Technically the truth

Delivered on By Justin Pyvis

Good morning! Australia’s Defence Minister Peter Dutton announced “a $A3.5 billion military upgrade for the ADF”, warning that:

“We have an autocrat in Russia and an autocrat in China… The Chinese government is on a course in relation to Taiwan and amassing nuclear weapons.

There is potential of conflict in our area in a couple of years.”

Let’s just hope they do some research before placing orders this time, avoiding a repeat of situations such as the cancelled French diesel subs (up to $A5.5 billion down the drain), or more recently the cancellation of a $A1.3 billion order for US MQ-9B drones, which no doubt also attracted some kind of penalty.


Reading the tea leaves

Daily % change

AUD/USD

75.8

+0.5%

AUD/CNY

4.82

+0.4%

AU Bond

2.93

+4.6%

US Bond

2.56

+6.0%

ASX200

7,528

+0.2%

S&P500

4,525

-1.3%

Brent (bbl)

105.3

-2.0%

Gold (oz)

1,926

-0.2%

Iron ore (t)

163.1

-0.4%

Bitcoin

45,936

-1.5%

Ethereum

3,455

-1.9%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 fell -1.26% and bond yields spiked after the relatively dovish Federal Reserve governor Lael Brainard spooked markets by saying:

“inflation is much too high and is subject to upside risks. The Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted…. I expect the [Fed’s] balance sheet to shrink considerably more rapidly than in the previous recovery”.

Locally, the ASX200 edged up 0.19%, giving up earlier gains of as much as 0.8% after the Reserve Bank of Australia left rates on hold but changed its language to be slightly more hawkish, increasing the odds of a rate hike in the coming months (see Food for thought below for all the deets). The Aussie dollar immediately shot up half a cent on the news, reaching a 9-month high.

A notable mover was Mineral Resources, which added 5.4% after it announced that it will soon raise production at its Wodgina and Mt Marion spodumene lithium mines following “unprecedented” demand.


Food for thought

An unofficial inflation gauge accelerated again in March, rising at an annualised rate of 10%.
An unofficial inflation gauge accelerated again in March, rising at an annualised rate of 10%. Source

The Reserve Bank of Australia (RBA) left its cash rate on hold yesterday for the seventeenth consecutive month. It has now been 137 months (over 11 years) since the RBA last increased rates. Justifying the latest decision, governor Lowe said that: “Inflation has increased in Australia, but it remains lower than in many other countries.”

That’s technically the truth, but it’s very misleading. While inflation in Australia is below many other countries, a big reason for the discrepancy is because the latest inflation data for many other countries are from March 2022, while Australia’s is averaged from October - December 2021. Lowe hints at as much in the concluding paragraph:

“Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs.”

That’s a big change from the previous few statements, in which the RBA said it was “prepared to be patient”. The hawkish pivot indicates a rate hike could be on the cards as soon as next month following the release of the March quarter inflation data on 27 April, but more likely in June after the election and the wage price index release on 18 May.

Lowe will never admit it (bureaucrats don’t stick their necks out!) but barring a major shock, the RBA is already locked into multiple rate hikes this year. It has two mandates, full employment and 2-3% inflation. It gets a check mark for the former – unemployment is at its equal lowest level since 1974 – but a fail for the latter, with inflation already above 3% last year.

There are good reasons to believe that the official measure of inflation will jump again in the March quarter. Unofficial data from the Melbourne Institute’s inflation gauge, which measures “month-to-month price movements for a wide range of goods and services across the capital cities of Australia”, showed that inflation increased 0.8% in March, a fourth consecutive monthly rise.

On an annualised basis, i.e. if the monthly growth rate seen in March were sustained for a full year, the gauge is showing inflation of 10.0% (see chart above).

That measure was captured before last week’s big spending federal budget, which front-loaded plenty of demand stimulus into this year. According to a recent NAB research note:

“We see Core Trimmed Mean CPI at 1.2% q/q and 3.4% y/y. If realised the six-month annualised would be even hotter at 4.4% and would be on par with some measures of US core inflation given the Dallas Fed Trimmed Mean is running at 4.6% six-month annualised.

Our CPI forecasts, if realised, would again blow the RBA’s February SoMP forecasts out of the water… A much higher-than-expected core CPI would suggest the risks of waiting too long are higher.”

The RBA will want to wait at least until after the federal election (mid-May) before raising rates to avoid being labelled as partisan, which means a June rate hike is shaping up as the most likely lift-off point.

But the longer the RBA waits, the harder it will have to act to bring inflation back into its target range, risking a much more severe slowdown than would have otherwise been necessary.


Chewing the fat


Bits and bytes

🛂 Queensland’s government will from next Thursday abolish is vaccination mandate for cafes, pubs, clubs, theme parks, casinos, cinemas, weddings, showgrounds, stadiums, galleries, libraries and museums.

🕵️‍♀️ Australia’s Human Rights Commissioner warned that the WA government’s continued use of emergency laws “transfers an enormous amount of power to the executive… and reduces parliamentary oversight and scrutiny”.

🚀 Australia, the UK and US (AUKUS) “will begin co-operating on research into hypersonic weapons and how to defend against them”.

⛈️ Does it ever not rain? The NSW State Emergency Service warned residents that they will be hit with “significant rainfall later this week”.

😊 According to ANZ/Roy Morgan, Australian consumer sentiment increased for the first time in a month last week, although remains well below where it was a year ago. Inflation expectations declined to 5.8% “as petrol prices dropped sharply… [explaining] much of the lift in sentiment”.

📈 Inflation in South Korea hit 4.1% in March, the fastest pace of price increases for more than a decade. Core CPI, which excludes energy and food, rose 2.9% from a year ago.

📉 The World Bank cut its forecast for growth in China to 5.0% this year, down from 5.4% in its October update, a downgrade that would have been larger were it not for “its government’s capacity to provide stimulus to offset adverse shocks”.

🤖 US firms are renting robots “by the hour, at a cost that’s less than hiring a human… I’m paying $10-$12 an hour for a robot that is replacing a position that I was paying $15-$18 plus fringe benefits”.

🗳️ “Only a quarter of Guardian Essential respondents think the Morrison government’s cash splash budget is good for them personally, and just over half (56%) think the budget’s primary purpose is to help the Coalition win the coming election.”

🚢 Spain’s Civil Guard and US federal agents seized a superyacht owned by Russian oligarch Viktor Vekselberg in the port of Palma de Mallorca, Spain.

🧪 The US government will spend $US10 billion to “to buy therapeutics and vaccines and maintain the nation’s testing capacity if another Covid wave hits the US”.

📡 Scientists are preparing to broadcast radio signals into deep space “to be received and, they hope, understood by an intelligent alien civilisation”, ignoring warnings by the late Steven Hawkings that aliens won’t necessarily be friendly.

🔥 The Californian government is partnering with Native Americans to revive the practice of controlled burns, decreasing the likelihood of future wildfires. The practice had been banned for over 100 years.

🤔 In last week’s budget the Australian Future Leaders Foundation received $A18 million over five years from 2021-22, and an additional $4 million per year after that, despite having “no office, website or staff, apart from its directors… [and] no tender process”.