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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.

🛎️ BEFORE THE BELL

Data is provided by Market Index AU. Stock data as of market close

🥝 UNITED STATES
Federal Reserve Cuts Interest Rates, Signaling Economic Confidence and Inflation Progress

In a dramatic and far-reaching decision that is sure to send ripples through financial markets, the US Federal Reserve has just made the bold move of cutting interest rates.

This marks one of those rare pivots in monetary policy-a reflection of growing confidence in the battle against inflation, carefully balanced to maintain economic stability. With the world of investors and consumers holding its collective breath, this rate reduction may have aftershocks that go a long way in rearranging the topography-something that could lower mortgage rates and send shockwaves through everything from stock market performance upwards.

Key Takeaways:

• The Federal Reserve cuts the target range for the federal funds rate by 0.5 percentage points to 4.75-5%.

• The move reflects growing confidence that inflation is declining "steadily" toward the 2% target.

• Economic activity continues to expand at a solid pace, with job gains slowing and unemployment slightly up but still low.

• The Committee remains committed to achieving maximum employment and stable inflation, while being attentive to risks.

Why it matters: This rate cut is a big signal that the Federal Reserve thinks the economy is on a more stable footing. In a balancing act between keeping a lid on inflation and not choking off employment, the Fed cut interest rates in an attempt to stimulate the economy. The move could mean cheaper borrowing costs for businesses and consumers, which might raise spending and investments. On the other hand, it also shows the judgment of the Fed that the economy can handle lower rates without heating up inflationary pressures-a potential pivot point in the post-pandemic economic recovery.

Our Analogy: The Federal Reserve is like the master pilot who flies the aircraft through foul weather. The interest rate is like the throttle control: till recently, the Fed was giving full throttle, climbing above the storm clouds of high inflation; now, with clearer skies ahead, as inflation is trending down, they're easing off the throttle to find the right cruising altitude.

It is a fine balancing act between keeping the flight smooth-that is to say, a stable economy-without stalling the engines in this context causing a recession or flying too low and allowing resurgent inflation. This switch to a new tack against economic headwinds heralds a new chapter in the economic cycle-one that might just unlock opportunities in rate-sensitive areas where investment strategies will now need to be rebalanced to consider this changed monetary landscape.

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🌋BIG PICTURE

• New Zealand's Economy Faces Deeper Recession in June Quarter. Statistics New Zealand reported that economy activity decreased 0.2% in the June quarter, deepening recession in New Zealand to 0.5%.

• BNZ Adjusts Home Loan Rates Following US Federal Reserve Decision. After the US Federal Reserve cut benchmark interest rates overnight, the BNZ adjusted its home loan rates. The bank lowered its one-year fixed housing rate by 0.16 basis points to 6.29% and its two-year rate by 0.10 to 5.79%.

• RBA and Treasury Release Insights on Central Bank Digital Currency. The RBA will develop wholesale CBDC over retail. RBA Assistant Governor Brad Jones told the Intersekt Conference September 18 that the top bank has a three-year plan internally referred to as Project Acacia.

  
  
  
  

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🚨ANZ
Microsoft's AI Academy expands to Australia and New Zealand, boosting workforce AI skills and driving innovation.

For Microsoft, this foray into Australia and New Zealand is a new frontier in its pioneering AI Academy, which will drive changes in innovative technologies and empower the local workforce.

This tailored multi-modal training program will bring about a sea change in how organizations implement AI, not only within their technology-based teams but throughout all levels of business.

With as many as 200,000 AI-related jobs to be created in Australia by 2030, the timing for the expansion of the AI Academy could not be better. So, the stage is really set for a transformative wave of AI literacy that could reshape industries and drive innovation on an unprecedented scale when five major organizations, including Australia Post and NAB, have finished pilot programs.

Four key points :

• The AI Academy, by Microsoft goes to Australia and New Zealand in partnership with Akkodis Australia for implementation.

• About five major organizations such as Australia Post, ANZ, ASB Bank, BOQ and NAB have undertaken pilot programs - over 4,100 employees taking up the training.

• The initiative - named AI Academy upskills both technical and non-technical workers in AI technologies

• The program has now opened to all organizations in Australia and New Zealand, as well as plans to further expand across Asia.

Why it matters: This development is important, catering to the current and continuously increasing demand for AI literacy in all levels of the workforce. As these technologies of AI continue to evolve in rapid cycles, an organization, if not changed, will lag in productivity, innovation, and competitiveness. By democratizing AI education and making it accessible to a wide range of employees in their respective roles, Microsoft's AI Academy is helping bridge that gap in skills and preparing the workforce for an Australian and New Zealand future where AI will be at the core of business operations and decision-making processes.

Our Analogy: The extension of Microsoft's AI Academy could be compared to planting a high-yield, fast-growth crop in fertile soil. Just as a farmer invests in quality seeds and proper cultivation techniques, so too does the investment of an organization in this AI education program sow the seeds for future innovation and efficiency.

The return on investment here is not merely in productivity gains but in cultivating a workforce that can leverage AI to create new products, services, and business models. If nurtured long-term, this "AI literacy crop" will grow into considerable returns via competitiveness, market share, and economic growth for the overall region.

🌏GLOBAL MARKETS

🇺🇸 Federal Reserve's Rate Cut Sparks Mixed Reactions in Stock Futures. U.S. stock index futures rose in evening deals on Wednesday after the Federal Reserve cut rates by 50 basis points and started an easing cycle that may lower rates further.

🇯🇵 Japan's Cash Culture: The Challenge of Embracing Digital Payments. Japan's Bank of Japan is exploring Central Bank Digital Currencies (CBDCs) to improve cross-border transactions, despite limited domestic benefits due to existing banking infrastructure

🏦 Maybank Strengthens Commitment to SMEs with Funding Societies Investment. Maybank has invested in Funding Societies | Modalku, the largest unified digital finance platform for Southeast Asian MSMEs, partnering with over 1 million ASEAN-based enterprises.

🈺BUSINESS
CommBank Launches AI Factory with AWS, Revolutionizing Banking Innovation and Customer Experience

In a breakthrough move, the Commonwealth Bank of Australia unveiled its state-of-the-art AI Factory with Amazon Web Services. It's a leap into an entirely new dimension in their journey of AI transformation at the bank, totally promising to reshape the landscape of financial services. By harnessing the power of Generative AI and next-generation cloud computing, CommBank will introduce its customers to new levels of personalization and efficiency, cementing its position at the forefront of technological change in banking.

Key Points:

• CommBank goes live with next-generation AI Factory, built on AWS

• AI Factory to accelerate Generative AI adoption throughout the bank

• Leverages advanced computing from AWS using Amazon SageMaker and Amazon EC2 P5 Instances • Will be able to cut in half-by about four times faster than previously-the development of AI-powered initiatives.

Why It Matters: The move simply changes the game for CommBank in the banking space. In furthering a suite of AI capabilities, the bank positions itself for hyper-personalized services, efficient operations, and quicker responsiveness toward customer needs.

It not only raises the customer experience but also in the innovation bar of the industry. The AI Factory is more likely to unleash targeted banking solutions way faster, which can revolutionize how financial services are provided or consumed with accelerated development times and employees empowered with state-of-the-art tools.

Our Analogy: Consider the AI Factory at CommBank as the automated assembly line for innovative finance. Just as Henry Ford put the car within the reach of ordinary people with his assembly line, so too will the AI Factory do the same for CommBank in terms of personalized banking services.

By vastly accelerating the development and deployment of AI-powered solutions, it is really creating a sort of 'mass customization' platform for financial services. It might start a new era where tailor-made, highly sophisticated banking products and services will become the rule rather than the exception. It could completely alter the competitive landscape in the whole financial sector, including customer expectations.

🛸 ECONOMY
This is why your insurance premiums keep going up  

By Fei Huang, UNSW in Sydney

Premiums for car, home and home contents insurance have been on the rise — and for many Australian households, they're contributing to cost of living stress.

If insurance seems to be getting less affordable, you're not alone.

Premiums for car, home and home contents insurance have been on the rise — and they're contributing to rising costs of living, according to the Australian Bureau of Statistics' latest figures.

The news follows an August report revealing 15 percent of all households now face home insurance affordability stress, meaning their insurance premiums now cost more than four weeks of gross household income.

This equates to 1.61 million households, up from 1.24 million a year ago — a 30 percent increase in just one year, the report by the Actuaries Institute found.

What impacts premiums (hint: it's not just inflation)

To understand what's driven premium increases, we need to understand the key factors that tend to influence home insurance premium costs.

They include claims cost — the anticipated cost of claims, primarily determined by a property's "riskiness" — as well as price inflation — because in a high-inflation environment, the costs associated with rebuilding a home (such as labour and materials) rise, which in turn increases claims costs.

Market competitiveness can also play a part. In a more competitive market, insurance prices tend to be lower.

What's more, insurers may adjust prices based on consumers' sensitivity to price changes, a practice known as "price optimisation". This involves using sophisticated data mining tools to adjust premiums based on factors unrelated to risk, such as consumers' willingness to pay.

This practice is legal in Australia, although several US states have banned price optimisation in response to concerns about fairness. Similarly, the UK in 2022 banned "price walking" — a practice where insurers charge renewing customers higher premiums than new customers with the same risk profile.

The cost of capital also plays into insurance premium costs. Insurers must hold reserves to cover future claims, and these reserves are influenced by the expected return on capital that investors expect to receive. This cost can be particularly high for catastrophe insurance.

Reinsurance costs can additionally impact insurance premiums. With the global increase in catastrophic events, reinsurance premiums have risen, leading insurers to pass these costs onto consumers.

In response, the Australian government established the cyclone reinsurance pool, backed by a $10 billion guarantee, to lower insurance premiums for households and small businesses at high risk of cyclone and flood damage.

Finally, insurers also incur other costs related to managing risks, including expense loading, commission fees, taxes, and levies — and they often pass these costs on to policyholders.

In New South Wales, these costs made the news when the state government abolished the Emergency Services Levy in November 2023 to reduce insurance costs for households. Before that reform, that levy added up to 18 percent to home insurance premiums.

Another factor is related to AI and Big Data. These mean insurers are increasingly equipped with more data and better technologies to more accurately estimate the risk of each property. 

This more individualised pricing approach can lead to higher insurance premiums for properties with higher risk levels.

Why have home insurance premiums increased?

In the last few months, home insurance premiums have risen due to several interrelated factors. Three are claims inflation, the current "hard market" and reinsurance costs.

Claims inflation refers to the increase in costs for repairing and rebuilding homes, driven by price inflation. 

It is particularly significant for those in climate-prone areas. While climate change may not be the immediate driver, the growing number of people living in high-risk areas can increase the risk exposure and exacerbate the issue.

What about costs relating to the hard market?

The insurance industry operates in cycles, typically lasting 5-10 years. We are currently in a hard market, where demand for insurance exceeds supply, leading to higher premiums and reduced risk appetite among insurers.

The higher frequency and severity of climate-related claims, such as bushfires and floods, have entrenched the hard market.

This is linked to higher reinsurance costs. Reinsurers have faced major global losses, which have constrained their capital and spilled over into the primary insurance market, ultimately increasing costs for policyholders.

With premiums unlikely to fall, what can consumers do?

This trend is likely to continue until inflation decreases and the market softens.

As a consumer, there are three key things you can do to reduce spending on insurance premiums.

First, be risk-aware. When purchasing or renting homes, consider the insurance risks and insurance premiums. Avoid high-risk areas and opt for climate-resilient building materials and structures to mitigate risks.

Second, engage with insurers about risk and premium reduction. That is, discuss with your insurer ways to reduce risks, which can lead to lower premiums.

Implementing risk mitigation strategies is one effective approach. Ideally, insurers would have more transparent and explainable channels to support customers understanding potential ways for risk and premium reduction.

Third, shop around. To avoid the "loyalty penalty" often caused by insurers' price optimisation strategies, it's important to compare policies and premiums from different insurers to find the best deal.

While it's unlikely premiums will decrease in the near future, there is hope.

Researchers are beginning to look into how Australia — and the rest of the world — can transition to a climate-resilient future that does not disproportionately burden already disadvantaged communities.

To achieve this, it's crucial to conduct evidence-based research and propose viable pathways towards socially equitable insurance solutions for climate disaster risks.

Collaborating with experts from multiple disciplines, my research agenda focuses on developing an ethical framework to assess the justice and social impact of climate disaster responses and insurance solutions, with a particular emphasis on disadvantaged communities.

Dr Fei Huang is a Senior Lecturer in the School of Risk and Actuaries Studies at UNSW and Lead, Data and AI Tech at UNSW Business AI Lab.

Originally published under Creative Commons by 360info™.

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