Markets Overview
- ASX SPI 200 futures down 0.6% to 6,738.00
- Dow Average up 1.0% to 30,486.85
- Aussie up 0.2% to 0.6304 per US$
- U.S. 10-year yield fell 1.7bps to 3.9942%
- Australia 3-year bond yield fell 8 bps to 3.46%
- Australia 10-year bond yield fell 10 bps to 3.92%
- Gold spot little changed at $1,650.72
- Brent futures down 1.6% to $90.18/bbl
Economic Events
- 10:30: (AU) Sept. Westpac Leading Index MoM, prior -0.05%
- 11:00: (AU) Australia to Sell A$800 Million 3.25% 2029 Bonds
The Australian central bank’s decision to down-shift its pace of policy tightening reflects better-behaved wages and heavily indebted households that set its economy apart from global counterparts.
While inflation is still a problem in Australia, the Reserve Bank on Tuesday highlighted its fears of fallout from ultra-aggressive interest-rate increases, having hiked by 2.5 percentage points in six months. That compares with a Federal Reserve that has raised by 3 points in eight months.
Officials from Ottawa to Oslo have continually reinforced the need to crush inflation at all costs via sharp policy tightening. The RBA surprised markets two weeks ago when it delivered a quarter-point hike, ending a string of half-point moves and becoming the first major central bank to break ranks.
The following charts set out how and why RBA Governor Philip Lowe has turned less hawkish than his overseas colleagues.
Wages have contributed less to price pressures in Australia than elsewhere. Annual growth was a benign 2.6% in the second quarter and Lowe says labor costs remain “consistent” with inflation returning to the RBA’s 2-3% target.
In the US, where inflationary pressures are more powerful, wages are rising at more than 5%. Former Treasury Secretary Larry Summers said last week the economy will need to go into reverse to drive up unemployment sufficiently to cool pay and price pressures.
The Reserve Bank of New Zealand — among the most hawkish central banks globally — pointed this month to “heightened” wage pressures as it delivered a half-point hike. The RBA, by contrast, has said that “some further rise” in salaries would “not necessarily be cause for concern.”
Another factor seen easing pay pressure is a rapid recovery in overseas arrivals, including students who tend to work in the hospitality and tourism sectors where demand is the steepest.
That helps explain why economists expect the RBA will end its tightening cycle around 3.3% compared with 4.7% for the US.
Fiscal policy in Australia is seen tightening too, relieving pressure on the RBA from doing all the heavy lifting on prices. Treasurer Jim Chalmers has signaled a bias to restrain spending and insists he doesn’t want to make the central bank’s job any harder than it already is.
Chalmers will unveil his first budget on Tuesday when he will likely map a route to narrower fiscal deficits. Some lawmakers have suggested an easy option would be to reconsider tax cuts for high-income earners legislated to begin in mid-2024, following the chaos in the UK from its plan to scrap the top rate.
“No responsible government can ignore high and rising inflation,” Chalmers told reporters in Canberra this month.
Worries about second-order effects from a slump in the country’s A$10 trillion ($6.3 trillion) property market are also playing on policy makers’ minds. Prices in bellwether Sydney fell for an eighth straight month in September as rising rates hit buyers’ borrowing capacity.
Economists are forecasting a 15-20% peak-to-trough drop in national home values. They fear a deeper downturn could prompt Australia’s heavily indebted households to slash spending and trigger loan defaults, raising financial stability risks.
The RBA is also mindful of the lag between its policy actions and their transmission across the economy. With more than two-thirds of mortgages on variable rates, policy is particularly potent. In the US, by contrast, around 90% of home-loans are fixed over 30 years.
The difference in the structure of the mortgage market suggests the RBA can cool demand significantly by lifting rates close to neutral, instead of taking policy deep into restrictive territory.
An under-appreciated difference is that Australia’s central bank has multiple objectives. Unlike counterparts that focus solely on inflation, the RBA is also charged with achieving full employment and “the economic prosperity and welfare” of the Australian people.
Outside of the early part of the pandemic, Australia hasn’t recorded two consecutive quarters of economic contraction — the technical definition of recession — for 31 years.
The bank “has to be cautious because it has to balance out concerns about controlling inflation while not damaging the economy and causing unemployment to rise,” points out former Governor Bernie Fraser, who oversaw the introduction of the inflation-targeting regime. “These are the objectives they have to work with.”
That explains why Lowe has repeatedly highlighted the need to get control of inflation while keeping the economy on an “even keel.” That’s a sharp contrast with the Fed that has signaled a willingness to risk even recession to contain prices.
(Bloomberg)
Other News
A café owner charges customers more than TWICE as much if they don’t order politely. Chaii Stop, in Preston, Lancashire, has introduced a new rule to help customers remember their manners – charging them more for their drink.
Usman Hussain, 29, opened the shop selling chai, doughnuts, street food and desserts in March this year. He recently introduced a sign explaining that customers will pay different prices for the same drink depending how politely they order.
The sign explains that saying “Desi Chai” will cost you £5 while “Desi Chai please” will cost you £3. But “Hello, Desi Chai please” will cost you just £1.90.
Usman said that while the shop have never particularly experienced bad-mannered customers, he hopes the rule will encourage people to open up and reinforce the cafe’s culture of “good vibes only.” Soon-to-be dad-of-two Usman said: “I think it’s a nice reminder to use your manners, because unfortunately sometimes we do need reminding.
“We’ve never struggled with rude customers but since having the sign people are definitely coming in more open and having a laugh with us. To me, the most important thing in my business is to walk through the door and be treated like you’re a welcome guest in our home. It’s nice to have that respect reciprocated.”
(Manchester Evening News)
