Market Wrap June 2021

Markets

Local: The ASX200 index rose 2.26% in June. Capping off an 8% quarterly total return for the index.

Global: The S&P500 index also rose well by 2.2% over June.

Gold: Spot price for Gold fell to $1,763.15.

Iron Ore: Iron Ore continued to rise strongly to US $215.5 per ton, a $14 rise on the previous month.

Oil: Brent Oil rose again to close out the month at $75.13 a barrel.

Property

Housing: National home values rose 1.9% in June, taking annual growth to 13.5% for the financial year. The growth in Australian dwelling values was led by houses, which rose 15.6% over the year, compared to a 6.8% lift in unit values. Each of the capital cities saw an uplift in dwelling values in June, ranging from a 3.0% rise in Hobart to a more subdued 0.2% lift in Perth. The performance gap has narrowed between regional Australia and the capital cities, though regional Australia did outperform slightly in monthly growth terms, rising 2.0% through June compared to 1.9% across the combined capital cities. Darwin maintained the highest annual rate of growth across the capital cities, increasing 21.0% in value over the financial year, followed by Hobart 19.6%. Across regional Australia, regional NSW had the highest annual growth in dwelling values 21.1%, followed by regional Tasmania at 20.8%.

Meanwhile in the US, new home sales have dropped 5.9% to a seasonally adjusted rate of 769,000 units last month, the lowest levels seen since May 2020. The median house price jumped 18.1% over the previous 12 months to US$374,400, with sellers looking to cash out on the inflated market. The number of U.S. homes for sale climbed to 6.7%. Cooling prices may be on the horizon as home-price growth is expected to slow to less than 10%. Demand may also slow if buyers are priced out, especially with the expectation of interest rates to increase in the near future.

Economy

Interest Rates: RBA Cash rate remained unchanged at 0.10%.

Employment: The unemployment rate dropped very sharply again to 5.1%, the equal lowest since 2019, remarkably now only 0.2% above the lowest since 2008, nearly reaching our forecast of 5% for the end of 2021. The participation rate rebounded to 66.2%, near a record high 66.3%. The broadest under-utilisation rate fell even more sharply to 12.5%, the lowest since 2013.

US Employment: Job growth accelerated in June, with payrolls gaining the most over the past 10 months. The largest payroll gains were in the hospitality and leisure sector adding back 343,000 jobs. Non-farm payrolls increased by 850,000, 130,000 more than was previously forecast. The unemployment rate rose slightly to 5.9% from 5.8% in May.

Bond Yields: Australian government 10-year bonds slipped slightly to 1.51%.

Exchange Rate: The Aussie dollar fell slightly against both the American dollar, at $0.751, and the Euro at $0.630.

Consumer Confidence: The Westpac-Melbourne Institute Index of Consumer Sentiment fell 5.2% to 107.2 in June from 113.1 in May. The latest fall in June is almost certainly due to concerns around the two-week lockdown in Melbourne. The survey was conducted during the first week of the lockdown. The Index is now back at the level we saw back in January when the country was impacted by significant lockdowns in parts of Sydney and Queensland.

Business Conditions: Trading conditions and business sentiments related to revenue have improved throughout the financial year. In July 2020, nearly half (47%) of businesses reported decreased revenue over the previous month, compared to less than a quarter (24%) of businesses in June 2021. Monthly revenue data has weakened between May and June 2021, with a higher proportion of businesses reporting decreased revenue and a lower proportion reporting increased revenue. Some businesses commented that their revenue had been affected due to recent lockdowns in Victoria. In June, 19% of employing businesses reported that they did not have enough employees based on current operations, compared to 12% in March 2021 and 15% in December 2020.

Purchasing Managers Index: Rather than measure an economy directly, a PMI measures the business activity that helps drive it. A PMI above 50 indicates an expanding market, while a PMI below 50 indicates a contraction. The Australian PMI has risen again to 63.2 with a 2.27% rise from the previous month, while the US PMI has fallen slightly from 61.2 in May to 60.6 in June.

Covid: Overall global cases passed 181 million in June. The number of cases linked to Sydney’s Bondi cluster grew to 143 on Tuesday 29^th of June, with NSW announcing a further 22 cases on June 30. Parts of Victoria, Queensland, New South Wales and the Northern Territory have been placed under lockdown as state governments attempt to stop the spread of the Delta variant. So far, only around 5% of the population is fully vaccinated and approximately 30% have had their first shot.

Comments

The Intergenerational Report examines the long-term sustainability of current policies and how demographic, technological and other structural trends may affect the economy and the budget over the next 40 years. The COVID-19 pandemic has produced a stumbling block to recent economic growth causing the most severe global shock since the Great Depression.

However, due to a strong fiscal position the government was able to respond decisively to the pandemic with $291 billion in direct economic support. The current speed of Australia’s economic recovery is exceeding even the most optimistic of expectations, currently outperforming all major advanced economies.

Despite such positive news on the back of the COVID-19 pandemic the next 40 years might be more of a challenge than previously anticipated. The Australian economy is projected to grow at a slower pace over the next 40 years than it has in the 40 years prior. Slower population growth is the main reason for the expected slowdown in economic growth. Australia’s total population is projected to reach 38.8 million by 2060-61, 1.2 million less than previously forecast. This is below previous projections due to lower levels of migration resulting from the COVID-19 pandemic and a lower fertility rate.

In 2060-61, 23% of the population is projected to be over 65, a rise of around 7 percentage points from 2020-21. The ratio of working-age people to those over 65 is projected to fall from 4.0 to 2.7 people over the next 40 years. Australia is currently in the middle of a significant demographic transition, as people in the baby boomer generation reach 65. This has already driven a rapid fall in the ratio of working-age people to those over 65 through the past decade, which will continue for the next decade. Furthermore, the labour force participation rate is also expected to fall from a record high of 66.3% in March 2021 to 63.6% by 2060-61, reflecting Australia’s ageing population.

GDP (Gross Domestic Product) – The total monetary or market value of all goods and services produced within a country’s borders over a specific time period.

GNI (Gross National Income) – The total amount of money earned by a nations businesses and people, including investment income regardless of where it was earned. It is used to measure and track a nation’s wealth year to year.

The larger slowdown in GNI growth than GDP growth reflects an assumption that the terms of trade will decline before leveling out at long-term levels. Over the past 4 decades there have been periods where significant increases in commodity prices and the terms of trade have boosted growth in incomes, which could be a factor in the upcoming economic slowdown.

In terms of economic productivity, the economy in real and nominal GDP terms, would be nearly 10% smaller, while gross national income per person would be $32,000 lower than the baseline scenario. By 2061, the deficit would roughly double – from 2.3% of GDP to 4.5%. Net debt as a percentage of GDP would also be higher at 57%.

After falling from a pandemic-induced high, government spending is projected to gradually increase over time. Health will comprise the single largest component of spending, accounting for 26% of spending in 2060-61. Real per person health spending is projected to more than double over the next 40 years, considerably due to rising incomes, changes in preferences and the costs of using new health technology.

In the future, more Australians will retire having made superannuation contributions while working. This will reduce the call for government support through the Age Pension. However, superannuation entices favourable tax treatment which reduces government revenues. The projected combined total of Age and Service Pension expenditure and superannuation tax concessions is estimated to grow from around 4.5 per cent of GDP in 2020-21 to 5.0 per cent of GDP in 2060-61.

Lastly, social policy will dictate the budget and create huge difficulties for politicians seeking fiscal restraint. Health is expected to increase from 4.6% of GDP in 2021-22 to 6.2% by 2060-61 mostly due to rising income, population ageing, public hospital demands and advancement in medical technology. The report also optimistically projects the NDIS to level out at 1.4% of GDP nearly 30% higher than predicted by the 2015 IGR.

The IGR is valuable as it assumes current policy but looks at the structural and demographic trends. The real debate our nation needs is about our future economic performance, the ultimate message from the report suggests that Australia should not be a passive player. It needs a strong far sighted and active policy agenda, whether this will happen is another debate entirely.

Interest Rates, A Worldwide Dilemma?

Even before coronavirus, Australia was experiencing a gradual decline in interest rates. Since June 2020, the RBA has maintained record-low interest rates – noting that it will maintain supportive monetary conditions for some time and will not increase the cash rate again until its economic (i.e. employment and inflation) targets have been met.

The Fed lowered its US federal funds rate to help support economic conditions in the face of coronavirus. While noting the economic recovery is far from complete and that inflation is expected to increase temporarily, the ongoing economic recovery has called for a change to monetary policy settings – with markets anticipating an announcement later in the year.

After lowering interest rates in 2020, Russia increased interest rates again in 2021, noting that the rapid recovery of demand coupled with inflationary pressures required a return to earlier monetary policy settings – a time marked by higher interest rates.

After a period of low interest rates (due likely to coronavirus), Turkey raised interest rates again in 2021 in an attempt to dampen inflation in an uncertain economic environment.

Japan has had negative interest rates since 2015, which meant the central bank relied on other monetary policy easing measures to support its economy during coronavirus – particularly in 2020.

As economic activity continues to pick up, interest rates could start to rise to combat inflationary pressure. However, the progress in vaccination distribution remains uncertain, especially in emerging markets. In tandem with this, global central banks are applying unproven monetary policy frameworks, including money creation and large-scale bond purchases. While studies show that interest rates have been falling over the past several centuries, the confluence of these factors will be revealing in the years that follow.