Until it was too late

Delivered on By Justin Pyvis

Good morning! The blame game has well and truly kicked off after Australia’s new deputy Prime Minister Richard Marles said:

“We are experiencing in Australia a cost of living crisis because of the failures of the former Liberal government. We see that with rising power prices, with rising petrol prices.”

We do have labour shortages and we do still have Covid absenteeism, and the international environment has become more challenging as well.

There is no point tiptoeing around these serious economic challenges. There is no point mincing words about the sorts of conditions that we have inherited.

We have inherited high and rising inflation and rising interest rates, we’ve inherited falling real wages and we’ve inherited $1 trillion in debt."

To be fair to the Libs, almost everything he described is also happening in every other developed economy, and just about every government around the world spent big on the taxpayer’s credit card.

But that doesn’t mean they didn’t make it worse – it turns out that Frydenberg’s 29 March pre-election budget:

“…disregarded Treasury warnings not to splash cash on cost of living handouts, despite concerns it would unleash wasteful election spending and fuel more household consumption at a time of rising inflation.”

Not a good look. And Labor wants to pile an additional $18.9 billion in spending on top. Good luck with that!


Reading the tea leaves

Daily % change

AUD/USD

71.8

0.0%

AUD/CNY

4.80

+0.2%

AU Bond

3.48

+3.5%

US Bond

2.93

+3.1%

ASX200

7,234

+0.3%

S&P500

4,101

-0.8%

Brent (bbl)

123.0

+3.0%

Gold (oz)

1,850

+0.4%

Iron ore (t)

134.0

+0.6%

Bitcoin

29,635

-6.6%

Ethereum

1,786

-10.5%

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 -0.75% after JOLTS job openings fell in April, “narrowing the historically large gap between vacant positions and available workers”, and Fed board members all finally got on the same hawkish page, with Atlanta Fed President Raphael Bostic saying:

“…his suggestion that the central bank take a September ‘pause’ in its push to raise interest rates should not be construed in any way as a ‘Fed put,’ or belief that the central bank would come to the rescue of markets.”

Hawkish comments were also issued by Bullard and Daly, who said high inflation was straining the Fed’s “credibility” and that monetary accommodation should be withdrawn until inflation is “trending down to the level we need it to be”.

Locally, the ASX200 gained 0.08% despite a bloodbath in lithium stocks, which dragged the materials sector down -0.3%, more than offsetting gains for the big iron ore miners.

Lithium stocks were flogged (e.g. Pilbara Minerals -22.0%) after Goldman Sachs published a note saying “we see the battery metals bull market as over for now”:

“In this context, we see prices on a downward trajectory over the course of the next two years, with a sharp correction in lithium, and to a lesser extent cobalt.”

But it didn’t stop there – Credit Suisse downgraded its lithium price forecasts and targets for local miners, but perhaps most frightening of all for investors was China’s BYD Co (its largest electric vehicle maker), which announced it had reached agreements to buy six lithium mines in Africa that can produce enough to make batteries to cover the company’s demand for the next 10 years.


Food for thought

Officials convinced themselves inflation was "transitory" for well over a year.
Officials convinced themselves inflation was "transitory" for well over a year. Source

How it all went so wrong: The Washington Post provided a good timeline of how US policymakers “misjudged inflation threat until it was too late”. A snippet:

February 2021: Biden is talking about injecting nearly $2 trillion in new federal spending into the faltering economy, even as some question the total, coming so soon after previous stimulus efforts, citing the risk of inflation.

About two weeks later, Federal Reserve Chair Jerome H. Powell says the money the government is spending on stimulus and covid relief shouldn’t be a problem. “I really do not expect we’ll be in a situation where inflation rises to troublesome levels,” Powell tells the Senate Banking Committee, as Congress nears approval of Biden’s $1.9 trillion stimulus plan. “This is not a problem for this time.” A “burst” of new spending shouldn’t cause unwanted inflation, he says.

May 2022: The Senate votes 80 to 19 on May 12 to confirm Biden’s nomination of Powell to a second term as Fed chair, despite questions about whether the Fed has moved quickly enough to tackle rising inflation.

The same day, Powell tells Marketplace that the bank probably should have acted faster. “If you had perfect hindsight you’d go back,” he says, “and it probably would have been better for us to have raised rates a little sooner.”

Add in a six month lag due to the lockdowns and later arrival of COVID, plus a big-spending federal election, and you have the situation in Australia today. But we’re unlikely to ever get a “my bad” moment from RBA governor Philip Lowe unless his term is extended beyond September 2023.

Low-quality growth: Australia’s March quarter GDP growth slowed but came in above expectations at 0.8%, thanks largely to consumer (+0.8 percentage points) and government (+0.6 percentage points) spending, along with rising inventories (+1.0 percentage points).

A strong result for sure, but households can only run down their savings for so long and governments can’t continue deficit spending forever. Notably, the household saving to income ratio fell to 11.4% – the lowest since the start of the pandemic.

The GDP implicit price deflator – a broad measure of inflation that includes all prices, not just those in a consumer goods basket – rose 2.9% in the quarter (12.1% annualised), the fastest rate of increase since the March quarter 1988.

But perhaps most worryingly, public sector growth again outpaced that of the private sector – as it has done for the past several years – and at 27.7% of GDP is looking very bloated.


Chewing the fat


Bits and bytes

🏡 Australian house “price growth [in May] had either flatlined or actually fell almost everywhere in the country”, according to separate data from CoreLogic and PropTrack.

🎈 The Australian government has sunk billions into hydrogen: “Scientists are warning that hydrogen leaked into the atmosphere can contribute to climate change much like carbon — and could even make global warming worse over the coming decades.”

👷‍♀️ New federal Treasurer Jim Chalmers said Labor’s submission to the Fair Work Commission’s annual minimum wage case will include calls for a 5.1% increase, matching the rate of inflation in the March quarter.

💉 The WA government will abolish its workplace vaccination mandates from 10 June, excluding those in healthcare, hospitals, aged care and disability settings.

🚑 St John WA recorded its worst ever month for ambulance ramping in May, “five times the 1011 hours recorded in May 2020”.

🏭 The Caixin China Manufacturing Purchasing Managers' Index (PMI) rose to 48.1 in May from 46.0 in April but remained in contraction (below 50) for the third straight month “as manufacturers expressed the least optimism in five months amid stringent Covid-19 control measures”.

🚀 This will make Putin really cranky: “The United States will send Ukraine advanced rocket systems and munitions as part of a new $700 million package of military equipment.”

🛒 Germany’s retail sales fell -5.4% in April, “the biggest month-on-month drop since the time series began in 1994”, as rising food prices caused consumers to tighten their belts.

✈️ Foreign Affairs Minister Penny Wong departed for Samoa and Tonga last night, her third international trip in less than two weeks as she seeks to “increase our contribution to regional security”.

🤷‍♀️ How do they still have jobs? US Treasury Secretary and former Fed Chair Janet Yellen said: “I was wrong then about the path that inflation would take. As I mentioned, there have been unanticipated and large shocks to the economy… that I, at the time, didn’t fully understand.”

😷 Whether they should be mandatory at this stage of the pandemic is a separate question: “Mask wearing significantly reduces SARSCoV2 community transmission.”

🥝 Influenza rates in New Zealand are at levels about 3-4 weeks ahead of the usual winter pattern.

👩‍⚖️ A judge ruled mostly in Johnny Depp’s favour in his defamation trial against Amber Heard, a decision he said “gave me my life back”.

🍁 The Bank of Canada hiked rates by 50 basis points to 1.5% and said it “continues to judge that interest rates will need to rise further”.

🏢 Elon Musk reportedly sent an email to every Tesla executive with the title “Remote work is no longer acceptable”, telling them they “must spend a minimum of 40 hours per week in the office, or else ‘depart Tesla’.”