Good Afternoon, everyone! Miko here. My apologies, the newsletter is a bit late today as we are in anticipation of the RBA's announcement on the Australian cash rate decision.

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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.

🛎️MARKET OVERVIEW

Data is provided by Market Index AU. Stock data as of 3:24pm 24/09 (AEST)

🥝AUSTRALIA
RBA Holds Cash Rate at 4.35% as Inflation Battle Continues

This has been a closely watched decision, with the RBA deciding to leave the cash rate target at 4.35%, pointing to a cautious approach toward monetary policy in light of sustained inflationary pressures. This current decision reflects the dilemma this central bank finds itself in between taming inflation and being cautious regarding economic growth, as it tries to tackle increased prices while propping up economic activities. The decision underlined the continued challenges facing policymakers to confront inflation well above target and their frustrating search for measures that actually work to combat price increases.

The Highlights:

• GDP data points to weak economic growth, while resilient consumer demand

• Labour market conditions remain tight, unemployment at 4.2%

• The RBA forecast inflation to fall back within the target range by the latter part of 2025, reflecting its view on how consumers and input markets will likely behave.

Bottom line: The decision heralds a continuation of a 'no change' monetary environment that is tight. The stance should keep the upward spiral in borrowing costs going for a while longer, especially with likely effects on real estate markets and business investments.

Investors should also be warier of interest rate-sensitive sectors, such as real estate and high-growth stocks.

On the other hand, it does point to capital growth in sectors that benefit directly from inflation-such as certain commodities and inflation-indexed securities. The fact that the RBA is focusing on getting inflation under control, rather than pursuing short-term economic growth, suggests that the period of adjustment in the economy will last much longer, and businesses and investors should also be adaptable.

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🌋BIG PICTURE

• Scam Complaints Surge: Banking Ombudsman Reports 27% Increase in New Zealand. The Banking Ombudsman in New Zealand reports a 22% increase in scam complaints, highlighting the need for stronger consumer protections and a multi-agency approach to combat increasingly sophisticated scammers.

• Commonwealth Bank Explores Stablecoins and Tokenisation: Australia's Crypto Future. Australia's biggest bank, Commonwealth Bank of Australia, is exploring cryptocurrency and blockchain projects, including stablecoins and tokenisation, while highlighting the need for better regulatory clarity and political support to foster innovation in the country's financial sector.
  

🏆SANTOS UNFILTERED
US Interest Rate Cut: What It Means for Australia's Economy

In this episode of Santos Unfiltered, Miko Santos interviews Peter Munckton, Chief Economist at Bank of Queensland, about the recent US Federal Reserve interest rate cut and its implications for the Australian economy.

Munckton explains that while the US and Australian economies often move similarly, they are currently at different stages of the inflation cycle. He discusses the potential impacts on the Australian dollar, exports, and investors. Monckton also touches on global economic trends, the upcoming US election, and provides an optimistic outlook for Australia's economy in the coming years.

🚨ANZ
Australian consumer confidence hits 20-month high, signaling economic optimism amid labor market strength

Consumer confidence in the Australian economy has reached its best level since January 2023, according to the latest ANZ-Roy Morgan Australian Consumer Confidence report. The optimism has taken the index up to 84.9 points as Australians start to feel more optimistic about the country's economic outlook and their family's financial situation.

That confidence gain also comes on the heels of a surprisingly healthy labor market, where numbers showed a much larger-than-expected 906,000 net new positions created over the past three months. The good news about the job market-a significantly higher increase in employment-seems to be driving off some of the fears about widespread job losses among all consumers. We shall see what this surge in confidence might mean for Australia's economic outlook and, perhaps importantly for businesses and investors, too.

The Four key points:

• Consumer confidence rose 0.8 points to 84.9, the highest level since January 2023;

• Confidence in economic conditions increased markedly, with both the short-run and medium-run outlooks increased;

• Weekly inflation expectations increased slightly to 4.9%.

• This optimism could perhaps be explained by very encouraging recent labour market data that created over 143,000 new jobs in three months.

Bottom line: This development creates both opportunities and considerations from a financial and investment point of view. Because the outlook has improved, especially of economic conditions, it could indicate a probable surge in consumer spending and, consequently, business activities.

In this respect, the retail, hospitality, and discretionary goods sectors should benefit. However, the fact that inflation expectations have slightly increased to 4.9% does hint that there is still caution by consumers with respect to price pressures, which will start to influence spending habits and, subsequently, financial decisions regarding investments.

To investors, this improving consumer confidence may prove a good investment environment in consumer-oriented stocks and local businesses. However, the fact that it still remains below the long-term average level indicates further recovery and growth at better levels. Besides, strong labor markets underlined in the report not only spur wages and household income growth but also have an important role in influencing consumer sentiment.

This in turn places the onus on investors and businesses to actually monitor the translation of this optimism into actual spending and economic activity over the coming months. The fact remains that external factors-like global economic conditions, interest rates, and geopolitical events-may still change the spending behavior of consumers. In light of these considerations, this can be seen as one positive indicator, but diversification of investments and monitoring of broader economic indicators are important in a holistic investment approach.

🌏GLOBAL MARKETS

🇩🇪 BNP Paribas Expands Wealth Management: Acquires HSBC's German Private Banking Unit. BNP Paribas has agreed to acquire the private banking unit of HSBC in Germany, confirming itself as the leading private bank in the Eurozone, increasing its managed assets above 40 billion euros, as HSBC continues with the pruning of its global

🇨🇳 Asian Markets Rally as China Announces Economic Support Measures. Asian equities advanced, led by jumps in Hong Kong and China, as the People's Bank of China announced a series of measures to support its economy, including a cut in bank reserve requirements and plans to steady the stock market.

🇺🇸 US Stock Markets Reach Fresh Highs Amid Quiet Trading Session. US stock markets reached new record highs on Monday, with Tesla leading the gains, as investors remain optimistic following the Federal Reserve's recent interest rate cut despite mixed economic indicators.

🈺BUSINESS
Geelong's economic transformation: A beacon of growth and innovation in Regional Australia

Imagine the strength and diversification in the economy when Geelong unmistakably is the centerpiece, a powerhouse of growth in Regional Australia. In a remarkable show of economic resilience and diversification, Geelong has emerged as a powerhouse of growth in Regional Australia. A visit by the CEO of the Commonwealth Bank, Matt Comyn, shows the transformation that has taken place in this once-industrial hub into a thriving, multisector economy that paces regional development across the nation.

Geelong has moved from what was considered to be its base of manufacturing industry to a more diversified economy that now includes the health industry, construction, retail, hospitality, tourism, and education. In doing so, Geelong has become nothing less than Victoria's largest regional economy and the third-largest within the state. In the details of Geelong's success story lies a blueprint for regional growth that can shape Australia's economic future.

The Highlights

• Third-fastest growth in gross regional product of all large regional areas of Australia over the past five years.

• It will see the city grow from 275,000 people now to almost 400,000 by 2041, adding 55,000 jobs and $9.75 billion to its current GRP of $19.6 billion.

• The Geelong economy also diversified from an industrial-based economy into manufacturing, health, construction, retail, hospitality, tourism, and education.

• Commonwealth Bank is very much open for business and is heavily and actively investing in those businesses driving the growth in Geelong, as part of its commitment to regional Australia.

This success is instructive for policymakers, investors, and businesses looking to tap the potential of regional areas and may mean that in future years, economic growth will become more evenly spread throughout the country.

Bottomline: There are significant opportunities in Geelong's growth trajectory. An increasing population and further economic growth projected do not only indicate a strong market in real estate but also lead to the advancement of infrastructure and create avenues for business investments.

This diversified economy reduces the risk of sector-specific shocks, which in turn enhances its resilience. To an investor, this means that values might go up, and demand for goods and services will equally increase, thus providing an opportunity to invest in budding local businesses.

Nevertheless, rapid growth comes with specific issues: strain on facilities and infrastructure, housing affordability, and environmental impacts. These prudent investors shall always pay close attention to local policy and planning for infrastructure development so as to align the strategic position with the sustainability in growth of the region.

🛸 ECONOMY
Can Australians expect an interest rate cut soon?  

By Luke Hartigan, The University of Sydney in Sydney

These are unusual times for the Australian economy, which is subdued. Here’s what that means for interest rates.

The Australian economy is in an odd spot at present. 

Demand is the weakest it has been in more than 30 years (excluding the COVID-19 crisis), but the labour market remains relatively tight, and inflation continues to be a problem. 

This leads to several questions: What’s going on? Are interest rates the only tool available? Or could the government manage inflation some other way?

The current weakness in demand is a direct result of the Reserve Bank of Australia (RBA) aggressively increasing interest rates 13 times between May 2022 and November 2023, with the aim of slowing demand to rein in inflation which had surged following the COVID-19 supply disruptions. 

While the economy is weak it is still growing, albeit only just. So, it is more correct to say the economy is “subdued” than “smashed”. We need to look back to the last recession in 1989-91 for an example of the RBA truly smashing the economy.

Recently, other central banks, most recently the Federal Reserve in the US, have started cutting interest rates in their economies to help spur sagging growth. 

This has led some commentators to question whether the RBA will follow suit when its board meets on September 24.

However, the RBA is unlikely to start cutting rates here anytime soon because inflation is still too high, and the pace of decline is slow. 

This is partly because the RBA was late to respond to the post COVID-19 inflation surge compared to its peers and when it did finally act it decided to not lift rates too aggressively as some other central banks had (such as in New Zealand) since it was trying to a manage what it called "the narrow path" of bringing down inflation while limiting the impact to the labour market and hopefully avoiding a recession.

Why is inflation still a problem if demand is weak? 

While the RBA did not respond right away and did not lift interest rates as high as it probably should have, the other contributing factor has been that the supply side of the economy has been even weaker which has been making the RBA’s job even harder. 

This means the economy can't grow as fast as it previously could without contributing to inflation. 

Unfortunately, there has been a significant decline in Australia's productivity performance since the pandemic. This is highlighted by the current very low unemployment rate which shows the economy is operating at close to its full capacity. 

So, it is likely that the economy will have to remain subdued with higher interest rates than otherwise for an extended period to ensure inflation gets back under control.

This raises the question of if the supply side is part of the problem, why is the RBA using interest rates to manage demand instead? 

The RBA only has one tool (the cash rate), and it has been working to bring demand and supply more into balance by weakening demand using higher interest rates.

Interest rates are currently the most effective tool for managing demand and therefore inflation.

This is because they can influence demand through various channels; the most important of which is via housing prices and investment and not just by reducing household spending as is popularly believed. 

Alternative tools that have been proposed, such as changing the GST or adjusting the super levy, are unlikely to be as effective as interest rates in controlling demand and inflation.

The reason is both tools only affect inflation by reducing demand via their effect on household spending. In contrast, interest rates affect demand through three additional channels which the RBA suggests are much more important. 

These include the wealth channel (housing prices), the exchange rate and the investment channel with the first two channels being the most important in Australia.

Further, both alternative tools will require parliamentary approval, and this typically will take longer to implement and could be subjected to political considerations rather than economic considerations. 

This is why the RBA was made independent of the government: so that it can make unpopular decisions.

Is there anything governments can do to help bring down inflation? 

Currently, the different levels of government are providing various forms of support to households, but in aggregate these might just be adding to demand and inflation. A longer-term solution would be to lift the economy’s speed limit. 

This could be achieved by improving productivity. Governments (both state and federal) could implement policies that improve productivity. 

There is a list of suggestions that the Productivity Commission has proposed that should be considered, but these have been forgotten. 

With no material improvement in productivity, we will have to get used to living with slower growth or higher inflation (and higher interest rates).

Dr Luke Hartigan is a lecturer in economics at The University of Sydney. He received his PhD in Economics from The University of New South Wales in 2017. His research interests relate to macro-econometrics, focusing on methods useful for the empirical analysis of business cycles and summarising and nowcasting economic and financial conditions. He also previously worked as an Economist at the RBA.

Originally published under Creative Commons by 360info™.

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