for your needs and are up to date. You might even be able to reduce premiums by bunding policies or shop around for a better deal.

Automation

Streamline your finances by setting up automatic bill payments and contributions to savings and investment accounts to decrease the time you need to spend on life admin and keep you on track with your financial goals. This will also help you avoid those pesky late fees!

Trim the Expenses

If you’ve lost count at the number of subscriptions or memberships you’ve signed up to (hello, streaming services!), it may be time to cut away the ones you no longer need or use enough to justify the fees you’re paying.

Set New Goals

Once you’ve refreshed your finances, you can set some new goals that will help bring you closer to your ideal financial situation. It might even be beneficial to write them down and put the list somewhere you can view them every day to keep you motivated.

So, open up your windows, let in the fresh air, and give your finances some TLC this spring – your future self will thank you!

Economic Update: October 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:

  • US Fed pauses interest rates in September but upsets markets with hawkishness commentary
  • US economic data remains positive but further analysis indicates conditions are softening
  • GDP data for Australia is showing mild growth but on a per capita basis we are in recession

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

So much data is released every month that it is nearly always possible to find a justification for a ‘good’ or ‘bad’ forecast/outlook, depending on one’s view or motivation. The responsibility of macroeconomic analysts is to deploy skill in their analysis and be able to step back and synthesise the information to present a cogent and balanced view.

We agree that both the US and Australian economies can currently be viewed through an optimistic lens. But we see some cracks beneath the surface getting bigger. The lion’s share of responsibility for managing the many stresses and forces operating in the global and national economies falls in no small part to governments and in particular, central banks.

At time of writing, this turns on how central banks increase their interest rate settings to hopefully return inflation to an acceptable range without causing economic growth to slow to the point where a deep economic recession is inevitable. In our view, the now restrictive interest rate policies have done the job and it is time for central banks to acknowledge the lagged effects of high interest rates, in order to ensure that economies do not unduly succumb.

A key economic measure/indicator is employment. At the start of September, US jobs data were seen by many as holding up while inflation data were showing some impressive gains i.e. falling. As a result, almost everyone expected the Fed to keep rates on hold at its 20 September 2023 meeting – and it did. Therefore, the immediate stock market reaction was positive – until the Fed chairman’s press conference which started half an hour later.

During that question time, the Fed chair, Jerome Powell, became increasingly hawkish – meaning that he was leaning towards more interest rate hikes, or, at least, the current hikes being held ‘higher for longer’. As a result, September proved to be a bad month for equity markets.

Our take on the US jobs data is that it went against the superficial media coverage. 170,000 jobs had been expected and 187,000 jobs were created. The unemployment rate was 3.8% and wages rose by 4.3% against an expected 4.4%. We can see why a cursory glance might lead one to view that the US labour market was strong.

What we also read was that the previous two months jobs’ data were revised down by 110,000 and that most of the jobs created in the latest month were in two non-growth sectors: health care & social assistance, and government. However, jobs in many of the important building blocks of growth went backwards by -28,300, which was a clear deterioration from prior months.

When viewed through that lens, interest rates may have been (and potentially should have been) cut in September! And 3.8% for an unemployment rate is a big kick up from the expectation of 3.5%. Some say a 0.5% increase in the unemployment rate is a sign of a slowdown.

US GDP data came in after the Fed meeting and showed that growth in the June quarter, at its customary second monthly revision each quarter, held steady at 2.1%. We can see how that could also be construed as good. The Fed thinks anything above 1.8% causes upward pressure on inflation and the like. But consumption, the big driver of the US economy (circa 67% of GDP growth), was revised downwards from an initial 1.7% to an unimpressive 0.8%, and that is an annual figure. That is unequivocally not good!

So how did GDP growth hold up then? It transpires that business investment was revised upwards and it compensated for the loss in consumption. That investment was fuelled by Biden’s push to onshore semiconductor production after the pandemic/ shutdown/China situation from 2020 to 2022. There is an old saying, ‘Never fight the Fed’. It seems the government is fighting the Fed and that in part explains why temporarily the economy is holding up a bit longer than some expected. Monetary and fiscal policy work better in unison.

And other headwinds are gathering in the US. It was reported that US consumers had accumulated $2.1 trillion in ‘excess savings’ from government Covid-related cheques and personal savings back in 2021. Those savings had dwindled to $190 billion by June and was thought now almost gone except the GDP report also suggests they found a little bit more savings in the revision. Consumers have been partly living off excess savings for two or three years and that well has almost run dry.

The market still thinks the Fed might not hike rates again this year – pricing in about a 35% chance of another hike – and cuts could start as early as the first half of 2024.

However, the Fed published its dot plots last meeting – a brilliant graphic to show what all the members (voting and non-voting) think the Fed rate will be at each of the end of this and the next few years. Since the dots are not attributed to each member, and not all members vote, it is not trivial to interpret the expectations of the voting Fed.

Since there are only two meetings to go this year (1 November and 13 December) there was reasonable cohesion among the Fed members (12 for a hike and 7 for on hold) for the end of 2023. For 2024 and beyond the dots are dispersed widely. Two members expect a higher rate in 2024 than now (1 or 3 hikes from here); 4 the same as now; and the rest for up to four cuts from here (or five if they hike again this year).

Given that there are accepted to be long and variable lags following interest rate changes before effect, knowing that they will need to cut quite a few times soon, it makes little sense to put in another hike to then try and cancel it quickly.

Here in Australia, the RBA looks more likely to be ‘done’ and interest rate cuts could start soon. Our CPI monthly inflation data were within the RBA’s target range for three consecutive months but petrol/fuel inflation burst the bubble in the latest month.

Our initial GDP data were released for the June quarter and, again at first sight, they looked fine. Growth was 0.4% for the quarter (not annualised) and 2.1% for the year. However, when our material immigration flow is accounted for, growth per capita was ‑0.3% for the June quarter following ‑0.3% for the previous quarter. We were in a per capita recession during the first half of 2023. On average, we were going backwards!

The September quarter has now finished but it will be nearly three months before we find out whether the ‘going backwards’ continued. The Organisation for Economic Cooperation and Development (OECD) is pulling no punches. It forecasts we (Australia) will be in a per capita recession for two years (2023 and 2024). So, the OECD assessment adds further weight to the argument for the RBA to not raise interest rates further and to be contemplating cutting rates sooner rather than later.

The Bank of England (BoE) has surprised in the opposite direction. It was widely expected to hike again this month but it didn’t. The BoE hinted that the inflation data released the day before turned its hand. For the record, the UK headline CPI came in at 6.7% down from 6.8% the month before and the core variant that strips out volatile items came in at 6.2% down from 6.9%. No matter which variant you use, US inflation is around 4% or better and they are talking about hiking. Clearly there is significant divergence between how various central banks choose to implement monetary policy and their strong reliance and dependency on data.

China is the real mystery in all of this. Of course, their economy is not hitting the higher growth rates of years gone by. That is the fate of all maturing economies. What is 5% growth now amounts to about the same extra output as 10% growth when China was half the size (not so long ago). The problem is to do with what is going on with property and property developers. There have been defaults and possibly more to come. But the third quinquennium (Chinese long-term economic plan) is just around the corner. Every five years China has a big conference and announces new policies and possibly stimulus. Perhaps during October, we will have a stronger picture to paint for our major trading partner!

Asset Classes

Australian Equities

The ASX 200 fell ‑3.5% in September in part due to the hawkish comments made by the US Fed and concerns over property in China. Energy (+1.3%) was the only one of the 11 sectors to make gains. Property (‑8.7%) and IT (‑8.0%) took by far the biggest tumbles.

For the nine months to the end of September, the ASX 200 is up by only +0.1%; the IT sector is up +22.5% and consumer discretionary by +12.2%.

When dividends are included (but not franking credits) the ASX 200 is up +3.7% for the nine months.

We still have consensus earnings forecasts, sourced from Refinitiv, pointing to a solid end to the year and the market is modestly under-priced by our assessment.

International Equities

The S&P 500 was also down by ‑4.9% over September. In contrast, the London FTSE was up +2.3% but all the other major indices we follow fell by a similar quantum to the ASX 200 and S&P 500 for the month.

Over the year-to-date, the Japanese Nikkei has rocketed ahead by +22.1%; the S&P 500 (+11.7%) and the DAX (+10.5%) have made creditable gains. The other major indices are more or less flat over 2023 to date but, at least, showing small positive gains.

Bonds and Interest Rates

The Fed did not raise interest rates at their 20 September 2023 meeting but the chair, Jerome Powell, made a hawkish statement in the press conference that followed. The Fed dot plots chart, showing participants forecasts for the US cash interest rate for the end of this year and several following, show a broad divergence in opinion.

More members than not saw another hike in rates this year with the CME Fedwatch tool which measures the Feds interest rate changes that are implied by movements in the bond market, show only modest support for that view.

The US Government bond market has experienced some volatility with the 10-year bond yield closing at 4.57% being markedly ahead of the 4.10% at the end of August.

The RBA now has a new governor, Michele Bullock, and she has not ushered in a rate hike at her first meeting, especially as the market had not pricing one in. Indeed, the market had priced in a small chance of a cut!

We consider Australian inflation largely under control with some doubts about the strength of the economy. We are in a per capita recession and chinks are appearing in the labour market which until recently has proven to be quite resilient.

The Bank of England kept its interest rates on hold in September despite a market prediction of an increase and inflation coming in at over 6%.

The European Central Bank (ECB), Norway, and Sweden all raised their official cash rate by 0.25% and hinted at the prospect of more to come. Switzerland’s central bank held rates steady instead of increasing them, the first pause since March 2022.

Japan is still maintaining its negative interest rate of ‑0.1% although there is growing commentary about the need for the Bank of Japan (BoJ) to change its stance. Japan’s latest GDP growth is 4.8% (after a revision from 6.0%) and inflation is running at just over 3%.

Other Assets

The price of oil was up by nearly 10% in September following OPEC+ (essentially Saudia Arabia plus Russia) supply cuts.

The price of iron ore rose 2.1%. The prices of copper (‑2.8%) and gold (‑4.4%) were both weaker. The Australian Dollar depreciated fractionally (‑0.4%) against the US Dollar over September.

The VIX (US Share market) volatility index rose to 17.7 at the end of September after being in the normal range (at around 13) for some time.

Regional Review

Australia

CPI inflation came in at 5.2% (for the year) from 4.9% the month before. Core inflation was reported to be 5.5% and down from the previous month of 5.8%. We also compute a quarterly (annualised) inflation rate to follow new trends in a timely fashion.

Our headline quarterly inflation rate was in the RBA’s target range (2% to 3%) for three consecutive months but then a massive increase in petrol/fuel prices in August took that measure to 6.4%. The core equivalent quarterly rate was falling steadily into June and close to the RBA’s target but drifted a little higher in the latest two months possibly on the back of a depreciating Australian dollar which makes imports more expensive.

GDP growth came in at 0.4% for the June quarter and 2.1% for the year. However, when population growth is taken into account, per capita GDP shrank by ‑0.3% in the June quarter following on from a ‑0.3% fall in the March quarter.

Although the definition of a recession in this country is usually ascribed in terms of GDP, and not per capita GDP, we cannot ignore that, on average, the Australian economy in a viable metric (per capital GDP) has been going backwards and the OECD predicts that behaviour to continue into 2024.

The household savings ratio fell modestly from 3.6% to 3.2% in the June quarter but this ratio is well below ‘normal’ levels. It seems unlikely that saving will fall much more making it less likely for consumption to maintain current levels unless consumers increasingly use debt facilities.

The ‘mortgage cliff’ is almost on our doorstep when hundreds of thousands of mortgages previously fixed on low interest rates in the unusually low interest rate era will need to be rolled over to interest rates significantly higher. However, data from Domain.com suggest that stress in the form of ‘forced sales’ has been falling after a very recent peak. Hopefully the worst of that sort of stress has passed.

At first sight, the latest jobs report seemed promising with 64,900 jobs created – about three times what would normally be considered good. However, only 2,800 of these were for full-time work – the rest being for part-time work. The unemployment rate was unchanged at 3.7% but the number of hours worked fell by 9 million. That loss is equivalent to losing about 60,000 full-time jobs, which is further evidence that the labour market is weakening.

Unsurprisingly, therefore, the Westpac MI consumer sentiment index fell to 79.7 (with 100 being the breakeven point between optimism and pessimism). The index has been around 80 for several months; this level is usually associated with a recession or at least a serious downturn. Business sentiment indices from NAB, however, were more positive. Both the confidence and conditions measures were marginally up and in positive territory.

China

China holds a major government conference, the quinquennium, every five years to realign policies and, possibly announce new stimulus. It is due to start on 16 October 2023.

There have been many reported problems within China’s property sector including the massive Country Garden failing to pay coupon payments on some of its debt securities on time. Other data have been more encouraging.

Retail sales were up 4.6% against an expectation of 3.0% and industrial output was up 4.5% against an expected 3.5%.

China is reviewing some of the tariffs applied to imports from Australia imposed in 2020 and several of them have already been lowered or removed.

US

US inflation statistics continued to improve. Indeed, the monthly rate of the Fed’s preferred ‘core PCE variant’ came in at 0.1% which is below the Fed target of 2% pa. That measure rose 3.9% over the year. Headline PCE inflation rose 0.4% for the month and 3.5% for the year.

US CPI headline inflation rose 0.6% for the month and 3.7% for the year. The core variant rose 0.2% for the month and 4.3% for the year.

In our view US inflation is nearly there but, if the Fed holds interest rates higher for longer, there is a big danger of overshooting i.e. a recession ensues due to restrictive interest rate policy settings.

The headline jobs number was good but, as our preceding analysis shows, there are cracks appearing as the composition of the numbers shows employment growth is occurring in government and care sectors which are less positive for economic growth.

Europe

The Bank of England (BoE) paused its interest rate tightening cycle. CPI inflation fell to 6.7% from 6.8% (over the year). Core inflation fell to 6.2% from 6.9%.

On the other hand, the ECB hiked 25 bps to 4.0%.

Rest of the World

The New Zealand economy bounced back with 0.9% growth for the latest quarter and 1.8% for the year. Only 1.2% growth had been expected.

Lending update: September 2023

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After two months devoid of interest rate increases, home loan customers are getting comfortable with the repayments that will become the new normal. Initial indicators of ‘mortgage stress’ are up as households spend on average more than one third of the pre-tax earnings on home loan repayments.

The value of new housing finance fell for the second month in a row with July recording a 1.2% drop after a 1.6% drop in June. These are still well below the 5.8% drop in February which seems to coincide with the drop and then slight recovery that has been observed in house prices.

Owner Occupier lender seems to have suffered the largest drops, with a 1.9% drop vs a very slight 0.1% increase in Investment lending. Previously published drops in construction approvals are also flowing through to the home loan market as construction finance has dropped by 5.7% in the month.

Home loan borrowers are continuing to shop around for a good deal. Refinance activity in general jumped by 5.4% and totalled more than $21.5 billion – a record high. This is reflected in competition between the banks as interest rate pressures start to heat up now that cash-backs and other incentives have finished.

Banks and lenders continue to evolve their strategies, with a distinct shift towards retention of existing clients already on the book. Now is the time to look for a bargain in your own backyard – often the first step in getting a better rate is asking the question.