Markets
Local: The ASX200 index relatively underperformed, falling -2.6% over May, as investors reacted to the RBA hiking the cash rate to 0.35%
Global: The S&P 500 index lifted slightly by 0.2%
Gold: Gold fell sharply by US $60 to US $1,852 as rising global rates proved a headwind.
Iron Ore: Iron Ore prices dropped by US $6 to US $137/Mt as Chinas intensifying COVID restrictions and property cycle impacted demand.
Oil: Brent Oil climbed by US $12 to US $122/bbl.
Property
Housing: Housing markets lost more steam in May as a combination of higher interest rates, rising inventory levels and lower sentiment dampened conditions. CoreLogic’s Home Value Index (HVI) showed Sydney (-1.0%) and Melbourne (-0.7%) dwelling values continued to record the most significant month-on-month falls, while Canberra (-0.1%) recorded its first monthly decline since July 2019.
CoreLogic’s Research Director Tim Lawless said despite the 0.5% rise in housing values across Australia’s combined regional areas, it was not enough to keep the national index in positive monthly territory, with the national HVI down -0.1% in May, the first monthly decline in the national index since September 2020.
Economy
Interest Rates: The RBA increased the cash rate to 0.35% at the start of May and has recently increased by another 0.5% to hit 0.85% at the start of June. The first back-to-back rate increase in 12 years.
Retail Sales: Retail sales in Australia rose by 0.9% mom to another record level of AUD 33.9 billion in April 2022, unrevised from the flash figure and after a final 1.6% gain in March. This was also the fourth straight month of growth in retail trade, as the economy recovered further from COVID-19. Food retailing led the rise (1.9% vs 0.5% in March), amid increased household spending over the April holiday period.
Bond Yields: Australian government 10-year bond rose 22 bps to 3.34% from the previous month. In contrast, the US 10-year bond fell slightly by 5 bps to 2.84%
Exchange Rate: The Aussie dollar increased slightly against the American dollar, at $0.7184, and remained stable against the Euro at $0.669.
Inflation: The annual inflation rate is currently sitting at 5.1% reflecting surging oil and food prices globally. Many believe this rate will increase even further in the coming months.
GDP: In Q1 2022 GDP rose by 0.8% q/q (3.3% y/y), a fairly solid result considering the disruptions to domestic activity in early 2022, following the strong pickup in Q4 2021.
Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 5.6% to 90.4 in May from 95.8 in April. The Index is now at its lowest level since August 2020 when households were unnerved by the ‘second wave’ lockdown in Victoria. The weakness in this survey is not related to another pandemic shock but to the combination of rising cost of living pressures and the prospect of rising interest rates.
Employment: The seasonally adjusted unemployment rate for April 2022 was 3.9%, Employment also increased by 4,000 people in April, the sixth consecutive monthly rise.
US Employment: Total nonfarm payroll employment rose by 390,000 in May, and the unemployment rate remained at 3.6%, notable job gains occurred in leisure and hospitality, professional and business services and transportation and warehousing. Employment in retail trade declined.
Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) fell by 6.1 points to 52.4 points in May 2022, indicating a weaker pace of expansion. This halts three months of consistent acceleration for the Australian PMI® since February 2022. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.
Sources: ABS, AFR, AiGroup, BLS, CoreLogic, RBA, NAB, UBS, Westpac
Comments
The Corrosion of Globalisation
Global Interconnectedness has been diminishing in recent years, and with countries feeling the need to become more self-reliant, deglobalisation could become a more constant occurrence.
It has become the norm that companies with more complex international supply chains have had to grapple with increased and unexpected costs. Firstly, the tariffs imposed by former US president Donald Trump that were applied with little warning, mainly against the Chinese government have started a political standoff. The emergence of the COVID-19 pandemic with its harsh lockdowns and travel restrictions, have put extreme pressure on Australian goods and the price of oil and agricultural commodities have soared due to the continued Russia-Ukraine conflict. With Russia now cut off from much of the world economy, there is the prospect of sustained shortages of crucial industrial materials including nickel, palladium and neon as well as important food sources such as barley and wheat.
China still remains the most critically important country in global supply chains and with this China is being somewhat careful not to run afoul of Western sanctions on Russia. Chinese companies still recognise their large reliance on the US and Europe.
The pandemic dramatically demonstrated the vulnerabilities in long supply chains and made countries start to look closer to home for their required goods as national self-reliance became more important. Many have stated that the pandemic has only accelerated what was already the end of sustained growth in the globalisation cycle.
If deglobalisation does take hold, or even a deceleration of globalisation, there will be some consequences that the world will have to face, this includes higher production costs that lead to higher prices for consumers and a lower real purchasing power. This shift away from efficiency could put further strain on already high inflationary pressures, especially if we need to look at replacement products that are heavily manufactured in Russia and Ukraine.
The flipside is that many global companies are wary of this excessive dependence on China as they could be open to sanctions from the west, either through its intimate relationship with Russia, or because of its own geopolitical actions. China`s continuing zero COVID case policy and the accompanying hard lockdowns that this policy has created is also creating a significant disruption to global supply chains.
It should be noted that the benefits of globalisation are not completely disappearing. In a competitive global market companies are still identifying the incentives to seek out the lowest cost and the greatest efficiencies. The changes in diversification could merely be a bump in the road and has not quite become accustomed to the world we are currently living. Some countries may even benefit if companies try to diversify themselves away from China. Regionalisation of supply chains could improve investment in emerging markets such as South America and Asia, which could improve efficiencies and consumer choice if done correctly.
Sources: AFR, Deloitte
Inflation Snapshot
Inflation problems are affecting the global economy as a whole and even the most affluent economies are feeling the current inflationary pressures. The below table represents inflation data for the countries within the G20 and how they fair against one another.
Problems behind the global cost of living crisis
Around the world, the cost of living is on the rise. There are a range of issues that cut across borders in disrupting the modern global economic system and driving inflation around the world, the mammoth-scale problems of disease, war and weather are among them which have been briefly explained in the below points.
- The Coronavirus Pandemic – The spread of the pandemic was clearly an economic shock, with borders closed and businesses and factories forced to shut down. With demand lower and travel restrictions still in place, supply chains have been upended. If a car manufacturer in South Korea faces a shortage of semiconductors, it will pass on the added costs to consumers. When a country emerged from a shutdown, there was often a surge in demand that led to higher prices.
- The War in Ukraine – Russia’s invasion of Ukraine on Feb 24 injected new uncertainty into an already fragile global economy. The war has particularly affected energy and food, both key sectors in which inflation is high.
- Slowdowns in China – The country’s economic woes, geopolitical problems and its protracted exit from its “zero COVID” policy are contributing significantly to global inflation. The lockdowns in major Chinese cities has exacerbated global supply chain pressures and inflation concerns.
- Damaging Weather – Unpredictable weather events, such as droughts that damage crops and storms that upend trade routes, are increasingly seen as a key factor in the rising cost of living. Furthermore, efforts to transition to a green economy is putting more pressure on prices for commodities such as lithium used for batteries and copper for computer chips.
- Record Government Spending – With large inflows of money from aggressive monetary policies many countries budget deficit is bigger than ever. Interest rate rises in countries already saddled with huge amounts of debt, making it harder for them to provide relief from inflation. In addition, countries in emerging markets that have already borrowed heavily to fund the pandemic could at worse result in their governments defaulting.
Sources: AFR, Trading Economics