Posts Tagged ‘Inflation’

So, the much-discussed mid-terms are over and done with, and the US stock market is up about 2%, as it usually is when the uncertainty of elections is over.

As we predicted a year ago, the Democrats handily won the House, (probably by more than estimated in early reports), and there was an “as you were” result in the Senate, which is likely to leave the Republicans in control. (We say “likely”, because a number of races are still toss ups, but it’s by far the most likely result.)

But what happens next is vitally important to the health of the US economy, and more broadly the world.

Nancy Pelosi, who despite some rumblings is certain to hold onto her job as head of the Democrats in the house, (if for no other reason than she is both a wily negotiator and a fundraising ballistic missile), has spoken warily of the need to work with the White House across the “aisle”.

In return, President Trump has said he wants to work with Pelosi on boosting infrastructure spending and lowering prescription drug prices, two rare policy stances of agreement.

“I think she’s a very smart woman. She has done a very good job,” Trump said at a press conference Wednesday, adding that the two didn’t discuss the prospect of impeachment in a phone call. “A lot of people thought I was beings sarcastic or joking, I wasn’t,” Trump added, in reference to a tweet saying Pelosi deserved to be speaker. “There was nothing sarcastic about it, it was really meant with good intentions.”

But – and it’s a big but – two things are likely to impede both sides’ vaunted good intentions.

Firstly, the desire to impeach Trump for something – anything, frankly – may prove irresistible to many Democrats who are still smarting from two plus years of insults from the Cheeto-in-Chief, after what they consider to have been a stolen Presidential election, and would love to hurt him back.

And Trump does not take well to assaults on his person. If war is declared, it will be fought bitterly.

Secondly, despite some areas of agreement, the Democrats are distant by a country mile from the Republicans on healthcare and will also seek to spread the benefits of a moderately booming economy to their own middle class base and away from the 1% and rustbelt industries that they fell deserted them in 2016.

So whilst the two sides may co-operate – and let us all fervently hope so – the stage is just as likely set for a “do nothing” period of government akin to when Obama lost control of the House.

If the reality of so-called gridlock sets in, then it may limit the current “relief rally”, added Nigel Green, founder and chief executive of the financial consultancy deVere Group. Of such a gridlock, he said: “This will halt deregulation legislation, which in turn will hurt sectors such as banking, energy, industrials, and smaller companies that stood to gain most from looser controls.”

Green’s concerns would be just the beginning, though. The Democrats may choose to wade in on the nasty little trade war going on with China, introducing yet more uncertainty. (Whilst the world might welcome a move to free up trade again, uncertainty on policy settings is what drives stock markets down.)

And what is absolutely certain is there is no appetite in Washington to do anything serious to tackle the ever-ballooning American government debt, from either side, but most definitely not from “tax and spend” Democrats.

Failure to do anything serious about the debt is the ticking time bomb at the heart of the American economy, containing within it a potential fall in the value of the dollar through a general loss of confidence in the essential health of the economy and its currency, and a possible subsequent stoking of inflation. That inflation then causes more uncertainty, and so on we go …

In summary, a fall in the value of the dollar:

  • Makes US exports cheaper to foreigners importing US Goods.
  • It is cheaper for non-US citizens to go on holiday to the US.
  • US consumers face higher price of imported goods.

However a devaluation is often just a temporary increase in competitiveness. Devaluation often causes inflationary pressures which reduce a temporary gain in competitiveness.

Also, as exports become more competitive (ie cheaper to foreign buyers) without firms having to make much effort to make that increase happen, then therefore there is less incentive for them to cut costs and boost productivity, and so in the long run costs will increase and therefore inflation will increase. If firms are well run and they cut costs when times are good then this may be avoided, but there appears to be little appetite for that in the USA at the moment.

If there is a devaluation in the value of the US dollar then there will be an increase in the price of goods being imported to the USA. After decades of manufacturing decline, imports are now quite a significant part of the country’s CPI, therefore increasing their prices will contribute towards cost-push inflation.

It is possible that retailers might not pass the price increases onto consumers but choose to live with lower profit margins, but if the devaluation is sustained, prices will inevitably go up.

The Financial Times have estimated that as a rough rule of thumb, a 10% devaluation may increase prices to consumers by 2-3%, affecting confidence. The components of the CPI most affected by a devaluation in the dollar are:

  1. Air travel (-1.29)
  2. Vegetables (-1.22)
  3. Gas  (-0.71)
  4. Fuel (-0.54)
  5. Books (-0.35)

Numbers 2-5 hit ordinary consumers hardest, of course. That won’t help the party in power.

And after yesterday’s results, that means both of them.

The price of a war between the House and everyone else will be international market instability. That doesn’t help anyone, inn the USA, and beyond. Let’s hope Pelosi and Trump can work that out.

 

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Per cent key

(Yahoo and others, including plenty of pithy comment from us)

Paying heed to the distress calls from Australia’s business bodies and retail sectors, the Reserve Bank of Australia (RBA) has cut – Yahoo said slashed but in our opinion 1/4 of 1% is hardly a slash – the official interest rates by 25 basis points for October.

In what is being described as the closest call in months, the central bank has therefore moved the key interest rates from 3.50 per cent to 3.25 per cent.

How much will you save on your mortgage?

If the banks pass on the rate cut in full, here’s how much you’ll save:

– Repayments on a $100,000 mortgage will drop by nearly $16 a month on average.

– Repayments on a $150,000 mortgage will drop by nearly $24 a month on average.

– Repayments on a $200,000 mortgage will drop by nearly $32 a month on average.

– Repayments on a $250,000 mortgage will drop by nearly $39 a month on average.

– Repayments on a $300,000 mortgage will drop by nearly $48 a month on average.

– Repayments on a $350,000 mortgage will drop by nearly $55 a month on average.

– Repayments on a $400,000 mortgage will drop by nearly $63 a month on average.

– Repayments on a $450,000 mortgage will drop by nearly $71 a month on average.

– Repayments on a $500,000 mortgage will drop by nearly $79 a month on average.

Assumes 25-year standard variable rate loan at an average new interest rate of 6.6 per cent. (Source – CommSec)

Governor’s speech – “bloody Europe!”

At its meeting today, the Board advised that outlook for growth in the world economy has softened over recent months, with estimates for global GDP being edged down, and risks to the outlook still seen to be on the downside.

Economic activity in Europe is contracting, while growth in the United States remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago.

Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.

Boom? Bust? Plateau? Who really knows?

Key commodity prices for Australia remain significantly lower than earlier in the year, even though some have regained some ground in recent weeks. The terms of trade (how much money we make by selling minerals and gas overseas, essentially) have declined by over 10 per cent since the peak last year and will probably decline further, though they are likely to remain historically high.

Financial markets have responded positively over the past few months to signs of progress in addressing Europe’s financial problems, but expectations for further progress also remain high so the potential for disappointment is in there too.

Low appetite for risk has seen long-term interest rates, faced by highly rated sovereign debt including in Australia, remain at exceptionally low levels.

Nonetheless, capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Whether this will continue is hard to tell.

Share markets have also generally risen over recent months.

In Australia, most indicators available for this meeting suggest that growth has been running close to trend, led by very large increases in capital spending in the resources sector. Consumption growth was quite firm in the first half of 2012, though some of that strength was temporary. Retailers will be praying for a decent pre-Xmas rush.

Investment in dwellings has remained subdued, though there have been some tentative signs of improvement, while non-residential building investment has also remained weak.

Looking ahead, it is assumed that the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. (This reflects concerns about Chinese growth, in particular, but as that economy is notoriously hard to predict your guess is essentially as good as anyone else’s.) As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.

Pick a job, any job? Um, not any more.

Labour market data have shown moderate employment growth and the rate of unemployment has thus far remained low. The Bank’s assessment, though, is that the labour market has generally softened somewhat in recent months.

Anyone seeking skilled, professional positions will agree that what was a seller’s market a year or so ago has become significantly more iffy since. The lists of people being interviewed for relatively low or medium-level jobs are growing.

Moderate labour market conditions should work to contain pressure on labour costs in sectors other than those directly affected by the current strength in resources. This and some continuing improvement in productivity performance will be needed to keep inflation low as the effects of the earlier exchange rate appreciation wane.

The inflation monster

Inflation has been comfortably low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that. (In the opinion of Wellthisiswhatithink this should have led to more aggressive rate cutting, but then we are always in favour of low interest rates to stimulate spending. A little inflation, in our opinion, is merely the sign of a busy economy. But so many of today’s leading politicians, businesspeople and bankers were growing up in the 70s and 80s when inflation wreaked terror in financial markets, so we are not holding our breath waiting for people to agree with us.)

The introduction of the carbon price is affecting consumer prices a little in the current quarter, and this will continue over the next couple of quarters.

The Bank’s assessment remains, at this point, that inflation will be consistent with the target over the next one to two years.

Interest rates for borrowers have for some months been a little below their medium-term averages. There are tentative signs of this starting to have some of the expected effects, though the impact of monetary policy changes takes some time to work through the economy.

However, credit growth has softened of late and the exchange rate has remained stubbornly higher than might have been expected, given the observed decline in export prices and the weaker global outlook.

Clearly Aussies are too busy taking holidays in Europe and America at never to be repeated exchange rates, rather than investing in household goods, cars or homes.

At today’s meeting, the Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target. The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.

‘Rate cuts needed before December’

The RBA move should come as a relief to the business owners around the country with trading conditions hitting the weakest level in 14 years.

An Australian Chamber of Commerce and Industry (ACCI) investor confidence survey for the September quarter released on Tuesday showed business conditions at 46.4 index points, down from 47.4 points in the previous quarter, prompting calls for a 50 basis points cut before Christmas.

It’s the lowest index level since the survey began in 1998, and remains below the 50-point level separating contraction from expansion.

“It is concerning that the declining trends in trading conditions, sales and profits have seen no sign of rebounding since early 2010,” ACCI director of economics and industry policy Greg Evans said in a statement.

This had dampened forward expectations and investment plans, while hiring intentions for the next six months also declined to the lowest in 14 years.

“Further rate relief in the order of 0.50 per cent between now and Christmas is required to assist the mainstream economy,” Mr Evans said.

House price increases

However, some strong increases in house prices seem to have not influenced RBA’s decision at all. Last month’s home price rise across Australia’s eight capital cities was the largest in two and a half years, and comes on the back of 125 basis points of rate cuts over the last 12 months.

The RP Data – Rismark home value index shows the price gains were strongest in Adelaide (2.4 per cent), but then broadly spread against the other big capital cities which posted gains between 1.6 per cent (Perth) and 1.1 per cent (Brisbane).

Prices in Hobart and the territory capitals all went slightly backwards in the month, while regional houses fell 1.2 per cent (although those rest of state figures only run to the end of August).

RP Data’s research director Tim Lawless says the improvement in capital city home prices – which are now up 2 per cent over the past three months – is largely due to interest rate cuts, although Wellthisiswhatithink believes it has more to do with people sticking their heads back up above the parapet and working out for themselves that the sky hadn’t fallen in.

Mr Lawlee might be right though: “It’s no coincidence that housing market conditions bottomed out at the end of May, after the Reserve Bank cut the official cash rate by 50 basis points,” he noted in the report.

“A further cut of 25 basis points in June and the anticipation of further rate cuts in the pipeline appear to have instilled renewed confidence in the housing market which has driven the growth in home values.” However, Mr Lawless says the strength in home prices generated by the rate cuts is likely to weigh against the Reserve Bank making further reductions.

Mr Evans said the survey clearly showed manufacturing and construction industries would continue to face “significant headwinds” over the rest of 2012 and into early 2013.

This includes weak consumer demand, a high dollar and increasing global economic difficulties.

Or in other words, we are not out of the woods yet, although they are not quite as thicketed as a while back.

closing down sale

Shame they didn’t work a bit harder when times were good, really

Negative retail growth

Never an organisation to talk things up – like most industry bodies – the Australian Retailers Association, the peak retail industry body, said on Monday there has been negative retail growth in all categories in the past two months showing consumers are under budget stress. Executive director Russell Zimmerman says recent store closures and profit downgrades is a sign the sector is struggling.

“Certainly retail has struggled and that has been well documented” he said.

“We also know that households have just received their first power bill which does incorporate increased costs due to carbon tax and this just adds to the huge range of cost increases consumers are experiencing at the moment.”

And maybe so. However in our opinion what is really happening is that weak retail brands are being weeded out by what is, in effect, a very small slowdown in retail spending, and consumers are sitting on their hands until they perceive value.
Many retailers are still doing well, when they remember that there is more to marketing than having a sale, more to aggressive retail behaviour than cutting prices, and that customers usually respond to improved service and the feeling that their needs are being consciously catered for.
Or put it another way, that retailing is about more than simply raking in vast profits when times are good.
In our opinion, Australia is losing retailers who are being bankrupted by rents that they should never have agreed to in the first place, with stores in the wrong location, with too much stock, and with outdated stock, with weak brand personalities, with inadequate monies spent on promotion in a desperate attempt to stay in the black, with wimpy management and lackadaisical and badly motivated staff, and with inadequate customer care.
And as a consumer, we think they are not much of a loss, frankly.
So there.