Category: Australia & NZ

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Australian job growth surprise

Australian jobs grew by a surprising 50.2K, compared to consensus estimates of 20K, with total employment reaching 14.4 million.

Australian Jobs

But employment per capita remains steady at 64% because of the huge swell in immigration.

Australian Jobs per capita

The unemployment rate ticked up to 4.1%, while trend remained steady at 4.0%, as the participation rate grew.

Unemployment Rate

Total hours worked increased to 1.97 billion, a 1.3% increase in the trend since June 2023.

Total Hours Worked

Average hours worked (trend) declined to 136.6 hours in June, from 138.6 hours 12 months ago, reflecting slowing demand growth.

Total Hours Worked

Conclusion

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.

China Deflation

Acknowledgements

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Australian Outlook | Chris Joye

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.

Conclusion

We expect strong inflationary pressures in the next decade as governments run large fiscal deficits. Additional government spending is needed to:

  1. Address the energy transition from fossil fuels to renewables and nuclear;
  2. On-shore critical supply chains; and
  3. Increase defense spending in response to geopolitical tensions.

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.

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Australia: Resilience or recession, it depends where you look

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.

Judo Bank/S&P Global Composite PMI

The Manufacturing PMI continues to signal contraction (below 50) but the rate slowed to 49.6 in both April and May.

Judo Bank/S&P Global Manufacturing PMI

The Services PMI continues to flag expansion, however, but at a slower rate of 53.1 compared to 53.6 in April.

Judo Bank/S&P Global Services PMI

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.

Unemployment

Real per capita income tells a more depressing tale for consumers, declining more than 5.0% p.a. in 2023.

Real Per Capita Disposable Income

Household mortgage arrears have climvbed to 0.70%, the highest rate in the last 8 quarters.

Mortgage Arrears

Source: Equifax

Insolvencies

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.
Insolvency Trends

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.

Days Beyond Terms

Source: Equifax

Cyclical Sectors

The construction sector has been hard hit, with 2758 insolvencies, or 2.1% of all business entities, in Q1 of 2024.

Construction Insolvency

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.

Insolvency Volumes by Sector

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.

Trade Payments

Source: Equifax

Conclusion

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.

Real GDP per Capita

Construction and Accommodation & Food Services are the largest cyclical employers in the economy:

Employment by Sector

Household finances may receive a boost from the latest budget but unemployment is expected to rise as the number of small business failures increases.

Acknowledgements

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Made in Australia

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%.

Unemployment

The economy is growing, with aggregate hours worked rising to 1,962m in April. The trend (light blue) still points upward.

Aggregate Monthly Hours Worked

Wage Rates

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.

Wages Index

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.

Real Wages

Made in Australia

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.

Electricity Prices in US$/kWh

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.

Conclusion

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.

Acknowledgements

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ASX sector performance

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.

ASX 200

The 6-month chart shows the up-trend losing momentum. Breakout above 7900 is less likely but would offer a target of 8200.

ASX 200

Economy

The real cash rate (cash rate minus CPI) remains close to zero, reflecting easy monetary policy despite rate hikes in 2023.

Real Cash Rate

But declining credit growth warns that economic growth is slowing.

Credit & Broad Money Growth

Consumer sentiment is lower than in the 2008 financial crisis — the result of high inflation from negative real interest rates after the pandemic.

Consumer Sentiment

Sectors

The 6-month chart of Financials shows the up-trend losing momentum, as with the ASX 200.

ASX 200 Financials

Net interest margins of the major banks remain under pressure.

Major Bank Net Interest Margins

Consumer Staples are in a down-trend after breaking primary support (red below). Trend Index peaks at zero warn of selling pressure.

ASX 200 Staples

A-REITs are still in an up-trend but declining Trend Index peaks warn of selling pressure.

ASX 200 A-REITs

Health Care threatened a primary down-trend after breaking support at 42K but has since recovered — a bullish sign.

ASX 200 Health Care

Consumer Discretionary is also losing momentum — similar to Financials.

ASX 200 Discretionary

Telecommunications are in a strong down-trend, with the Trend Index breaking below zero.

ASX 200 Telecommunications

Information Technology is outperforming, with accelerating trendlines and rising Trend Index troughs above zero.

ASX 200 Information Technology

Utilities is another bright star, displaying similar accelerating trendlines and rising Trend Index troughs above zero.

ASX 200 Utilities

Energy is testing primary support at 10K with a bearish Trend Index declining below zero.

ASX 200 Energy

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.

ASX 300 Metals & Mining

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.

All Ordinaries Gold Index

Conclusion

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.

Acknowledgements

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Australian CPI disappoints

CPI disappointed, coming in at 1.0% for the March quarter, against expectations of 0.8%. The year-on-year measure declined to 3.6% but there are some worrying signs for the RBA.

Australian CPI

Non-tradable inflation — reflecting domestic goods and services as opposed to imports — remains high at 5.0%.

Australian CPI - Non-Tradable

That includes rent inflation which jumped to a year-on-year rate of 7.8%.

Australian CPI - Rent

It is also distorted by low electricity price inflation at 2.0% which has been adjusted downwards by inclusion of government Energy Bill Relief Rebates. The increase before rebates is 17.0% according to the ABS.

Australian CPI - Electricity

Alex Joiner from IFM Investors shows the Sticky Inflation rate for Australia, calculated using the Atlanta Fed methodology, is at a similar rate to non-tradable inflation:

Australian CPI - Sticky Inflation

Conclusion

Prospects of rate cuts from the RBA in 2024 are fading. Long-term government bond rates jumped on release of the report, with the 10-year AGB yield rising to 4.38%. Rising long-term rates are bearish for stocks but particularly for A-REITs.

ASX 200 A-REITs

Acknowledgements

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Australian consumer sentiment

The Westpac Melbourne Institute Consumer Sentiment Index declined 2.4% to 82.4 in April, from 84.4 in March.

Consumer Sentiment Index

The pessimism that has dominated the consumer mood for nearly two years now is still showing few signs of lifting. The latest Index read is well below the ‘neutral’ level of 100, meaning pessimists outnumber optimists by over 15ppts. It is also in line with the average recorded over the last 24 months, marking an extended period of bleak sentiment reads by historical standards. Indeed, outside of the deep recession of the early 1990s, this is easily the second most protracted period of deep consumer pessimism since we began surveying in the mid-1970s, with all other sentiment slumps lasting nine months or less.

Source

Westpac: Consumer sentiment sinks back towards historic lows, 9 April 2024

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Rising Crude and Gold warn of inflation

Brent crude continued its advance, closing at almost $89 per barrel on Tuesday. Our target is $94 per barrel would increase inflationary pressure in the months ahead and possibly delay Fed rate cuts.

Brent Crude

Rising crude oil prices have forced cancellation of plans to restock the strategic petroleum reserve (Bloomberg). US crude and petroleum inventory (including SPR) is testing the lows from January 2023.

Crude & Petroleum Inventory

Treasury Market

10-Year Treasury yields broke resistance at 4.35% but is retracing to test the new support level. Respect would confirm an advance to test resistance at 5.0%. Failure of support is less likely but would warn of another test of 4.05%.

10-Year Treasury Yield

Federal debt at 120% of GDP, deficits of 6% of GDP, and a growing interest rate burden limit the available options.

Federal Debt/GDP

The Fed can suppress long-term interest rates but the cost — in terms of inflation — is likely to be high.

Federal Debt Interest Burden

The US is well along the path to fiscal dominance as explained in this 2023 paper from the San Francisco Fed:

Fiscal dominance refers to the possibility that the accumulation of government debt and continuing government deficits can produce increases in inflation that “dominate” central bank intentions to keep inflation low….If global real interest rates returned tomorrow to their historical average of roughly 2 percent, given the existing level of US government debt and large continuing projected deficits, the US would likely experience an immediate fiscal dominance problem. Even if interest rates remain substantially below their historical average, if projected deficits occur as predicted, there is a significant possibility of a fiscal dominance problem within the next decade.

The essence of fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts. The use of non-interest-bearing debt as a means of funding is also known as “inflation taxation.” Fiscal dominance leads governments to rely on inflation taxation by “printing money” (increasing the supply of non-interest-bearing government debt).

The rise in Gold — currently at $2270 per ounce — reflects bond market fears of an inflation rebound.

Spot Gold

The same inflation fears are also driving demand for stocks.

S&P 500

US Economy

The US economy continues to display resilience, with job openings holding steady at 8.8 million in February, exceeding unemployment by a wide margin of 2.3 million.

Job Openings & Unemployment

Light vehicle sales remain robust at a seasonally-adjusted 15.8 million annual rate in February, reflecting consumer confidence.

Light Vehicle Sales

However, heavy truck sales (41.6K in February) are trending lower — with the 6-month moving average crossing below the 12- month MA — reflecting declining business confidence.

Heavy Truck Sales

Conclusion

The economy remains robust but fears of an inflation rebound are growing, fueled by rising crude oil prices and large fiscal deficits. The odds of Fed rate cuts in the second half of the year are shrinking but there are still two possible scenarios:

  1. A sharp decline in economic activity could still prompt the Fed to cut rates despite inflationary fears. That would be a strong bear signal for stocks.
  2. Fiscal dominance, with the deliberate use of inflation as a tax in order to restore the ratio of debt-to-GDP to more sustainable levels. This involves shrinking the public debt in real terms by expanding GDP through inflation. A strong bull signal for real assets such as Gold, Stocks and Commodities.

Acknowledgements

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Australian jobs & GDP

Great research note by Gareth Aird at Commbank, where he predicts that the unemployment rate in Australia will rise to 4.5% by the end of 2024.

The latest ABS report showed unemployment dropped to 3.7% in February, while the trend remained at 3.8%.

Australian Unemployment Rate

Aird says the sharp rise in employment (green below) in February is at odds with Commonwealth Bank data on the number of salary payments transferred into CBA accounts. The annual percentage change (blue) is declining steeply.

Australia: CBA Salary Payments (Number)

He says that the labor market should not be viewed in isolation but assessed against GDP data. GDP growth is falling and negative per capita GDP growth — indicating a per capita recession in the last three quarters — reinforces that the economy is growing below trend.
Australian Quarterly GDP

It is unusual to have such strong growth in employment in a slowing economy that is running well below trend. But it’s not unprecedented.

However, the trend in employment (blue) is still declining and ABS research (according to Aird) has previously shown that trend data is “superior” to seasonally-adjusted data (red).

Australian Employment Trend

Declining Seek job ads (blue below) since May ’22 also show that the tight labor market is now easing.

Australia: Seek Job Ads

Conclusion

The Australian labor market is expected to weaken in 2024, with the unemployment rate rising.

Poor employment growth is likely to drag GDP growth even lower.

Commbank project three RBA rate cuts of 25 basis points each, commencing in September 2024, based on a deteriorating employment market. Our own view is  less certain, given the potential of higher crude oil prices to increase inflationary pressures and slow RBA monetary easing.

Acknowledgements

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Nuclear: “Energy security is national security”

Dr Stephen Wilson, Professor of Energy Management in the School of Mechanical & Mining Engineering at the University of Queensland, debunks the latest CSIRO Gencost report.

Conclusion

LCOE should not be taken seriously. The cost of energy rises as the percentage contribution from renewables grows.

Failure to address energy security is a national security issue.

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