Credit growth remained solid, at 9.1%yoy in June. Business credit growth is still strong and housing credit growth remained solid, though it’s likely to fall as the housing downturn impacts.
Another terms of trade surge in the June quarter. Export prices rose another 10% due to surging coal prices (+271%yoy) and gas prices (+105%yoy) whereas import prices rose only 4%qoq (largely due to higher petrol prices). The continuing surge in the terms of trade is good for national income and tax revenue – but can’t be assumed to last. (Fortunately, Treasury is not assuming that it will in its budget projections.)
What to watch over the next week?
In the US, the main focus is likely to be on July jobs data to be released on Friday, which is expected to show a further slowing in payroll growth to around 250,000, unemployment to be flat at 3.6% and wages growth slowing slightly to 5.1%yoy. June data for job openings (Tuesday) is likely to remain high but show some moderation and the ISM business indicators (Monday and Wednesday) for July are likely to slow further. US June quarter earnings reports will continue.
China’s July Caixin business conditions PMIs (Monday and Wednesday) are likely to see a stalling in their improvement.
In Australia, the RBA on Tuesday is expected to raise the cash rate by another 0.5%, taking it to 1.85%, as part of an ongoing effort “to do what is necessary” to return inflation to target by slowing demand and ensuring that long-term inflation expectations don’t rise. Fortunately, the slightly slower than expected inflation rate for the June quarter of 6.1%yoy likely removed the need for a further step up in the size of rate hikes to 0.75%. However, with the RBA still seeing the economy as resilient, the labour market coming in stronger than expected, inflation on its way to over 7% and the RBA viewing the cash rate as still well below its assessment of the neutral rate, the RBA is expected to remain hawkish warning of further rate hikes ahead. The RBA’s Statement on Monetary Policy (Friday) is expected to lower its unemployment rate forecast for this year to 3.25% but revise down the growth outlook for the next year and revise up the inflation outlook to over 7%yoy for this year.
Another 0.5% increase in the cash rate, if passed on to mortgage holders as we expect, will add roughly another $150 to the monthly payment on a typical $500,000 mortgage, which will take the total increase in monthly payments since April to around $500 a month.
On the data front in Australia, expect CoreLogic home price data (Monday) for July to show a 1.5% fall with Sydney prices down by 2.3%, the Melbourne Institute’s Inflation Gauge for July (also Monday) to show a further pick up reflecting rises in energy prices, June building approvals and housing finance data (Tuesday) to show falls of -14% and -2% respectively, June quarter real retail sales (Wednesday) to rise 0.6% and the June trade surplus (Thursday) to fall back to $12.5bn.
The June half Australian earnings reporting season is now getting underway. Consensus expectations are for around 20% earnings growth for the 2021-22 financial, year but with this boosted by energy earnings (+275%) and industrials averaging around 9.5% growth. The focus will likely be on the outlook, particularly given cost pressures, labour shortages and slowing consumer demand. Only a handful of companies will report in the week ahead though, including Genworth and Woodside.
Outlook for investment markets
Shares remain at high risk of further falls in the months ahead as central banks continue to tighten to combat high inflation, the war in Ukraine continues and uncertainty about recession remains high. However, we see shares providing reasonable returns on a 12-month horizon as valuations have improved, global growth ultimately picks up again and inflationary pressures ease through next year allowing central banks to ease up on the monetary policy brakes.
With bond yields looking like they have peaked for now, short-term bond returns should improve.
Unlisted commercial property may see some weakness in retail and office returns (as online retail activity remains well above pre-COVID levels and office occupancy remains well below). Unlisted infrastructure is expected to see solid returns.
Australian home prices are expected to fall 15 to 20% into the second half of next year as poor affordability and rising mortgage rates impact. Sydney and Melbourne prices are already falling aggressively, and falls are spreading to other cities.
Cash and bank deposit returns remain low, but are improving as the RBA cash rate increases flow through.
The $A is likely to remain volatile in the short-term as global uncertainties persist.
However, a rising trend in the $A is likely over the medium-term as commodity prices ultimately remain in a super cycle bull market.
This content was originally published here.