Hedge Clippings | 28 June 2024

Like it or not, this week's inflation figures confirmed an unpleasant reality: The RBA is now closer to raising rates than cutting them. Although it was only the monthly number, inflation inched up in April to 3.6%, from 3.5% in March, but then jumped to 4.0% in May. Seasonally adjusted, May's number is a tad higher at 4.1%; excluding volatile items, such as fruit, veg and fuel, also came in at 4.0% (actually down 0.1%), while the Annual Trimmed Mean figure jumped 0.3% to 4.4%. The RBA's task (although out of their direct control) might be helped by figures released yesterday showing job vacancies falling 2.7% in May, and are now down 26% since their post COVID peak in May 2022.

That's it for the hard numbers, but where does it leave the RBA? Let's put it this way, the narrow path is getting narrower, to the extent we'd say they're more like walking a tightrope. The challenge for the RBA is that they have a two speed economy, or two sections (at least) of it, each of which is affected differently in the current economic times.

Those on lower incomes, or reliant on assistance of some sort, are feeling the pinch, so the government is "splashing the cash" to save them. Meanwhile, more fortunate sections of the community, such as those with higher incomes, or possibly baby boomers enjoying the fruits of their previous labour, or those with the good management or fortune to have paid off their mortgage, have spending patterns that are relatively unaffected by inflation of 4%.

So while the RBA is aiming on taming persistent inflation using the only tool at their disposal - trimming demand to match supply - their task is being made more difficult by a government that is trying to soften the inflationary blow, particularly for those less well off, and those hurting as a result of that inflation, including higher mortgage or rental costs, and sky high power bills. Hence Canberra's support for across the board wage increases for 2.6m lower paid workers, and tax cuts and power subsidies for all, each of which kick in from next Monday.

In its effort to please those doing it tough, the government is not helping the RBA. Rather, it is helping to fuel inflation, whether it be via tax cuts or income support. That may be helping some people, but it is not helping the RBA. We were always taught that things work best when everyone pulls on the same rope, and in the same direction. This looks more like they're pulling from opposite ends.

Which takes us back to the old saying, which according to the Bob Dylan song, can be attributed to Abraham Lincoln: "You can please some of the people all the time, or all of the people some of the time, but you can't please all of the people, all of the time."

The government's dilemma is not helped by the fact that there's a countdown to an election due either next May (half Senate) or in September for the House of Representatives. So pencil in sometime between now and 24th of May next year for both. Albo will be desperate not to risk being remembered as a one-term wonder, so it was notable that Treasurer Jim Chalmers was this week spruiking a second successive budget surplus under a Labor government, while carefully avoiding to mention the impending fiscal cliff thereafter. Don't rule out an earlier date if they see things getting stickier.

Of course, as pointed out by the new RBA Deputy Governor Andrew Hauser (a.k.a. the first central banker with a rare sense of humour) in this presentation to the Citi A50 Australian Economic Forum last night. While the board is limited to influencing demand via monetary policy, they take a wide range of data into account when making their decisions. First and foremost on the list though is inflation, so watch out for their next rate decision due on Tuesday 6th of August.

By next week we may have a topic other than inflation and interest rates to consider. The first debate between Biden and Trump has just concluded, with early indications Biden faltered badly on occasions, but landed a strong blow with his accusation (presumably well practised) that Trump has the morals of an alley cat. Expect snippets of both to be repeated ad infinitum in respective TV ads between now and November.

Meanwhile across the Atlantic, the UK heads to the polls next Thursday in what is shaping up as a disaster for the (currently) ruling Conservatives. How the mighty are fallen, and seemingly mostly from self-inflicted wounds.

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It doesn't look like the RBA is planning to join

the global rate-cuts club soon

Pendal

June 2024

AS expected, there was no rate change from the Reserve Bank today.

We believe changes are more likely to happen at RBA meetings where updated forecasts are released in the form of their Statement on Monetary Policy.

Those meetings are held in February, May, August and November.

What did we get out of today's statement?

There are a lot of known unknowns at the RBA at the moment:

• To what extent are lags from past policy tightening still feeding through to the economy?
• How will consumption growth look after tax cuts, the wealth effect from rising house prices and lower inflation?
• What pricing responses will we see from businesses in light of a tight labour market and slowing demand?
• And what of the external environment? Geopolitical risks remain elevated. The economic outlook for China and the US has improved. Commodity prices have risen.

The central bank rate-cut club has increased its membership in recent months.

The Bank of Canada and the European Central Bank both joined the club this month, easing by 0.25% each.

Existing club members include the Swiss National Bank and Sweden's Riksbank.

Anyone looking for Australia to join the club soon would be disappointed, however.

The final paragraph from today's RBA note said: "Inflation is easing but has been doing so more slowly than previously expected and it remains high.

"The Board expects that it will be some time yet before inflation is sustainably in the target range."

So the RBA is not ruling anything in or out. Rate hikes? We see this as highly unlikely.

What the RBA is looking for

The RBA needs to see inflation moving sustainably towards its target before easing policy.

Instead, right now it sees excess demand in the economy and a tight labour market.

There is now a higher risk of an RBA policy mistake caused by holding policy too tight, for too long.

The RBA is now reactive to past data. Gone are the days of relying on forecasts resulting in policy changes.

That is a scenario they are more comfortable with, however.

Easing policy too soon - without inflation properly contained - is the death knell for any central banker.

Author: Steve Campbell head of cash strategies.

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Transition trilemma: a reckoning for decarbonisation?

abrdn

June 2024

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