RBA Nov 2023 | Inflation – Material Enough?

Speaking of inflation , I feel I've got a bit of a rant coming on , so stay tuned for that later in the update . And finally , I'll share my latest property market updates and thoughts in terms of where the market's going . So let's get into this update .

However , before we get into unpacking all of the economic data , it's important to note that , highlighting the geopolitical tensions and the outbreak of war in the Middle East , which is obviously not only a humanitarian disaster , an incredibly tragic and life-changing event for those involved .

But because this is an economic update , I can't also avoid about not talking about the broader negative global economic impacts .

So when you see uncertainty and instability affect those global economic indicators , what we're talking about there is confidence , sentiment , investment and , of course , when we then start to think about on the ground impacts oil supply and the prices of oil , trade , disruptions in terms of those supply chain networks and that obviously then flows on in disrupting the

broader economic activity and we see that downturn in that economic activity . So let's hope we can find a pathway to a lasting resolution for peace in the Middle East and also let's hope that we can see that Ukraine find a way forward in terms of what's happening over there with the invasion by Russia into that particular market . So very challenging .

And so when we see so much geopolitical uncertainty and then we combine that with the inflation uncertainty sorry , there is a significant increase in the cost of debt . That's also compounding to put this pressure on governments and also business profits .

And what we've seen globally is the equity and bond markets have become very jittery around those particular developments .

So , generally speaking , we've seen share markets across most of the developed worlds coming off their peaks by at least double digits in most cases , and there's going to be further downward pressure in terms of the risk stemming from those geopolitical tensions and those inflationary forces slowing down those developed economies .

So we're basically going to see equity markets struggle over the near short to medium term as well . So really sorry to be starting with such somber and negative news when it comes to that , but we ultimately do need to recognize that these do have economic implications as well as , obviously , the very , very disturbing humanitarian consequences as well .

All right , enough of that . Let's now move into some of the data and let's unpack the story , like we always do , starting with the US data . First up , let's look at their GDP results , and the US Bureau of Economic Analysis reported that the US economy expanded and an annualized 4.9% in the third quarter .

Now , that's the most since the last quarter of 2021 and above market forecasts of a 4.3% . Looking at the advanced estimates , the US GDP expanded by 2.9% when compared to the last quarter of last year , so that is a pretty solid number in terms of the quarterly results .

Making up the results , we see the consumer spending rose 4% , the most since quarter 4 of 2021 , export soared 6.2% , rebounding from a 9.3% fall in quarter 2 , and imports also increased 5.7% versus 7.6% .

Private inventories added 1.32 percentage points to growth , the first gain in three quarters , and residential investment rose , for the first time in nearly two years , 3.9% versus negative 2.2% , along with government spending , which increased faster at 4.6% versus 3.3% . Now for the most important data read let's focus in on their inflation story .

Now , the US inflation rate remains steady at 3.7% in September of 2023 , defying market expectations of a slight decrease to 3.6% , as a softer decline in energy prices offset slowing inflationary pressures in other categories . Energy costs fell by 0.5% of 1% , following a 3.6% decrease in August , primarily driven by a rebound in fuel prices .

Additionally , prices increased at softer rates for food 3.7% versus 4.3% . Now we did see new vehicles at a reading of 2.5% , a parallel reading of 2.3% , medical care commodities at 4.2% , shelter at 7.2% and transportation services at 9.1% . Now , cost of use cars and trucks , as well as medical service care , continued to decline .

The core CPI , which excludes volatile food and energy prices , slowed to a reading of 4.1% , making it the slowest reading since September of 2021 .

In terms of month on month inflation , us consumer prices rose by 0.4% from a month earlier in September 2023 , easing from a 0.6% advance in August , but exceeding market expectations by only a 0.3% increase In terms of US interest rates on the back of that inflationary story . So a bit of a mixed result there , but inflation is still quite high up .

So at the time of recording this presentation , the November US rates decision hadn't yet been released , as I pre-recorded this presentation before travelling overseas . So my apologies , but I can't provide the latest decision by the Fed .

I'll be sure to give a more meaningful insight in my December update , but what I can add at this point in time is the pressure on rates to increase higher and staying higher for longer is , in the US , remains the most likely base case scenario right now , on the back of tight labor markets and still positive consumer spending .

Speaking of the tight labor market , let's take a look at the data in terms of their employment rate . So we saw . The unemployment rate in the US was at a reading of 3.8% in September , slightly above market expectations of a reading of 3.7 . Still , the result consolidated evidence that the labor market remains tight on historical standards .

The number of unemployed individuals was essentially unchanged at 6.36 million people . The U6 unemployment rate , which also includes people who want to work but have given up searching and those working part time because they can't find full employment , edged lower to 7% after touching a 15 month high of 7.1% in August .

Finally , the labor force participation rate was also unchanged at 62.8% , the highest since February of 2020 . Looking at the US consumer data , starting with the US spending data , and what did we see ?

It was reported that personal spending in the US rose by 0.7% of 1% from a month earlier in September , and that's following a 0.4 increase in August , and that beat the market consensus of a 0.5 increase , boosted by both expenditure on services and also goods .

In terms of retail sales in the US , volume is advanced by 0.7 month on month in September , following an upwardly revised 0.8 of 1% rise in August and beating forecasts of a 0.3 advancement in the previous month .

The data continues to point to robust consumer spending , despite higher prices and borrowing costs , hence making the Fed's job of taming inflation that much harder , which I mentioned earlier . Looking at the year on year retail sales , we see an increase of 3.7% in September over the same month of the previous year .

On the consumer confidence front , what did we learn ? Well , the University of Michigan's consumer sentiment for the US fell to a reading of 63 in October from a reading of 68.1 in September , and that's the lowest in five months , and missing market expectations of a reading of 67.2 , which was the preliminary estimate .

The gauge for current economic conditions fell to a five month low of 66.7 from a reading of 71.4 in the previous months , and consumers future expectations retreated to a reading of 60.7 from 66 , also the lowest in five months .

Interestingly , the year ahead inflation expectations rose to a reading of 3.8% from a reading of 3.2% in the earlier month and the highest since May . And the five year outlook increased to 3% from 2.8 . So that's basically consumers and the market saying that they expect inflation to be higher and remain a little bit higher in terms of their forward expectations .

Now , remembering that the Fed has a target inflation range of 2% . So having these consumers think that it will be running at least one full percent higher than their target isn't going to sit well in terms of that inflation psychology perspective , so that again , the US Fed needs to do something about that .

Now , from the business side of the equation , what did we learn in terms of the data coming out of the US ? Well , business confidence first . What did we see ? Well , let's look at the IMS manufacturing PMI , which rose to a reading of 49 in September from a reading of 47.6 in the previous month .

Now , that was well above market expectations of a reading of 47.8 to reflect the slow contraction in the US manufacturing sector in 10 months .

Despite the softening slowdown , the data still pointed to the nearly one year's worth of consecutive monthly contractions in US factory activity , underscoring the impact of higher borrowing costs from the Fed reserve in this sector .

The Institute of Supply Management noted that , despite declining for the 13th month in a row , new orders fell at a significantly slower place as the evolving supply chain environment drove consumers to take on more projects .

As a consequence , production rebounded from August stagnation and grew the most since July of 2022 , also supported by the rapid depletion of supply chain bottlenecks . So that's a good new sign for the you know , a difficult part of the manufacturing sector in the US . Looking at the services PMI now , what did we learn ?

Well , the S&P Global US Services PMI increased to a reading of 50.9 in October of 2023 , from a reading of 50.1 in September , the highest in three months , and above market expectations of a reading of 49.8 from the preliminary estimates . And remember , anything below 50 is contractory , anything above 50 is expansionary .

So employment rose , but new business fell for the third month running , albeit at a slower pace than seen in September .

On the price front , we saw service providers saw a notable slowdown in charge of inflation amid competition pressures and consumer requests for concessions , which is a good sign also for future inflationary you know downward pressure as we look at those reads in the coming months .

In summing up the US story , although the recent summer GDP growth numbers was better than expected .

It's clear the US economy is going to have to slow further for the Fed to reach its 2% inflation target , as no country wants their inflation rate running anywhere higher than 3% , because technically it erodes citizens' borrowing power and , over time , the overall standards of living .

So just how high the Fed must go to slow the economy and reduce employment is the $64,000 question that the Fed is going to have to answer over the coming months , rodio .

Let's turn our attention now to China , starting with their GDP results , and we saw that the Chinese economy grew by a seasonally adjusted 1.3% in Q3 of 2023 , topping market expectations of a 1% rise and sharply accelerating from the downwardly revised 0.5% of 1% increase in Q2 .

In terms of this was the fifth consecutive period of quarterly expansion , buoyed by the slew of monetary stimulus measures over the past three months , including interest rate cuts and constant liquidity injections by the country's central bank . Looking at their annual GDP , it grew by 4.9% year on year in Q3 .

That beat market forecast of a 4.4% increase and offers hopes that it will meet its official annual target of around 5% this year , as sustained stimulus from Beijing that I mentioned a little earlier is offsetting the impact of prolonged property crisis and also weaker trading conditions , namely their exports .

In terms of the inflation story now , and what did we see around inflation ? Well , remember China's biggest concern is deflationary pressures rather than inflationary pressures . As we learn , the consumer price remained unchanged in September from a year earlier , following a 0.1% rise in the previous month and falling short of market consensus of a 0.2% gain .

The latest data indicates persistent deflationary pressures in the world's second largest economy , raising concerns about that sustainability of the economic recovery due to this sluggish demand that we've been sort of highlighting . In terms of their exports .

In annual core inflation rate , which excludes again the food and energy prices , remained unchanged at 0.8% of 1% in September . On the monthly basis , the CPI rose by 0.2% in September compared to consensus of 0.3% .

So inflation is benign in China and they do need to do something seriously about to bring that inflation , so pushing away that disinflation or stagflation pressures in their economy . So , with low inflation , what did they do about interest rates ? Well , the People's Bank of China held steady for October , as widely expected .

The one year loan prime rate , the LPR , which is the medium term lending facility used for corporate and household loans , was left unchanged at a record low of 3.45 . And the five year rate , which is a reference to mortgage rates , was maintained at 4.2% for the fourth straight month . Looking at the unemployment rate , what did we learn ?

In terms of China , surveyed urban unemployment rate declined to 5% in September from a reading of 5.2% in August . This was the lowest jobless rate since November of 2021 . The jobless rate in the 31 large cities and towns inched down to a reading of 5.2% in September from a reading of 5.3 in August .

The average weekly hours of employees in enterprises across the country edged up 48.8 hours from 48.7 hours from the month before . Retail sales what do we see the consumer in China doing on a month to month basis ? We're seeing retail sales in China increase by 0.02% of 1% in September over the previous month , so effectively flat in terms of that .

Now , year on year sales , we saw the Chinese retail sales climb by 5.5% year on year to September , accelerating from a 4.6% gain in the previous month and exceeding market estimates of a reading of 4.9% .

This was the largest increase in the pace of trade since May of this year , so that is a good sign in terms of the localized consumer spending , in terms of what they're doing in those retail sales areas . So that's a positive sign In terms of business confidence .

We saw the official NBS manufacturing PMI increase to a reading of 50.2 in September from a reading of 49.7 in August , topping market forecasts of a reading of 50 flat . This was the first growth in factory activity since March , amid recent stimulus from Beijing to bolster economic recovery .

Outputs rose for the fourth month running with the rate of expansion the fastest in six months In terms of the manufacturing PMI . The manufacturing PMI now . And we saw the Shenzhen Chinese general manufacturing PMI declined to a reading of 50.6 in September from August's six months high of 51 and below market estimates of a reading of 51.2 .

It was the second straight month of increases in the sector , amid several efforts from Beijing to revive the weakening post pandemic recovery . Output expanded the most in four months , amid further modest increase in new business , with export orders falling at a marginal pace .

That was the softest in three months , so it sounds like there's an improvement in terms of what's happening in their exports . Let's look at the services PMI now and the Shenzhen Chinese general services PMI dropped to a reading of 52.2 in September from a reading of 51.8 in the previous month .

This is pointing to the softest increase in services activity since the start of the year , as both business activity and new orders grew the least in 2023 to date , as demand in the sector remained weak despite the string of support measures . So a little bit of green shoots , but still very much a mixed bag in terms of China's sorry .

How do we sum up the China story right now ? Well , last month , the central bank added a net $289 billion into the financial system via a medium term lending facility , which is the largest monthly injection since December of 2020 to allow banks to extend credit .

So we've seen earlier stimulus and now another sort of significant stimulus program in terms of trying to kickstart the Chinese economy .

So the Chinese current economic performance is best done that by the Chinese statistical bureau , which said in their statement , and I quote we must also note that the external environment is becoming more complex and severe and domestic demand is still insufficient and the foundation of economic recovery still needs to be consolidated , meaning effectively .

While the local economy might be stabilizing somewhat , when combined with the global outlook , headwinds are still persistent , which is going to require further financial stimulus that they added in the last month . So China still got a lot to do to get their economy firing . All right , finally , let's go to the Eurozone .

So we always remember , the US is the biggest economy in the world , the combination of the Eurozone , or area , is the second biggest and obviously China is the third biggest economy . But the Eurozone is a combination of countries . So what do we see in their GDP results ?

Well , they hadn't actually been published at the time of recording , so I'll jump straight into their inflationary story and their month on month inflation rate . We saw the consumer price index in the Euro area increase by a reading of 0.3 of 1% in September over the previous month .

In terms of the annual inflation rate , it was confirmed that a reading of 4.3% year-on-year in September , and that is down from 5.2 and the lowest reading since October of 2021 . In terms of price , increased at a slower pace for services at a reading of 4.7 versus 5.5 in August . Non-energy industrial goods 4.1% versus 4.7 .

And food , alcohol and tobacco at 8.8% , down from 9.7% . So that's a positive reading in terms of all of those inflationary numbers heading in the right direction . In some further good news , energy costs decline further at a negative 4.6 versus negative 3.3 . So that's disinflation in terms of those particular numbers there as well . So good signs there .

The Eurozone's core inflation rate , which also again takes out the volatile food and energy prices , was also confirmed at 4.5% in September , making it the lowest point since August of 2022 . Among the largest economies in the Eurozone , which is referred to , hicp rates decreased in Germany , so we saw the inflationary rate in Germany fall from to 4.3% from 6.4 .

And the Netherlands they're in disinflationary territory . That's a good news story for them . So negative 0.3% of 1% versus the last inflation rate at 3.4% , but was unchanged in France at 5.7 . So France still has a lot of inflation rolling through their economy at the moment .

However , in Italy and Spain , inflation rates accelerated to 5.6 and 3.3 , from 5.5 and 2.4 respectively , as reported by EuroStats . So both Italy and Spain have got inflation going in their own direction . And what did the inflation data do in terms of the Eurozone's cash rate in their October meeting ?

Well , the ECB kept the cash rate on hold at multi-year highs during their October meeting , making a significant shift from the 15-month streak of rate hikes and reflecting a more cautious weight and sea stance among policymakers , which was influenced by the gradual easing of price pressures and concerns about the impending recession . So , sentiments low .

They're thinking about recession . That's having a positive impact on inflation and businesses are not passing on those costs , and that's also a good sign in terms of a potential pause in interest rates over in the Eurozone .

Now , this decision follows a series of 10 consecutive rate increases since July of 2022 , which elevated the main refinancing operation rate to a 22-year higher 4.5% and the deposit facility rate at an all-time record of 4% .

Whilst rates were kept on hold , the central bank stated it's determined to ensure that inflation returns to its 2% target range over the medium term and says that it will maintain interest rates at a higher level for a sufficiently extended period until they achieve this objective . So no rate cuts coming anytime soon in the Eurozone .

Looking at their unemployment data now and we saw the area seasonally adjusted unemployment rate fell to a reading of 6.4% In August the lowest on record from an upwardly revised 6.5 in July , which was in line with market expectations . The number of unemployed people decreased by 107,000 from the month earlier to 10.856 million .

Amongst the largest Euro area economies , the lowest jobless rates were recorded in Germany 3% , whilst the highest rates were observed in Spain 11.5 , yes , 11.5 , italy 7.5 , and France 7.3 . In terms of consumer confidence and sentiment .

Now the consumer confidence indicator for the Euro area edged down to a reading of 0.1 points from the previous month of negative 17.9 in October . This is the lowest in seven months and compared to a market expectations of a reading of negative 18.3 in preliminary estimates .

Elevated interest rates , alongside the rise in oil prices stemming from the Middle East conflict , further hit on consumer sentiment . The latest retail sales weren't available at the time of recording , so we'll skip down into looking at some of their business data now , and we saw the manufacturing PMI , which is referred to as the sorry .

The HCOB , eurozone Manufacturing PMI fell to a reading of 43 in October from a reading of 43.4 in September , the lowest in three months , and missing market expectations of a reading of 43.7 in preliminary estimates . New orders received fell sharply , again dropping at a slightly faster rate than September .

Back logs of orders were consequently depleted and dropped at a slightly faster rate . Firms reduced employment for the fifth consecutive month and at the sharpest rate since August of 2020 , so those orders aren't coming in , that employment's being dropped and obviously that's slowing the economy .

On the prices front , input prices were down for an eighth consecutive month , although the rate of decline eased for a third month in a row and average prices charged fell markedly . Now all of this is showing that high interest rates are having the desired effect when it comes to the manufacturing side of things in the Eurozone .

On the services PMI , we saw the HCOB Flash . Eurozone Services PMI fell to a reading of 47.8 in October , from a reading of 48.7 in September and below a forecast of 48.7 . The reading pointed to the third consecutive month of contraction in the services sector activity and the biggest slump since February of 2021 .

Recent months have seen that the services sector performance alter markedly , as a strong resurgent in activity early in the year has moved into reverse , in part reflecting a calling and post-pandemic surge in spending and travel and recreation . New business fell the most since January of 2021 and hiring came close to stalling .

Unfortunately , from an inflation perspective , input costs were buoyed by higher fuel prices and wage rates , although service sector cost inflation has fallen sharply compared to the year ago and the rate of inflation remains higher that at any time in the pre-pandemic period since 2008 . Here we see it again . Services inflation are problem in also the Eurozone as well .

So their momentum it really is starting to slow . So how do I sum up the Eurozone . These have been subtle changes in some positive areas , but that's all about inflation . But what is that doing ? It's actually ultimately slowing their economy and that's going to drive up unemployment and obviously have a negative overall economic impact .

So it really is a case of that . Their quarterly inflation data and the aggressive tightening cycle is having their desired effect slowing the economy but obviously means the overall economic impact is higher unemployment and poorer living standards and conditions in the short term in the Eurozone . All right , that wraps up our global fly-around .

Let's now talk about the biggest game in town , and that is the data . Back home here in Australia , and with all eyes glued on the RBA and their rate decision , before they glue their eyes to the , to the race that stops the nation , the Melbourne Cup . What did the reserve governor and the reserve board do ?

Well , in very much a close call today , the reserve governor Bullock and the reserve board pumped the economic breaks once again by deciding to increase the cash rate by 0.25 basis points , taking the cash rate to 4.35 percent .

Now , this is the 13th rate hike in this cycle and it now takes the cash rate higher than any level since April of 2012 , when the cash rate was at a reading of 4.25 .

It's clear that their decision of the new governor and the board had decided that the global uncertainty is leading to higher oil prices , which ultimately lead to higher input costs combined with higher electricity and rents , along with sticky services .

Inflation has led them to the conclusion to judge , in their opinion , that there has been an upward swing in the outlook to inflation in the short term and they aren't prepared to let this trend continue or see inflation getting trended in our economy . In fact , the governor made in speech a couple of weeks back , prior to the latest inflation data being released .

This is what she said . She said our focus remains on bringing inflation back to target within a reasonable time frame , whilst keeping unemployment growing . Now she also mentioned it is possible that this can be done with the cash rate at its current level , but there are risks that could see inflation return to target more slowly than currently forecast .

Now she says the board will not hesitate to raise the cash rate further if there is a material upward revision in the outlook of inflation .

So by lifting the cash rate today , the RBA governor and the board has judged that the latest inflation data was , in fact , material enough to bring the cash rate higher to further pump the brakes on a slowing and slowing the economy which will lead into the Christmas and , effectively , the Black Friday and Cyber Monday sales in November spending period .

So they're tapping the brakes early to try and make sure we spend less over that period and put more pressure on businesses Now off the back of this rate call . Let's take a look at the inflation data now and try and break it down . So that annual inflation data figure . What did we learn ?

Well , the annual CPI inflation was at a reading of 5.4% in the September quarter . Now , that was lower than the 6% annual rise in the June quarter and this marks the third consecutive quarter of lower annual inflation and down from a peak of 7.8% in the December 2022 quarter . So , on the annualized basis , it's heading in the right direction .

Then , if we look at the TRIME mean annual inflation rate of 5.2% was also lower in the September quarter compared to the June quarter , where the inflation reading was 5.9% In the peak of the December 2022 , where it was a reading of 6.8% . So , again , heading in the right direction .

But that's not our problem , it's the pace in which inflation is moving slower . So let's take a look at that quarterly data now and we saw that the CPI rose by 1.2% in the quarter , which is up from a 0.8% increase in the June quarter , and that's our problem .

So the most significant price rises were in automotive fuel on the back of higher fuel costs , so plus 7.2% in the quarter . Electricity our other big problem 4.2% . Rent was up 2.2% and new dwelling purchases by owner occupiers was up 1.3% .

So let's go a little bit deeper and unpack some of those key items to get a real sense of where our inflation problem is at when we look at the average of all eight capital cities . So I just mentioned before 1.2% for the quarter and in terms of September on September , change for all group CPI was 5.4% .

Now , food and alcohol beverages rose by 0.6% of 1% in the quarter . Alcohol and tobacco 1.4% . Living and footwear 0.4% . Housing 2.2% . Furniture , households , equipment and services . Disinflation negative 0.8% . Health 0.8% of 1% . Transport 3.2% . Think about transport .

Transport is a very high input cost in terms of passing on to the goods that we buy in the stores . In terms of communication 2.1% . Education and culture is easing at 0.2% , but year on year change is still sitting at 5.6% . So that's still sitting very , very high .

In terms of education negative 0.4% , and the annual September quarter on quarter change between September 22 and September 23 is 4.8% . So that's definitely heading in the right direction . And insurance and financial services grew by a further 1.4% , and that's also problematic at an annualized quarter on quarter September quarter on September quarter at 8.6% .

So , whilst inflation is continuing to come down , the $64,000 question remains is the speed at which is returning to the 2% to 3% target range as set by the RBA by the end of 2025 .

Now , if it goes any slower than this , then the real risk is that the economy , with higher inflation , being entrenched and remember that that wrecks any purchasing power and living standards , meaning that our money doesn't bias as much as what we want it to . And if it can , if it persists , then ultimately our living standards and condition continue to deteriorate .

So it's time for my rant and , yes , I've been ranting enough about inflation over time , but when it's coming back I need to rant further . So here I go Now . In terms of , we believe that the federal government is telling us that this inflation restory is a global events one . So , yes , let's unpack that .

Russia invades Ukraine , a revenue spending after COVID and huge government stimulus did kick off this current surge , the original surge of inflation . And now , on the back of that , we've got the Middle East conflict , which is elevating oil prices , potentially disrupting trade routes and supply chains and those types of things .

So that is definitely part of the picture . So when our treasurer talks about , you know it's all global well , he's half right . The other part of the story is the current resurgent inflation also has a lot to do with our domestic behavior . And so whilst that was then , this is now , and so what the RBA has to do is correct this story .

And so what are our big challenges domestically , where we have four big spending problems ? So they are electricity costs , housing costs , higher food and higher wage costs . So let me break them down for you , because I know how frustrating this might seem in terms of you know , the penalty of having all of these higher mortgage repayments .

So electricity costs first . So you know , in terms of our move to clean energy , which I fully support , but it was always going to come at a big economic cost in the short term . So demand for energy continues to grow , but we are lagging in the production supply to meet the ever growing demand .

And as we are retooling the energy grid for renewables , this also comes at a cost , and so that , combined with 20 years of government incompetence on both sides of politics , then we end up here where we are today , where the end consumer is basically being forced to pay higher energy costs . But we think about that from a household perspective .

What we also don't remember or some of us you know bypass is it's also a massive input cost . When it comes to businesses producing things . They have a significant increase in the spike of their costs and they pass that on to consumers and ultimately that leads to a spike of inflation .

In addition to that , housing costs recent record low interest rates combined with , obviously , a housing stimulus policy . Back in the time when we had the pandemic and we wanted to make sure that we could keep the economy moving , everyone government's pointed housing to do that . So what we did see is a huge spike in construction and demand for a construction .

So that , also , combined with the supply chain issues , led to construction costs over the last 80 months exploding in price . In addition to that , when you've got shortages of labor , the labor cost input also spikes up as the subcontractors can start charging higher and higher hourly rates for the work they're doing on the construction side as well .

So that also leads to , you know , higher you know input costs in terms of housing .

Now , if you combine that with the record levels of immigration , that's also the other factor here , which is the rents are increasing at their fastest rate in over a decade , with higher costs through interest rates , higher government taxes , higher government charges and compliance costs , all putting pressure on landlords .

They are passing on those costs Not all of them , I might add . They are currently subsidizing Most property investors are subsidizing their tenants at the moment in terms of those costs , but they are being passed on . So that's why we're seeing very , very strong inflation when it comes to rental inflation . Now let's look at the higher food prices .

So what I mentioned before electricity is a huge input costs . The other huge input cost is transport . Putting raw materials and finished goods into place for sale does come at a higher price . So higher oil costs , higher fuel costs and also higher wages costs , which is the other big input cost in any type of production of goods and services , has flowed through .

So our food costs are also significantly higher than they were a year earlier and we've all noticed it at the supermarket I mean in terms of prices of cheese and dairy and all of these other things have exploded In recent times . So food is an essential need and obviously we need to keep buying it . But in terms of businesses , they've got a choice to make .

Do they force that onto prices that we pay at the checkout or do they look at , you know , other ways in which they can reduce those costs ? Well , if they've got higher electricity costs , higher transport costs , higher wages costs , there's only so much of that that they can , you know , internally absorb without passing on those costs .

So , building on that story , we also know I mean , if you follow what's happening in terms of beef and lamb and all those things the actual market for those particular products , the prices have fallen through the floor , but we aren't necessarily seeing that at the checkout prices that we pay .

So what we've got to think about there is well , someone's obviously taking the difference . So is it in the distribution chain ? So is it in the , you know , because it's not happening at the farmer's gate ? So is the wholesaler able to , you know , take more profitability before they pass it on to the retailer ?

So the abattoirs and so forth , or , you know , is it the retailer getting the higher profits by not reducing the price at the checkout . Those two things are meaningful .

But when you start to also think about that , well , if all of those different businesses in the chain of businesses delivering these goods have all got higher prices , they may also be saying well , they are subsidizing those higher prices based on the reduced sort of raw input costs that they're paying for the lamb and for the beef and ultimately it's all being

absorbed by , maybe , energy , you know , oil manufacturers offshore , because they're the ones who ultimately benefit from these types of situations as well , those oil producers offshore . So it's really really challenging in terms of where those cost savings are going to come . But what I can tell you is , if you stop spending , doesn't matter where they come .

Those businesses have to make difficult decisions and those difficult decisions usually are about the number of staff that they've got on board and in terms of how many people they're employing and how else they can also find productive inputs and ways to improve their cost base so they can maintain some margin and some profitability .

That's a good little segue into the wages costs . So this is a tough balancing act , right , because ultimately a lot of consumers are out there . They're working hard , all the costs of living prices are going up , so they want higher wages , and that's completely understandable .

We definitely want those higher wages because our borrowing power is being diminished by these higher costs . But on the other side of the fence , every time we want higher wages , businesses want to recover those higher costs in selling their goods at a higher price , so they're not impacting the margin , and so that is the challenging point .

So really , in terms of the higher wages , if those higher wages are forthcoming , what , outside of productivity increases , what levers do businesses have to pull ? Well , in simple terms , they can increase the prices , which is what's inflationary , and that's what we've seen them doing , because consumers are still buying the goods .

They can increase the costs but keep the price as is , so they can absorb in terms of those increased costs , which reduces profitability , or , in terms of what we were saying before , they can look at their staffing levels and in some cases they may be able to increase the wages of some staff , but ultimately they may have to lay off some other staff as well .

So they're the difficult businesses that are difficult challenges and decisions that businesses have to make in terms of the trade-offs and the judgment calls around that .

So , if I summarize this , whilst all this activity in terms of spending and the economy continues and I'm not just talking here about the consumer , I'm also talking about governments , who have also got very , very large infrastructure spending programs , welfare programs such as NDIS and then you've got businesses , who , on the whole , feel pretty good about where the

situation is and we'll talk more about their data in a second and then you've got the household . The combination of the three of those continue to accepting the higher prices being offered . That ultimately means that inflation remains stickier .

So those businesses will keep passing on those costs until such time as either governments stop their spending , other businesses stop spending in terms of business to business and consumers also stop investing or spending in those consumables and those services as well .

And in terms of building on that story , I wanna sort of reference a couple of examples , and a clear example of that is in the services inflation . Although having come down a tad , it's still running at 5.8% over the year , and if you include some of the volatile items so that's stripping out those volatile items it's running at 6.2% .

So it's still running too high . And services inflation is definitely the most stickiest , and let me demonstrate this further by sort of talking about some additional context of that question . So , when you look at domestic driven inflation story , you need to look at what's referred to as the non-tradable goods and services .

Now , these are mainly driven by domestic factors . So in the latest data we saw the non-tradable inflation rise has risen by 1.3% for the quarter and is currently running annually at 6.2% .

Now , if you compare that to the inflation on tradable goods and services , which has a higher proportion of international trade , so that's the inflation that we import in through higher goods as we buy them in . That tradable inflation only rose by 0.7 of 1% in the quarter and is only running at 3.7% over the year .

So clearly you can see that we're not actually importing inflation . That's not really our problem at the moment . And in terms of , yes , we do have these higher costs in terms of oil and potentially global impacts . But don't be misled , don't be missold by our government telling us that it's all global measures that are causing our inflation issues here .

It's not . What it is is a spending problem . So we need to highlight that and , as I mentioned in my last update , it's this psychology that if we've got money , we need to spend it governments and businesses and consumers .

If we keep that psychology going , then ultimately the inflation genie and getting that inflation genie back in the bottle is going to be a very , very difficult task and interest rates are going to have to keep rising . So it's not a bad thing to be thinking about your spending and what you can contribute .

And in the lead up to Christmas so in November we've got obviously the Black Friday sales , cyber Monday sales and also Christmas spending coming up .

So that's the piece of work that the government and the RBA are going to be looking at in terms of continuing to reduce that spending , and we need to start seeing businesses start to reduce a bit of their spending as well , unless it's for productive purposes , which I'll talk a little bit later about .

But really , that ends my rant in terms of what needs to happen . And it clearly shows that , although the inflation story started with supply issues and offshore issues that we inherited and that triggered this ability for businesses to start charging more and they haven't led up because these record levels of savings , we have continued to keep spending .

So it is a domestic problem , more so than being told otherwise that it's a global problem for now . So we're in control , ultimately , by reducing government spending , by reducing business spending and by reducing household spending . All right , let's move on to other data .

Now let's have a look at the employment and labor force data to see what we can learn here . The ABS reported Australia's seasonally adjusted unemployment unexpectedly was at a three month low , at a reading of 3.6% in September , easing slightly from August's figure and falling below market consensus of a reading of 3.7 .

But there is some positive news in terms of a slowing economy . Don't just necessarily think that that's a big problem . The number of unemployed individuals dropped by 19,800 to 520,500 , as people looking for full-time jobs decreased by 19,700 to 338,300 , whilst those seeking part-time jobs dropped by 100 to a reading of 182,200 .

Now , at the same time , employment advanced by 6,700 jobs to 14,101,000 employed people , less than market forecast of 20,000 gain after a 63,300 increase in August . Part-time employment increased to 46,500 to an overall 4.3 million , whilst full-time employment declined by 39,900 jobs to 9.81 million .

Now , when you combine that with a participation rate , which went down to 66.7% from last month's record high of 67% , then you're also factoring the under-employment rate , which edged down to 6.4% from 6.5% , and you wrap them all up and you then start looking at the additional monthly hours in jobs , dropped by 8 million or 4% to 1.93 million .

What does all of this mean ? Because there are a lot of numbers , right , and they can be pretty jumbled up , but in theory , what's basically happening is how does the RBA read this ? Well , on face value , the unemployment rate going down and the media reports and those sound bites would have been a concern for people who were worried about interest rates .

But whilst the labor force remains incredibly strong , inside the data , what we did see is , quite frankly , 6,700 new jobs instead of an estimated 20,000 jobs . But when you also look at the participation rate , that's also dropping . That was the reason why the unemployment rate went higher . So people who are looking for employment , they are dropping off .

They're basically saying no , I don't think I'll be able to get that full-time employment , so that's also going down .

So , on the whole , when you judge the labor force data , it's actually still going in the right direction , but it still remains incredibly strong and we probably need to see that unemployment rate and the participation rate continue to decline further , leading to the unemployment rate being around 4.5% , which is consistent with the RBA's forecast .

So a little bit of work to do there in terms of slowing the economy down , and I know that sounds terrible , but that's what needs to happen here . In terms of the consumer , let's start with the consumer sentiment story .

In the Westpac Melbourne Institute , consumer Centerman Index rose by 2.9% to a reading of 82 in October from 79.7 in September , hitting the highest level in six months , but still deeply in pessimistic territory .

So when you get a batch of long-term no changes to interest rates a few months of that , people start to feel like you know , the world's not collapsing from underneath them . So obviously sentiment is going to be challenged with the prospect of higher interest rates .

In terms of what we saw in the confidence here , the only one that's really worth noting is the job story is continuing to be confident , so people still feel like they're going to have gainful employment , they're not worried about being unemployed , and so what are they doing ? Well , that's sort of well . They're not worried about it , so they're outspending .

So that's what we're basically seeing , and that also then showed up in the consumer spending data in terms of retail sales and consumer spending . So we saw retail sales rise 0.9 of 1% in September , following an upwardly revised increase of 0.3 in August and 0.5 in July .

The release of the latest iPhone and seasonally warmer weather was being reported as a possible reason why we saw that bounce in spending . People were out there gardening , improving their homes , doing their spring cleaning and so forth and also enjoying the good weather , so they're out and about spending .

Now , despite the bounce , the underlying trend and we have been talking about the trend is in the right direction still remains subdued , when you factor in the population growth story as well .

Now , if you're looking at Our video presentation of this , this is an excellent chart to look at because you can start to see some real indications of retail trade , retail trade per capita and the inflation adjusted retail trade , and you can really see that it is heading in the right direction .

So we saw retail trade is 2% higher than a year ago , which is well below the pre-pandemic average annual growth of 4.8% . And in per capita terms , westpac Group estimates that the retail trade is 0.8% lower than a year ago , which is well down on the pre-pandemic average annual growth rate of 3% . So we're definitely slowing , but we're still spending too much .

The monthly outcome was driven by bounce across most categories , including department stores 1.7% up , household goods 1.5% and other retailing 1.3% , on the back of that strong employment story we were talking about .

In terms of personal credit and this is a developing story that I mentioned earlier in a couple of other updates In looking at the personal credit data , we saw Nises credit cards and personal loans is continuing to expand at a solid pace of 2.3% over the year to September .

Now I flag this could be a developing story and a developing risk to some households , because that is the largest increase since November of 2010 .

So this is a developing story because , on the eye , that what we could be seeing is folks are going out there and , because they've run out of their own savings , they're now borrowing money to continue to keep their living standards and lifestyle at a certain level . So let's hope that isn't the case .

Let's hope it might be delayed delivery of cars or certain things that are coming offshore and we're seeing those spending coming up in the data , because that would be quite concerning that . We're seeing personal debt continuing to crease .

That would be dangerous over the medium to longer term for those households and , ultimately , if we get too much personal debt in the economy . Let's look at the business data now and what do we see ? We saw business conditions fell by three points to a reading of still plus 11 , which is a very strong index reading for September .

Despite the fall , conditions remain around average level . So again , businesses , from a conditions point of view , they're pretty happy in terms of , from a confidence point of view , that was also unchanged and has now been at a plus one index point for three consecutive months .

So businesses are still feeling pretty good about the economy and where it is right now and they're not second guessing themselves for the time being . On a positive note , all three sub indices eased over September and I know this sounds again silly when I say a positive note . This is positive for inflation , not so much positive for the short term economy .

But trading conditions were down three points , but still at plus 16 . Profitability was down six points at plus eight and unemployment Sorry employment , I should say was down two points at plus eight . Profitability recorded the largest decline and is now below the 10 year average , indicating business costs are starting to bite in terms of an .

On another positive note , growth in labor costs , these by 2% over the quarter in September , following by that sharp spike in July . So again , if you look at the graph there , you can get a sense of purchase costs , labor costs and prices .

In fact , growth in the labor market is well below the 3.3% rate recorded over the quarter to September 2022 , suggesting that the underlying momentum in wages growth is also moderating . So that is a good new story . Looking at business credit and borrowing , what did we learn ?

Business credit expanded by 0.8% of 1% in the month of September , followed by another strong reading of 0.7% over August . Now , over the past three months , business credit growth has averaged 0.6% . Now this is a step down from the rapid growth recorded through much of 2022 , but is comfortably above the 10 year average rate of 0.4% .

So business credit continues to be supported by resilient demand , elevated capacity utilization and a catch up in investments following the pandemic . Now , what's adding to the business decline in borrowings is the strong financial buffers in terms of what they accumulated during the pandemic .

So businesses getting the stimulus as well as performing well during the pandemic , have built up those buffers , so they're confident in terms of continuing to invest .

Overall , business still continues to remain upbeat as general spending and economic activity holds up , when , to some degree , we need to see investments starting to slow with the only exception of when we do want to see business investment , and that is in productivity gains . So in buying equipment or materials or software , that is productivity led .

That will ultimately be counterproductive for inflationary outcomes as well . So that's ultimately where we want to see that business investment occurring . All right , now let's talk about property . We're getting to the final lap . We're almost there , starting with housing credit , what did we see in the data ?

We saw that the data showed demand for housing credit remains strongest for owner occupiers , where credit grew by 0.4 in September and investors' credit grew by was also recorded at 0.2 of 1% . Both investor and owner-occupied credit has accelerated on a three-month average basis , suggesting a slight uptick in borrow activity is currently underway .

Whether this continues as the economic headwinds continue to mount is obviously the big question in terms of what that's going to look like .

So you can put that sort of credit growth potentially on slightly higher property prices , but certainly , based on our experience in our business , there is definitely more selling and buying activity going on by both owner-occupiers , more so than investors , but investors are still out there in the marketplace as well .

All right , so now let's take a look at the core logic price movements that were recorded across dwellings for the capital cities across Australia and we saw that the core logic national home values index rose a further 0.9 of 1% in October , accelerating from the 0.7% rise in September .

Now that was revised down from 0.8 , so they readjusted the growth rate from last month , in August , down to 0.7 , but we're seeing a 0.9% increase in the October data . Now , in terms of that's an increase of 7.6% since the most recent bottom of values were recorded in January of this year . So that's measuring the index of Australian property prices .

So we saw the bottom in January and we're now 7.6% above that bottom in terms of that recent decline .

Now , when comparing quarterly growth trends , we see that capital city growth values in the three months to June recorded 3.7% increase , but overall the last three months , when you factor in the three months to October , that growth race has slowed to 2.6% and so and that's when we measure all capital cities so we are starting to see that slowing down .

But we're also starting to see a further diversions in regards to capital cities on a city by city basis . So let's talk to that story now . We saw a pretty solid month in Sydney 0.8% growth for a quarterly gain of 2.5% . In Melbourne , 0.5% growth to a quarterly gain of 1.2% . Brisbane a quarterly gain of 1.4% . Very strong quarterly gain 3.8% very strong .

Adelaide 1.3% quarterly gain , 4.2% very strong . Perth the strongest 1.6% for the month , 4.6% for the year . Hobart managed to get some growth , which is great 0.8% of 1% but the overall quarterly growth is only 0.3% of 1% .

Darwin was the only capital city that had a negative rate of growth , which was negative only by negative 0.1 , so almost flat , and then the quarterly growth rate of only 0.3% of 1% . Canberra was also just got out a little bit of growth in the market at 0.1% of 1% and for the quarter , a 0.7% of 1% .

In summing up the results , I note that the three capital cities that have seen dwelling values rise by more than 10% over the first 10 months of the year was led by Sydney 10.9% , perth 10.8% and Brisbane 10.2% .

Now when we look at Brisbane , housing values posts a nominal recovery in October , erasing the previous negative 8.9% drop to values that reach a new record high .

Brisbane has effectively reached its new record high after its bottom in October of last year , and Perth and Adelaide have also reached new record highs after recovering from slow , from shallow downturns earlier this year . So they've had little double dips , but they are continuing to move into record high territories .

Now the remaining capital cities have some way to go . So they've had the remaining Sydney values 2.2% off their peaks , below their January peak of 2022 , and Melbourne values are still 3.7% below their March 2022 peak . Hobart values are down the most from their recent highs , remaining 11.6% below their recent peaks .

Now the big challenge is for prices to keep rising in both capital cities and regional markets is one of affordability . So affordability , supply and higher interest rates for longer .

In markets where affordability constraints coupled with rising supply levels , they are going to be tested in terms of the depth of the demand side of the equation how much of that supply can be absorbed .

And how much of that supply can be absorbed is the equation and , in my view , that is going to put downward pressure on prices in those particular locations as those demand levels fall into 2024 .

In markets where they are still affordable and where supply remains low , it's logical to see further upward pressure on prices in these markets over the next six months , as interest rates and demand remain strong for existing properties due to the shortage of property in those particular markets .

So my message is simple for this month In affordable locations across the country where supply is tight , expect solid competition and expect properties to sell quickly as soon as they are listed . If you don't have all your ducks lined up and you can't move quickly on an offer , then you won't be able to compete and win in that market .

You will not be able to buy . Properties will move too quickly for you . So the advice is get your pre-approval in play . Get ready to act . Do your research . Don't go crazy if you want to compete in those markets and win , because they are classic seller's markets and they will remain so into 2024 .

Now , if you're buying for the longer term , the decades term , and you are looking at other markets where supply is not as good as the long term but if you are looking at supply , imbalance will start to occur and the demand will fall away Well , you can be a little bit slower . You can be a little bit more controlled in terms of your execution .

You should always be buying into those markets . You're going to have more choice to also buy into those markets and when you're taking that longer term view , you should also be able to have some negotiating power . So that is what we would call a buyer's market that we're going to enter into in some of those other markets .

That's a pretty big but important takeaway in terms of looking at the markets within markets . There are definitely some seller's markets out there which are very hard to compete and win in , and there are also going to be some buying markets that are going to emerge in terms of some of our more expensive cities .

So there's going to be opportunity in those markets into 2024 as well . If you're taking a super long term view , as Warren Buffett or Uncle Warren would say , I like buying things at fair value , and so you'll start to see some of those fair value opportunities in those buyers markets .

But what you'll also see in those seller's markets , if you're looking to get a quick equity gain , you're going to be under competition . So make sure you've got all your ducks lined up and get your broker to get your pre-approval in play . Well , that wraps up another epic monthly update .

Sorry for those data points that I weren't able to update because I've had to pre-record this , but always remember I'll be back next month and remember that knowledge is empowering , but only if you act on it . So until next month . Bye for now .

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