Last night the mask dropped \u2013 if not the dollar \u2013 after new-ish Reserve Bank governor Michele Bullock warned a stunned Australian Business Economists dinner that inflation here has quietly mutated into an awful, \u201chomegrown\u201d monster which will probably take circa two more years to tackle.<\/p>\n
Homeowners spat out their soup and called their brokers to brace for more pain, when Bullock said she intends to wield the \u201cblunt tool\u201d of rate hikes \u201cto serve the welfare of Australians, collectively\u201d.<\/p>\n
The problem \u2013 aside from goods and services costing heaps \u2013 is that the demands of getting your hair cut, going out for a feed or just opting to get your teeth cleaned are marching ahead \u201cstrongly\u201d as simple daily services is running ahead of supply in this country.<\/p>\n
Here, I\u2019ll turn to the other bankers at UBS who yesterday suggested that despite 13 rate increases and a 425bps increase in the cash rate, the Aussie economy\u2019s resilience is both impressive, but also a bit of a double-edged sword.<\/p>\n
In terms of the equity market UBS says we\u2019ve now pretty much been priced in for the peak in the cash rate, which they say will likely top out around this 4.35% level.<\/p>\n
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But that observation comes with the rider that, by about May next year, the market has just one rate cut priced in \u2013 \u201ca genuine higher-for-longer environment\u201d but a prediction which seems utterly dovish in comparison to what the guv\u2019nah was saying last night.<\/p>\n
Bullock expects \u2013 against this soft-supply environment \u2013 that herding the cats of inflation back to the RBA\u2019s 2-3% target range was a circa two-year project.<\/p>\n
\u201cWe expect it to take another two years \u2026 because much of the remaining task of bringing inflation back to target will require bringing aggregate demand and aggregate supply into closer alignment.\u201d<\/p>\n
Which suggests this model, recently released by the RBA, is now defunct:<\/p>\n
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Via RBA<\/p>\n
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The solution, she says, isn\u2019t to lift supply, but to smash demand.<\/p>\n
\u201cThat is what the board is aiming to do with monetary policy \u2013 to slow the growth of demand enough to bring inflation back to target while keeping employment growing.\u201d<\/p>\n
IG\u2019s market analyst Tony Sycamore is, to put it mildly, sceptical.<\/p>\n
\u201cNext week\u2019s retail<\/span> sales and monthly inflation data will need to be red hot for the RBA to raise rates at the December RBA board meeting, although a rate rise in February is a risk.\u201d<\/p>\n \u00a0<\/p>\n UBS reckon the problem is the \u201ctwin peaks\u201d of record high migration and big spending Boomers. Not haircuts and dentists.<\/p>\n Migration to Australia is tracking at 600,000 a year right now, this would see Australia\u2019s population surge by a never before seen 2.5% this year.<\/p>\n At the same time senior Australians have emerged as a spending force, with $29bn of superannuation benefits paid in Q3-2023, which is equal to an astounding 10% share of total household disposable income.<\/p>\n The jolt to the economy from these \u2018twin peaks\u2019 has (and should continue to) prevent a collapse in consumption, even as the middle demographic gets squeezed by cost of living and rates.<\/p>\n We would highlight this fact with data from CBA\u2019s latest earnings report, which shows all them Aussies aged 55 and over are not only spending more in absolute terms than a year ago \u2013 but are actually accelerating their spending.<\/p>\n A the other end of the stick \u2013 youngsters under\u00a0 34yrs are in outright retrenchment, and can\u2019t apparently afford a Paddle Pop.<\/p>\n But check out how hard the youngsters spend is being cut off,<\/strong> according to CBA\u2026<\/strong><\/em><\/p>\n \u00a0<\/p>\n Via CBA<\/p>\n \u00a0<\/p>\n The RBA\u2019s been hoisting the cash rate under previous guv\u2019nah P Lowe since May last year. It\u2019s just hiked the cash rate again by 25 basis points in November, after keeping rate steady for a full quarter.<\/p>\n \u00a0<\/p>\n But Bullock says the inflation animal has changed from one created by surly supply chain issues to a simpler, scarier demand v supply beast \u2013 compounded by labour shortages.<\/p>\n UBS says although the rate rise-led suppression of the economic and profits cycle is \u201csmoothing\u201d Australia\u2019s economic landscape, \u201cit is also creating a sideways and rangebound equity market.\u201d<\/p>\n The ASX200 has been rangebound between ~6,400 and 7,600 for three years now (~ +\/-10%).<\/p>\n \u00a0<\/p>\n Via UBS<\/p>\n The sticky local inflation compared to most other advanced economies has weighed on the $AUD over the last two years but UBS says this could now swing over to a strengthening bias.<\/p>\n \u201cHistorically, the most direct sector view for a rising AUD has been long Mining over Healthcare.\u201d<\/p>\n Without any \u2018imminent turning point\u2019 in the economic cycle evident, the bank says playing EPS momentum trends is the handiest way to eke out some shorter term gains.<\/p>\n As we\u2019ve highlighted, UBS likes construction related stocks as the best illustration of this dark matter momentum in the real Aussie economy, with upward revisions for messrs: Boral (ASX:BLD)<\/strong><\/a>\u00a0,\u00a0James Hardie (ASX:JHX)<\/strong><\/a>,\u00a0CSR (ASX:CSR)<\/strong><\/a>,\u00a0Worley (ASX:WOR)<\/strong><\/a>,Seven Group Holdings (ASX:SVW)<\/a><\/strong>\u00a0and\u00a0Reece (ASX:REH)<\/strong><\/a>.<\/p>\n \u00a0<\/p>\n I think we should always be scared when officials start pinning their ears back and say, however much they don\u2019t want to do x, y and z \u2013 the truth is it will all be for the greater good of the country.<\/em><\/p>\n Bullock, after a few months, is firmly in this category of disassociated power brokers, on the basis of last night\u2019s comments that it\u2019s tough love, but that the country will take the medicine it\u2019s given \u2013 knowing what the impact of the RBA\u2019s decisions have on low income Aussies.<\/p>\n The boss says she gets letters all the time from citizens under the pump to make ends meet.<\/p>\n \u201cEveryone is seeing prices for goods and services rise strongly\u2026 This emphasises the need to get inflation back down.\u201d<\/p>\n She said she was also aware that interest rate rises are squeezing the finances of households with a mortgage.<\/p>\n \u201cBut while the board recognises there is a wide diversity of experience, the bank\u2019s statutory objectives are economy-wide outcomes, and our key tool \u2013 the interest rate \u2013 is a blunt one.<\/p>\n \u201cThe board must therefore set its policy to serve the welfare of Australians collectively.\u201d<\/p>\n Cool. Scary. Blunt.<\/p>\n \u00a0<\/p>\n <\/span><\/p>\n The post RBA boss Michele \u2018Blunt Tool\u2019 Bullock shows she\u2019s a hawk of a different feather in terrifying Sydney inflation speech<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"Twin Peaks<\/h2>\n
A new beast<\/h2>\n
For the good of the nation<\/h2>\n