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Welcome to Firstlinks Edition 466 with weekend update

  •   14 July 2022
  • 19

The Weekend Edition includes a market update plus Morningstar adds links to two highlights from the week. 

Weekend market update

On Friday in the US, markets surged with the S&P500 up 1.9% and the NASDAQ gaining 1.8%.

From AAP Netdesk: The Australian sharemarket closed lower on Friday after iron ore prices tumbled to a 10-month nadir on demand fears from China.
After falling by 113 points, or 1.7%, in the first 45 minutes of trading, the benchmark S&P/ASX200 index climbed steadily to finish the day down 45 points, or 0.7%. The mining sector dropped 3.2% on the day to finish the week down 6.1%, its sixth consecutive week of declines.

Chinese economic data released at midday Friday showing the world's second-largest economy grew just 0.4% in the second quarter, well below expectations. Rio Tinto finished down 2.9% after the miner reported that skilled labour shortages and inflation had hit its second-quarter earnings. BHP and Fortescue likewise hit their lowest level this year, 3.5% and 6.2% respectively. Goldminers Newcrest, Northern Star and Evolution were all down, hitting multi-year lows.

ANZ fell 1.3% to $21.64, Macquarie dropped 1.8% to $167.99 and Westpac dipped 0.2% to $19.90. CBA was flat and NAB rose 0.5% to $28.45. Pendal Group was down 7.8% to a nine-year low of $3.76 after the fund manager announced funds under management dropped to $111 billion in the June quarter, from $124.9 billion.

From Shane Oliver, AMP Capital: Share markets mostly fell over the last week on fears that still rising inflation will trigger faster rate hikes and recession. While Japanese shares rose, US, European and Chinese shares fell although a Friday rally moderated US losses. The fall in Eurozone shares was magnified by the risk of a permanent shutdown of Russian gas flowing through the Nordstream 1 pipeline to Germany.

Inflation and interest rate hikes, and the fear they will drive recession, continued to dominate investment markets. However, headline inflation is likely to slow in July helped by a sharp fall in gasoline prices and falling upstream price pressures. But for now, the Fed will remain aggressive, seeking to slow demand and cool the labour market which is likely contributing the ongoing acceleration in services inflation. We expect the Fed to hike again by 0.75% later this month but there is a high risk that it will hike by 1.00%. This increases the risk that the Fed goes too far knocking the US economy into recession.


'Cakeism' was shortlisted for the Oxford English Dictionary word of the year in 2018 and is undergoing a revival. The language is always evolving, with new words entering our lexicon regularly. Cakeism comes from 'having your cake and eating it too', but the word now means variously 'a wish to enjoy two desirable but incompatible alternatives' or 'proposing a future scenario that sounds better than is actually achieveable'. Enter the Reserve Bank and Governor Philip Lowe. They want to simultaneously fight inflation by taking away spending power while not creating a slowdown that pushes into a recession. The massive injection of government money and central bank stimulus helped cause the inflation which is now hitting the same people the money was supposed to assist.

And here's the dilemma for investors:

"Recession talk cannot seriously be applied to Australia. Westpac continues to forecast Australia's economy to grow 4% over 2022, led by consumer spending pent-up from Covid lockdowns into early 2022." Sean Callow, Westpac.

“Recession or not, the next 12-18 months is going to feel like one, especially for equity investors.” Raheel Siddiqui, Neuberger Berman

One of the reasons the Governor is speaking regularly at public and media events is his desire to talk down consumer optimism. Confidence is usually a good thing, but it is proving a headache for the Reserve Bank, as low unemployment and government assistance have encouraged consumers to spend.

This week, the ABS released the latest household spending for May 2022, showing a rise of 7.9% compared with the same time last year. Jacqui Vitas, Head of Macroeconomic Statistics, said household spending increased in all categories:

“Strength in the services categories was driven by transport (up 14.5%), as air travel continued to recover, and higher petrol prices increased motor vehicle running costs. Strong growth was also seen in spending on miscellaneous goods and services (up 12.6%), hotels cafes and restaurants (up 10.3%), and recreation and culture (up 10.0 per cent)."

Compared to pre-pandemic January 2020, total household spending is 10% cent higher in current prices. The Reserve Bank started increasing cash rates on 4 May, but only by 0.25%, so perhaps the message had not reached enough people.

While this spending pushes Philip Lowe to raise rates, other indicators of consumer sentiment provide reason for the Reserve Bank to temper its new enthusiasm for rate rises.

The Westpac-Melbourne Institute index of consumer sentiment is falling sharply, and is now at levels only seen during major disruptions. Consumer confidence is hit by economic events, such as the GFC and Federal Budgets, and of course, it took a severe hit in 2020 during the pandemic before recovering on vaccine optimism. It has now fallen for seven months.

Consumer Sentiment Index

What is the relevance of all this for interest rates? As Westpac says:

"The cash rate has increased at a faster pace than we have seen in any cycle since 1994 and this is clearly unsettling for consumers also facing a sharp rise in the cost of living. A more cautious approach will be appropriate once policy has moved to ‘neutral’ in August."

More up-to-date data is provided by the CBA Tracker:

"Our internal CBA credit and debit card spending data to 8 July has been showing a clear decline in the pace of spending growth. The falls have also been more noticeable in some of the discretionary spending categories that households are likely to pull back on first. With prices continuing to increase, that indicates the volume of consumer spending is likely to be even softer."

Back to cakeism. Perhaps Philip Lowe will enjoy a rich black forest rather than a simple sponge if consumer sentiment falls enough to stop him increasing rates toward the predicted 3% or even 4%. Thousands of borrowers will celebrate if he has his cake and eats it too. If borrowers want to help, they should stop buying stuff.

Hopes for inflation easing were not helped on Wednesday night when US consumer prices rose 9.1% in June 2022 from a year ago, above expectations. It's a 40-year-high driven by increases in gas, food and rent. The US market is now pricing in another 1% rise from the Federal Reserve later this month.

Which is all feeding into the ways Australians are investing, and three recent reports show the latest funds flows locally as well as globally. Compared with 2021, Australians have significantly changed how they are investing in 2022.

Another factor which is suddenly playing into the Reserve Bank thinking is the potential impact of a new Covid wave. I had my fourth jab on Monday, the first day it was available to under 65s, and I'm surprised how many people do not wear masks on public transport. I was in a lift on Monday where people piled in like the old days. We have become too relaxed. The implications stepped up this week when Federal Health Minister Mark Butler said Australians should consider working from home to curb rising Covid-19 cases. He said millions of Australians may be infected in the last six weeks of winter.

It's time to pay serious attention to pandemic again. The latest subvariant easily overcomes immunity from prior infections and vaccines and increases the risk of reinfection. The same variant is taking hold in the US and China, and may go some of the way to slowing the economy instead of central bank tightening. Adrian Esterman checks the evidence and numbers.

Firstlinks has covered the banning of stamping fees paid to brokers and financial advisers in great detail, such as here and here. Treasury is undergoing a post-implementation review of this 2020 policy, and we have gained access to the full submission by the Australian Shareholders' Association's Rachel Waterhouse. It seems unlikely the policy will change, with Stephen Jones, Minister for Financial Services telling The Australian Financial Review:

“I will look at the report, but it would be an extremely high bar to get over. I am focused on more Australians getting access to quality advice, not opening up the door to conflicted remuneration again.”

I'm with Jones on this one as there was plenty of evidence that brokers and advisers placed clients into funds based on receiving the fee. How else could a relatively unknown fund manager raise a billion dollars in a month?

We welcome the return of veteran global pension consultant, Don Ezra, who gives an intriguing explanation of how our lives will change when living to 100 is normal. He sees a good life lived in five acts.

Ashley Owen shares one of his great slides to show what has happened to Australian house prices over decades of inflation, and yes, real price falls are common. The 40% increase in 2020 to 2021 was extraordinary and we are now paying for the stimulus largesse, but buying a home is a long-term decision and favourable fundamentals are still in play.

We tend to focus on averages when describing markets, such as the market went up 'x%' or recessions usually last 'y days'. Robert Almeida warns that averages provide no insights into variations, and the peaks and troughs that can really damage a portfolio. Every market cycle or recession is different.

Some investors argue firmly for an allocation to gold, but others criticise it for the lack of income and price volatility. Sawan Tanna identifies five major misconceptions in making the case for gold in a diversified portfolio.

This week, Morningstar looked at opportunities in a down market with Susan Dziubinski checking 33 undervalued opportunities in US shares and Vikram Barhat discusses three cloud-based companies to counter recession fears.  

Even if you don't usually read our White Papers, this week's from Neuberger Berman is well worth a look. Reporting on the Q3 meeting of their Asset Allocation Committee, they explain the rationale for making multi-sector portfolio adjustments like this:

In brief, more into quality bonds to earn higher yields, less into equities to avoid a possible earnings downgrade.

Graham Hand

A full PDF version of this week’s newsletter articles will be loaded into this editorial on our website by midday.

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Plus updates and announcements on the Sponsor Noticeboard on our website


July 19, 2022

I would like some experts to explain the fallacy in the following argument regarding the Reserve Bank. The new Australian Treasurer is shaking his head predicting a horror budget as the huge debt run up for Covid benefits, bushfire and flood relief etc. has now to be serviced at much higher interest rates than when incurred, thus taking money from other important government spending requirements. However, this money was created by the Reserve Bank at no cost, with no provision of goods and services to go along with it. If the interest payments are flooding into the Reserve Bank, its "profit" is increasing as the government is losing. However the Reserve Bank is a wholly owned quango of the Government who can surely require the Reserve Bank to provide it a dividend to the value they paid. No impact on the Budget bottom line at all.

Warren Bird
July 19, 2022

David the Reserve Bank does not create money. And it also doesn't create government debt. The government funds its spending either from taxes or, if it's in deficit, it issues bonds. The Reserve Bank buys some of those bonds, but from the same public market as super funds, insurance companies or individuals who get them via the stock exchange. The price the RBA pays is the same price as everyone else. It's not the bonds that have been bought in the past that the Treasurer is now talking about - they are fixed interest rate securities. But when the government issues new bonds - including refinancing its past debts when they mature - they will have to do so at higher interest rates now. That will increase the interest expense to the government. This is interest they pay to all bond holders, including probably your super fund. Nothing to do with the Reserve Bank who probably won't be buying bonds from here on. So your comment that "interest is flooding in to the RBA" is just not correct. Hope all that helps.

July 21, 2022

Warren, What would cause the Commonwealth to issue inflation indexed bonds?

Warren Bird
July 21, 2022

I'm not sure what your real question is Dudley. What causes the government to issue bonds is mostly the need to finance the budget deficit. Inflation-linked bonds have been part of the funding mix for many years and continue to be issued on a regular basis to the tune of $2.5 bn a year ( There's also a secondary objective, even if the budget were in surplus, to continue to provide a liquid, risk free asset to support the operation of the government bond futures market as a pricing benchmark for all fixed income assets in the economy. But indexed bonds aren't part of that mix. In the end, the government issues inflation-linked bonds because there is investor demand for them so they play a role in helping to fund the budget deficit. Was there more to your question than that?

July 21, 2022

"government issues inflation-linked bonds because there is investor demand for them":

Presumably if government does not offer them then government 'turns away' some demand and would find the cost of non-indexed bonds would increase noticeably.

My interest starts from contemplating indexed bonds as longevity insurance.

Warren Bird
July 21, 2022

Dudley, if the government doesn't offer them then they don't exist. There is little to no incentive for a non-government bond issuer to sell inflation protection to investors. Governments are really the only issuers of these types of securities.

They do form a kind of longevity insurance, but how effective that is depends upon the relationship between your cost of living and the CPI inflation rate. This is taking the conversation into a much more specific advisory type one that I don't think I can add anything to from here. There's a place for linkers in many portfolios, but whether that's your portfolio or not I can't say.

Clive Wilson
July 17, 2022

Over the past couple of years there have been plenty of market commentators willing to express opinions on the performance of the RBA and the RBA Governor in particular. This commentary continues today, albeit under a different rate cycle. However not much has been said of the RBA board which includes 6 non executive members.

As in the commercial world the role of the RBA board is outlined in a charter which in this case pertains to "the greatest advantage of the people of Australia". In commercial world if things were perceived to be not right the stakeholders / shareholders would become "activists" aimed at the board not just "commentators" aimed at the boss. If the RBA is to become more accountable, this needs to start with the board.

July 17, 2022

Clive, I agree. All decisions are approved by the Board, and while it is now common to criticise Lowe, nobody focusses on the board. Take a look at the members, the pillars of business. Let them speak about their support for Lowe over the last two years while he had made mistakes.

July 17, 2022

It's hard not to feel extremely sorry for the many who bought houses at inflated prices on the back of Phil Lowe's "no interest rate rise until 2024" assertion just a few months ago. These people are going to really suffer as a result. But where are the consequences for Lowe after such an irresponsible statement? 

July 17, 2022

Agree, however presumably the board gave permission for him to make such a statement. If the board did not endorse the statement this should have been disclosed at the time. In any case having the CEO (Governor) chair the board is untenable as it is in commercial world ... the Chair should be independent.

SMSF Trustee
July 17, 2022

Did he - and the Board - ever actually say that? Or was it media misinterpretation of a statement of expectation rather than a promise?
I think the latter. The Australian financial press is really ignorant, but isn't subject to the same requirements to understand financial concepts, such as risk management, that advisers and fund managers are.
The rest of us knew that it was always possible that rates could go up before 2024. Did the press ever say that?

July 17, 2022

Yes, SMSF trustee, it could not be a promise, whatever that means, or stronger, a guarantee, but it was firm and clear guidance repeated month after month, until late 2021. Even Lowe admits he was wrong and traders were right, yet you call the financial press "really ignorant". In October 2021, the RBA wrote "The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently." Yet we don't yet have significant wages growth and he is increasing rates. Even in November "In our central scenario, underlying inflation reaches the midpoint of the 2 to 3% range only in late 2023. Having underlying inflation reach the midpoint of the target range for the first time in seven years does not, by itself, warrant an increase in the cash rate." And Lowe even criticised the market, which he now says was corrent: "I find it difficult to understand why rate rises are being priced in next year or early 2023. While policy rates might be increased in other countries over this timeframe, our wage and inflation experience is quite different." And finally this: "While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances." Lowe was wrong to be so firm.

SMSF Trustee
July 17, 2022

Alex, in that case I stand corrected.

July 14, 2022

The RBA is reaping what it sowed. Slashing interest rates to 0.1% went way past common sense. The additional bang for their buck ceased to have any value past 1.5%, and now people are horrified by 'huge' rate rises of 0.5%. My God, doesn't anybody in the RBA read economic text books? Marginal utility anyone?
We are now in a wage price spiral which will be difficult to stop because cakeism doesn't exist and the unpleasant choice is inflation or recession.

July 17, 2022

Agreed. The government didn’t complain at the time. The RBA going so low was another tool for the government to eat away it’s debt. They can’t get enough of short term growth.

July 14, 2022

Christopher Joye AFR 10th July nailed it: "One of our finest institutions, the venerable Reserve Bank of Australia, is in turmoil. Riddled by extreme group think and a hierarchical and tenure-based organisational structure that suffocates dissent, the RBA is once again blindly repeating mistakes that have plagued its policy decisions....." Does not bode well!

July 14, 2022

One of the problems for Chris Joye talking about his great predictions is that the AFR has a good searchable database. It's only in recent months that he has turned from praising to criticising the RBA.
Feb 22: "The Reserve Bank may only raise its cash rate to 1.25 per cent as house price declines limit the magnitude of this hiking cycle."
Nov 21: "the all-important September quarter wages data that vindicated governor Phil Lowe’s relentless dovishness on both wages and monetary policy."
"While it is possible the RBA raises rates in 2022, it appears more likely that the first cash rate increase will not be until 2023 at the earliest."

July 18, 2022

A board in 'turmoil'? The RBA Board is not in turmoil. It has little to no grasp on the reality of global financial markets. There is no doubt, no matter who they try to blame, that their cavalier assertions encouraged the public to acquire more debt than was prudent. The Australian public has been duped.

Warren Bird
July 19, 2022

Peter, as much as I believe that central banks globally have totally missed the early signals of this inflationary outbreak, to say that the RBA Board ''has little to no grasp on the reality of global financial markets'' is nonsense.

They know all too well how global financial markets constrain what we can do in Australia. Even if they'd wanted to tighten policy in 2021 as I believe they should have, the fact that the Fed, ECB and BoE were pursuing low rate policies risked pushing the AUD too high and hurting our export markets. They could, possibly, have made the decision to do that anyway for the sake of heading off inflation, but you can't say they made the decision in a vacuum.

And remember, house prices had collapsed in the period before the pandemic hit and were only just recovering. Over the 3 years to March 2020, established house prices in Sydney were pretty much flat. So the decision to provide the capacity for borrowing to take place to play along with the fiscal measures, in a time of great uncertainty - the stock market was down 25% over the year to March 2020 - does not reveal ignorance of financial or economic reality.

Sure, by the end of 2020 in my view they should have seen the evidence that things weren't as bad as they'd feared 9 months earlier, but as I said, they were acutely aware of global financial markets. That's not a criticism I would dare level at people like Phil Lowe, Guy Debelle, or Board Members like Ian Harper. I can assure you that they are far sharper about economic and financial reality than you or me!


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