Markets
Local: The ASX200 index fell -2.4% over February, as the RBAs 25 bps rate hike to 3.35% placed pressure on the already decelerating economy.
Global: The S&P 500 also lost momentum, dropping -2.4%. The Dow Jones Industrial Average fell -4.19% for the month and was down -1.48% YTD.
Gold: Gold prices fell strongly by US $105.25 to US $1,819, on increased scarcity driven by the sector’s requirement to replenish resource inventories of wasting assets and the lack of new discoveries.
Iron Ore: Iron Ore price fell $3.00 to US $126 /Mt on flat demand and a soft Chinese property market.
Oil: Brent Oil price also fell by $2.04 to US $82.45 /bbl fuelled by a stronger USD.
Property
Housing: CoreLogic’s Home Value Index (HVI) recorded a sharp reduction in the rate of decline through February.
The national index declined -0.14% over the month, the smallest monthly fall since May 2022 (-0.13%), when rate hikes commenced.
A 0.3% rise in Sydney dwelling values was the most significant driver of the national deceleration, however, the loss of downwards momentum was broad-based. Darwin (-0.3%) was the only capital city to record a steeper monthly fall in February, albeit from relatively flat conditions previously. Every other capital city except Hobart (-1.4%) saw housing values fall by less than half a per cent over the month.
CoreLogic’s research director, Tim Lawless, said “The past four weeks have seen the flow of new capital city listings tracking -17.0% lower than a year ago and -11.9% below the previous five-year average, this trend towards a below average flow of new listings has been evident since September last year, coinciding with a loss of momentum in the rate of value decline.”
Economy
Interest Rates: The RBA Cash rate has now had 10 consecutive rate rises. A rise of 0.25% at the start of March has pushed the cash rate to 3.6%. Further increases are likely in the months ahead.
Retail Sales: In January retail sales in Australia rose by 1.9% MoM and rose 7.5% compared with January 2022.
Bond Yields: Australian government 10-year bond moved in reaction to tightening monetary policy, selling off 30bps to 3.86%. The US 10-year bond also sold off 39bps to 3.92%, in reaction to stronger than expected economic data.
Exchange Rate: The Aussie dollar fell over February against both the American dollar to finish the month at $0.675, and the Euro at $0.637.
Bitcoin: Bitcoin moved just 0.03% last month in US dollar terms, making February 2023 its least volatile in history. Bitcoin finished the month at US $23,410.
Inflation: The monthly Consumer Price Index (CPI) indicator rose 7.4% in the year to January 2023, Michelle Marquardt, ABS Head of Prices Statistics, said “This month’s annual increase of 7.4% is lower than the 8.4% rise for the year to December 2022. It is, however, the second highest annual increase since the start of the monthly CPI indicator series in September 2018, signifying ongoing high inflation.”
Consumer Confidence: The Westpac-Melbourne Institute Consumer Sentiment Index fell 6.9% from 84.3 in January to 78.5 in February. After a modest rally through the Christmas-New Year period, consumer confidence has fallen sharply to be back near the historic lows seen last November. Cost of living pressures and interest rate rises continue to weigh heavily. Hopes of some easing in both have been dashed by the strong December quarter CPI and the RBA’s resumption of its interest rate tightening cycle.
Employment: Australia’s seasonally adjusted unemployment rate unexpectedly increased to 3.7% in January 2023 from December’s near five-decade low of 3.5% and above market estimates of 3.5%. This was the highest jobless rate since last May, as the number of unemployed climbed by 21,900 to 523,200.
Purchasing Managers Index: The headline seasonally adjusted S&P Global Australia Manufacturing Purchasing Manager’s Index™ (PMI®) posted 50.5 in February, up from the neutral level of 50.0 in January. This signalled an improvement in the health of the Australian manufacturing sector in February, albeit only marginally.
US Services PMI: The Feb US Services PMI printed at a strong 55.1, above estimates of 54.5 and nearly the same as January. New orders, which surprised last month, rose again by 2.2 points to 62.6.
US Global Manufacturing PMI: The S&P Global Manufacturing PMI for the US was revised lower to 47.3 in February of 2023 from a preliminary of 47.8 and compared to 46.9 in January. The reading showed manufacturing activity shrank for a fourth consecutive month, amid further contractions in output and new orders, although rates slowed in both instances. Weak domestic and foreign client demand reportedly drove a further drop in total new sales as firms adjusted their spending activity and inventory holdings down accordingly.
Sources: ABS, AFR, AWE, Binance, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS.
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Chinas Reopening
China underwent one of the world’s longest, and strictest, COVID management policies. Snap lockdowns of entire cities weakened consumer spending and disrupted supply chains were key features of the Chinese economy in 2022. This saw China’s economy grow by only 3% in 2022 – it’s worst performance in nearly half a century.
The abrupt end of China’s zero COVID policy was announced in December, and after 1,016 days China re-opened their borders to the world on the 8th of January. Already, this reopening has shifted the dial on global economic sentiment. The Economist magazine says that “China’s reopening will be the biggest economic event of 2023”. The IMF’s latest World Economic Outlook paints the outlook as ‘less gloomy’ than previously forecast, largely thanks to China’s sudden reopening.
China is expected to be a significant engine of global economic growth in 2023 and 2024. China and India alone are expected to account for around half of global growth this year, versus just a tenth for the US and Euro area combined.
Chart: Contributions to world GDP growth
Yang Jianwen, an economist at the Shanghai Academy of Social Sciences, said property and consumption were the “two biggest issues” China needed to solve. Shanghai was well-placed to tackle both, he said, adding that the city’s real estate market was “not under great pressure”.
Importantly though, consumer spending figures during the Lunar New Year period are already looking up. This is a much-needed boost for China after December retail figures contracted 1.8%, marking the third consecutive monthly decline. Box office tickets and searches for travel improved, signalling the start of a consumer bounce back over 2023 as savings loaded consumers return to old spending habits.
The rest of the world is also gearing up for China’s reopening. At an otherwise very difficult time for the global economy, the global outlook is supported by a re-engaged China. With no more restrictions, there is the potential for supply chain disruptions to ease considerably over the year.
Last week’s RBA Statement on Monetary Policy noted “the earlier opening of the Chinese economy is supporting Australia’s terms of trade and national income”.
China’s reopening will also have important implications for two key exports: international education and tourism. Australia was a popular destination for both pre-COVID, with 1.4 million short term visitors from China in 2019 (an average of 120,000 per month) and 212,000 Chinese students in 2019.
COVID border closures hit tourism particularly hard with only 9,000 short term visitor arrivals from China in November 2022, only a sliver of the pre-COVID monthly average. International student numbers fell to 155,000 in 2022 as pre-COVID students finished their courses and fewer new students replaced them.
Both exports are expected to have big upsides in 2023, though the timing of this resurgence is unclear. China is facing long delays in processing passports and visas as well as sky rocketing flight prices. These are both globally competitive markets, as other countries vie for the same boost to education and tourism as Australia.
Sources: AFR, Deloitte
The Fixed Interest Rate Cliff
Mortgage rates fell dramatically during the pandemic. This was particularly the case for debt on ‘fixed’ terms (where payments are held steady for a specified period). Short-term fixed loan rates averaged as low as 1.95% in May 2021 for owner-occupiers, as bank funding costs plunged in line with the RBA’s temporary Term Funding Facility and fierce competition among lenders.
Fixed term home lending has historically comprised around 15% of new home loans, however as fixed interest rates plunged to record lows, fixed term home lending surged to 46.0% of new mortgage commitments in July and August of 2021. The RBA October Financial Stability Review noted that about 35% of outstanding housing credit was on fixed terms. This included the fixed component of split loans, so not all of these fixed loans represent the entire debt value of housing purchases.
The RBA noted in the Financial Stability Review that around two thirds of the 35% outstanding fixed mortgage debt would expire in 2023. Hence the ‘cliff’: around 23% of all outstanding mortgage debt will be re-priced over the course of the year, and re-priced at a much higher rate. When fixed terms come to an end, borrowers will need to refinance their loan. Factoring in another 50 basis points of rate hikes over March and April, average variable rates could be around 5.7% for owner-occupiers and over 6.0% for investors.
As more fixed loans revert to variable rates, there is likely to be some challenge to serviceability. Interest rates have risen beyond 3 percentage points for many borrowers, which is the minimum serviceability buffer recommended by APRA in assessing whether someone can repay their debt.
Stretched serviceability could be compounded by an increase in the unemployment rate this year along with higher than budgeted household costs due to high inflation. A rise in distressed sales could also put added downward pressure on property values. If people are forced to sell their home in a declining market, there is the added risk of being unable to recover mortgage debt from the sale of a home.
Looking ahead, there’s no escaping that Australians with fixed-rate loans are about to see a painful adjustment. This is partly the intention of rising rates, as households have to curb spending in response to higher interest costs. So far, listings data and arrears data suggest there is minimal impact on the housing market from defaults. However, the true test of the market will be over the next ten months.