The Reserve Bank of Australia ("RBA") met for the second time this year, increasing the official cash rate by 0.25%. Despite some softer local results, the move appeared to be inevitable given the market interest rate momentum and strong inflation commentary.
Consumer confidence remains low, but households are still spending. However, GDP data from the previous quarter showed only modest growth, with an annualised rate of less than 3%, which was lower than expected. It appears that "good" news these days can take the form of factors that drive down inflation there are indicators showing a slowing of inflation, such as weaker-than-expected wage growth was received well by the local market.
This is the Government's balancing act: how to achieve growth during a period of inflation while also raising interest rates to dampen it.
As we mentioned last month, 'Business Confidence' has been cautious but still relatively high. According to data from the Australian Bureau of Statistics, Australian businesses plan to invest around $130 billion in capital expenditure in 2024, for example.
This is boosted in part by the rate of inflation, but it still provides good protection against rising interest rates and weaker forwards data.
However, many business leaders have been vocal about their expectations for a softer year ahead, so perhaps invest with caution.
Shares & Markets
The Australian share market has caught up with sentiment after a very strong run recently. The All Ordinaries had a negative month in February, falling by more than 3%. Given their 2021 highs, this is perhaps unsurprising.
The drop in Australian shares mirrored a broader global trend in which investors are once again concerned about the global economy's sustainability.
What Is the Future of Local Interest Rates?
Again, some insights from the ASX Cash Rate Futures, gauging month-to-month expectations for a peak cash rate destination. Expectations have risen sharply this month, with the market now pricing in more rate hikes before a rate cut in early to mid-2024.
The ASX Cash Rate Futures indicate this, as shown below.
As a result, financial markets anticipate that the cash rate will peak and remain at around 4.2% until April 2024.
Interest Rates Worldwide Update
Central banks throughout the developed world continue to deal with higher interest rates, aware that their decisions have serious consequences.
New Zealand remains on the radar, particularly with severe weather events posing short-term challenges. Their central bank meets in April, and more increases are still expected. There is also real concern about households, with 90% of mortgages currently on fixed rates, with many of these coming off in the next year.
In the United Kingdom, the Bank of England raised interest rates by 50 basis points to 4.0% at their February meeting, the highest level in 14 years.
While more rate increases are expected, there is some hope that inflation has reached its peak.
The yield curve in the United States is now less inverted at the short end, with the two-year yield hovering around 5% (15-year high). This is based on their very strong local data, which indicates that the central rate will exceed 5.0% in 2023. When the Federal Reserve meets later this month, this will result in a 25 basis point increase.
Following their eighth rate hike this cycle last month, the Bank of Canada is expected to hold rates at 4.50%. Their economy appears to be at the front of the cycle, with both prices and growth levels stabilising.
The momentum in the Eurozone has shifted quickly with central interest rate expectations rising to 4%, especially after inflation in France, Spain, and other parts of the region rose faster than expected.
Before making any changes today, we compare central bank cash rates to their longer-term 10-year bond yields. The "spread" has narrowed this month, with long-term rates rising significantly.
As a broad statement, this reflects expectations for higher interest rates, with long-term rates looking realistic in a more "normal" rate world.
The change or narrowing of the spread between short and long term money is something to keep an eye on from now on. Now that short-term interest rates are higher and potentially more stable, we can see what the market thinks about the long-term outlook for rates and economic conditions.
Local Money Exchanges
Australian money markets were active, with yields rising across the board.
The yield curve is currently very flat, though it is more "normal" than in other economies. The RBA still has room to manoeuvre if necessary.
The 180-day rate increased as expected, reflecting shifting expectations for higher interest rate hikes.
As our yield curve flattens, the 10-year rate follows global markets and moves significantly higher (3 and 5-year money moves even higher). The market has quickly changed its mind about the severity of future interest rates.
Residential Real Estate
The latest CoreLogic residential monthly property results show an overall fall, but it is more modest than the recent trend, with Sydney actually recording an increase last month.
It's early days, but one headline is that rising housing prices coincide with low supply and an overall increase in clearance levels.
Charter Keck Cramer released some really good residential property analysis in February, focusing on the Apartment market in Australia.
Many of the key findings echoed sentiments expressed last month, namely:
Population growth drives the demand for more and more diverse housing types. Melbourne, for example, is heavily reliant on Net Overseas Migration ("NOM"), and it will account for the lion's share of NOM in Australia (34% over the next decade), with Sydney close behind on 32%. This will increase demand.
As we all know, many parts of Australia are experiencing a severe rental crisis, which is expected to last for the foreseeable future.
In summary, CKC anticipates a "natural price floor on apartment price falls," driven by a lack of supply, higher rents, and, despite a record level of longer-term renters, an inherent desire for many to buy.
Commercial Real Estate
Not surprisingly, retail has been the most reviled sector of the property market.
So it was very encouraging to read that the Melbourne CBD led a very strong contraction in the vacancy rate to only 9.2%, despite some improvements in other markets (except for a struggling Perth with a vacancy rate of 26%). This was driven in part by returning office workers and international students, and it confirms that our overall understanding of economic conditions is skewed.
The Australian dollar fell to its lowest level this year, just below US68, as strong US data allowed it to outperform most currencies.
Otherwise, it was a fairly consistent month.
The AUD remains a relevant currency on global markets; in fact, it is the world's fifth most traded currency, trailing only the USD, Euro, Yen, and Pound.
We wish you a prosperous month in the coming months.