RBA Cash Rate Sept 2023: China's Economic Slowdown and Its Impact on Australian Interest Rates

In my property section update , I'm focusing in on supply absorption , and hang around to the end of this update as I finish off with some data that's really concerning me . So stick around to the end of my update for what is a , in my view , a very dangerous data story .

Okay , so let's get started using , starting obviously with the US of A , and I want to start with the inflation data first . Now . We don't get August US inflation data until later this month , so all I'm commenting on at this stage is really the July data . And what did we see in that July data ?

We saw that the annual inflation rate in the US accelerated to 3.2% in July from 3% in June , but below a forecast of 3.3% . This result breaks the 12 consecutive months of declines due to the base effect calculations . A year earlier , inflation had started to fall from its peak of 9.1% .

In the July data , we saw energy costs fell 12.5% less than 16.7% drop in June , with prices declining at a smaller pace for fuel and oil negative 26.5% . So that's disinflation from a negative 36.6% . Gasoline negative 19.9% versus a negative 26.5% and utility gas services negative 13.7% versus negative 18.6% . Costs of apparel 3.2% versus 3.1% .

So what we're looking at here is inflation is still coming down , but still in the positive territory , as opposed to when we see a negative number . That's showing disinflation in the market . And again , cost of apparel was 3.2% versus last month 3.1% . Transportation services 9% versus 8.2% increase .

On the other hand , electricity prices rose 3% below 4.5% in June and inflation slowed for food 4.9 versus 5.7 , shelter 7.7 versus 7.8% and new vehicles 3.5% versus 4.1% . Now the cost of medical services was down 1.5% versus last month of a negative 0.8 of 1% , and prices for used cars and trucks declined 5.6% versus negative 5.2% .

So some real mixed data in terms of what's happening in the broader context of inflation in the US . In terms of the core inflation , which are a reminder for everyone , excludes food and energy costs eased to 4.7% from a reading of 4.8% in June . Now that was below market expectations of a 4.8% result .

So in terms of core inflation , still tracking in the right direction . Looking at the interest rate story , and whilst we start spring here in Australia , the US obviously moves into autumn as fall as they call it and that means that August is the final month in summer and the Fed Reserve basically take a month off in terms of any cash rate decisions .

So in terms of what we are going to see is they'll reconvene later in the month and they'll give their decision on their cash rate on the 20th of September . So , with that sort of pause , that's happened in August .

What did we see in terms of some of the commentary that was coming out of the US to get us a little bit of an indication of where they see interest rates ?

So what we did see it's speaking at the Jackson Hole Symposium , the Federal Reserve Chair , jerome Powell , continued his narrative around potential for further rate increases in order to effectively manage inflation . Now that's in light of the continued strong labor market and solid economy and that's pushing up against the mandate to move inflation back to the 2% target .

Any further decisions will be informed by the latest data and , given the current downward trend in inflation data , he gave some indications that rates could remain on hold in September as they buy more time to assess the impact of the recent rate increases .

Moving on to the labor market in the US , and we saw the unemployment rate in the US rose to 3.8% in August from 3.5% in July . Now that's the higher since February of 2022 and above market expectations of a 3.5% reading . The number of unemployed people increased by 514,000 to 6.355 million and employment levels rose by 222,000 to 161.484 million .

Their big data numbers Now . The USICS unemployment rate , which also includes people who want to work but have given up searching , as well as those working part time because they cannot find full time employment , went up to 7.1% in August , the highest reading since May of 2022 , from a 6.7% reading in July .

Finally , the labor force participation rate increased to 62.8% , the highest since February of 2020 , from a reading of 62.6% . All of this data points to high interest rates are doing their job in slowing the US economy and that's obviously playing out in their unemployment story .

Now let's take a quick look at the US consumer and see what's happening and what the data is telling us . So , retail spending we saw retail sales in the US were up 0.7% of 1% month over month in July , marking the fourth consecutive rise and beating market forecasts of a 0.4% increase . It follows an upwardly revised 0.3% gain in June .

In another sign , consumer spending remained strong despite higher prices and higher borrowing costs . Consumer confidence we saw the US of sorry the University of Michigan . Consumer sentiment for the US was revised lower to a reading of 69.5 in August from a preliminary result of 71.2 .

The gauge for consumer expectation was revised down to 65.5 from 67.3 and the current conditions sub index was also revised lower to a reading of 75.7 from an initial reading of 77.4 . And finally , consumer inflation expectations for the year were revised higher to a reading of 3.5% from 3.3% and the five year outlook was revised up to 3% from 2.9% .

So , short term challenges , but , in terms of looking more longer term , a little bit more optimism from the consumer in the US . On the business side of the equation , what did we learn ? We learned that the ISM manufacturing PMI climbed to a reading of 47.6 in August from the previous month 46.4 , slightly exceeding market consensus of a reading of 47 .

Even this reading still indicates that economic activity within the manufacturing sector had contracted for the 10th consecutive month . While production levels stabilised , the inflow of new orders experienced a more rapid decline and it appears that the pace of job shedding has showed signs of easing .

On the cost front , we saw factory input prices remain subdued but showed signs of reversing , as the surveys measure of prices paid by manufacturers rose to 48.4 last month , from a reading of 42.6 in July .

The PMI has consistently remained below the 50 thresholds since last November , signifying that prolonged period of contraction in the US manufacturing sector , which is the most extended stretch of its kind since the GFC of 2007 to 2009 .

So in my summary of the US , the data shows that the US is slowing , but their equity markets tell us that they believe that the slowing will only be short lived as the US stock market continues to outperform its global peers . Now how I'm judging the US outlook in the short term is simply by watching the inflation data , like pretty much everyone else .

If the Fed can continue to bring inflation back to their 2% target sooner rather than later , the economic outlook looks pretty good and they will avoid a technical recession .

If inflation either bucks up against or remains stubbornly high , the Fed will move on rates which will further slow down their economy and will result in a slower and longer economic recovery for the US .

It's very much a narrow path that they are walking and , at the same time , this narrow path is the same sort of narrow path that we are walking here in Australia , too .

Yet their biggest advantage over us is their cost of energy is far more competitive than ours and , based on our current government policies here , it's going to take us some years , or even potentially decades , for our energy pricing to be meaningfully competitive , and that is obviously a challenge for us in terms of how we look at our inflation story here in

Australia . With those higher energy costs , it obviously flows through to higher input costs in our goods and services , and that's usually passed on to consumers in higher inflation . So that's what we have got as a challenge , but the US don't necessarily have as an immediate challenge for them .

Alright , let's turn our attention now to China and , as I mentioned in the intro , the Chinese economy is really important to what happens here in Australia . So we are seeing that the Chinese economy is struggling .

They need to further stimulate their domestic economy amid slowing business activity , a growing deflationary outlook and weaker export conditions and overall performance . Let's take a look at some of their latest data now , and then I want to talk more about the negative impacts in terms of the Australian economy and our interest rates .

So let's start with inflation , like we always do , and again we don't have any August data . That will be released shortly , but we don't have it at the time of recording , so we're looking only at the July data .

China's consumer price has dropped by 0.3% year on year in July , the first decrease since February of 2021 , compared to a flat reading in June and market estimates of a 0.4% fall . The cost of food fell 1.7% after rising in the prior 15 months , amid a plunge in pork prices . Non-food prices were flat after falling 0.6 previously .

Costs rose for clothing 1% versus 0.9 in June . Housing 0.1 of 1% versus a flat reading in June . Health 1.2% versus 1.1% , and education 2.4% versus 1.5% , while prices for transport continue to fall negative 4.7 versus negative 6.5 . Economic deflation is an emerging risk for China .

However , china's statistics agency said a fall in the CPI will only be temporary and inflation is projected to pick up gradually as the impact of the higher base year will fade away .

In their data , looking at China's core CPI reading again that extracts out the energy costs and those higher volatile costs , we saw that it was up 0.8 of 1% year on year and it's the most since January , after a 0.4% gain in June .

Global markets generally are worried about China's inflation data because general price declines in an economy that wasn't hit by the higher inflation breakouts that we saw in the Western developed nation means prices are falling because of slowing economic demand from both within China , but also weaker global demand for Chinese goods .

With inflation now non-existent , the central bank of China has moved on making money cheaper in China . They dropped their one year loan prime rate , their LPR , by 10 basis points to a record low of 3.45 , but they held steady their five year rate at 4.2% , which is really their mortgage rate . Now what ?

They are trying to play a balancing act here of stimulating their domestic economy whilst avoiding further weakening the Yuan , which is their currency , against other currencies like the US dollar . Looking at the employment picture now , we saw China surveyed urban unemployment rate inched up to 5.3% in July from June's 16 month low of 5.2% .

Interestingly , the Chinese authorities announced that , starting from last month , the release of their urban unemployment rate for youth and other age groups across the country will be suspended , citing the need for further improvement and optimizing this labor force survey statistics .

Now one could read into this that showing this level of youth unemployment or failing to showing this level of youth unemployment is because it's politically sensitive and also economic embarrassing for the government going forward if it struggles to show growth in , obviously , youth employment in their particular market .

So it really is one of those interesting sort of ideas of hiding the data and obviously not putting any media attention around sort of youth employment if it continues to see higher unemployment in that particular market . Looking at their retail sales , and we saw a decrease of 0.06% in July over the previous month .

Now they don't publish a current monthly consumer confidence or sentiment survey , so it's really hard to get a real time gauge and reading on whether they're optimistic or pessimistic right now in terms of the Chinese consumer . In terms of business picture , what did we see in the data ?

The official NBS manufacturing PMI rose to 49.7 in August from a reading of 49.3 in July , exceeding market forecast of a 49.4 but still indicating a slowing . Manufacturing sector Output grew the most in the five months 51.9 versus 50.2 in July and new orders increase for the first time in five months 50.2 versus 49.5 .

In some positive news out of China , export sales fell to their softest pace in three months 46.7 versus 46.3 , and employment declined for the six months in a row for a reading of 48 , even versus 48.1 last month .

On the price front , input costs climbed for the second straight month at the fastest pace , so 56.5 versus 52.4 , while output charges on my apologies accelerated for the first time in six months 52 , even versus 48.6 . Finally , business sentiment improved to a six month high of 55.6 versus 55.1 .

In some other positive news , it does appear some of the already implemented government stimulus is having some positive impact on increasing business activity , but it is also being offset by lower demand for Chinese export goods , giving this slowing global economy an increased price competition .

So the Chinese government has little choice but to try to stimulate further growth in the coming months to help their economy rebound . As I mentioned in my intro , a slowing Chinese economy isn't great for the Australian economy on a couple of fronts , as they are obviously our biggest trading partner .

Firstly , the most logical one is obviously Australia's biggest tourism industry in terms of attracting the Chinese market into Australia . Post COVID is one of our biggest growth markets and so obviously bringing that money into the country is very , very good for our terms of trade and also our local GDP .

Secondly , but even more importantly , their economic slowdown impacts the demand for the Australian dollar .

Now , over the past year , the Aussie dollar valuation against the US and other major currencies has been significantly impacted , and the demand for China for our dollar or , more to the point , their lack of demand is playing a big part in our currency devaluation .

So the net effect of a lower Australian dollar is that our imported goods cost more and this means it runs the risk of us importing higher inflation . Now , a great example of this is currently fuel . With our dollar falling further recently and because we don't produce fuel locally , we are paying higher prices for our petrol at the Bowser .

Now this is going to start showing up in higher inflation numbers over the next couple of months . So this is a problem for us in terms of if we import this inflation , it's gonna make it harder for the RBA to do their work .

Now we can obviously expand out from petrol and start thinking about sort of some of the other things that we import from China , namely clothing , electronics and obviously if our dollar is buying less against either the US or the Yuan , we're going to see . Obviously that means that we're going to import those goods are going to cost more .

Those costs are going to be passed on to us as consumers and that's ultimately going to relate to higher inflation , and higher inflation also then puts pressure on our interest rates .

So that's why it's really really important that , from an Australian economic perspective , that China is being our biggest trading partner , that they continue to want to buy more of our natural goods and also a lot of our primary production goods , such as our wheat , barley beef , seafood , et cetera .

We want to be able to put some demand for the Australian dollar as part of that , because obviously that will increase our Aussie dollar , which will mean that anything that we do import , such as the finished goods I was talking about before clothing , electricals obviously means less price inflation coming into the country as part of that .

So , again , a strong Chinese economy is very , very good for us in terms of putting pressure on the Australian dollar , which obviously reduces the risk of inflation and obviously impacting our interest rates here . So that rounds out the Chinese story . Let's finish off our offshore update by talking about the Eurozone .

Let's again start with the inflation story , and the preliminary results of August showed that the annual inflation rate in the Euro area remains steady at 5.3% , more than two and a half times above the ECB targeted goal and above the market consensus of 5.1% . Their core inflation rate eased as expected to a reading of 5.3% , down from July's 5.5% .

Disinflation on energy prices decreased at a slower pace , so negative 3.3% versus the month prior , which was negative 6.1% in July , and inflation slowed for food , alcohol and tobacco sorry 9.8% versus 10.8% as well as non-energy industrial goods 4.8% versus 5% , and services 5.5% versus 5.6% . On a monthly basis , consumer prices rose by 0.6% in August .

Now these numbers show that inflation is still continuing to persist in the Eurozone at a reasonable pace and higher than they would like it to be . In terms of any cash rate decision , they , too , also have a summer break in August , so their next decision on interest rates isn't until later this month .

Over the course of just over a year , the ECB has increased rates from negative 0.5 of 1% to 3.75 in order to combat this surge in inflation . Just like in the US , any further rate increases will be governed by the latest data on a meeting by meeting approach .

Looking at their employment story , we see that the EUO area seasonally adjusted unemployment rates stated a record low of 6.4% in July , matching market forecasts A year earlier , the jobless rate was higher at 6.7% . Still , the number of unemployed people increased by 73,000 for the month earlier to 10.944 million .

Amongst the largest EUO areas economies , the lowest jobless rate was recorded in Germany 2.9% , while the highest rate was observed in Spain 11.6% , italy 7.6% and France 7.4% . On the back of the employment picture , what's happening with the EURO zone's consumer , starting with the consumer confidence ?

According to the European Commission , the consumer confidence indicator in the EUO area was confirmed at a reading of negative 16 in August , down from negative 15.1 in July . This was the highest reading since February of 2022 , and it was the first decline in sentiment since September last year .

As consumers continue to find the going tougher , consumer confidence in the European Union also worsened negative 17 versus negative 16.1 in July . Their survey respondents got more pessimistic about their household's future financial situation and the expected general economic situation in their respective countries .

In terms of consumer spending , retail sales in the EUO area went down 0.3% of 1% from a month earlier , in June of 2023 , after a revised 0.6% rise in May , making market sorry , missing market expectations of a 0.2% of 1% increase .

In terms of the business picture , we saw business confidence in the EUO area decrease to 0.33 in August from a negative 0.09 points in July . Looking at the HCOB , eurozone Manufacturing PMI came in at a reading of 43.5 in August , up from a July 38 month low of 42.7 .

The reading is still indicative of a worsening health of the EUO area manufacturers in their economy , as total new orders and new export businesses declined at record rates and backlogs of work were sharply reduced .

The HCOB Eurozone Services PMI dropped to 48.3 in August from 50.9 in July and lower than market forecast of a reading of 50.5 , which were the preliminary estimates shown the services activity contracted for the first time since the end of 2022 amid worsening demand conditions , which is similar to the manufacturing PMI changes being experienced in the EU .

Let's try and assess the Eurozone . As they move forward past their summer and into their cooler and winter months , the European economies are continuing to face uphill challenges , and that continues to make the ECB job just that much harder .

Whilst they also continue to support Ukraine in their prolonged war efforts against Russia's illegal invasion , things aren't looking so great in that Eurozone . I know I've talked earlier about the basket case that is the UK economy as well . Things aren't looking so great over there at the moment . Let's take a look now at our story back home .

Like we always do , we start with the RBA update . In his final RBA board meeting , dr Govna Low and the RBA board made their cash rate decision before our first female governor in , michelle Bullock , takes over the reins . So did Dr Low leave a positive note for mortgage holders ?

Well , pleasingly , for the third month in a row , dr Low and the RBA board kept the cash rate on hold at 4.1% , giving a further welcome relief to many mortgage holders across the country .

With this being the third pause in a row , the RBA now appears comfortable , with which the speed of inflation is returning towards its target range of 2% to 3% , which is helping preserve as much of the employment gains that have been made over the past couple of years .

Now the decision indicates that the RBA to increase rates further from this point , they'll need a further inflation trigger point that worsens the short-term outlook for inflation . Before they make any such call but don't expect them to decrease the cash rate .

For at least the remainder of this year and into early 2024 is my prediction the risk still remains to the upside for a higher cash rate instead of a lower cash rate for now .

Now , as I mentioned at the start of this update and in closing out my RBA commentary , I do want to spend a moment to acknowledge the work of our outgoing governor , dr Phillip Lowe , for his service and important contribution over his term as governor .

Now I stand by what I've said publicly before , that Governor Lowe has done a great job in what has been very challenging and often a thankless role in terms of the work he has to do when he increases interest rates .

Now , over his tenure , his only misstep was his belief that interest rates would need to stay low into 2024 , and he's publicly apologized for getting this forecast wrong , even though most folks took his comments out of their original context , when he clearly stated if economic conditions remain challenging , then rates would need to stay low until 2024 .

Now most media sound bites about the rate call failed to provide this full message and all we got was this message rates were going to stay lower until 2024 . Now , for me , he's been harshly judged by some politicians , some in the media and , as usual , joe Public , who are always looking for someone to blame when things go wrong .

Obviously , with the benefit of hindsight , recent history tells us that the economic conditions didn't stay as challenging as long as they initially expected as record levels of government stimulus , put record amounts of money in our bank accounts , and then , when we got released from our COVID restrictions , most of us couldn't wait to get out and spend , spend , spend

whatever the price of the goods and services we were buying . That willingness to get on with life at any cost , when combined with global supply shocks stemming from worldwide lockdowns and slowdowns and , obviously , supply change bottlenecks , led to a reduction in productivity .

Plus Russia's invasion of the Ukraine , causing an energy and food supply shock in prices , resulted in an unexpected inflation breakout , which Dr Lo and the RBA board have no choice but to get to work on fixing by raising interest rates and slowing our economy .

It's always important that we are all reminded that macroeconomic forecasting borders on the near impossible to be consistently right . No central bank in the world predicted that a severe outbreak of inflation would occur , and then that inflation breakout would be a lot more severe because Russia invaded the Ukraine .

If Russia hadn't have done that , that inflation breakout wouldn't have been as severe and we wouldn't have seen the economic tightening cycle that we've seen here . And that's happened . Right now , as Dr Lo's term comes to an end , we see some of his and his board's work coming to fruition , so he has done a great job .

Now they , at the moment , appear to be threading the needle with a soft landing . This is no mean feat , if past history is anything to go by . When inflation breakouts occur , they usually take a far longer to rain back in and they usually have more devastating effects on employment , businesses , asset valuations and the economy overall .

Plus , the economic recovery usually takes a lot longer . It's still too early to call if we've tamed the inflation cycle for now .

However , if this rate cycle is over , or very close to it , and inflation does return to the 2% to 3% target range by the end of 2025 , as forecast , then Dr Lo and his board need a lot of kudos in navigating this narrow path , the result of which will be this less businesses failing , less people losing their jobs , asset price values holding up , governments

having more tax revenues to either spend or , hopefully , pay some of that debt off . So for that , he does deserve our enduring thanks for helping land the plane safely , if it does play out that way . Anyway , thanks for putting up for me speaking my mind . Let's now take a deeper look when it comes to the domestic data and what did we learn from that data ?

Starting with the inflation data , so in some further improving inflation news , the monthly consumer price index CPI indicator continues to moderate , growing by 4.9% over the year to July , down from the 5.4% recorded in June . Now , this was the lowest annual growth rate since January of 2022 .

When you adjust for volatile items and also holiday travel , the indicator shows a 5.8% increase in annual terms , down from 6.1% recorded in June , and this was the lowest annual growth rate since June of 2022 .

In terms of core inflation , this inflation in the headline number was driven by goods , particularly fruit and vegetable fuel , household items , with international holiday travel also contributing to the downward trend .

Contributing to continued upward pressure , however , was a 6% monthly increase in electricity , which would have been even higher , ie 19.2% , without the government market intervention In the July data was the first test in terms of whether businesses would pass on larger than usual wage increases effective from July and preliminarily driven by the Fair Work Commission's

2023-2024 increased wage decision .

We aren't out of the woods yet in terms of businesses passing on these costs , as we need more proof in the data in the next couple of months , but it's a good start that consumers are being more cost and spending conscious , forcing businesses to either absorb these cost increases or restructure their businesses to find savings or productivity improvements in other ways

. This data helps us with our understanding of any further or growing risk of a wage price spiral which , if allowed to materialise , causes higher inflationary outcomes . Hence why the RBA watches out for such developments Now , because inflation is our biggest challenge right now .

I thought I'd just summarise some of the price changes across certain categories to just highlight exactly what's been happening in terms of different categories and the inflation challenges we've had .

So this is the annual inflation in July compared to recent peaks , starting with petrol , the recent peak was 43.2% increase and now that's at a reading in July 2023 of negative . So disinflation negative 7.6% . Fruit and vegetables is in disinflation territory at negative 5.4% . That's coming off a peak of 19% . Communications is still actually growing . So 0.3% of 1% .

So it's still some level of inflation there , but it's down from 2% . Clothes 0.4% of 1% down from 9.2% . Meat and seafood is 2.4% down from 8.4% . Tobacco 3.6% down from 5.6% . Furnishing and household equipment 4.3% down from 8.5% . Cpi broadly 4.9% down from 8.4% . Alcohol 5% down from 5.4% . Health 5.2% down from 5.4% . Education 5.2% down from 5.6% .

Holiday travel 5.3% down from a peak of 29.3% . New dwelling purchasing costs . So this is the challenges we have . In the property side 5.9% , but down off its peaks in terms of 21.7% . So that was all of those . Supply bottlenecks is now starting to ease off as demand for housing starts to ease off . Non-alcohol beverages 6.8% down from 11.2% .

Rents , on the other hand , remained at 7.6% from their peak , so it's still at peak territory . Other food 8.3% down from 11.9% . Insurance and financial services still remaining at their peak 8.5% . Bread and cereals 9.9% down from 12.9% . Dairy is 12.7% versus 15.3% .

Now we all see that in our dairy costs , our yogurts , our cheeses , all of that stuff is showing up at the supermarket shelves . Gas 13.9% down from 27.2% . And electricity again our biggest challenge still at a peak level , increasing at 15.7% . So you can still see some of those .

So rents , other foods , insurances , cereals , dairy gas , electricity still very , very strong inflationary pressures in those particular markets . So we got to see those start coming down if we're going to achieve the target range of 2% to 3% for inflation . But a really healthy way to look at it to give you some greater context in terms of what's happening .

All right , let's move on to our labour force data numbers , and we saw that the employment declined in Australia by 14,600 jobs in July . Now this is the largest fall since the Delta lockdowns of 2021 . Yet it's only the third fall in the past 21 months showing the strength of our labour market . The result is that the unemployment rate rose to 3.7% from 3.5% .

Growth in the working age population accelerated marginally to a record annual pace of 2.8% in July . It is , however , worth highlighting that this increase in labour supply was partially offset by a fall in the participation rate to 66.7% from 66.8% last month .

Now , if you look at the numbers , without the falling participation rate , the unemployment rate would have increased further to a reading of 3.8% . So we're immigrating working age population people . They're coming in , but that participation rate fell down .

Now this is a turning point in the labour market that the RBA and most economists have been waiting for and wanting to see occur on the back of this tightening cycle , and it's now starting to play out . We saw job ads are trending lower , but businesses are still looking for workers . So the overall labour market is still tighter than in the past .

Now , based on the current restrictive cash rate settings and looking at the RBA unemployment forecast . They still believe that further job losses are on the cards and that unemployment rate will continue to increase from here , when we've got these restrictive cash rate settings in place . Let's focus on the consumer now , starting with the consumer sentiment survey .

We saw the Westpac Melbourne Institute consumer sentiment dipped 0.4 of 1% to a reading of 81 in the month of August and is 0.3% lower over the year . This result comes even after two consecutive rate pauses in July and August , before the announcement today . Consumers still remain very pessimistic about their general short-term outlook .

We can see that there in the graph if you're watching the video . A couple of things to highlight here . A time to buy a dwelling the typical average is $1.21.4 reading . That's currently sitting at $72.1 . So that's going to test the depth of the buying market in terms of demand . But house price expectations index suggests something different , averaging $125.8 .

Yet the reading at the moment is $151.2 . So people think that house prices are going to continue to keep going up . Just highlighting a couple of those points . Looking at retail spending , and we saw retail spending increased by 0.5 of 1% in July , partially reversing a fall of 0.8 in June .

This increase was supported by some temporary factors , such as the 2023 FIFA Women's World Cup and also school holidays , so we spend more when we're out socialising and able to be able to participate in things . It also could be attributed to the Fair Work Commission's award wage increase which took effect from 1 July , putting more money in people's pockets .

When you do that , they usually spend it . Spending on most non-food categories increase , partly reversing the sharp falls recorded in June . So department stores was plus 3.6% recorded the fastest rise , followed by clothing and footwear plus 2% and other retailing plus 0.3 of 1% . Spending in cafes and restaurants was 1.3% , also increased .

Just a reminder that population growth and higher inflation increases the overall retail spending amount . So when you take those into account , the underlying growth in retail trade still remains quite weak . Retail spending has gone sideways since November of 2022 .

Inflation-adjusted spending per capita , when we take a deeper dive into it , has increased by an annual average pace of around 1.5% over the past three and a half years . Now that is below the pre-pandemic annual average of around 1.9% .

So , for clearer context , inflation-adjusted spending per capita has fallen by around 5% over the past year on the back of the RBA tightening or taking away household spending power through higher interest rates as well as household savings budgets also being eroded .

Let's look at the business picture now , and we saw a business confidence Australia's NAB business confidence index increase to a reading of two in July from a downally revised negative one in the prior month , pointing to the highest level since January but remaining historically low .

Business conditions stayed resilient , with a reading of 10 versus 11 last month , a mid-steady sales profitability and solid employment story . Capacity utilization so this is starting to think about the flywheel , the economic flywheel . Capacity utilization rose further and remained well above average 84.5 versus 83.6% . Trading conditions again this is forward indicating .

Leading indicators strengthened slightly , with forward orders edging higher from negative one versus negative two . Labor cost growth in quarterly equivalent terms rose sharply 3.7% versus 2.3% in June , due to wage rises taking effect from the 1st of July .

It was further rises in purchasing costs in terms of purchase cost growth , possibly reflecting energy prices 2.6 versus 2.2 . And final price growth also accelerated 2% versus 1% . These cost accelerations are noted by most economists as worth keeping an eye on , which I'm sure the RBA will be closely watching as well .

It comes back to the story of just how much of these costs businesses are willing or able to pass on In terms of those increased cost that into prices that we pay , which will obviously push inflation higher or We'll again they go about not being able to do that and look at finding costs in other areas , such as savings or higher Predictivity elsewhere .

If the RBA is looking for a reason this is important If the RBA is looking for a reason to car to to increase cat the cash rate , again it's going to come from this source and that's why consumers and businesses need to spend a little bit , a little bit less in the time For the time being .

Now , talking about spending , there's some other important business data from capital expenditure Intentions which did point to businesses willing to invest into their future , and that's obviously going against the grain of of reducing their spending . But there is a silver lining to some of this spending , which I'll mention at the end here .

So in the June quarter , capital expenditure jumped by 2.8 percent , with gains across all asset classes . In annual terms , capex is up 10.8 percent , the strongest uplift in 18 months .

Elevator levels of capital utilization and strong growth in employment are driving a need to invest , coupled with last-minute rush to take advantage of the generous tax incentives on offer by the government .

So , based on some forward projection models by St George Bank , they see capex potentially increasing by further 10.2 percent for non mining investment in the 23-24 period .

Now let's hope and this is what I was mentioning before let's hope that that investment is all about lifting productivity , which is an inflation buster , rather than just having to do that in in wage costs , which will potentially be passed on in terms of higher costs for goods and services , and that's inflation rate , which is what we don't want .

So that runs out our general economic update . Let's pivot now and focus in on the property story . A couple of areas I want to focus in on is housing finance . We saw the value of housing finance , excluding refinances , fell 1.2 percent in July . This was the second consecutive monthly fall , after a 1.6 percent slide in June .

Despite these falls , activity remains 5.8 percent above the February low , which coincides with the trough in the national dwelling price . Owner-occupier lending fell 1.9 percent in July after June's 3.1 percent drop .

Weakness was evident in lending for construction of new dwellings We've been talking about that a lot which had a reading of negative 5.7 percent amid continued challenges in the industry . Finances for the purchases of new dwellings was negative 1.2 percent and Established negative 0.4 of 1 percent . Dwellings also slipped investors .

Lending recorded a slight negative 0.1 fall , with larger deviations across states . So we saw Queensland , actually , was quite positive in in terms of investment lending 6.8 percent surge in the month , whilst investor lending in the largest state of New South Wales was negative 0.8 of 1 percent and victoria was negative 2.6 percent .

In its result , other states and territories were mixed . Now , in refinancing terms , activity jumped 5.4 percent in July , hitting a new record high of over 21.5 billion . As household shopped around for better mortgage deals , refinancing activity for owner occupiers was positive 4.9 percent and for investors was positive 6.5 percent .

Now , that's on the back , obviously , of all of these fixed rates also currently Expiring . It's a timely reminder folks that if you haven't Shopped your mortgage around in the past 18 months , you should be shopping that around using your investments . Have your broker To to be able to find you a better deal .

Now , in terms of price movements , what did we learn ? We're looking at the core logic , monthly data . We saw dwelling prices rose a further 0.8 of 1 percent in august and that's a reacceleration On the july 0.7 percent gain , you know .

So that's back to back gains with no interest rates being probably the the main cause for a sentiment shift and an increase in activity In terms of what that looks like . So if the peak of the cycle , the rate cycle that is , is over , that is going to have a positive sentiment impact in terms of people Getting active in the property market .

Now , since the bottom the bottom , we add , in february national dwelling prices are now 4.9 percent higher . So let's do our around the grounds we saw . Sydney's monthly result was 1.1 percent higher over the quarter . It's 3.8 percent higher . Melvin was 0.5 or 1 percent higher quarterly 1.6 . Brisbane a very solid month 1.5 percent growth 4.2 for the quarter .

Adelaide 1.1 percent growth , 3.4 for the quarter . Perth 0.9 of 1 percent for the quarter 2.9 percent . Hobart the only negative market which saw property prices fall , and hobart negative 0.1 of 1 percent for the quarter . It's negative 0.5 . Darwin was up 0.8 of 1 percent to 1.6 percent for the quarter .

Canberra was up 0.3 of 1 percent and for the quarter was up 0.5 of 1 percent . Now , as I've mentioned , in the last couple of months and also coming now into the spring selling season , the supply of new listings will be critical in terms of the short term price direction for property .

Now new listings have increased by an uncharacteristically larger 12.9 percent over the past two months . Now , that said , this increase in supply has been absorbed by the market , with absorption of new listings remaining above 100 percent .

If you're looking at the chart , you'll see that if you're watching the video , meaning that current demand levels are Are being absorbed higher than new suppliers coming online at least for now anyway , and I think that's an important measure to see where property prices are going to go . Now .

I'm expecting new listings to further increase On the back of cost of living pressures for owner occupiers and higher holding costs for investors , as that puts pressure On rental yields . If that starts to play out , fixed rate mortgages roll over now .

That will significantly increase those costs of those mortgage repayments and that could force more sellers into the market . Now again , I don't see it as being a contagion or a material impact , but I do believe it's going to increase supply in certain markets .

Now , the longer that the cash rate remains at restrictive levels , the more new listings I'm expecting to see now . This is naturally going to test the depth of the demand side and we'd put some downward pressure on values in some locations , but at the moment the demand side is beating those tests .

So again , we've got to keep an eye on this on a month-to-month basis for short-term direction of property prices . Now what we are seeing in the latest data also is that supply and demand drivers are performing differently In different markets around the country . So we're back to the classic markets within market story .

Now I expect this to continue over the next 12 months or more , and so we are going to see significantly better buying opportunities in the short term in some markets Compared to other markets over this period . Now , if you add to this , there's a clear you know instruction or impact of APRA's restrictive borrowing power assessments .

It is also forcing demand from investors into cities where there are affordable markets . So I'm expecting markets in that 400 to 700 price range to potentially outperform in the short term Based on this higher investor demand coming in , in addition to , obviously , the bulk of first home buyers playing this in this affordable market .

So it's a classic case of another Unintended and negative consequence of the APRA enforcing their buffer rate and impacting macro prudential Authority on the lending market .

Now , with that said , my warning is this to all investors that were heading into these markets time and time again , I've seen people jump into these markets and into regional markets or fringe markets and Most of the growth is actually led by investors , not by the fundamentals or the locals living in that particular market .

So whilst they might get an initial spike , the correction Because of this irrational behavior Is ultimately going to be a negative for them and the performance of that property over the long term . So always remember the economic fundamentals in the location that will drive future long-term land growth Is all that you're looking for .

So be quite picky about any location . Don't just grab anything because it's the next hot spot , because you'll find yourself you might have had a great win in the short term but ultimately you'll get an underperformance in terms of long-term capital growth . So that's really a quality message around .

Just remember economic quality of location is going to be , is going to be what really matters Over the next couple of decades and that's again what's going to drive your long-term capital growth in that particular market .

Now that wraps up the property side of the update , but again , I'll continue to promise I'll keep an eye on the supply side over the coming months and I'll keep you well informed in terms of what I'm seeing the depth of the demand side versus the expected increase supply that's going to come online until such time as we see a potential rate cut in the market ,

increasing the level of demand activity . Now I'll always highlight that again this is a great time for those people who are fortunate enough to invest , because you want to be buying when others aren't in the marketplace .

So this does give you another opportunity to potentially get into those really healthy markets before interest rates start coming back down , which we're sort of anticipating around the middle of next year . Alright , I also promised at the start of this update that I wanted to share some troubling data with you , and so here it is .

The value of new fixed term personal loan finances rose 4.7% in July , with lending for travel and holidays increasing 12.3% to be more than 60% higher than a year ago . So this suggests households are borrowing money to have holidays rather than relying on money saved for such trips .

Now , this is troubling me for this type of spending behavior whereby a sugar hit such as a holiday is paid for with borrowed money . Now , the least dangerous form . It means that the cost of a holiday is a lot more than you initially paid , because you're going to have to pay interest on the money that you borrowed , but the most dangerous form .

It puts individuals and households into a debt spiral that results in greater financial and personal harm over the long term . So my message here is one should never borrow or spend money on anything you can't afford or you haven't yet earned . By doing so , you are robbing your future self of your own money and paying more for the privilege of doing that .

Furthermore , you're setting yourself up on a course of creating a very dangerous habit which you might keep repeating throughout your life . Too often I hear or I witness stories of people who have fallen into the trap and have lost years of their life in playing catch up , or were still , they never get out of that personal debt trap .

Forming good money habits is the pathway to a less stressful and more rewarding life . For the bigger opportunities Now it starts with spending less than you earn and building saving habits . That teaches you delayed gratification outcomes .

Using someone else's money to take a holiday isn't a smart idea , and if you want to make something of your life , you keep doing that . You're ultimately going to end up on the harder side of life .

So please make sure you tell and help others family , friends , loved ones , colleagues this important lesson because , based on this data , too many people that's too many of them are building these bad habits , this instant hit , rather than forming better long term habits , and it really is going to play havoc with their lives in the future .

So that's what I'm seriously concerned about in terms of people borrowing money to basically have leisure and lifestyle outcomes . Anyway , that's a wrap for the MySeptember update . I'll be back again in early October and always remember that knowledge is empowering , but only if you act on it . Until next month , life and health .

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