Markets
Local:
The ASX200 underperformed in May falling -2.5% on continued rate hike expectations.
Global:
The S&P 500® gained 0.4% in May.
The Dow Jones Industrial Average® dropped 3.49% for the month and was off 0.72% YTD.
The Stoxx Europe 600 Index is down 14.88 points or 3.19% this month to finish at 451.76.
Gold:
Gold prices fell by US$30.10 to US$1,952 on a stronger USD and continued rate hike expectations.
Iron Ore:
Iron Ore prices fell by US$5 to US$100 /Mt on seasonally weaker demand and prices.
Oil:
Brent oil fell by US$6 to US$73.5/ bbl, as concerns continued around Chinese oil demand after weaker than expected Chinese manufacturing PMI at 48.8 in May.
Property
Housing:
CoreLogic’s national Home Value Index (HVI) has recorded a third consecutive monthly rise, with the pace of growth accelerating sharply to 1.2% in May. After finding a floor in February, home values increased 0.6% and 0.5% through March and April respectively.
The rise in values was broad-based with the rate of growth accelerating across every capital city last month.
CoreLogic’s Research Director, Tim Lawless, noted the positive trend is a symptom of persistently low levels of available housing supply running up against rising housing demand.
Economy
Interest Rates:
The Reserve Bank of Australia has lifted the cash rate to an 11-year high of 4.1% at its June meeting and flagged further interest rate rises, as it grapples with upside risks to inflation, accelerating wages growth and stagnant productivity. The cash rate is now at its highest level since April 2012.
Retail Sales:
Australian retail turnover was unchanged (0.0%) in April 2023, this follows a 0.4% rise in March 2023 and 0.2% rise in February 2023.
Bitcoin:
Bitcoin fell slightly in May to finish the month at USD$27,713.91.
Bond Yields:
The Australian government 10-year bond rose to 3.60% and the US government 10-year bond also rose to 3.64%, as rate hikes continue to apply pressure.
Exchange Rate:
The Aussie dollar remained steady in May against both the American dollar at $0.65 and the Euro at $0.61.
Inflation:
Australia: The monthly CPI indicator rose 6.8% in the twelve months to April. The most significant price rises were Housing (+8.9%), Food and non-alcoholic beverages (+7.9%) and Transport (+7.1%).
USA: The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4% in April on a seasonally adjusted basis, after increasing 0.1% in March. Over the last 12 months, the all items index increased 4.9%.
EU: The euro zone’s annual headline inflation rate fell to 6.1% in May from 7% in April, below the 6.3% predicted in a Reuters poll of economists. Core inflation, closely watched by the European Central Bank, eased to 5.3% from 5.6%.
Consumer Confidence:
The Westpac Melbourne Institute Consumer Sentiment Index fell by 7.9%, from 85.8 in April to 79.0 in May. The Index has fallen back to just above the dismal levels seen back in March, which recorded the lowest monthly read since the COVID outbreak in 2020 and, before that, since the deep recession of the early 1990s. The two key developments over the last month have been the surprise decision by the Reserve Bank Board to lift the cash rate by a further 0.25% in May and the Federal Budget.
Employment:
Australia: Australia’s seasonally adjusted unemployment rate unexpectedly rose to 3.7% in April 2023, marking a slight increase from the previous months and deviating from market expectations of 3.5%. The number of unemployed individuals increased by 18,400 to reach 528,000, while employment declined by 4,300, reaching a total of 13.88 million.
USA: Total nonfarm payroll employment increased by 339,000 in May, and the unemployment rate rose by 0.3% to 3.7%. Job gains occurred in professional and business services, government, health care, construction, transportation and warehousing, and social assistance.
Purchasing Managers Index:
The Judo Bank Australia Manufacturing PMI edged up to 48.4 in May 2023 from 48 in the previous month. It pointed to the third consecutive month of deterioration in the manufacturing sector due to lower new orders as tighter global monetary policies dampened buying interest resulting in subdued domestic and foreign demand.
US Services PMI:
The S&P Global US Services PMI was revised slightly lower to 54.9 in May 2023 from a preliminary 55.1 but continued to point to the strongest expansion in the services sector since April 2022, mainly supported by new business. The upturn in new orders was driven by improved demand conditions in both domestic and export markets. At the same time, firms stepped up their hiring activity again, with employment increasing at a solid pace.
US Global Manufacturing PMI:
The S&P Global US Manufacturing PMI was revised slightly lower to 48.4 in May 2023 from a preliminary of 48.5 driven by a solid contraction in new orders amid muted demand condition
Sources: ABS, AFR, AWE, BLS, CoreLogic, Europa, Macquarie MWM Research, RBA, Statista, TradingEconomics, UBS.
Comments
Consumer Sentiment
Consumer confidence is continuing to trend lower as they dig in for a lengthy period of stubbornly strong inflation and witnessing interest rates remain at levels not seen for more than a decade.
The Index has fallen back to just above the dismal levels seen back in March, which recorded the lowest monthly read since the COVID outbreak in 2020 and, before that, since the deep recession of the early 1990s.
The two key developments over the last month have been the decision by the Reserve Bank Board to lift the cash rate by a further 0.25% in May and again in June and the outcome of the Federal Budget. The survey is usually conducted in the week of the Reserve Bank Board meeting but was delayed a week to gauge the sentiment impact of the Federal Budget. While this means we do not have ‘before’ and ‘after’ reads on the surprise RBA decision, we do have a clear ‘before’ and ‘after’ picture on the Budget.
Sentiment amongst those surveyed before the Budget announcement showed an index read of 81.3 (down 5.3% compared to April). Sentiment amongst those surveyed after the announcement came in at 75.3, down an additional 7.4%. A strict interpretation would attribute about 60% of the May fall to the Federal budget and the remaining 40% to the interest rate decision and other factors.
But even though consumer sentiment has clearly soured, it’s not yet bad enough to force central banks to contemplate cutting interest rates.
That means that the big question for investors is whether this pervasive pessimism will make consumers cut their spending much more viciously in the second half of the year.
This would precipitate an abrupt economic slowdown, given that consumer spending is the main driver of economic growth and possibly even produce the interest rate cuts that financial markets continue to expect.
As the Reserve Bank’s latest Statement on Monetary Policy noted “household consumption remained subdued in the March quarter”.
The RBA also pointed out that “the consumption of discretionary goods – including clothing and footwear, and household goods – has declined, but there was continued steady growth in discretionary services categories such as transport and hotels, cafés and restaurants”. As consumers prioritise spending on experiences, rather than on discretionary goods.
According to the minutes from its May meeting, the Reserve Bank board considered the possibility that consumption could turn out to be even weaker than expected.
“Many households were experiencing significant financial pressures associated with the higher cost of living and increased mortgage payments, and a further increase in aggregate mortgage payments was expected as fixed rate loans progressively expire”.
But even though there are signs that consumers are beginning to buckle, central banks are not yet confident enough about the outlook for inflation to pause their campaigns to push borrowing costs higher.
Sources: AFR, Westpac
Housing Market Update
Not that long ago, Australia was in the midst of the fastest drop in housing values on record, as rapidly increasing interest rates caused capital city values to plunge more than 9% in the space of about 10 months.
That’s all changed since hitting a low in February, with three consecutive months of positive growth in housing values due to a significant imbalance between supply and demand.
Not only are we seeing housing values stabilising or rising across most areas of the country, but a number of other indicators are also confirming the positive shift. Auction clearance rates are holding slightly above the long run average, while sentiment has lifted, and home sales are trending around the previous 5-year average.
There’s not a lot of competition in the market for vendors currently with decade-low listing numbers. It’s one of the reasons selling conditions have strengthened, as evidenced by above average clearance rates, faster selling time and less negotiation. For context, the total number of homes listed for sale nationally is tracking 28% below usual. When listing volumes are very low, selling conditions strengthen, which means potential vendors thinking about selling may well be tempted to list now rather than waiting until the traditional spring period, when activity surges and there’s a spike in competition to sell.
Despite some of this positive news, the ability to service a loan is going to be one of the biggest hurdles that prospective buyers will face this year. Interest rates are high, but loan servicing assessment levels are three percentage points higher again. However, qualifying for the loan is only one challenge. We can’t ignore low consumer sentiment levels, which will also be having some dampening effect on the market’s current exuberance, and we shouldn’t expect to see a material lift in property activity until there’s an improvement in consumer confidence more broadly.
The 2023 Outlook
The total volume of dwellings for sale in Australia has been trending lower since the onset of COVID-19 restrictions in 2020. As of April 2023, there were 138,144 listings observed over the month, which is near decade-lows. Total listings were -31.5% below the decade monthly average, and -33.8% below the average for April.
While interest rates are close to peaking, (we believe 2 more rate rises are still likely to come) the cost of debt remains much higher than the pre-COVID decade average against a backdrop of near record levels of house indebtedness. The combination of a high cost of debt and a high level of debt, as well as cost of living pressures are likely to keep sentiment levels low, at least until interest rates start to come down.
Although values have fallen, the housing market remains unaffordable for many. Even with the recent sharp drop in values, the median value of a capital city dwelling remains 12.0% or roughly $83,000 higher than it was at the beginning of COVID in March 2020. Serviceability costs have also continued to rise, with approximately 42% of the median capital city household income required to service a new mortgage, a figure that is expected to continue to rise.
Furthermore, we are yet to see the full impact of the rapid rate hiking cycle flowing through to household balance sheets. The lag of the rate hikes hitting households will be longer than usual, due to the larger portion of fixed rate borrowers who have, so far, been insulated from these rate hikes. As more borrowers feel the impact of higher interest rates its likely we will see more evidence of distress and reduced consumer sentiment leading to a potential lift in motivated listings.
The overall outlook for housing markets largely rests with the trajectory of interest rates. The timing of future rate cuts remains uncertain and with many tipping the cash rate to reach 4.85% (currently at 4.1%) it could be a long time coming. However, once we see rates coming down (possibly in 2025), that is when we could see more sustained momentum gather in housing markets.