Local: The ASX200 index rose 6.2% in January as investors improved their economic outlook.
Global: The S&P 500 also gained 5.3% over January.
Gold: Spot price for Gold rose strongly to US $1,924, following a positive reaction to the slower US PPI reading and safe haven flows after renewed geopolitical tensions.
Iron Ore: Iron Ore prices slowed to US $129/Mt with slowing demand by China off the slowdown in the constructure season.
Oil: Brent Oil price dropped slightly to US $84.90/bbl with a strong USD and uncertainty around Chinese demand.
Housing: CoreLogic’s national Home Value Index (HVI) fell a further -1.0% in January, a slight improvement on the -1.1% decline recorded in December, and the smallest month-on-month decline since June last year.
The reduction in the rate of decline was evident across most capital cities, except for Adelaide (-0.8%) and Perth (-0.3%) where housing values have held firmer since interest rates began rising in May.
CoreLogic Research Director Tim Lawless said although the housing downturn remains geographically broad-based there are signs some momentum has left the housing downturn.
“The quarterly trend in housing values is clearly pointing to a reduction in the pace of decline across most regions, however at -1.0% over the month and -3.2% over the rolling quarter, national housing values are still falling quite rapidly compared to previous downturns,”.
Interest Rates: The Reserve Bank of Australia has pushed through a ninth consecutive rate rise at its first meeting of 2023 to contain the sharp increase in the cost of living. Policymakers lifted the official cash rate by 25 basis points to 3.35% from 3.1% in line with expectations.
Retail Sales: Retail sales in Australia declined by 3.9% month-over-month to AUD 34.47 billion in December 2022, reversing from an upwardly revised 1.7% in the previous month and worse than market forecasts of a 0.3% fall.
Bond Yields: Australian government 10-year bond fell by 50 bps to 3.55% from the previous month. The US 10-year bond also fell 35 bps to 3.53%, a reaction to stabilising GDP and inflation prints which supported investor sentiment.
Exchange Rate: The Aussie dollar improved over January finishing the month at $0.704 and stayed steady against the Euro at $0.649.
Inflation: The Consumer Price Index (CPI) rose 1.9% in the December 2022 quarter and 7.8% annually.
Consumer Confidence: The Westpac Melbourne Institute Consumer Sentiment Index increased by 5%, from 80.3 in December to 84.3 in January. This is the largest increase in the Index since April 2021, and prior to that, since October 2020 when consumers were responding to positive news around the pandemic. One likely explanation for the lift in confidence is that January was the first month since April last year that did not see an increase in the RBA cash rate. While that was because there was no RBA Board meeting in the month rather than an explicit decision by the Bank to leave rates unchanged, the break in the tightening cycle looks to have provided some relief.
Employment: Australia’s unemployment rate has remained flat at 3.5%, surprising market expectations which had forecast a mild fall. New data also showed that for December 2022 employment decreased by around 15,000 people while the number of unemployed Australians increased by 6,000 people.
US Employment: Total nonfarm payroll employment rose by 517,000 in January, and the unemployment rate changed little at 3.4%. Growth was widespread, led by gains in leisure and hospitality, professional and business services, and health care. Employment also increased in government, partially reflecting the return of workers from a strike.
Agriculture: Australia’s crop exports were valued at an estimated 39.6 billion Australian dollars in the fiscal year 2022. It was forecasted that this value would increase to around 46.7 billion Australian dollars in the 2023 financial year.
Purchasing Managers Index: The Judo Bank Flash Australia Manufacturing PMI posted 49.8 in January 2023, down from a final reading of 50.2 in the previous month, marking the first contraction of the manufacturing sector in 32 months. Manufacturing output shrank due to weaker demand and supply constraints. Domestic and global new orders decreased as a result of higher interest rates and a deterioration in global economic conditions. On the positive side, manufacturers expanded their workforce numbers at the fastest rate in five months, despite lower demand and output.
Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS
Summary of the World Bank’s Global Economic Prospects Report
Global growth is slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine, according to the World Bank’s latest Global Economic Prospects report.
Given fragile economic conditions, any new adverse development—such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic, or escalating geopolitical tensions—could push the global economy into recession. This would mark the first time in more than 80 years that two global recessions have occurred within the same decade.
The global economy is projected to grow by 1.7% in 2023 and 2.7% in 2024. The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies and nearly 70% of emerging market and developing economies.
Over the next two years, per-capita income growth in emerging market and developing economies is projected to average 2.8%, a full percentage point lower than the 2010-2019 average. In Sub-Saharan Africa, which accounts for about 60% of the world’s extreme poor-growth in per capita income over 2023-24 is expected to average just 1.2%, a rate that could cause poverty rates to rise, not fall.
Growth in advanced economies is projected to slow from 2.5% in 2022 to 0.5% in 2023. Over the past two decades, slowdowns of this scale have foreshadowed a global recession. In the United States, growth is forecast to fall to 0.5% in 2023, 1.9 percentage points below previous forecasts and the weakest performance outside of official recessions since 1970. In 2023, euro-area growth is expected at zero percent, a downward revision of 1.9 percentage points. In China, growth is projected at 4.3% in 2023, 0.9 percentage point below previous forecasts.
Excluding China, growth in emerging market and developing economies is expected to decelerate from 3.8% in 2022 to 2.7% in 2023, reflecting significantly weaker external demand compounded by high inflation, currency depreciation, tighter financing conditions, and other domestic headwinds.
By the end of 2024, GDP levels in emerging and developing economies will be roughly 6% below levels expected before the pandemic. Although global inflation is expected to moderate, it will remain above pre-pandemic levels.
The report offers the first comprehensive assessment of the medium-term outlook for investment growth in emerging market and developing economies. Over the 2022-2024 period, gross investment in these economies is likely to grow by about 3.5% on average—less than half the rate that prevailed in the previous two decades. The report lays out a menu of options for policy makers to accelerate investment growth.
“Subdued investment is a serious concern because it is associated with weak productivity and trade and dampens overall economic prospects. Without strong and sustained investment growth, it is simply impossible to make meaningful progress in achieving broader development and climate-related goals,” said Ayhan Kose, Director of the World Bank’s Prospects Group.
Sources: The World Bank
The December 2022 quarter confirmed that inflation still sits well above the RBA’s target band for inflation – increasing by 7.8% through the year, and by 1.9% in the quarter.
This is the highest inflation has been since 1990 and confirms that Australia’s inflation rate was still rising through to late 2022. Unlike the US, for example, where it has started to move down.
The most significant contributors to the quarterly increase were travel costs, with both domestic (13.3%) and international travel prices (7.6%) increasing notably. Electricity prices were also a key contributor, increasing by 8.6% in the December quarter. While grocery prices overall kept rising, there was some respite – fruit and vegetable prices dropped by 7.3% in the quarter.
By state prices grew markedly quicker in Perth, increasing by 3.6% in the December quarter, elevated by the end of electricity rebates in WA. Adelaide however had the highest annual inflation (8.6%), followed then by Perth (8.3%) and Melbourne (8.0%).
With the combination of high inflation, rising interest rates, falling house prices, low levels of consumer confidence and negative real wage growth, spending growth is expected to decelerate markedly over coming months.
The Reserve Bank has consumers in a pincer movement. The rapid shift up in interest rates means that mortgage repayments, including principal and interest, are already on track to rise to a record high as a share of household disposable income. Yet, at the same time, real household disposable income per capita is falling. That combination means consumer spending in real terms is expected to fall over the next six months in Australia.