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As I See It: May 2023


1.  Interest Rate Decision The RBA has raised rates by a further 25bp to 3.85%, which must have been a lineball decision particularly considering the market expectation that interest rates will actually drop later in the year. While the decision making is based on an assessment of historical data and possible future trends, it really would have been better for wider confidence in the community if the RBA had held off and allowed market forces to resolve supply-based inflation issues rather than impacting the cost of overnight money and short-term pricing of bonds.

Graph:  RBA Cash Rate Movement (Source: RBA)

At this stage equity markets have declined reflecting the hawkish nature of the RBA comments which were not telegraphed to the market in advance and concerns that they may raise rates further.  Click here to read their full statement.

Living Cost Index – Employee Households compared to CPI (Source: ABS, ABC)

2.  US Banks et al

JP Morgan has formally acquired the assets ofFirst Republic, the third US lender to have failed in the last few weeks. This had been brokered by US regulators and continues the pattern of regulatory intervention to quarantine any potential losses to depositors through effectively taking over any failed institutions and then on selling to viable larger competitors.

US Bank Failures (Source: The New York Times)

This has been well received by the markets and at this stage has avoided the potential contagion effect of knock on unrealised losses between bank counter parties. It is essential that there is absolute global confidence in the banking system particularly where interest rates have risen substantially and, in some cases, assets marked down to reflect the higher cost of borrowing.

At this stage, the smaller remaining regional US banks share prices have rebounded, and no depositors’ funds have been lost irrespective of size. With global interest rates peaking and market conditions normalising, banks should be able to manage any potential bad debts.  So far, the US quarterly earnings season has been very strong with the larger banks a highlight.

3.  Sydney Property and Mortgage Refinancing

Sydney property prices increased again in April setting a clear trend that the worst should be behind us. Property markets tend to look to the future and the key drivers of supply and demand tempered by expectations of interest rate policy generally increase valuations in most years. Declines in valuations reflect the real and perceived increase in uncertainty caused by interest rate rises and rarely last longer than 18 months. 

Rolling Quarterly Change in Dwelling Values (Source: CoreLogic)

Over the decades residential property has proved to be remarkably resilient and a foundation stone of personal wealth and economic security. The personally owned residential home currently is not taxed at sale making it a very attractive wealth creation vehicle assuming that there are no impending legal challenges over the asset. The reestablishment of aggressive migration targets should soak up any limited availability in the rental markets of our inner cities and indeed we do have a significant supply problem that will take several years to normalise.

 Rents – Annual Movement (%) (Source: ABS)

4.  Possible Changes at the RBA

The external review into the structure and performance of the RBA has now been released for wider community consultation. The catalyst for this reflected the political concerns of commitments by the RBA Governor to keep interest rates at emergency minimal levels until 2024 and the consequences of the community purchasing properties in the last few years based on that tacit understanding.

The main recommendations are to have two separate boards:

  • one operating as a traditional public company with oversite obligations
  • the other as a specialist group of economists to set interest rate policy

 This group comprising of 6 members would only meet 8 times a year rather than the current 11, and members would all have the expertise to challenge any internal groupthink at the RBA who historically have made all major appointments from internal promotions. This structure reflects similar methods in the UK and Canada and will probably be accepted as a better operating model. Actual interest policy should not materially change and will remain data driven while watching the decision making of other similar countries.

5.  Upcoming Budget – Tuesday 9th May

Next week we have the Federal Budget which will set the economic priorities for next year. There does appear to be a significant improvement in the outlook since last year as the resource sector has done particularly well leading to much higher corporate tax being paid. Later this week three of our major banks (NAB, ANZ and Macquarie) will release interim results which are anticipated to be very strong again leading to higher company tax being paid.

This plus a concerted drive to increase migration should provide greater options for the Federal Government to support positive social outcomes including social housing for the disadvantaged and higher unemployment benefits for those over 55. Rather than speculating too much we will wait for the facts and report back next week.

6.  Small client functions around VIVID

We are now coming into the winter season in Sydney with the VIVID light shows being a highlight. We will be running several small client functions to take in the sites and share a meal. Do let us know if you would like to be part of one of the groups info@virtueandpartners.com.au. As always, we welcome your feedback and referrals.  We will continue to work Thursday evenings and Saturday mornings for those clients that need advice out of normal working hours. Our details for correspondence and appointment setting fiona.googland@virtueandpartners.com.au and tony.virtue@virtueandpartners.com.au. We will have full details on the budget at www.virtueandpartners.com.au.

Posted by Dr Tony Virtue, Principal


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