Australia’s negative gearing back in the headlines.
Before we get to what is driving markets globally, it is worth highlighting that the sensitive topic of negative gearing is back doing the domestic headlines. Australians have an affinity to the housing market (often the largest component of their total wealth) and a large part of the population also holds an investment property. It has been reported in the media that the Federal Treasury department is exploring changes to negative gearing and the capital gains tax (CGT) discount for investment properties. Recall that in the 2019 election, the Australian Labor party also proposed potential changes to negative gearing and tax breaks on investment properties. During that time both residential prices and stocks associated with the property market – such as Stockland (SGP) and Mirvac (MGR) – were adversely impacted. In fact, in the lead up to the May 2019 Australian Federal election, Australian property prices declined 10-15%. For Stockland & Mirvac, their respective residential facing businesses saw contract sales moderate materially. Whilst the current Labor Government hasn’t admitted to ordering the Treasury department to model potential changes to negative gearing tax concessions for property investors or that they are even considering it as a policy, the mere speculation in the media could be enough for investors to wait on the sidelines.
China’s bazooka stimulus package.
Shifting our focus to global markets, it appears China’s President Xi Jinping has finally lost patience with China’s moderating economic growth which has seen Chinese stocks materially underperform its global peers. For some time now, global investors have been calling for Chinese policymakers to implement meaningful measures to support their ailing growth to avoid a deflationary death trap and some even questioned whether President Xi Jinping was focused on economic growth at all. Why is this important? Well China’s growth is a key contributor to global growth given China is a major trading partner for many countries, including Australia. It appears their prayers have been finally answered.
At a recent Politburo meeting – China’s version of a presidential cabinet – policymakers indicated supporting the economy was now the top priority and confirmed stimulus was coming with a focus on spending. Further, consumer support is becoming a higher priority, in particular targeting low-income groups. China’s central bank People’s Bank of China cut interest rates on existing mortgages by 0.5% and reduced the level of reserves banks required for new loans. On the back of these announcements, Chinese assets including stocks have experienced a material re-rating, although from depressed valuations.
It is estimated the total amount of stimulus announced over the past week amounts to approx. CNY8.8tr or US$1.1tr.
Is the rally in prices sustainable? From our perspective the liquidity injection and fiscal policy support are clearly a positive development, but the sustainability of this rally will really come down to the consumer. That is because the core issue is weak credit growth driven by depressed confidence levels among consumers and corporates. However, as fiscal policy measures are announced over the coming months, we expect Chinese stocks to rally over the short term.
U.S. Federal Reserve delivers a large interest rate cut. The other major news this month was of course the U.S. Fed’s decision to reduce its monetary policy rate by 50bps versus the more widely expected 25bps cut. Interestingly though some of the asset prices did not react to the rate cut like one would have expected. Take the U.S. bond market for example. A cut to the interest rate should see bond yields decline and therefore the value of these bonds should increase. However, in response to the U.S. Fed’s larger than expected rate cut, long-term bond yields in the U.S. increased rather than declining on the day. This suggests to us that investors expect interest rates to stay higher for longer. The market may be of the view that given the U.S. Fed has delivered a material rate cut, this may support the economy from heading into a recession and therefore no further interest rate cuts will be required.
Global wage growth. One data point to support the view that the U.S. Fed may not need to cut rates further is wages growth. As per the chart below, wages growth is showing signs of strengthening in recent months in the U.S., UK and Euro area. If unemployment remains contained and wages growth continues to accelerate, the argument for further rate cuts becomes difficult in our view as it continues to stoke inflation fears.
ECONOMIC NEWS
In Australia. RBA kept interest rates at a 12-year high of 4.35% and ruled out a rate cut in the next six months, as the bank lifted its forecasts for inflation and economic growth with minutes from policy meeting revealing the bank will likely need to hold interest rates at their current 12-year high for an “extended period” to ensure that inflation returns to its target band next year and RBA Deputy Governor Andrew Hauser announcing the bank will not follow the U.S. Fed and cut interest rates this year because inflation is still too high and the 4.35% cash rate is not very high by global standards. Wage price index rose +4.1% y/y in 2Q24, matching its first quarter reading. Consumer confidence rose +2.8% MoM in August following the introduction of tax cuts and after the RBA paused interest rates, though persistent inflation remains a burden on households. Private sector business activity rose at the fastest pace in three months in August with services PMI expanding and manufacturing PMI marking the slowest pace of deterioration since May, however, business cost pressures increased markedly, with the input price index at a higher level than was recorded at any time in the five years prior to the pandemic-era inflation surge.
In the U.S. The economy grew at a slightly stronger pace in 2Q24 than initially reported, with GDP rising at a +3% annualized rate vs prior estimate of +2.8%, reflecting an upward revision to consumer spending which advanced +2.9% vs the prior estimate of +2.3%, that more than offset weaker activity in other categories. Manufacturing activity shrank in August at the fastest pace this year as output shrank by the most in 14-months, orders contracted for a second month and employment came close to stagnating, however, services activity expanded at a solid pace with a measure of prices received by service providers declining to the lowest level since the start of the year. Job market continued to deteriorate with August indexes in each of the five regional manufacturing reports showing shrinking payrolls at factories, gauges of employment at service providers settling back and measures of hours worked slipping. Consumer sentiment improved in August for the first time in five months to rise to a six-month high as slower inflation and prospects for Fed interest-rate cuts helped lift expectations about personal finances.
In China. Factory activity contracted for a fourth straight month in August despite cost of production materials falling for the first time in five months while manufacturers slashing selling prices to remain competitive, however, the non-manufacturing measure of activity in construction and services rose MoM, boosted by consumption during the summer holiday season. Residential slump deepened in August with value of new-home sales from the 100 biggest real estate companies falling -26.8% y/y to 251bn yuan. Broad budget expenditure contracted with combined spending in the general public budget and the government fund account down -2% y/y to 19.7 trillion yuan in the first seven months of the year as income from land sales for local governments fell at a record pace by -8.9% y/y.
In Europe. Firms across the euro zone slowed hiring in 2Q24 with employment growing +0.2% after +0.3% in 1Q24, amid mounting signs of economic weakness with a key gauge of euro-zone wages easing during the quarter with negotiated pay rising +3.6% y/y, down from +4.7% y/y in 1Q24. Euro-area inflation plunged to the lowest level since mid-2021 in August with CPI rising +2.2% y/y and economy got an unexpectedly strong boost from the Paris Olympics, which propelled private-sector growth to the fastest pace in three months with a gauge for services climbing to the highest level since April, though the region’s manufacturing slump deepened. Euro-area economic confidence edged higher for a second month in August as readings for industrial confidence and services both advanced, while consumer sentiment snapped six months of gains with the European Commission announcing consumer confidence remains short of its long-term average.
In UK. GDP grew +0.6% in 2Q24, reflecting strength in government spending and the services sector. Unemployment fell unexpectedly after companies hired at the strongest pace since November, which saw employment surged by 97,000 and jobless rate fell -20bps to 4.2% in 2Q24. Government borrowing came in higher than forecast in the first four months of the fiscal year with the budget deficit totaling £51.4bn between April and July, £4.7bn higher than OBR’s forecast, while the national debt remained at levels last seen in the early 1960s at 99.4% of GDP. House prices declined -1.5% MoM (up +0.8% y/y) to £367,785 in August.
In Japan. Economy rebounded to growth in 2Q24 with GDP expanding at an annualized pace of +3.1%, driven by an increase in private consumption. Businesses boosted investment in 2Q24 with capex on goods excluding software rising +9.1% y/y (+1.9% q/q), reaffirming signs of confidence that the economy is recovering slowly with the help of an uptick in domestic demand-led activity.
