Lost some potency
By Justin Pyvis – Delivered on 02 Dec 2021

Good morning! There was a "not a prison" break at the federal government's Howard Springs quarantine facility in the early hours of yesterday morning, after three indigenous teenagers aged 15, 16 and 17 climbed the fence and trekked a few kilometres to nearby Palmerston, where they were apprehended. NT Police Commissioner Jamie Chalker said:

"It's a 165-acre site, the Howard Springs facility. That is an enormous footprint. So we're bolstering external security, to provide further assist with that – as I say, [with] increased CCTV, ensuring that is actively monitored 24/7, so the moment we see any movement, we can try and respond and keep everyone within the perimeter."
...
Chief Minister Gunner said the facility was "not a prison, but it isn't a playground either".

Elsewhere it was all about reassuring Australians that even with the Omicron variant's arrival, lockdowns are in the rear-view mirror. NSW's Health Minister Brad Hazzard said "it's time for a change in approach", while ScoMo said at national cabinet "We all got on the same page about what this variant means and there was nothing in front of us yesterday that should suggest a step back... [we're only] having a pause for the next step."

Fully vaccinated population (aged 16+)

ACT
NSW
VIC
TAS
SA
NT
QLD
WA
Markets

Daily % change

AUD/USD

71.0

-0.7%

AUD/CNY

4.53

-1.5%

AU Yield (%)

1.66

-2.4%

US Yield (%)

1.43

-0.6%

ASX200

7,236

-0.3%

S&P500

4,540

-0.6%

Brent (bbl)

70.6

+0.6%

Gold (oz)

1,781

+0.3%

Iron ore (t)

103.8

+1.9%

Bitcoin

56,911

-0.2%

Ethereum

4,599

-0.7%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing the US S&P500 was down 0.59%, after at one stage being up as much as 1.9% in the morning session following a positive ADP report showing a better than expected increase in private payrolls in November.

Sentiment appeared to turn sour after the US reported its first domestic case of the Omicron variant, a person in California who had travelled from South Africa on 22 November.

Locally, the ASX200 (-0.28%) followed a weak lead from the US to flip back into the red, with just about every sector other than materials (+0.57%) and health (+0.17%) performing poorly.

Economy

Australia GDP: Australia's economy contracted by 1.9% in the September quarter from June, "with prolonged lockdowns across NSW, Victoria and the ACT resulting in a substantial decline in household spending".

As a whole, Australia's economy was 0.2% smaller than it was pre-pandemic and the saving to income ratio rose from 11.8% to 19.8%, driven by both declines in spending (lockdowns) and rising incomes (government handouts). No doubt that shift also temporarily suppressed inflation in the quarter, although at 3% it was still very high.

Small side of town struggling: China's Caixin manufacturing PMI came in at 49.9 in November, indicating a contraction from the prior month for the first time in three months (a reading of 50 splits expansion/contraction). Unlike Tuesday's official PMI which focuses on large manufacturers, the Caixin index tracks small to midsized firms that tend to be more trade exposed.

Stagflation already?: Retail sales in Germany dropped 2.9% from a year ago (-0.3% from the month prior), well below expectations for a 2.0% annual decline. Meanwhile, inflation is running at 6.0% per year... 😬

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Feature
Lost some potency

According to CoreLogic, Australia's house prices increased for the 14th consecutive month in November, rising 1.3% in the month with the median house price adding A$126,700 over the past 12 months.

Breaking it down: While still strong the rate of growth has slowed in recent months, after "virtually every factor that has driven housing values higher has lost some potency over recent months".

Looking at CoreLogic's chart above – we've modified it slightly to indicate where the Reserve Bank of Australia (RBA) has cut interest rates recently – it's clear that house prices tend to spike immediately following downward moves by the RBA.

That makes perfect sense, too – when rates are cut, borrowing costs come down and people can take on more debt relative to their incomes, most of which gets funnelled straight into housing.

Why this matters: Property price rises on the back of lower interest rates are sustainable so long as nothing else changes (hah!). Given that housing supply is relatively rigid, the immediate effect is a temporary surge in prices as additional debt (demand) flows into housing.

It's great news for existing home owners, local councils (higher rates) and state governments (stamp duty) but not so good for everyone else, especially as it also increases the nation's 'fragility'. Essentially higher levels of debt with incomes unchanged makes Australians more vulnerable to interest rates moving in the other direction.

Looking forward: The RBA hasn't increased the cash rate since November 2010. Even then, it tightened for only a year before promptly reversing course and never looking back. The last time Australia faced a sustained tightening cycle was in the naughties, and two decades feels like a lifetime ago – interest rates always go down and house prices always rise, right?

Notwithstanding the emergence of Omicron, inflation looks to be a real risk going forward. The RBA may have eased a little too much by misunderstanding the structure of the COVID-19 recession. If it's forced to tighten policy then the sugar rush Australia received from a 92% cut in the cash rate between June 2019 and November 2020 (sending national housing values 22.2% higher over just the past 12 months) could quickly reverse, leaving us with a nasty comedown.

The Wrap Up
    🦠Dutch health authorities found the new Omicron variant of the coronavirus in cases dating back as long as 12 days, well before it was discovered in southern Africa.
    💊The US Food and Drug Administration panel voted 13-10 to approve Merck's antiviral COVID-19 treatment pill, molnupiravir, for high risk patients aged over 18.
    🖐The Biden administration's vaccine mandate was partially halted by a third judge, preventing it from applying to healthcare workers nationwide after he ruled that "mandating a vaccine... is something that should be done by Congress, not a government agency".
    😌BioNTech's CEO said those vaccinated with the Pfizer jab will likely "have substantial protection against severe disease [hospital or intensive care] caused by Omicron... there's no reason to be particularly worried".
    🏝️A United Nations-backed project seeks to build a floating island off the coast of Busan, Korea that will house up to 10,000 residents "made up of large hexagonal platforms that float on the water... able to produce its own food, energy and freshwater [and] withstand a Category 5 hurricane".
    🤖Tiny biological, programmable machines called xenobots figured out how to "reproduce via kinematic replication, which has never been observed before in organisms".
    🦗Moving the 5th Ashes test away from Perth due to its strict border restrictions could cost Cricket Australia as much as $A17 million in lost revenue, depending on the venue selected.
    🗾Japan's former PM Shinzo Abe said any Chinese "military adventure" with Taiwan "would be the path to economic suicide".
    🗳️Later today Health Minister Greg Hunt is expected to announce that he will retire from politics at the next election.
    👋Controversial former Attorney-General Christian Porter announced that he will not recontest his seat at the next federal election.
    🚀In a leaked internal memo Elon Musk warned staff that SpaceX faces a "genuine risk of bankruptcy" due to slower than expected progress on its Raptor engines.
    🌡️Australia officially recorded its wettest November in 122 years and its coolest in 22 years.
    💉The President of the European Commission said the Commission should lead talks on "how we can encourage and potentially think about mandatory vaccination within the European Union".
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