Jacqueline Barton

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.

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.

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!

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.

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.

Are you saving for a new house or a holiday? Need some guidance with your budgeting? Finance calculators can be a great tool to help you make more informed financial decisions, so we’ve listed a range below that are both free and easy to use.

Home Loans – estimate your monthly payments and borrowing power to aid in your budgeting and decision-making throughout the homebuying process.

Home Loan Borrowing Power

Find out how much you could potentially borrow for your mortgage.

Mortgage Repayments Calculator

Determine roughly how much your home loan repayments will cost each month.

Life Insurance & Income Protection – how much cover do you actually need? These calculators can give you an approximate indication.

Life Insurance Needs Calculator

Estimate how much life insurance and income protection cover you may require.

Income Protection Insurance

Estimate how much cover you may need if you’re unable to work.

Savings & Budget – set financial goals and track your income and expenses with these handy tools.

Savings Plan Calculator

Find out how much you will have in savings after a period of time based on what you deposit and the interest.

Budget Planning Calculator

A great way to help track your income and expenses and assist you with planning for future expenses.

Loans – Personal & Car – estimate your monthly payments based on factors like loan amount, loan term and interest rate.

Loan Comparison Calculator

If you’re trying to decide between home loans, you can calculate which one may work out better for you.

Car Loan Calculator

Find out an estimate of your repayments and how much interest you could pay.

Finance calculators can provide you with some more clarity as you navigate the world of loans, savings, budgets and more. It’s important to note that they’re not meant to be a source of complete accuracy, more so used as a guide to get you started.

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

Key points:

• The impact of interest rate increases is starting to appear in economic data
• China is struggling to reinvigorate its economy
• Equities take a breather

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

Backward looking inflation data, with most of the level being delivered in the early months of the data reporting window, has our current inflation rate at 4.9% annualised. However, if we take our guidance from more recent data (calculated on a rolling quarterly basis and then annualised) then we are seeing a level that is within the RBAs target band of 2%-3% p.a. The past three-monthly observations for this series being 2.4% p.a., 3.1% p.a. and 2.7% p.a. respectively.

On this basis the RBA should be encouraged that their monetary tightening policy is delivering the results intended and, save for a sudden inflation shock, be sufficient to tame inflation and not require further interest rate increases.

Further support for this position is evident through the latest retail sales data in Australia. The June quarterly result was ‑0.5% when measured in volume terms (i.e. removing inflation effects) and ‑1.4% for the year. The latest three quarterly results have all been negative.

Employment data was also softer as 15,000 jobs were lost in the latest month but that figure masks a worse outcome for full-time jobs which were down 24,000 because there was an offsetting gain in part-time positions. In July our unemployment rate went up from 3.5% to 3.7% indicating a deteriorating employment environment. The Westpac consumer confidence index also fell.

By taking a similar approach to observing US inflation data, its rate has also improved and looking contained, but there are so many alternative variants of that measure. Focusing on the measure that consumers actually face (CPI), and for the latest quarter and not the whole year, the latest read was 1.9% which is just under the Fed’s stated 2% target.

The US did record 185,000 new jobs in the latest month but three factors contribute to our view that this number was weak. First, it was 15,000 jobs less than expected. Second, 87,000 of those new jobs were in government and ‘health care & social assistance’ sectors which are typically not growth sectors. Third, the 209,000 new jobs for the prior month were revised downwards to 185,000.

During August, one of the big three ratings’ agencies, Fitch, downgraded US debt one notch to AA+ because of the debt default deliberations. Moody’s, another big ratings’ agency, down-graded 10 US banks and put six big banks on negative watch. Home affordability was reported to be the worst in 38 years, and the Fed just hiked its interest rate again in late July to the highest in 22 years.

The annual Fed-sponsored conference in Jackson Hole, Wyoming, was held at the end of August. Fed Chair, Jerome Powell, emphasised the need to keep policy restrictive and to be data dependent!

Is anybody winning? Well Japan hasn’t flinched yet still keeping its negative interest rate (‑0.1%) on hold since 2016. Its latest inflation read was 3.1% and its economic growth rate for the June quarter was 6.0% (annualised). However, there was some disturbing signs in their growth when we dig deeper. Consumption went backwards and imports were well below expectations. Offsetting this, retail sales were up an impressive 6.8% against an expectation of 5.4%.

We have often been able to point to China to lead the way for our economy – but so far, not this time. All China’s major economic statistics were weak and it is experiencing deflation rather than inflation. Deflation incentivises not spending now! We anticipate China will continue to try and find ways to stimulate its economy but what this looks like is not yet clear.

While there were several negatives during August, we are of the opinion that stock markets have largely factored in the state of the economies. Markets work on expectations of the future and not so much on past data. Our analysis of Refinitiv expectations of future company earnings remains positive overall.

After a bit of whiplash, US 10-year bond yields have settled down at just below 4.1%. Bonds are again a viable investment vehicle. Market volatility, as measured by the VIX Index, is at normal levels.

Asset Classes

Australian Equities

The ASX 200 fell 1.4% over August. A lot of the negativity appeared to arise from uncertainty about the Fed’s next move. Consumer Discretionary was the stand-out sector rising +4.6%. The year-to-date capital gain of +3.8% for the broader index is quite respectable given the long-term average of around 5%. August finished with a strong spell of daily gains. Moreover, our analysis of company earnings data, provided by Refinitiv, noted a modest increase in predicted gains over the next 12 months.

International Equities

The S&P 500 was also weaker over August, falling 1.8%. All of the other major global share indexes that we follow were also negative. However, the year-to-date gain for the S&P 500 is an impressive +17.4%. Japan’s Nikkei is even more impressive having risen 25.0% so far this year.

Bonds and Interest Rates

The Fed did not meet in August but it raised its cash interest rate at the end of July by 25 bps to a range of 5.25% to 5.50% (the highest in 22 years) in a widely telegraphed move. The probability of a further rate hike at the Fed’s September 20^th meeting has been priced at around 10% to 20% since the last hike. However, the odds only just favour no hike at the November 1^st meeting.

We agree that the Fed will likely pause interest rate increases this month despite Powell’s sabre-rattling talk of the prospect of further interest rate increases at the Jackson Hole conference in Wyoming of the world’s central bankers. We think there might be enough additional evidence in inflation, jobs, and growth data over September to convince the Fed to pause again at its November meeting.

By the final Fed meeting of the year on December 13^th, we think it likely that there is only a very minor chance the Fed would contemplate a further interest rate increase. We think the ‘interest rate cutting debate’ will start around that time as the earlier interest rate increases will have slowed the economy. We anticipate the conversation will turn to when stimulus measures (interest rate cuts) could begin in the first quarter and most likely before June 2024.

The RBA should be encouraged by the latest monthly Inflation data to hold off on increasing our interest rate further. The RBA interest rate tracker app on the ASX website prices in an interest rate increase at 0% in September and 14% for a rate cut. While we are certainly supportive of no further rate increases in the near term, we think October is also a bit too soon for a cut, only 18 days into the tenure of the new RBA governor Michele Bullock.

Without going through the details of what all of the other major central banks did and might do, it does seem that there is overwhelming support for global interest rates being at or near their peaks. Except for Japan and, to some extent, Switzerland whose economies have not followed the same path of rapid rises in inflation in recent years.

Other Assets

The price of oil was slightly up over August.

The price of iron ore rose 5.6%. The price of copper fell 4.0%. The price of gold was down fractionally. The Australian dollar depreciated 2.9% against the US dollar over August.

Regional Review

Australia

Cracks are starting to appear in the Australian economy. Growth in inflation-adjusted retail sales data have been negative for three successive quarters. Westpac’s consumer sentiment indicator has been hovering around a score of 80 (compared to 100 for a neutral reading) for about nine months. This read is worse than during the GFC but not quite as bad as that in the depths of the 1990/91 recession.

Even the jobs report has started to show weakness but, given the sampling error range associated with using a very limited data set, one month of weakness is insufficient to call it problematic yet. It is reasonable for businesses to hold on to workers longer than seemingly necessary because of the cost of re-hiring when the economy bounces back. And on the supply side, workers losing jobs in times of downturns might accept inferior positions to keep their cash flow going. However, history shows us that labour markets can then sour quite quickly.

The RBA is predicting 1.75% p.a. economic growth in 2024 and 2% in the following year. We see that scenario as being an optimistic one. Because of lags in the system, the full force of the high interest rates will not be felt until 2024.

Meanwhile, wages growth has not yet been a problem. Wages grew by 0.8% in the June quarter or 3.6% over the year. Workers are still playing catch up to the pandemic induced high inflation period during 2020 – 2022. As yet, there is no wage-push inflation (i.e. wages increase at a rate faster than productivity).

With China saving our economic bacon in 2008/9, we avoided a recession when the rest of the world went into what some called ‘the Great Recession’. This time China is struggling to manage its own economy. It is hard to see from where a silver bullet might be fired to stave off the effects of higher interest rates and inflation on the Australian economy.

China

Chinese data released in August were weak almost across the board. Retail sales, industrial output, and fixed asset investment were slow in absolute terms and all missed ‘weak’ expectations.

The purchasing managers index (PMI) for manufacturing was below the threshold ‘50’ level for the last five months but, at least, there were small improvements over the last three months. At 49.7 for August, the PMI easily beat the expectations of 49.4. We’re not talking about a collapse. It is just taking time for the economy to recover from the three-year shutdown. But there are signs of deep-seated debt problems arising in the property sector.

More disturbing is the deflation that appears to be underway in China. The broad inflation measure the Consumer Price Index (CPI) was ‑0.3% in the latest month when ‑0.4% had been expected. The Producer Price Index (PPI) was ‑4.4% against an expected ‑4.2%. Deflation is thought to be bad because it incentivises delaying purchases until those goods and services become cheaper.

US

US inflation statistics – and there were many variants published in August – were largely interpreted as showing that there was more work to be done before the fight against inflation can be considered won. Assessing US inflation with a measure that gives more weight to the most recent data, we concur with this assessment. Of course, we need to see this trend of softening inflation data confirmed in the coming months before we are comfortable enough to call a victory, but the trend has been for a steadily improving read over most of 2023.

The headline jobs number at 187,000 was big enough for many to conclude that the US economy is still strong however, what is concerning to us is that jobs in many of the growth sectors were small or negative and the data relies of government jobs for its overall level.

The June quarter GDP growth was revised downwards to 2.1% from 2.4%. The Fed considers 1.8% to be the neutral growth rate as far as inflation pressure is concerned, indicating an improving situation for inflation fighting – but still some work to do.

With credit ratings agency Moody’s downgrading credit worthiness for 16 US Banks (or putting issuers on negative watch) is disturbing. This change in ratings is no doubt the fall-out from the regional banking crisis that started in March. The combined credit tightening, the Fed interest rate well above its neutral rate, and the Quantitative Tightening programme (the Fed paying back on more maturing bonds than it is issuing new ones) appears to be building up to produce a downturn in the US economy. Whether this results in a recession and how deep that recession is, should it eventuate, remains to be seen.

Europe

The Bank of England (BoE) is still on a tightening cycle. Its latest 25 bps increase to 5.25% takes its cash interest rate to the highest in 15 years. CPI inflation stands at 6.8% over the year.

Britain has a different problem to that of Australia or the US, it reportedly took up the green energy challenge with more gusto than most – and found itself caught out by the supply-side energy price inflation. It is not easy to mitigate the impact of such a major policy shift.

EU inflation came down to 5.3% from 5.5% and its economic growth jumped back to positive territory after two consecutive quarters of negative growth. The first recession might be over but the next might not be far behind.

Rest of the World

Japan’s inflation declined further from its recent high to 3.1%. While Japan’s GDP growth came in at an impressive 6.0% (annualised) for the June quarter, the headline result masked the underlying compositional issues. Consumption growth was negative and capital expenditure was flat. However, retail sales jumped 6.8% (annualised) in July against an expected 5.4%.

Another hold decision from the RBA for the second month in a row is increasing confidence amongst economists and consumers that we have reached the end of the interest rate hiking cycle. This confidence is apparently having a flow-on effect on the property market with some suburbs showing accelerated median price growth compared to Australia as a whole.

Since February, dwelling prices have risen 4.1% across Australia, however, Sydney alone has risen 7.6%. Many potential sellers are under the belief that the current is not a good time to sell due to a soft price market, however, once the news travels that property prices are up and demand is low, a flood of properties will likely come to ease the price hikes.

Refinance activity, driven by fixed-rate expiry and general price hikes, is still continuing in earnest. Lender assessment times have slowed as credit assessment teams struggle to keep up with demand, and an influx of junior credit assessors means that assessment in general takes longer.

A shift in client retention strategy from the lenders is evident across the board as lenders adapt to higher interest rates (with higher margins for them) and also a lack of cash-back to entice borrowers. In general, some lenders seem to be offering significantly better interest rates via their retention team for those clients who do ask, or for the broker that regularly reviews their clients’ lending.

The cash-rate outlook has been changing readily over the past weeks. The general consensus is that this seems to be the end of the ‘tightening cycle’ however the board has previously indicated they will be driven by the data so if consumers keep spending, the rates will keep rising.

Savings and investments are both strategies that share a common financial goal – to grow your wealth. Despite this key similarity, there are a few differences between the two, and finding the right balance can assist you in building a more stable financial future.

Navigating the decision of when to save and when to invest can be challenging, so we’ve provided some tips below to help you decide.

Savings

As we know, savings form from setting aside a portion of your income into a low-risk savings account that can accrue interest over time… but when is it best to do so?

When to save:

• If you’ll require the money in the next few years – when working towards a goal that you know you’ll require funds for in the near future, a savings account offers enhanced liquidity and flexibility.
• If you haven’t already built up an emergency fund to cover unexpected expenses – it is often recommended to have an emergency fund set aside should something happen and you are unable to work. This is also useful before implementing an investment strategy, as it can help mitigate potential risk.
• If you have a low appetite for risk – if your risk tolerance is low, you may feel more comfortable putting your money into a savings account as opposed to investing which can be unpredictable and carries a higher level of risk.

Investments

Investments involve putting your money into assets with the expectation of generating returns over time and can include stocks, bonds, real estate, and more. As already mentioned, one of the key differences that set investments and savings apart is the level of risk, so consider the following scenarios before proceeding:

When to invest:

• If you don’t require the money for a longer period of time e.g., five years – investments take time and patience and are not typically intended as a short-term strategy. If you’re comfortable with not accessing your funds until the distant future, you may be ready to invest.
• If you have a cash emergency fund to help manage the risks of investing – no one can predict what the markets will do with 100% accuracy, so it’s recommended to have an emergency fund as a buffer against unforeseen events.
• If you’re comfortable with taking some risk to build your wealth – the world of investing is unpredictable, continuously changing, and at times, volatile. Understanding and accepting the level of risk before proceeding may instil you with more confidence throughout the process.

By striking the right balance between savings and investments, you can pave the way towards a more secure financial future. If you’d like to tailor a strategy that aligns with your goals, get in touch with your financial adviser.