Economic Update - August 2024

What do central bankers like to do in their spare time? If the annual meeting in Jackson Hole Wyoming is a gauge, they like hiking and canoeing. Both activities typically follow a set route and are performed at a leisurely pace. Should we expect anything less from monetary policy? The Fed Chair has announced the bend in the river while Governor Bullock is still stuck on the trail.

What happened in Australia?

The RBA kept rates on hold at their August meeting with Bullock telling journalists that there is no rate cut on the agenda in the near term. According to the RBA’s latest forecasts, inflation will not fall within the target band until late 2026.

The minutes from the meeting showed a Board wary of any further delays in reaching the inflation target and inclined to raise rates. Recent information from the RBA that the economy was tighter than previously supposed supported the case for an increase. However, the Board decided that given that the market (and the RBA’s own forecasts) had factored in several rate cuts in the near term, the RBA could effectively tighten conditions by keeping rates on hold for now.

“Members observed that it was possible to achieve a comparable degree of tightening in financial conditions as an increase in the cash rate by holding the cash rate at its current level for longer than the technical conditioning assumption underpinning the forecasts.” Minutes of the Monetary Policy Meeting of the Reserve Bank Board, 5-6 August 2024.

RBA Deputy Governor Andrew Hauser underlined the high degree of economic uncertainty at present in a recent speech that warned of “false prophets” among economic commentators: “But when the stakes are so high, claiming supreme confidence or certainty over what is an intrinsically uncertain and ambiguous outlook is a dangerous game.” Unsurprisingly many commentators didn’t like the comments and are quite certain Hauser is wrong.

On the data front, recent releases show a slowing economy which indicates that excess demand is decreasing. CPI decreased from 3.8% in June to 3.5% in July (see chart below) while household spending fell 0.5% in June compared to May.

Even better was the 1.8% decrease in household spending on services on a monthly basis. Spending on services on an annual basis is now at its lowest levels since before the RBA started raising rates (see chart below). Unemployment also ticked up to 4.2% in July.

What happened around the world?

USA

The Great Rotation rolled into a minor panic at the start of the month when nonfarm payroll data for July showed an increase of 114,000, which was less than the median forecast of 175,000. The prior two months were also revised down. The result suggested that the labour market and economy were in a worse state than previously thought.

The S&P 500 fell to a two-month low on the back of the release (see chart below). After the Fed Reserve had decided to keep rates on hold two days earlier, some in the market gave way to hysteria and called for an emergency rate cut.

“The market knows so much better than the Fed. They’ve got to respond.” Jeremey Siegel, University of Pennsylvania’s Wharton School, professor emeritus.

However, over the rest of the month, data releases showed a robust economy but with just enough slowing to convince markets that rate cuts are on the way.

Fed Chair Powell confirmed the market’s hopes with his speech at the Jackson Hole conference indicating that the Fed Reserve is now satisfied with the path of inflation and is now turning its attention to preserving employment. Rate cuts are on their way.

“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Jerome Powell.

At the end of the month, the Fed’s preferred inflation measure, PCE, increased in line with expectations for July: 0.2% higher compared to June. The three-month annualised rate shows the smallest increase in over a year (see chart below). The case for rate cuts is increasing.

China

After last month's disappointing result for the June quarter GDP, August did little to break the bad news cycle. Average house prices continue to fall (see chart below) while overall investment decreased from 3.7% in June to 1.9% in July compared to the previous year.

The official manufacturing PMI decreased for a fourth month in a row in July. The Caixin PMI showed a small increase.

The IMF even came out during the month to call for increased government stimulus for the Chinese economy in 2024 and 2025 to support the real estate market:

“Directors emphasized downside risks from the ongoing adjustment in the property market and the drag from local government debt. In that context, they concurred that macroeconomic policies should support domestic demand in the short term.” People’s Republic of China, IMF Staff Report for the 2024 Article IV Consultation.

Retail sales was a rare bright spot, increasing from 2% in June to 2.7% in July on an annual basis, slightly higher than expectations.

EU

Euro area inflation increased slightly from 2.5% in June to 2.6% in July on an annual basis. This will not worry the ECB.

Meanwhile, the Euro area economy continues to stabilise with GDP growing 0.3% in the June quarter compared to the first quarter, while unemployment decreased from 6.5% in June to 6.4% in July. The German economy decreased 0.2% in the June quarter compared to the previous quarter.

Japan

After the Japanese stock market fell (chart below) and Yen surged on the back of last month’s surprise interest rate increase, government ministers made rare comments on BOJ policy. The BOJ responded by telling the market that it was in no hurry to increase rates again any time soon. The BOJ also needs to deal with the prospect of falling US interest rates which will increase demand for the Yen.

“I believe that the bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile”, Shinichi Uchida, BOJ, deputy governor.

UK

The BOE cut interest rates by 25 bps in its meeting on 31 July reflecting the fact that inflation had fallen to its 2% target in May and June.

However, Inflation has increased slightly to 2.2% in July with occupier’s housing costs (OOH) the main driver. OOH rose 7% in July up from 6.8% in June. House price and rent have yet to really moderate. House prices grew 2.4% in August on an annual basis, the fastest rate since December 2022. The interest rate cut has given it a little bump. Its impact should moderate over the following months. 

New Zealand

The Reserve Bank of New Zealand cut interest rates by 25 bps in August to 5.25%. It is confident that imported inflation is declining and while services inflation remains high, it is also declining.

What this means for Australian Private Debt

With US interest rates set to start a downward cycle and Australian rates on hold for now, Australian private debt remains an attractive prospect.