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- 🏦Australia's inflation rate drops to 2.7%, lowest since August 2021, as energy and fuel costs plummet.
🏦Australia's inflation rate drops to 2.7%, lowest since August 2021, as energy and fuel costs plummet.
Miko Santos
September 26, 2024
Good Afternoon, everyone! Miko here. The other day the RBA kept the cash rate on hold, but yesterday's ABS report that inflation has fallen to 2.7% suggests a rate cut is imminent.
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Today’s reading time is 6 minutes. - Miko Santos
👇 Santos Unfiltered is a podcast that uses the best journalism to find the answers to the biggest questions.
🥝AUSTRALIA
Australia's inflation rate drops to 2.7%, lowest since August 2021, as energy and fuel costs plummet.
The latest data from the Australian Bureau of Statistics showed annual inflation cooled to 2.7% in August 2024, the lowest rate in three years, giving consumers some hope in the cost of living crisis. The sharp drop angers debates about what this extraordinary fall in inflation means for monetary policy, household finances, and economic growth.
The more you get into the details of this economic shift, it's about time you know precisely what dictates this course of change and what exactly it means for the ordinary Australians. From housing costs to grocery bills, from transportation expenses, the effects of this cooldown of inflation are expected to touch different dimensions of our daily life in ways that may reshape household budgets, consumer behavior, and savings habits in the months ahead.
The Highlights:
In annual inflation in August was 2.7%, from 3.5% in July
The weakness was especially supported by considerable declines in electricity prices -17.9% and automotive fuel -7.6%
Main contributors to annual inflation were housing, food and beverages, and alcohol and tobacco
Underlying inflation measures also fell to 2.5-year lows
Why it matters: This sharp drop in the rate of inflation is a big deal for the Australian economy. Generally speaking, lower inflation rates tend to reflect that an economy is stabilizing and, therefore, will put less stress on the budgets of households. Most impressively, there were significant declines in the prices of electricity and fuel prices: by 17.9% and by 7.6%, respectively, since these costs often have a cascading effect throughout many sectors of the economy.
That means more breathing room for consumers in their monthly expenses, perhaps allowing them to have a higher spending power elsewhere. Policy-wise, this data could affect decisions made by the Reserve Bank of Australia as far as interest rates are concerned, and if the trend were to continue, it may translate into monetary policy accommodation.
This, in turn, may affect everything from mortgage rates and consumer spending to business investments and job creation, molding the economic landscape in the coming months.
The bottom line: This inflation report is perhaps a very important point in the turning of Australia's economic journey. Such a cooling, especially in the key energy and fuel segments, would hint that some of the cost pressures that have been bleeding consumers and businesses alike could be receding. That might coax consumer sentiment better, and perhaps retail spending could rise in that process. For investors, this might be an environment in which to favor sectors benefiting from consumer discretionary spending.
While this might have been expected, given that inflation has cooled in some areas, it still remains above the RBA target of between 2-3%, a pointer that indeed there is still much to be achieved on matters to do with ensuring the right level of economic stability.
The mixed signals in different sectors, such as the continued rise in rental prices, suggest a complex economic picture. This is data to watch for its effect on monetary policy decisions from the investor's point of view, as a change in interest rate expectations may make huge differences in bond yields, the Australian dollar, and equity markets. What this generally positive report does bring out is the need for a nuanced approach toward investment strategies at this juncture. In other words, one must be well informed about events and adjust accordingly in investment decisions.
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🌋BIG PICTURE
Macquarie Bank Slapped with Record $4.995M Fine for Market Integrity Breaches. Australia's financial regulator fined Macquarie Bank a record $4.995 million for repeatedly allowing clients to place suspicious orders in the electricity futures market, potentially manipulating prices and affecting energy bills.
RBA Monitors AI Adoption in Finance: Balancing Benefits and Risks. The Reserve Bank of Australia is working in collaboration with financial regulators to understand the impact of artificial intelligence in banking; it points out various benefits from enhancing efficiency while also noting some of the potential risks, including operational issues, misinformation, and system vulnerabilities.
RBNZ Submission Highlights Efforts to Enhance Banking Competition and Access. The Reserve Bank of New Zealand supports efforts to improve competition in banking services, balancing financial stability with measures to enhance competition, innovation, and accessibility in the banking sector.
🚨HOUSING
Australian Property Market Hits Record High of Million-Dollar Suburbs
A record number of suburbs joined the million-dollar club, despite high interest rates and concerns about housing affordability in the Australian property market.
For the first time, about 30% of suburbs analyzed had median house or unit values of at least $1 million. This is despite a raft of challenging economic conditions, including high interest rates peaking at 4.5% for five years and a 10% fall in the housing affordability index in the last year. It is this resilience of the market that has driven the national home value index to fresh record peaks every month since November 2023.
In its latest Million Dollar Markets report, CoreLogic said 1,397 of 4,772 suburbs analyzed had reached a current median value of $1 million or higher-up from 21.7% back in January 2023 to 29.3% as of August 2024. The gains in million-dollar suburbs reflect both the ongoing strength in the Australian property market and raise vital debates on housing affordability and the distribution of wealth across the country.
The Highlights:
A record 29.3% of Australian suburbs have a median house or unit value above $1 Million in August 2024.
Sydney remains the leader of the million-dollar market, with almost 40% of all the million-dollar suburbs in the country.
Brisbane and Perth have both recorded large increases in the suburbs joining the million-dollar club, adding 46 and 36 markets, respectively.
This report looks at new entrants, re-entrants, and dropouts from the million-dollar club across different regions in Australia.
Why it matters: The growth of these million-dollar suburbs does matter, however, as this fact reflects both the strength and the challenges of the Australian property market. While this could indicate an exceptionally strong recovery and growth in property values, it has also underlined the fact that for many Australians, entrance into the housing market is becoming increasingly hard to enter.
The expansion of million-dollar suburbs beyond conventional affluent regions indicates a wider pattern of increasing property values that has already affected the affordability of houses, the distribution of wealth, and social mobility across the country. This could have long-term implications for general urban planning, including increased demand for infrastructure development, government housing policies related to affordability schemes or tax incentives, and financial well-being for Australian households, which may eventually lead to changes in the distribution of wealth and in social dynamics.
The Bottomline: is that while the million-dollar suburbs bring benefits like increased property value and rental yield, they also come along with risks like unaffordability and instability in the market for investors and home owners.
Meanwhile, though investors in such regions can enjoy immense growth in capital and price, they also have to be very aware of this market, which at this stage could risk not yielding anymore returns due to restrained affordability.
Investors should reflect upon the long-term sustainability of such high valuations in light of possible interest rate changes and economic fluctuations. Consider diversification across various property types, residential to commercial to industrial, and location-including urban and regional areas-as one of the key methods of managing those risks and enhancing the resilience of your property investment portfolio.
This could also overdrive the interest in more affordable regional markets for alternative property investments, such as commercial real estate or real estate investment trusts that show successful case studies of investors who have benefited from diversification into these sectors in search of better yield opportunities.
Full Report Below 👇️
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🌏GLOBAL MARKETS
🌏 Asian Markets Surge as China Announces Cash Handouts for National Day. Asian stocks surged, as China's announcement to dole out cash to encourage consumer spending ahead of National Day and upbeat developments in the technology sector, especially in Japan and South Korea, lifted sentiment.
🇨🇳 Calvin Klein Parent Company PVH Under Scrutiny in China for Cotton Sourcing Policies. China has launched an investigation into the American fashion house PVH, which owns Calvin Klein and Tommy Hilfiger for their refusal to use cotton from Xinjiang, raising the potential for sanctions that could greatly hamper its business in China.
🇺🇸 Wall Street Mixed: Dow Jones Drops, Nasdaq Edges Up Amid Economic Signals.U.S. stock markets showed mixed performance, with the S&P 500 and Dow Jones retreating slightly from recent record highs, while investors digest weak consumer confidence data and anticipate potential Federal Reserve actions.
🈺BUSINESS
CBA Sells 5% Stake in Vietnam's VIB Bank: A Strategic Move with Global Implications
Image : CBA newsroom
It sends shock waves in the financial world with the announcement by Commonwealth Bank of Australia of the sale of a substantial part of its stake in Vietnam International Commercial Joint Stock Bank.
This huge sale, effected on the Ho Chi Minh Stock Exchange, forms a milestone in CBA's international portfolio management. Dust is starting to settle on this A$160 million deal, and investors and analysts want to understand the implications of this deal for both institutions and broader landscape.
The Key points:
The Common Equity Tier 1 ratio, a key measure of a bank's core equity capital, is expected to rise by 3 basis points from the sale.
This transaction aligns with CBA's strategy to focus on Australian and New Zealand banking
Around 5% of the VIB shares were sold by the CBA on the Ho Chi Minh Stock Exchange.
Total earnings from the transaction will likely come in at A$160 million.
Why It Matters: This is important to note in the transaction, as it represents divestment for CBA-that is, a shifting back from its international expansions into core markets. This, in a certain way, reflects subtle portfolio management dynamics that could have far-reaching impacts on the trajectory of the Vietnamese banking sector.
The sale also allows CBA to focus on its core markets, releases capital for possible new investments, or strengthens the balance sheet. Indeed, for VIB, this diversification of shareholders can open larger growth perspectives but also make the company more interesting to a broader level of investors, which may bring sustainable growth and financial stability. It can also have a snowball effect in similar international banks re-evaluating their investment strategies in emerging markets, therefore leading to a realignment of global banking alliances and strategies.
Bottom Line: This transaction underlines, from an investment point of view, the continued adjustment in global banking strategies in light of changed market conditions and regulatory environments.
The modest increase to CBA's CET1 ratio, although not transformative in itself, does strengthen their capital position-a fact that might be looked upon favorably by regulators and investors alike. This partial exit of such a major international player as CBA might provide an opportunity for new entrants or existing shareholders to raise their stakes in the Vietnamese market.
However, this also begs a host of questions about the growth potential and challenges which will confront the banking sector of Vietnam in times to come-hence, landscapes and competitive dynamics changing within the region. Investors should pay close attention to how the restructuring could affect VIB's future performance and strategy, as well as any spill-over effect on other foreign-invested banks in emerging markets.
🛸 ECONOMY
New Zealand's Aging Population Poses Fiscal Challenges, Treasury Warns
Image: Dominick Stephens
According to Treasury Deputy Secretary and Chief Economic Adviser Dominick Stephens, New Zealand is facing a worsening fiscal outlook on account of the aging population. In this regard, Stephens said in his speech that the long-term fiscal challenge posed by an aging population is accentuated by higher-than-expected debt and structural fiscal deficits.
Reprising the Treasury's theme of unsustainable fiscal settings, Stephens also pointed out some bright spots. These include plunging interest rates, very strong population growth, and an 'astonishing' lift in labour force participation by people over 65 that have eased some of the fiscal pressures. But he made it clear there is no magic bullet to ensure the sustainability of the fiscal outlook over the longer term.
The Key Points:
Debt and structural deficits are rising with the fiscal challenge of population ageing
New Zealand has done relatively well to date to keep seniors in the workforce; this is partly due to the non-abatement of superannuation
Long-term fiscal sustainability will require pulling many different policy levers
Younger generations are vital to fiscal sustainability but face significant challenges such as education, mental health, and housing.
Why It Matters: Fiscal sustainability for New Zealand, within an ageing population, is a major determinant for the country's economic stability and the quality of life across all generations. As the number of over-65-year-olds continues to rise, pressure on public finances will increasingly present a challenge in key areas such as health care and superannuation. The sooner these challenges can be met, and effectively, the better will be the assurance that future generations are not encumbered with unsustainable levels of debt or reduced public services. The requirement for a strong, competent, and productive younger workforce will be increasingly important in supporting a rapidly aging population and helping New Zealand remain competitive economically on the world stage.
Bottom Line: New Zealand's aging population and fiscal challenges are a double-edged sword from both a financial/investment perspective. The New Zealand government is likely to undertake a mix of policy measures, covering possible adjustment to superannuation, healthcare spending, and tax policies that may have implications for the economy and investment landscapes. Investors should henceforth look out for every policy change that might affect healthcare, retirement services, and even government bonds.
This may further lead to more investments in education, technology, and industries serving the younger generation, impelled by the new emphasis on productivity enhancement and support for the young generation. With the Treasury now working on its next Long Term Fiscal Statement for 2025, investors and businesses should be paying close attention to developments and positioning themselves to adapt to a changing demographic and fiscal landscape in New Zealand.
GUESS WHAT ? THERE’S MORE
ANZ CEO Backs Capital Gains Tax: 'Time Has Arrived' for New Zealand. ANZ's chief executive Antonia Watson says it is now time for New Zealand to consider a capital gains tax on realised gains of property investment, adding her voice to some influential figures calling for some forms of tax reform in New Zealand.
RBA Cautions on Debt Risks, Eyes Global Threats in Financial Stability Review. The Reserve Bank of Australia then warns against over-indebtedness by borrowers once interest rates fall, while adding that the economy remains resilient despite current economic pressures.
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