Easy monetary policy pushing asset prices
Paradoxically the soft state of the labour force, the economy and commodity prices - and resultant low interest rates - are creating windfall gains for household balance sheets right now. A few point of interest from today...
Part 1 - Commodities sliding
The RBA released its Commodities Index today which declined by another 2.7 percent in February in SDR terms to be a horrible 20.6 percent lower over the past year. The driver has been the spectacular reversion in bulk commodities, being iron ore and coal prices.
In Aussie dollar terms the index actually increased by 0.2 percent in February, but this shouldn't delude users that the currency has done enough heavy lifting to cushion the blow. The index is still still down by 16.2 percent in Aussie dollar terms over the past year.
Since peaking in Q3 2011 the index in Aussie dollar terms is down by more than 30 percent, which is a horrid statistic any way you try to look at it!
Part 2 - Share markets pushing 7 year highs
It wasn't a great day for retailers.
The Woolies (WOW) share price dived by 4.62 percent roday after its underwhelming half year reporting last week.
Meanwhile Myer (MYR) got dumped by a painful 10.8 percent today to only $1.655 on "CEO succession" news. You may recall from my first book that I felt the Myer float was "optimistically" priced at far too high an earnings multiple - valuations have been crushed since with share prices declining awfully from their $4+ float price.
Despite this it seems that share markets are anticipating further rate cuts with relish in pushing new 7 year highs, the ASX 200 (XJO) adding another 30 points today and threatening to take out 6,000 in due course.
Don't be deceived by verbal trickery and commentary which suggests that "share prices are only back to where they were 7 years ago" - the total returns index which includes dividends is breaking all-time record highs with the financials index on fire in particular, offsetting overdue weakness in the resources sector.
Part 3 - Property recovery continues
CoreLogic released its February housing market results today which showed capital city prices rising by a more moderate 0.3 percent in the month driven largely by another 1.4 percent increase in Sydney dwelling prices.
Quarterly prices are a bit all over the place (for example, I doubt you'd find much support for the notion that Melbourne prices soared by 4.5 percent over the quarter - essentially this was reversing a previous decline), but the year-on-year figures generally stack up with what has is being reported by other data providers.
Sydney leads the way with 13.7 percent growth over the past year. Brisbane also looks solid having recorded 5.9 percent capital growth over past year.
However, given the low interest rate environment, dwelling values growth has been notably soft in Perth, Hobart, Canberra, Adelaide and Darwin.
The Brisbane result generally accords with the indices of other data providers such as Residex have reported. The ABS previously reported Brisbane prices appreciating by a solid +5.3 percent in the 2014 calendar year.
Since the last market trough Brisbane market has shown a steady recovery with dwelling values up by +11.2 percent.
The ABS indexes show Brisbane as being the most steadily consistent performer of late, with prices rising for the past ten quarters consecutively from June 2012 to December 2014, while Sydney's market is rising very strongly.
Some commentary focused on the erosion of rental yields, with gross yields on houses in Sydney declining to just 3.5 percent and Melbourne to an utterly dismal 3.2 percent, which is as low as we have seen.
Despite this, gross yields held up on Sydney apartments at 4.4 percent as compared to 4.7 percent in Q4 2013 and 4.3 percent in Q4 2012 on the CoreLogic/RP Data measures.
This dynamic of rents continuing to rise in tandem with prices is one of the reasons that commentators such as Shane Oliver of AMP - and indeed myself - expect Sydney apartment prices to continue rising through 2015, particularly since it is now possible to borrow funds at a lower mortgage rate than 4.4 percent (with further monetary policy easing appearing likely).
Detached house price gains have been imperiously strong so far in this Sydney cycle but, as Mark Twain once said, "everything has its limits" - it's time for units to take up the mantle, pushed higher by return-seeking investors.
Part 4 - Rates still have further to fall
Finally, what about tomorrow's interest rates decision?
Further soft data today including a TD-MI inflation reading for the past year of only 1.3 percent points to a likely cut sometime in the first half of this year (although the core reading was stronger), but whether that proves to be tomorrow hangs in the balance.
Commentators have tried and tried to pick the Reserve Bank's brains on this one but markets remain undecided, pricing a 60 percent chance of a cut tomorrow.
What we can say is that rates are generally considered very likely to be lower by the end of the calendar year, with implied yields of an incredibly low 1.695 percent priced for December 2015 cash rate futures contracts, and the cash rate expected to be at 1.75 percent all the way out until July 2016.
Let's see what happens in the March interest rate decision, paying particular attention to the wording of the press release, which may introduce an explicit easing bias.
Stacks of other data due in the fortnight ahead too.
Stacks of other data due in the fortnight ahead too.