Seasonally adjusted retail sales grew by 0.5% in volume terms in the September quarter.
The headline number, however, disguises the underlying stress consumers are experiencing. Per capita retail sales are falling steeply.
The RBA is unlikely to act on this, however. Instead, it will focus on headline numbers like dwelling approvals, which have broken their recent downtrend.
A November rate cut remains unlikely.
A strong September jobs report boosted the ASX 200 to a new high of 8355, confirming our target of 8500 for this year.
The Australian economy added a seasonally adjusted 64,100 jobs in September, according to the latest Labour Report, well above expectations of 25,000.
The unemployment rate remained steady at 4.1%.
The surge in jobs was absorbed by an increase in the participation rate to a robust 67.2%.
Aggregate hours worked also improved to 1,968 million in September, a 0.3% increase compared to the 0.2% average over the past 12 months.
Strong labor conditions failed to inspire business confidence, with NAB business confidence (black below) declining to -6 pts in the third quarter.
Wage costs were the number#1 issue affecting business confidence:
The Mining industry (red below) recorded a sharp drop in confidence.
The ASX 200 rallied through resistance at 8300, confirming our year-end target of 8500.
The ASX 200 rally was led by a strong surge in Financials, which is headed for a test of resistance at 8600.
The ASX 300 Metals & Mining Index remains tentative, weighed down by falling demand from China. Breach of support at 5600 would warn of another test of long-term support at 5000.
On the other hand, the All Ordinaries Gold Index is testing its July 2020 high at 9500. Breakout would offer a long-term target of 14500. The soaring gold price and falling energy costs have boosted margins, with diesel a substantial cost in extraction and transportation.
A strong jobs report boosted the ASX 200, which recorded a new high of 8355, confirming our target of 8500 for the year.
Strong employment growth suggests that the RBA is unlikely to cut interest rates before next year. Instead, the hawks will be keeping a beady eye on inflation.
Business confidence remains low, with Mining especially hard hit by sluggish demand from China.
The Financials sub-index is headed for a test of resistance at 8600. Breakout would offer a medium-term target of 9200. The All Ords Gold Index is also bullish, testing its 2020 high of 9500. Breakout would offer a long-term target of 14500. Metals & Mining, however, remain bearish.
Stocks retraced to test support on concerns over an escalation of hostilities between Israel and Iran and its potential threat to the flow of crude oil from the Middle East.
The S&P 500 retraced to test support at 5670/5700, but rising Trend Index troughs signal buying pressure. Respect of support will likely confirm another advance, with a target of 6000.
The equal-weighted index ($IQX) shows that large caps experienced a similar retracement.
Bitcoin is consolidating in a narrow “descending flag” channel. Marginally lower troughs are typically a bullish sign, reflecting support. Upward breakout from the channel would signal a fresh advance, confirming strong liquidity in financial markets.
Increased demand for safety drove 10-year Treasury yields lower, again testing support at 3.7%.
The Dollar strengthened, benefiting from the same flight to safety.
Gold retraced to test support, but the flight to safety will likely fuel another rally, breaking resistance at $2,700 per ounce.
Silver found short-term support at $31 per ounce and will likely re-test long-term resistance at $32.
The ISM Manufacturing PMI continues to signal contraction, holding steady at 47.2%.
The New Orders sub-index at 46.1% warns of further slowing ahead.
So does the Employment sub-index at 43.9%.
The Prices sub-index surprised, dropping below 50% for the first time since the beginning of the year, reflecting declining inflationary pressures.
Job Openings also surprised, increasing to 8.04 million in August. The gap above unemployment indicates continued labor market tightness.
Brent crude is rallying on fears of an interruption to oil supplies from the Middle East.
Escalation of hostilities between Israel and Iran is likely to fuel a flight to safety, increasing demand for Treasuries, gold, and silver.
We expect the S&P 500 to retrace to test support at 5670. Crude oil is likely to rally but remain in a bear market unless Iran attempts to interdict shipping in the Straits of Hormuz and the Red Sea through its Houthi proxies in Yemen.
The ISM PMI warns of a slowing manufacturing sector, but there has been no significant decline in cyclical sector employment so far. Job openings also maintain a healthy gap above unemployment, indicating a still-tight labor market. The economy is expected to remain reasonably robust until the new year, when liquidity may tighten as the US Treasury likely reduces T-bill issuance, replacing them with longer-term coupons.
A tall shadow on the ASX 200 indicates short-term selling pressure and a likely retracement to test its new support level at 8100.
Financials continue their advance, but gradually, with lower Trend Index peaks warning that buying pressure is fading.
The ASX 300 Metals & Mining Index hesitated after its recent rally and will likely re-test short-term support at 5200. Penetration of the descending trendline indicates that the downtrend has weakened, and a correction that respects support at 5000 would confirm that a bottom has formed.
Iron ore continues its downtrend as Chinese industrial demand weakens. A breach of support at $90 per tonne would confirm our target of $80.
However, the All Ordinaries Gold Index broke resistance at 8500, signaling another advance with an expected target of 9000.
The ASX 200 is retracing to test support at 8100. Respect will likely confirm another advance with a target of 8500. Financials and gold miners are strong, but iron ore remains in a downtrend with a long-term target of $80 per tonne.
The recently departed head of research says the RBA should have hiked rates higher to head off inflation, and the Board lacked the expertise to challenge the governor on rate decisions:
Australian jobs grew by a surprising 50.2K, compared to consensus estimates of 20K, with total employment reaching 14.4 million.
But employment per capita remains steady at 64% because of the huge swell in immigration.
The unemployment rate ticked up to 4.1%, while trend remained steady at 4.0%, as the participation rate grew.
Total hours worked increased to 1.97 billion, a 1.3% increase in the trend since June 2023.
Average hours worked (trend) declined to 136.6 hours in June, from 138.6 hours 12 months ago, reflecting slowing demand growth.
Westpac believe that the strong June labor report points to a soft landing ahead. We are more skeptical. Soft landings are often promised and seldom materialize.
China has reported deflation for the fifth quarter in a row. When your biggest trading partner suffers from deflation, it generally is bad news for you as well.
Central banks are too much under the sway of government and not doing enough to contain inflation. None worse than the RBA which is holding rates lower than they should be. The last time that we had inflation at 4.0% in 2008, the cash rate was 7.25%. Now the cash rate is only 4.35%.
RBNZ is far more independent and hiked their official cash rate to 5.5%. The NZ economy is in recession but they still face the threat of stagflation, with low growth and high inflation.
In Australia we have a negative output gap, where demand exceeds production capacity, far worse than in most other major economies. The only solution is to raise unemployment to lower demand. But RBA governor Michelle Bullock has publicly stated that the RBA is not looking to reduce employment.
The latest Australian government budget is highly stimulatory and likely to fuel further inflation.
The outcome is likely to be long-term inflation and higher long-term interest rates.
We expect strong inflationary pressures in the next decade as governments run large fiscal deficits. Additional government spending is needed to:
Long-term interest rates are expected to rise over the next decade, fueled by higher inflation.
Central banks may attempt to suppress interest rates by further expanding their balance sheets to buy long-term fiscal debt but that is short-sighted. Inflation would accelerate even higher.
Apart from the hardship to wage-earners, and the subsequent political chaos, high inflation would threaten bond market stability. Bond market investors would be reluctant to fund deficits when interest earned is below the inflation rate. Unless there are no alternatives.
That is why the long-term outlook for gold and silver is so bullish.
The Judo Bank/S&P Global Composite PMI Index for May continues to signal expansion (above 50 on LHS), albeit at a slightly slower rate of 52.6 compared to 53.0 in April.
The Manufacturing PMI continues to signal contraction (below 50) but the rate slowed to 49.6 in both April and May.
The Services PMI continues to flag expansion, however, but at a slower rate of 53.1 compared to 53.6 in April.
The May report was quite upbeat. Warren Hogan, Chief Economic Advisor at Judo Bank:
“The increase in the employment index to its highest level in more than six months suggests that private sector demand for labour remains strong, particularly in light of the weakness in consumer spending over the first three months of the year. The results are consistent with the official employment figures, which show an average monthly increase in total employment in Australia of around 40,000 in 2024, made up of both full-time and part-time jobs.
….The Flash PMI report points to resilience in Australia’s business sector despite ongoing cost pressures and skill shortages. Most impressive has been the ability for businesses to navigate this difficult operating environment as well as weak consumer spending. With the Government injecting more than $30bn into household finances in 2024/25 through cost-of-living relief and tax cuts, Australian businesses should be expecting to see some improvement in consumer spending.”
April unemployment rose to 4.1% in April despite the increase in hiring — the result of a workforce swollen by record-high immigration.
Real per capita income tells a more depressing tale for consumers, declining more than 5.0% p.a. in 2023.
Household mortgage arrears have climvbed to 0.70%, the highest rate in the last 8 quarters.
Source: Equifax
All is not well in the business sector despite the composite PMI signaling expansion. Insolvencies (green) soared to a monthly high of 1,136 in March.
Source: Equifax
Late payments are also rising, with the average days beyond terms rising to 6.5 days in Q1 of 2024, the highest since 2020.
Source: Equifax
The construction sector has been hard hit, with 2758 insolvencies, or 2.1% of all business entities, in Q1 of 2024.
Source: Equifax
Accommodation and food services had a lower number of insolvencies, at 1484 in Q1, but is a higher 3.3% of all entities.
Source: Equifax
Trade payment data also flags financial stress in the construction sector, with average days beyond terms rising to 12.3 days in Q1 of 2024, from 10.2 days in the preceding quarter.
Source: Equifax
Australia is already in a real recession, with real per capita GDP and real disposable income both falling. This is disguised by a massive surge in immigration which has kept aggregate GDP growth above zero.
Real GDP grew 0.2% in Q4 of 2023 but per capita GDP declined by 0.3%. Annual GDP growth of 1.5% for 2023 falls to -1.0% when measured per capita.
Construction and Accommodation & Food Services are the largest cyclical employers in the economy:
Household finances may receive a boost from the latest budget but unemployment is expected to rise as the number of small business failures increases.
The Australian labor market remains tight, even with unemployment rising to 4.1% in April. The trend (light blue) is at 4.0% — still well below its pre-pandemic low of 5.0%.
The economy is growing, with aggregate hours worked rising to 1,962m in April. The trend (light blue) still points upward.
The wage price index (WPI) ticked lower, to 4.09% for the 12 months to March ’24, while quarterly growth fell to 0.8% (3.2% annualized), warning of further slowing ahead.
The chart below, from Shane Oliver, shows how inflation has eroded real wages (blue) over the last three years. Slowing nominal wage growth suggests that workers are going to struggle to restore real income to pre-pandemic levels.
Treasurer Jim Chalmers revealed long-term plans to spend $22.7 billion on clean energy and strategic industries as part of Labor’s Future Made in Australia program. From the ABC (emphasis added):
Sydney-based SunDrive is one of the big winners of a budget that is investing major money into a “Future Made in Australia”.
The solar panel start-up has a new technology that replaces expensive silver with cheaper copper in a high-efficiency solar panel, developed from research done at UNSW.
But unlike previous Australian solar technology advances, which powered China’s dominance in producing panels, SunDrive’s founders want to manufacture at least some of their product onshore.
“Australia has led the world in solar innovation — today’s commercial solar cells were invented in Australia, Australia has held the world record efficiency for 30 of the last 40 years,” SunDrive CEO Vince Allen said.
“However, very little of the economic value that has been produced has been captured in Australia from its solar R&D efforts….”
Australia is unlikely to succeed in manufacturing any new technology at scale until it achieves structural reforms to boost the country’s international competitiveness. Costs of labor and energy are two of the largest impediments to establishing new industries here.
Australia enjoys similar median income to France, Germany, Canada and Japan — and similar electricity prices — but all of these countries are losing manufacturing industries to competitors with lower cost structures.
The biggest impediment for many poorer countries is political stability and corruption. Countries, with lower cost structures, that can solve these two challenges are likely to attract new industry to their shores.
Real wages in Australia have been eroded by inflation over the last three years. Most major political parties seem to agree that the way to address inflation is to encourage immigration to drive down labor costs. That has backfired, with rising shelter costs contributing to stubbornly high CPI. Real GDP per capita instead is falling as a result of high immigration and high inflation.
The Australian economy is largely supported by mining, housing and service industries. The only way for government to re-establish a manufacturing base here, is to attract new investment by addressing structural issues that cause high manufacturing input costs. Offering incentives for a few high profile projects does not address the underlying structural issues and leaves them reliant on government handouts for their existence.
The ASX 200 jumped sharply yesterday but ran into resistance at 7800 today. Declining peaks on the Trend Index warn of secondary selling pressure and another test of support at the recent lows (orange line) is likely.
The 6-month chart shows the up-trend losing momentum. Breakout above 7900 is less likely but would offer a target of 8200.
The real cash rate (cash rate minus CPI) remains close to zero, reflecting easy monetary policy despite rate hikes in 2023.
But declining credit growth warns that economic growth is slowing.
Consumer sentiment is lower than in the 2008 financial crisis — the result of high inflation from negative real interest rates after the pandemic.
The 6-month chart of Financials shows the up-trend losing momentum, as with the ASX 200.
Net interest margins of the major banks remain under pressure.
Consumer Staples are in a down-trend after breaking primary support (red below). Trend Index peaks at zero warn of selling pressure.
A-REITs are still in an up-trend but declining Trend Index peaks warn of selling pressure.
Health Care threatened a primary down-trend after breaking support at 42K but has since recovered — a bullish sign.
Consumer Discretionary is also losing momentum — similar to Financials.
Telecommunications are in a strong down-trend, with the Trend Index breaking below zero.
Information Technology is outperforming, with accelerating trendlines and rising Trend Index troughs above zero.
Utilities is another bright star, displaying similar accelerating trendlines and rising Trend Index troughs above zero.
Energy is testing primary support at 10K with a bearish Trend Index declining below zero.
The ASX 300 Metals & Mining index is attempting a recovery. Breakout above 6100 would be a bullish sign, while respect would warn of another test of primary support at 5600.
The All Ordinaries Gold index is in a strong up-trend. Respect of support at 7500 would signal another advance with a target of 8500. Breach of support, however, would signal another test of 7000.
The ASX 200 is losing momentum. So are Financials, A-REITs and Consumer Discretionary.
Staples and Telecommunications are in a down-trend and likely to be joined by Energy.
Health Care and Metals & Mining show signs of recovery but further confirmation is needed.
The All Ordinaries Gold index is in a strong up-trend. Respect of support at 7500 would confirm another advance but breach of support, while less likely, would test 7000.
