Retail Sales Scream Recessionary – If You Look Under The Hood!

We got the January 2024 retail data from the ABS today, and they reported that Australian retail turnover rose 1.1 per cent (seasonally adjusted) in January 2024. This follows a fall of 2.1 per cent in December 2023 and a rise of 1.5 per cent in November 2023.

Economists were divided on what to expect, with some looking for 1.5% monthly rebound, while others like Westpac were expected just a 0.3% rise.

The National Retail Association said the latest trade figures reveal the uphill struggle retailers face in 2024 if consumer sentiment remains low and trade continues to slow, despite Australia’s population boom. While data reveals that retail turnover has stalled, population growth and increasing costs of doing business show retail growth has actually fallen in real terms.

The ABS said “The rebound in January follows a sharp fall in December when consumers pulled back on spending after taking advantage of Black Friday sales in November. Retail turnover is now back at a similar level to September 2023.

But as Westpac notes, the pattern reflects difficulties the ABS is having adjusting for shift in seasonal patterns associated with the increasingly popular ‘Black Friday’ sales. Pinpointing these shifts is difficult and typically requires the accumulation of more months of observations. Volatility is progressively smoothed as this happens – notably today’s release again saw a softer profile through November (initially estimated as a 2% surge) and December (initially reported as a 2.7% drop).

However, this volatility has concealed a material slowing over the three months. On a 3mth basis, nominal retail sales growth has slowed to just 0.5%qtr, 1.4%yr, neither keeping pace with price inflation.

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Inflation Drifts Lower For Now, But…

The CPI data out today was meaningless, in terms of guiding a rate cut decision. So today I will explain why this is the case, as we go over the numbers. Alongside the main release, there was a second report on revised weights which were applied.

The Australian Bureau of Statistics (ABS) released its monthly inflation indicator for January, which were based on revised weights to the index, and we should also highlight that the first month of the quarter data is at best partial, as while it does provide us with an update on household durable goods the services data apart from garments repairs, hire and maintenance and repairs to dwellings.

Or in other words, the Numberwangers are at it again, despite the rather triumphant tones in some of the media about the prospect of rate cuts.
While the RBA still considers the quarterly CPI as the best gauge of inflationary pressures, the new monthly indicator factors into the central bank’s interest rate decisions when it delivers an unexpected outcome.

The result was a 3.4% rise over the year, below economists’ expectations of a 3.5% rise. 3.4% in the year to January, is in line with the outcome recorded in December to remain the equal softest print for monthly inflation estimate since November 2021.

When excluding volatile items from the monthly CPI indicator, the annual rise in January was 4.1%, down from 4.2% in December” and annual inflation when excluding volatile items has been declining since the peak of 7.2% in December 2022.

The Trimmed mean (core) inflation also fell to 3.8% in the year to January (prior 4.0%).

The RBA does not expect inflation to return within its 2 per cent-to-3 per cent target band until December 2025. And there is not enough here, in my view to lead the RBA one way or the other, though the door remains open, possibly for a rate cut towards the end of the year, unless we see a second surge in good prices due to higher transport costs, and higher wages pushing though to higher goods and services costs.

The bottom line is while the figures were a little lower than market expectations for inflation to increase to 3.6 per cent, they are unlikely to alter the outlook for monetary policy due to the volatility of the monthly consumer price index.

And by the way, the Aussie Dollar dropped a bit – but only after the Reserve Bank of New Zealand held the cash rate there, and signalled rate cuts, eventually.

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DFA Replay Q&A: A Mortgage Broker’s View Of The Property Market: With Chris Bates

This is a recorded version of my latest live show in which I discussed the current state of play of the property and mortgage markets with Chris Bates. Chris started as a Financial Adviser back in 2007 and sold his Financial Advice business in 2020. Over the past 9 years, Chris has grown into one of Australia’s top Mortgage Brokers and is passionate about taking the product providing industry to a trusted advice based profession.

Previously Weathful, Chris, and the team decided, in 2023, to rebrand and are now ‘Blusk’ – a name that better encapsulates the feeling they achieve for their clients. And further changes are afoot, as you will see on the show.

He is known for regularly airing his views on sound property investing on both LinkedIn and popular property industry podcasts The Elephant in the Room and Australian Property Podcast.

Find out more beforehand by watching this show: Many Households Are In Trouble – Mate! https://youtu.be/np4H9RkPqEo

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The Rental Market Is Broken…

In my latest surveys we showed that cash flow stress among households has risen to an all time high of 73.47% or more than 2.27 million households.

Mapping the Market data from CoreLogic shows the high proportion of areas where house rents have risen by 20% or more across Sydney, and Melbourne, those here, some areas especially to the east of the city did not follow suite. House rents in Brisbane showed more diversity, though central Brisbane saw consider considerable hikes. Adelaide and Perth also had many hot spot areas across house rentals, with some areas to the east of both CBD’s reporting slower growth rates over the past year.

That said, Canberra and Hobart bucked the trend with little or no growth – of course there are rents controls in the ACT which helps to moderate rents.

All this means that for many renters the ability to house themselves has become even more expensive, and this of course flows through into the inflation data with all rents – not just new rents running close to 10% annualised. It’s a real mess, and leading to real social consequences.

Then again, there are some winners as according to data from SQM Research residential landlords in some inner-city and middle ring suburbs pocketed up to $56,000 extra rental income in the past 12 months as rents hit record highs across the major capital cities.

A critical factor here is that some landlords, sitting on strong capital gains, are looking to crystalize their paper profits so have listed their rental property for sale, a trend we see most strongly in Melbourne, but it is spreading elsewhere. In addition, higher rents are not enough to cover the increased mortgage costs, even after negative gearing, so the supply of rental property is on the decline at a time when migration continues to run hot.

The Rental Market Is Broken but do those in political circles want to tackle this critical issue? Lip-service apart, I suspect not. So to that extent, Australia in broken too.

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The Costs Of Higher Interest Rates

Introduction

Using data from various sources including the RBA and APRA, we have estimated the gross and net additional payments households are making to financial institutions in Australia, following the RBA cash rate lifts from May 2022 to date.

We have only included owner occupied and investor loans, as these are the main foci of debt, but of course higher rates have also been applied to SME’s, personal loans and credit cards, but these are excluded from this analysis.  These findings are indicative only.

Approach

We took the loans outstanding data from the RBA monthly series, for both owner occupied and investor loans from their monthly series. We took the average interest rate charged on these loans again from relevant RBA data sources. We also took the total deposit pools held by the banks, using data from APRA (authorised depository institutions) and the typical interest paid from the RBA rate series.

During the period under review, the net value of loans and deposits grew, so we used the average balance each month. We applied the average interest rate charged to each balance, and compared the outcome in May 2022 to December 2023, the period over which interest rates rose.  The different between the May 2022 to December 2023 is the gross increase in payments households were forced to make.

We also provided a net offset calculation because banks in the period also provided higher rates, at least to some extent on deposits, calculated with a similar method. These payments went to different households of course.

Note we have not included any assessment of capital being repaid during this period, as we worked on gross average balances. But this effectively isolates the impact of the higher rates.

Results

On a gross basis, banks received an additional $49.52 billion on an annualised basis between May 2022 and December 2023, on owner occupied loans, and $22.5 billion on investment loans. Together this is worth around $70 billion annualised. This translates to $4.13 billion per month for owner occupied loans and $1.88 billion for investor loans.

Turning to deposits, banks paid out and additional $44.09 billion on an annualised between May 2022 and December 2023, or $3.67 billion per month.

Offsetting the deposit interest paid to the mortgage interest received, Banks received an additional $26.1 billion from households on an annualised basis, or $2.17 billion per month.

We would also make the point that the interest paid by some households are generally returned to asset rich savers, not the same households. So it would be appropriate to cite the gross impact, rather than the net impact if this distinction is made.

This is in addition to returns deposited with the RBA under the Term Funding Facility.

Which Households Are Hurting The Most – According To The RBA?

Reserve Bank governor Michele Bullock was back in front of the bright lights, appearing at a House Economics Committee Hearing on Friday.

I have selected the edited highlights in this show, from the 3 hours of questions, and have included some of her statements. While she didn’t add a whole lot more to what she said at Tuesday’s press conference, she emphasised two points that should give pause to those expecting multiple rate cuts this calendar year.

The first was in response to a question on inflation expectations: by the time inflation gets back to the midpoint of the target band of 2 per cent to 3 per cent, as required by the RBA’s new mandate – which occurs some time beyond the middle of 2026 on the RBA’s latest forecasts – inflation will have been outside the target range for four years, which is right on the edge of what the RBA will tolerate.

The second was on productivity.

But she also touched on the risks in the forecasts, the impact of the Bank of Mum and Dad, and other distributional impact questions across households. Frankly, I found this unconvincing. So the think the RBA has much to do to gain a better set of insights into the current state of play!..

Let me know what you think in the comments!

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Which Households Are Hurting The Most - According To The RBA?
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Which Households Are Hurting The Most – According To The RBA?

Reserve Bank governor Michele Bullock was back in front of the bright lights, appearing at a House Economics Committee Hearing on Friday.

I have selected the edited highlights in this show, from the 3 hours of questions, and have included some of her statements. While she didn’t add a whole lot more to what she said at Tuesday’s press conference, she emphasised two points that should give pause to those expecting multiple rate cuts this calendar year.

The first was in response to a question on inflation expectations: by the time inflation gets back to the midpoint of the target band of 2 per cent to 3 per cent, as required by the RBA’s new mandate – which occurs some time beyond the middle of 2026 on the RBA’s latest forecasts – inflation will have been outside the target range for four years, which is right on the edge of what the RBA will tolerate.

The second was on productivity.

But she also touched on the risks in the forecasts, the impact of the Bank of Mum and Dad, and other distributional impact questions across households. Frankly, I found this unconvincing. So the think the RBA has much to do to gain a better set of insights into the current state of play!..

Let me know what you think in the comments!

http://www.martinnorth.com/

Go to the Walk The World Universe at https://walktheworld.com.au/

Australian Households Pay More Because The System Is Rigged: Report

You have been hit by large rises in grocery, energy, transport, child and aged care prices, only adding to other cost of living pressures, according to a bombshell report. But the report argues the ongoing cost of living crisis is largely due to corporations unduly increasing prices.

As the Conversation reported, while extreme weather and supply delays have contributed to the increases, an inquiry into what’s causing the hikes has confirmed what commentators and consumers suspected – many sectors are resorting to dodgy price practices and confusing pricing.

Headed by the former Australian Consumer and Competition Commission (ACCC) boss, Allan Fels, on behalf of the ACTU, the inquiry found inflation, questionable pricing practices, a lack of price transparency and regulations, a lack of market competition, supply chain problems and unrestricted price setting by retailers are to blame for fuelling the increases.

The inquiry, which released its final report on Wednesday, is one of four examining price rises. The other three are being undertaken by a Senate committee, the Queensland government and the ACCC, which has been given extra powers by the government.

The official inflation rate in Australia peaked at 7.8% in December 2022 and has been gradually dropping since then.

While the inquiry found higher prices contributed to inflation, it reported that businesses claimed it was inflation that caused price rises – making it a chicken-or-egg kind of problem.

However, many businesses made enormous profits in 2022-23, which the inquiry said contributed to rising prices and inflation. In most cases, post-pandemic profit margins were much higher than before the pandemic.

The current pricing practices for all business sectors must improve for greater transparency and to protect Australian consumers from unfair pricing.

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Australian Households Pay More Because The System Is Rigged: Report

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Many Households Are In Trouble – Mate!

We walk through the latest from our surveys and modelling ahead of our live show which will be on 13th February 2024 at 8pm Sydney where we will look at specific post codes in more detail.

Household financial stress continues to bite, and is spreading into many different types of communities.

Ahead, we do not expect cash flow to improve for many, as mortgage rates will not be falling very soon, the costs of living continue to rise and income growth in real terms is muted, at best.

If you want data on a specific post code, put it in the comments and I will either cover it Tuesday week, or via a separate show.

If you want to get the full data set, this is available via Patreon: https://www.patreon.com/DigitalFinanceAnalytics

Our One to One Service is also available: https://digitalfinanceanalytics.com/blog/dfa-one-to-one/

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