The ASX200 index rose 1.8% in June underperforming the MSCI Developed Markets Index which rose 5.7% in the same time period, following softening rate hike expectations.
The S&P 500 gained 6.6% in June, bringing its YTD return to 15.91%.
The Dow Jones Industrial Average® increased 4.56% for the month and was up 3.80% YTD.
The STOXX Europe 600 Index is up 4.09 points or 0.89% this quarter to 461.93.
The spot price for Gold fell by US $52.15 to US $1,912 as the Fed and ECB hone in on inflation levels.
Iron Ore prices rose by US $13.50 to US $113.50/ Mt on demand growing slightly more than supply and inventories falling.
Brent Oil rose by US $2.24 to reach US $74.90/ bbl, as trading was tighter on market fundamentals over the driving season, coupled with continued political uncertainty in Russia.
Australian housing values have increased four months in a row, with seven out of eight capital cities recording a rise in June.
CoreLogic’s national Home Value Index (HVI) increased 1.1% in June, decelerating slightly from the 1.2% gain recorded in May. Every capital city except Hobart (-0.3%) saw dwelling values rise in June, with CoreLogic’s research director, Tim Lawless, noting that Sydney continues to lead the cycle.
“Sydney home values increased another 1.7% in June, taking the cumulative recovery since the January trough to 6.7%. In dollar terms, Sydney’s median housing value is rising by roughly $4,262 a week,” Mr Lawless said. Regional housing values have also trended higher, albeit at a slower pace relative to the capitals.
Australia kept the cash rate on hold at 4.1% as it grapples with whether it has done enough to tame inflation.
RBA governor Philip Lowe said the decision to keep the official rate on hold at 4.1% on Tuesday “will provide some time to assess the impact of the increase in interest rates to date and the economic outlook”.
Australian retail turnover rose 0.7% in May 2023, this follows a flat result in April 2023 and a 0.4% rise in March 2023. Ben Dorber, ABS head of retail statistics, said: “Retail turnover was supported by a rise in spending on food and eating out, combined with a boost in spending on discretionary goods. “This latest rise reflected some resilience in spending with consumers taking advantage of larger than usual promotional activity and sales events for May.”
In June the Australian government 10-year bond rose by 42 bps to 4.02%, whilst the US 10-year bond also rose by 18 bps to 3.81% on concerns of further tightening by the Fed.
The Aussie dollar rose slightly against the American dollar in June, finishing the month at $0.66, and remained steady against the Euro at $0.61.
Australia: The monthly Consumer Price Index (CPI) indicator in Australia advanced 5.6% in the year to May 2023, slowing from a 6.8% rise in the year to April 2023, and below the market consensus of 6.1%. It was the lowest annual inflation rate since April 2022, due mainly to a softer pace in the growth of both housing and transport prices.
USA: In May, the Consumer Price Index for All Urban Consumers increased 0.1%, seasonally adjusted, and rose 4.0% over the last 12 months.
EU: Euro area annual inflation is expected to be 5.5% in June 2023, down from 6.1% in May. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in June.
The Melbourne Institute of Consumer Sentiment index rose 0.2%, from 79.0 in May to 79.2 in June. For the last year the Index has held around levels we have not seen on a sustained basis since the deep recession of the late 1980s/early 1990s. The survey was taken over the period 5-9 June. That period covered the announcement of the decision by the Reserve Bank to lift the cash rate by 0.25% from 3.85% to 4.1%. While the full survey showed little net change in sentiment, responses within the survey week show a big rate rise impact. Prior to the announcement of the rate hike decision confidence had lifted sharply from 79.0 in May to 89.0. But following the announcement it tumbled to an extremely low 72.6.
Australia: The unemployment rate fell by 0.1% to 3.6% in May (seasonally adjusted). Bjorn Jarvis, ABS head of labour statistics, said: “with employment increasing by around 76,000 people and the number of unemployed decreasing by 17,000 people, the unemployment rate fell to 3.6%. “The strong growth in employment in May followed a small decrease in April, around Easter, when employment fell by more than it usually would over the holiday period.
USA: Total nonfarm payroll employment increased by 209,000 in June, and the unemployment rate changed little at 3.6%. Employment continued to trend up in government, health care, social assistance, and construction.
ABARES released their Australian Crop Report for the 2023/24 season recently. The area planted for winter crops in Australia is forecast to fall but remain historically high in 2023/24. Plantings at 23.3 million hectares would be 6% above the 10-year average.
Purchasing Managers Index:
Australia’s manufacturing sector is on track for a soft landing with further evidence in June of soft activity, weakness in new orders and easing price pressures. The overall manufacturing PMI dipped in June to 48.2, a level that is historically associated with a cyclical slowdown in activity, but is still well above recession readings, which typically see PMI readings below 42.
US Services PMI:
The S&P Global US Services PMI edged down to 54.1 in June 2023 from 54.9 in May and compared with market expectations of 54, preliminary estimates showed. Demand conditions at service providers remained robust, as new orders increased at a strong rate and new export orders also rose.
US Global Manufacturing PMI:
The S&P Global US Manufacturing PMI was confirmed at a six-month low of 46.3 in June of 2023, pointing to a second successive monthly decline in the health of the manufacturing sector, amid a renewed fall in output and a sharp downturn in new orders, dragged down by suppressed demand due to inflationary pressure and higher interest rates.
Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS
What really drives interest rates
Why do banks decide to increase or decrease interest rates and who influences their decision? This article explains as simply as possible what drives interest rates and may assist clients’ with the age-old question: “do I lock in a fixed rate, or opt for a variable rate?
The Reserve Bank of Australia (RBA) and the major trading banks may play the most visible role in setting interest rates, but in many cases, they are being reactive rather than proactive.
A wide range of external factors feed into their decision-making process, including, in no small part, our collective behaviour as investors and savers, borrowers and consumers. Then there’s the rate of inflation and wages growth, foreign currency exchange, the economic health of our trading partners, and the interest rates paid by local banks to borrow money from overseas. As a result of this, interest rate levels in other countries – particularly the US, have becoming increasingly important in driving local policy decisions.
Suddenly it’s not so easy to figure out where interest rates are headed, even in the short term.
A fine balance
To look at just one part of the puzzle: the RBA dropped the cash rate to 0.10% in November 2020 – the lowest rate on record. This made it cheaper for businesses to borrow and invest in job-creating activities.
However, mortgage rates also followed the cash rate down, allowing homebuyers and investors to borrow more which subsequently drove up house prices.
So how does the RBA keep a lid on housing costs without choking business activity and consumer spending?
One way is to get by with a little help from its friends, in this case, the banking regulator, the Australian Prudential Regulation Authority (APRA).
APRA is able to impose a range of restrictions on the banks. These include capping new interest-only lending and limiting the growth in lending to investors. Lenders can also be ordered to keep a tight rein on ‘risky’ loans, for example, where loans exceed 80% of the value of the property.
While APRA’s main motive is to make the banks more resilient to any shocks such as another global financial crisis and the economic slowdown caused by the COVID-19 pandemic, a side effect is that the banks have to reduce the amount they lend for housing. And according to the rule of supply and demand, if less money is available, then the cost of that money – the interest rate – will go up.
In May of 2022, the RBA increased the cash rate by 25 basis points to 0.35%, marking the first rate rise since November 2010. Since then the cash rate has been increased eleven more times to 4.10%. The RBA advised these rises have been made to assist in curbing the rapidly rising inflation rate across the country, with the economy recovering more quickly post-pandemic than initially expected.
Navigating uncertain waters
If inflation proves to be sticky, interest rates will remain higher for a sustained period of time. Inversely, if inflation falls quicker than expected, so will interest rates.
Leading economists have predicted the possibility of another two or three 0.25% interest rate hikes between August and October, adding 0.5% – 0.75% to current mortgage rates. Determining what will happen to rates at the end of 2023 will depend on the rate of inflation and whether this rate has fallen adequately enough. The big 4 banks have all predicted that interest rates should peak at 4.35%-4.6% in the coming months and then start to decline over the 2024 and 2025 years. The rate of decline and amount of decline is uncertain.
Appreciating the complexity of interest rates doesn’t always help in deciding how to respond to them. Even the experts get it wrong when trying to predict where interest rates are going. This doesn’t help answer borrowers’ eternal question: “do I lock in a fixed rate, or opt for a variable rate?”
Australia’s Employment Forecasts:
The Australian labour market is remaining resilient, heightened by the Labour Force Survey conducted in May 2023. Since the end of 2022, total employment has grown by more than 219,000 workers, with 75,900 workers added in the month of May.
Concurrently the unemployment rate remained low at 3.6% and the labour force participation rate reached an all-time high of 66.9%.
This strong performance is fighting against the backdrop of a broader economic slowdown as policy makers continue to test the limits of the economy, following a retail recession, extremely low consumer confidence and growing business failures. Much of the continued strength is due to the better access to workers than what we experienced during the pandemic.
In the year to May 2023 Australia’s civilian population aged 15 and above grew by 2.7% – the fastest annual rate on record. Recent growth is due to strong migration, with the Commonwealth Budget estimating net overseas migration of 400,000 people this financial year and 315,000 people in 2023-24 – well above pre-COVID rates. This additional labour supply has gone into reducing unmet labour demand – with national job vacancies falling for the third straight quarter.
Employment growth is expected to be 0.9% in 2023-24 and 1.1% in 2024-25 (compared with an estimated 3.6% in 2022-23 and 3.3% in 2021-22). In raw numbers, average employment gains of 135,900 per annum are expected over the next two years, compared with average gains of 452,900 per annum over the last two years.
Human services workers bore the brunt of the COVID pandemic as lockdowns dampened demand for service-based industries such as tourism and retail. White collar workers, on the other hand, didn’t see the same reduction in demand and were able to transition to a work from home environment which helped to mitigate employment declines.
Looking forward the labour market will likely slow down and be more pronounced for blue collar workers as industries such as construction and manufacturing are expected to be harder hit from deteriorating economic activity.
It is expected that human services workers will fare the best in the two years ahead, supported by underlying demand for more ’necessary’ services-based occupations. Average expected employment gains of 135,900 per annum over the next two years are comprised of 55,500 white collar job gains, 12,300 blue collar job losses and 92,600 gains per annum in human services, in job roles such as social work, nursing and counselling.