Economic Update - February 2024

US tech stocks tore it up in February with Nvidia and Meta reaching new highs. Meanwhile, the Chinese stock market found its inner dragon, Germany’s green economics is seeing red, and Australia ponders strong wage growth, falling iron ore prices, and Taylor Swift.   

What happened in Australia?

The RBA kept the cash rate unchanged in February, but its board minutes revealed that it had considered raising rates.

Maybe they should have raised rates, as the Wage Price Index jumped by its higher level since 2009 with a 4.2% increase in the December quarter on an annual basis (see chart below). The WPI has been increasing since December 2020 and unfortunately for the RBA has yet to show any real sign of slowing down.

On top of this, the RBA’s head of economic analysis said in a speech that, “services price inflation remains high and broadly based” and will only decline gradually.

The price of iron ore fell sharply over the month, which will weigh on Australian exports and growth. BHP was also impacted by the falling price of nickel.

House prices increased in January (see chart below) and retail turnover increased 1.1% (seasonally adjusted) after the 2.1% fall in December. So it appears the consumer, armed with increasing wages, still has some fight left in them. The stage 3 tax cuts will also come into effect in July which will put more cash in the average Australian’s pocket.

Economists are now pushing back a rate cut to Q3 with a Bloomberg survey of 32 economists showing a median interest rate cut of 25 bps.

What happened around the world?

USA

The US started the month with concerns over regional lender New York Community Bank and the commercial real estate market more generally. However, this was quickly overwhelmed by the performance of the top tech stops.

Nvidia’s and Meta’s Q4 earnings were higher than the market’s super-high expectations and this catapulted both stocks to the largest-ever one-day increases in market capitalisation (see chart below). Nvidia now has a higher market capitalisation than Amazon. With the growth of AI and its insatiable need for GPUs, Goldman Sachs called Nvidia, “... the most important stock on planet Earth”.

The bond market was forced to push back their expectations for a rate cut with inflation and the Fed’s preferred measure PCE (Personal Consumption Expenditure) both higher than expectations and higher than December's figures (see chart below for PCE). The Fed kept rates unchanged at the end of January.

January’s non-farm payroll also surprised on the upside and was accompanied by upward revisions for the second half of 2023. It turns out the US labour market is still running hot.

In a much-watched interview with 60 minutes, Fed Chair Jermo Powell pointed to the “danger of moving too fast when the job on inflation is not quite done”.

China

China began the month with stocks continuing their slide. Enter the dragon - the Chinese New Year Holiday saw a return to form for Chinese consumers with new records for train and plane travel (see chart below) and an expected 9 billion trips in total. The world hopes that this revival in Chinese consumer spending will not be short lived.

Xi Jinping has also cracked down on short-selling (see chart below) and installed a new head for the China Securities Regulatory Commission: Wu Qing, also known as “the broker butcher”. Together, this has seen a large recovery in Chinese stocks.

Deflation and housing market fears remain but the housing market decreased at the slowest rate in 10 months in January at -0.37%. Mortgage rates were also cut 25 bps which should bring relief to consumers.  

EU

After the small uptick in inflation in December, euro area inflation decreased in January from 2.9 to 2.8%.

EU GDP increased 0.3% in the December quarter but Germany slipped into recession with a second quarterly decrease in a row -0.3% and -0.2% respectively. The ECB kept rates unchanged in late January.

Manufacturers in Germany and Europe more generally are feeling pressure from China in both the solar and EV markets. A successful court challenge against the German’s government’s special budgetary spending programs such as its green transition spending is also increasing pressure.

EU countries installed record levels of solar capacity in 2022 but most of the panels came from China - for some EU members, China’s share was as high as 95%. This is not good for Europe domestic solar panel makers.

Volkswagen, Renault and Stellantis publicly admitted that they are thinking of working together on models as they face a decrease in EU EV sales and increasing competition from Chinese EV makers such as BYD (see chart below).

There’s a “perfect recognition that in the future, the companies which are not fit to face the Chinese competition will put themselves in trouble,” Carlos Tavares, chief executive officer of Stellantis NV.

Japan

Japan entered into recession territory but its Nikkei index hit highs not seen since the halcyon days of 1989.

The market is anticipating the end of the zero-interest rate era and investors have awoken to an undervalued stock market with good fundamentals, and which suddenly looks much better than China’s stock markets.

 “Japan sticks out as a big underweight in portfolios that there shouldn’t necessarily be anymore.” Yue Bamba, head of Japan active investments at Blackrock.

UK

The news keeps getting worse for PM Sunak. The Tories lost the Kingswood and Wellingborough by-elections to the Labour Party and the economy slid into recession (see chart below). CPI was flat at 4%.

There were mixed messages from the Bank of England on inflation and interest rates. Governor Andrew Bailey said that it was, “... too soon to conclude that we’re on that sustained path to target.”  while the BoE’s chief economist said that he believed that a “declining interest rate would be a reward for better performance on inflation.”

What this means for Australian Private Debt

Australian interest rate cuts are a little further away than expected with the uptick in the Wage Price Index but signs of a slowing economy reaffirm that the soft landing is still in sight.

Australian super funds have recently indicated their enthusiasm for private credit in both Australia and overseas.

“In parts of the credit market and private credit areas, particularly some of the activity we do directly ourselves in Australian credit, we’re finding good opportunities,” Brett Chatfield, chief investment officer at Cbus in Melbourne.

“We can buy traditional fixed-income but also the next question is: can you continue to do better?” Con Michalakis, deputy chief investment officer at Hostplus in Melbourne.