Under pressure

Delivered on By Justin Pyvis

Good morning! Another day, another election commitment from the federal government. This time the major spending pledge was entirely in Western Australia, where ScoMo is currently undertaking a 3-day pre-election tour:

  • Perth will get a new university campus in the inner city after the federal government committed $A294 million, the WA government $A199 million and ECU $A360 million towards the project; and
  • Perth will also get a new Swan River Bridge after the federal and WA governments agreed to split the estimated $A100 million price tag 50:50.

Asked if Victoria and Queensland should expect some handouts, ScoMo said “We’re doing a lot… we’ll be quite busy between now and certainly the election.”

It’s hard work spending a $A100 billion deficit! πŸ’ΈπŸ™„


Reading the tea leaves

Daily % change

AUD/USD

73.8

+1.1%

AUD/CNY

4.68

+1.1%

AU Bond

2.54

+1.5%

US Bond

2.19

+0.2%

ASX200

7,251

+1.1%

S&P500

4,412

+1.2%

Brent (bbl)

106.8

+9.0%

Gold (oz)

1,938

+1.6%

Iron ore (t)

150.0

-0.3%

Bitcoin

40,731

-1.0%

Ethereum

2,811

+1.4%

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

TheΒ US S&P500Β rose +1.23% last night, its third consecutive increase that marked the index’s best three-day run since November 2020. There were no obvious data releases moving the market, with investors likely buoyed by news that Russia managed to make some of its US dollar payments to creditors – reducing the risk of a messy default – along with yesterday’s dovish Fed comments and ongoing peace talks between Ukraine and Russia.

In commodity land, the price of Brent crude shot up over $100 after the International Energy Agency warned that the world faces “the biggest supply crisis in decades”, with the situation in Russia “threatening to create a global oil supply shock” in the coming months.

Locally, theΒ ASX200 gained for a second straight day, adding +1.05% with every sector except consumer staples (-0.22%) and utilities (-0.62%) finishing higher. The standout was tech, which rose +3.55% after strong gains in US markets following the Fed’s decision to undertake a ‘dovish tightening’, which was the least aggressive option available to it.


Food for thought

The last time unemployment was this low it didn't last very long.
The last time unemployment was this low it didn't last very long. Source

Australia’s unemployment rate fell to 4.0% in February for “only the third time in the history of the monthly survey [since 1974]”. The increase in employment was largely due to New South Wales where unemployment dropped -0.5 percentage points to just 3.7%, as hiring continued to pick up following the disruptive Omicron wave.

Australia’s jobless rate has now fallen 1.8 percentage points in just the past year, in no small part due to unprecedented fiscal and monetary stimulus.

  • According to the federal Budget, the government spent 15.2% of GDP on “direct economic support since the onset of the pandemic”. That does not include state government spending, which also surged.
  • In terms of monetary stimulus, the Reserve Bank of Australia (RBA) purchased most of the government’s new debt and is still holding the cash rate at an emergency low 0.1%.

Federal government deficit spending is likely to continue this year with a pre-election Budget, full of big-spending handouts, due to be announced shortly.

But with inflation already surging (the official data just haven’t picked it up yet), that puts the RBA under pressure to hike interest rates far earlier than it had forecast: as recently as October 2021 governor Philip Lowe said he didn’t expect to raise rates “before 2024”.

The RBA may soon find itself in the same predicament as its colleagues in the US, Canada, New Zealand… you name it (well, perhaps not Japan!). Full employment is an admirable goal but it’s not sustainable without price stability.

By obsessing on only one of its mandates – full employment – and losing focus on its equally important inflation target, the RBA has overheated the Australian economy. The consequences of that mistake, if not properly corrected, will be stagflation and higher levels of average unemployment in the medium- to long-term.


Chewing the fat


Bits and bytes

🌊 Some pre-election cash was also splashed outside of WA yesterday, with Deputy PM Barnaby Joyce pledging $A483 million to develop Queensland’s 970 gigalitre Urannah Dam, a project first proposed in the 1960s.

πŸ₯” The Kiwis try to cheat at more than just rugby: “A New Zealand couple who believed they had dug up the world’s largest potato… [was] not a potato and is in fact the tuber of a type of gourd”.

πŸ₯ The Kiwi economy expanded 3.0% the December quarter of 2021 despite a 107-day lockdown of Auckland, its largest city (>30% of the total population). Full-year growth in 2021 was 5.6%.

πŸ“ˆ The Bank of England hiked its bank rate by 25 basis points to 0.75%, its third increase since December and restores the rate to where it was pre-pandemic.

πŸšΆβ€β™€οΈ Liberal MLC Catherine Cusack will resign over the distribution of federal flood aid in NSW, describing it as the “most unethical approach I have ever seen”.

πŸ‰ The AFLW qualifying final between Brisbane and Collingwood was postponed after “multiple players” were unavailable due to COVID-19.

😀 After US President Joe Biden called Russia’s President Vladimir Putin a “war criminal”, the Kremlin responded by calling it “unacceptable and unforgivable rhetoric”.

πŸ“Ί Meanwhile, Russian actors are uploading ‘deepfakes’ of Ukraine’s President Volodymyr Zelenskyy in which he’s depicted urging Ukrainians to “lay down arms”.

πŸ”“ The mayor of Melitopol, who was kidnapped by Russian forces last week, was released in exchange for 9 captured Russian soldiers.

⚑ Ukraine has been connected “to an electricity grid spanning much of continental Europe, allowing the country to decouple its power system from hostile Russia”.

πŸ—³οΈ Three local government elections in NSW were tossed out “after a broken electronic voting system failed to register people’s votes on election day last year”.

🎾 ‘Novax’ Djokovic will be allowed to compete at the French Open after France’s government scrapped all of its COVID-19 restrictions.

πŸ–οΈ Hong Kong’s government closed all of its public beaches “amid outcry from mainland Chinese online users over social-distancing measures perceived as lax”.

βš”οΈ The UK Ministry of Defence said Russia’s invasion of Ukraine “has largely stalled on all fronts”, as Russian forces “continue to suffer heavy losses”.