Surging Inflation, Pre-Election Rate Rise? US Negative GDP, China Lockdown & SB Recommends!
Australian Inflation comes in Hot
This week the Australian Bureau of Statistics (ABS) published domestic Consumer Price Index (CPI) data for the first quarter of 2022. The outcome was a surprise to the upside, where inflationary pressures have surged above forecast. The result lifted core inflation above the Reserve Bank of Australia’s (RBA) 2-3% target band for the first time since 2010.
The data revealed consumer prices rising at the sharpest annual pace in two decades, where headline CPI rose 2.1% for the quarter, taking the year on year increase to 5.1%. This is compared to a forecasted annual increase of 4.6%. The Trimmed-Mean CPI, rose 1.4% and 3.7% on a year on year basis, surging ahead of the forecast 3.4% rise.
The Trimmed-Mean which excludes the CPI components that show the most extreme monthly price changes is a very important measure. It serves as the preferred measure for the RBA as it removes more volatile items that tend to be less affected by monetary policy.
Inflationary pressure was present across the board, with almost every component measured within the ABS ‘basket’ of goods and services showing a rise over the quarter with clothing and footwear being the sole exception.
It is notable that those components that make up the largest share of the consumer price index basket saw some of the most significant rises over the quarter. For example, we saw education lifting 4.5%, housing up 2.7%, healthcare up 2.3%, transport rising by 4.2%, with food and beverages up 2.8% quarter on quarter.
Unlike the U.S. Federal Reserve, the RBA has been slow to change its path in the face of the mounting inflationary pressures, but we have undoubtedly now reached an inflection point.
Pre-Election Rate Rise?
Surging inflation has fuelled speculation that the Reserve Bank’s hand may now be forced in terms of needing to lift interest rates at next week’s meeting. In usual circumstances, the need to lift rates immediately would be deemed a near certainty, but we currently have the significant complicating factor of a keenly contested Federal Election campaign.
The Reserve Bank of Australia (RBA) is typically seen as hesitant to make any movement during a campaign that may be seen to influence the outcome or raise question marks over the independence of the central bank. Given the central focus within the campaign on cost of living pressures, an increase in interest rates would be adding to growing consumer (and voter) despair in this regard.
Following the release of this week’s CPI data, the chorus of calls for the RBA to leap into action with rate increases has turned into a cacophony. What is abundantly clear is that the RBA no longer needs to keep interest rates at emergency lows of 0.1% and should tighten soon, probably at its next policy meeting on May 3 rather than waiting until June.
Investment markets quickly narrowed the odds on a 0.15% rate rise next week, which would bring the official cash rate from 0.1% to 0.25%. Consensus, however, is still dominated by the expectation of a June hike given the sensitivities of the election campaign. It should be noted though those expectations are firming on a 0.4% increase in June quickly taking the RBA base rate to 0.5% rather than a more gradual increase to 0.25%.
As the RBA now embarks on a rate-rising cycle, the economic reaction to this will be keenly monitored given the central bank’s last rate rise was under Glenn Stevens in November 2010, when a 0.25% increase took the cash rate target to 4.75%. Twelve years is a long time in anyone’s world, and memories of higher interest rates are distant, at best!
Negative US GDP
Figures released overnight have confirmed U.S. Gross Domestic Product unexpectedly declined at a 1.4% annual pace in the first quarter of 2022. The GDP figures, which measure the output of goods and services in the U.S. economy over the three months, revealed an abrupt reversal for an economy coming off its best performance since 1984.
The negative growth rate fell well short of the already subdued estimates of a 1% gain for the quarter and was the worst result since the pandemic-induced recession of 2020. A plethora of factors colluded to prevent growth during the first three months of 2022, following the 6.9% gain to close out 2021.
Factors included rising omicron infections in early 2022 significantly hampering activity, inflation surging at a level not seen since the early 1980s, and the Russian invasion of Ukraine also contributed to the economic conservatism and inertia.
Despite the disappointing number, some of the GDP declines came from factors likely to reverse later in the year. Fears are therefore not high that the U.S. is slipping back into a recession, at least not in the short term. Markets showed no sign of distress on the report, with shares rising substantially in the best trading day for the major U.S. indices since early March.
From here, economists are closely monitoring the impact of clogged global supply chains from China as well as the fallout from the Ukrainian conflict, and associated sanctions, as major variables influencing growth for the remainder of 2022. Should the U.S. economy splutter further, then expectations around the U.S. Federal Reserve needing to adopt very aggressive monetary tightening may also start to be revisited.
China Lockdown causes Shipping Chaos
As the rest of the world reopens and moves increasingly toward policies of living with COVID, residents in China are once again trapped in a 2020 Groundhog Day. An estimated 165 million people are now in lockdown, with residents of Beijing and Shanghai, the twin engines that power much of the nation’s economy and the world economy, facing severe restrictions.
Throughout the pandemic, China has stuck to a strict zero-Covid strategy that uses lockdowns, mass testing, quarantines, and border closures to contain the spread. Shanghai is at the centre of the latest outbreak, reporting upwards of 10,000 new cases a day. Authorities have responded with a city-wide lockdown that has already lasted weeks, confining nearly all 25 million residents to their homes or their suburbs. Now Beijing officials have commenced mass testing exercises, closed schools, and imposed targeted severe lockdowns on some housing in a bid to control infections.
Beyond the impact on the millions of families caught up in the lockdown, there are also severe implications for the efficient operation of the world economy. Shanghai is not only the largest city in China but also the busiest container port in the world. As the lockdown continues, off the coast, a growing number of cargo ships sit idle, waiting to make landfall and unload. According to shipping analytics firm Windward, 20% of the world’s roughly 9,000 active container ships are currently sitting in traffic jams outside congested ports. Close to 30% of that backlog alone is in China and growing rapidly.
Beyond the port of Shanghai, restrictions on cross-border trucking and movement throughout the city have prevented workers from off-loading and on-boarding shipping containers, further exasperating delays. In a world that remains extremely dependent on smooth supply lines to maintain economic growth, the latest lockdown and logistical bottleneck is an unwelcome development, to say the least, and the situation is becoming more critical by the day.
SB Talks Podcast
In our latest SB Talks Podcast, released late last week, we discuss the key factors influencing investors for the months ahead.
This includes a conversation on Australian inflation and interest rates, the pace of US interest rate increases, China lockdown (again) & supply constraint, and the recent energy price surge and European recession risks.
You can listen and subscribe to the SB Talks Podcast on Spotify here.
Not on iTunes or Spotify? Click here.
Russian gas blackmail
Following through on prior threats, Moscow has told Poland and Bulgaria it will halt gas supplies following their refusal to pay the Russian energy behemoth Gazprom in roubles, in an apparent warning shot to the rest of Europe.
Gas supplies to Poland through the Yamal pipeline were briefly halted early on Wednesday before resuming, EU data showed. The decision to halt supply followed Poland’s announcement on Tuesday that it was imposing sanctions on 50 entities and individuals, including Russia’s biggest gas company, over Moscow’s invasion of Ukraine.
The Russian threats are starting to test the unity of the West, with one of Germany’s largest energy firms, Uniper, announcing overnight that they are prepared to buy Russian gas using a payment system that critics say will undermine EU sanctions.
Uniper says it will pay in euros which will be converted into roubles, meeting a Kremlin demand for all transactions to be made in the Russian currency. Additional European energy firms are reportedly preparing to do the same amid concerns about supply cuts. In making the announcement, Uniper declared that it had no choice but said it was still abiding by EU sanctions. “We consider a payment conversion compliant with sanctions law and the Russian decree to be possible,” their spokesman told the BBC.
What is clear is that as the military picture worsens for Moscow, they will turn to any leverage they have to avoid defeat. In gas exports, that leverage remains very significant. Despite the many sanctions, Europe cannot escape its dependency on Russian gas.
Musk fights off Twitter’s Poison Pill
Elon Musk’s US$44bn Twitter takeover battle has been one of the most dramatic takeover attempts in recent history, seeing a swaggering billionaire pitted against an enormous, if stagnating tech giant.
Musk’s capture of Twitter has been a months-long pursuit that has caught the business world’s attention. Musk, the Tesla and SpaceX mogul, started accumulating shares in the social media firm at the start of the year. He subsequently rapidly rose to the top of its shareholder register, acquiring a 9% stake in the company as the largest single shareholder. But he then hit turbulence, accepting a place on the board only to rapidly complete a U-turn in rejecting it, seeing potential rival buyers of Twitter start to circle.
While this played out, executives within the social media firm appeared to be doing all they could to rebuff his advances, including launching a ‘poison pill’ strategy to sink his chances. Yet Musk confidently pushed through all the obstacles, finalising a $44billion offer and, very importantly securing, the financing needed to make that offer a reality. This prompted the board of Twitter to accept the deal and for negotiations to move to the next stage.
Speculation has been rife as to why Musk, who already has multiple very successful high growth companies to his name, would seek to dedicate his time to this stagnating social media platform. While it is not abundantly clear, Musk has been vocal in championing the cause for free speech and declaring that he sees Twitter as the Town Square of the online era.
He also clearly gets a lot of pleasure and benefit from tweeting and may desire the platform optimised for his personal and commercial messaging. No doubt, the growth in Tesla has been enhanced by him being a mercurial public figure on Twitter. He likely sees a lot of value in his tweets and seeks to protect and expand this value going forward. Time will tell on his ultimate plan, and if nothing else, it certainly should be an ‘interesting’ journey.