Are the banks preparing for higher interest rates + do Aussies get paid fairly?

Happy Friday everyone,

It seems every week I start with an interest rate update. Even I’m finding it a bit tedious, but the reality is that the biggest financial impact on every Australian’s life at the moment is interest rates… for both borrowers and savers.

And here’s the thing. Every week the economic data which affects future interest rate movements is constantly changing. So I have to cover it because we are in such an important period at the moment.

I’ll try and be as succinct as possible. This week the most important interest gauges were the latest Reserve Bank board meeting minutes and the unemployment figures.

As far as the RBA board minutes for July were concerned, there were no surprises in the discussions by the board to keep interest rates on hold. They are concerned about what the rate rises are doing to Aussie household finances which could lead to a sharp slowdown in the economy and a quick rise in unemployment.

Inflation is still a worry for them, particularly rising wages, rents and energy costs.

Those fears of a sharp rise in unemployment were allayed for the time being when the June figure was released yesterday at near 50-year lows of just 3.5 per cent. So the job market is still very tight (anyone who wants a job can get one) despite corporate Australia coming out with a string of major retrenchment announcements.

It does make me wonder whether the official figures are not yet reflecting the widespread official and anecdotal layoffs because the redundancy payments make the recipients currently ineligible to be counted yet.

Anyway, in June 32,600 jobs were created and 105,300 for the quarter. While the figures are much better than most expected, they are in line with RBA expectation in their statement of monetary policy in May.

Bottom line is that this low unemployment figure would lead the RBA to raise rates again at their August board meeting. But we have the important June quarter CPI figure on inflation coming next week, along with retail trade figures.

If the CPI figure doesn’t continue falling and retail trade is strong, then another rate rise is certain. But if the inflation figure is lower than expected and consumers are not spending at the shops, then it could counter the strong job figures and rates would continue on hold.

That’s why next week is important.

Top savings rates go even higher

Of course, rising interest rates only hurt if you have loans - for those with savings it is a bonanza. But only if you have a savings account where the rate rises are passed on. It is a BIG mistake to assume rate rises are passed through to all savings accounts… nothing could be further from the truth.

The highest ongoing savings rate is currently 5.65 per cent, from ME Bank’s HomeME savings account.

This account is offered through the ME Go banking app and available for balances up to $100,000 for Australian residents aged 14 and over.

It’s the only savings account that is currently higher than the monthly inflation rate of 5.6 per cent.

The maximum rate customers need to deposit is $2,000 into a linked transaction account each month and grow the balance.

ME Bank also launched a range of five charity linked Visa debit cards. Customers can choose to support either National Breast Cancer Foundation, Beyond Blue, Australian Wildlife Conservancy, Minus18 or Orange Sky with ME donating 1 cent to the chosen charity every time customers tap their digital wallet.

These cards are a low fee option with no monthly account keeping fees, no currency conversion fees and no domestic and international ATM withdrawal fees from ME Bank. However, the ATM provider may charge a fee.

Highest ongoing savings rates on RateCity.com.au

Just to reinforce my point about checking you have a savings account that benefits from rising rates, a huge number of online transaction accounts pay 0 per cent interest on balances (yes, 0 per cent) while the lowest ongoing savings rate from a big four bank is 1.1 per cent on Westpac’s e-Saver account.

RateCity research shows that a balance of $50,000 could potentially earn $2,350 more over the next year in a ME Bank HomeME account, as opposed to Westpac’s eSaver as an existing customer, provided they met the monthly terms and conditions. 

Interest saved on a balance of $50,000 for ME Bank HomeME vs Westpac eSaver

Are the banks preparing for higher interest rates for longer?

It was just a couple of months ago that some of our leading economists were predicting that now would be the peak of the interest rate cycle, which would then pause for a couple of months and then rapidly fall at the end of the year and throughout next year.

A lot has changed since then with the current consensus of one or two further rate rises and then no rate cuts until the second half of next year, if at all.

I wonder whether the banks are preparing for this scenario through their fixed rate home loans. I know the number of borrowers after fixed rate loans has dropped significantly but they do give an indication of where bank lenders believe interest rates are going.

Westpac, CBA and ANZ have all lifted short-term fixed rates above 6 per cent.

Big four banks’ lowest advertised fixed rates

Lowest fixed rates on RateCity.com.au

Do Aussies get paid fairly?

With all this focus on wage rises and working conditions, have you ever wondered how we compare with the rest of the world? I found this graphic really fascinating on how we stack up against other advanced economies in the OECD group.

Mexico works the most hours for the lowest wages (which is why a lot of US companies manufacture across the border) while Aussies seems to work reasonable hours for a reasonable wage… better than Eastern Europe but not as good as the conditions in Western Europe and Scandinavia.

Best performing superannuation funds

In last week’s newsletter I went through the average performance of superannuation funds over the financial year to June 30 to provide a benchmark against your personal super fund’s performance.

Those figures were the industry averages. This week SuperRatings released its Top 10 fund performers across different investment categories. Importantly, the performance figures were not just the 1-year result but also the 10-year… as we all know superannuation is a long term investment.

According to SuperRatings, the second half of the financial year provided the majority of gains for funds, led by a rally in international shares.

A key theme for returns in 2023 was that funds with higher exposure to shares generally outperformed for the year, while those with greater exposure to unlisted property and alternatives reported more subdued outcomes. As a result, members who were invested in index funds generally did quite well, given the strong focus on listed shares in these options.

Top 10 Balanced Options over 12 months

As at 30 June 2023

The top performing indexed fund was HESTA’s Indexed Balanced Growth option with a return of 12.5 per cent for the year to June. While this sits slightly lower than the top performing balanced option, over the past 12 months, balanced index options have tended to outperform their more actively managed equivalents.

Top 5 Passive Balanced Options over 12 months

As at 30 June 2023

Investments with a sustainable focus have also outperformed over the year with Raiz Super’s Emerald investment option matching the top performing balanced option with a return of 13.3 per cent.

Top 5 Sustainable Balanced Options over 12 months

As at 30 June 2023

But when you’re invested in a superannuation fund consistency is also an important element in performance. A fund has to be able to perform well in both good and bad investment environments.

The SuperRatings table below shows the top 10 funds ranked according to their volatility-adjusted return, which measures how much members are being rewarded for taking on the ups and downs in their balances.

CareSuper, which was the winner of the SuperRatings Smooth Ride award in 2022, for being able to manage the ups and downs, sits at the top of the table with its Balanced option return of 7.5 per cent a year over the past 7 years. This was closely followed by Australian Retirement Trust’s Super Savings Balanced option with a return of 8.3 per cent a year.

Top 10 Funds Based on Volatility-Adjusted Performance with 7-Year Return Shown

As at 30 June 2023

With last week’s performance averages and this week’s top individual fund performers, you’re now well prepared for when the annual statement arrives from your fund manager.

Apart from performance, other things to check should be if the investment option you’re in is suitable for your current stage of life and risk appetite, your current insurance cover and importantly, that all your contact details are up to date.

Most super funds offer simple risk profiling tools on their website to help with investment decisions, and checking on your details is easy through their websites and apps.

Top 10 Balanced Options over 10 years

As at 30 June 2023

Construction costs are coming down … at last

It has been a terrible time for home builders with many going to the wall because of the impact of inflation on their fixed price contracts, sparked by huge rises in the cost of materials.

Over the past two years, the cost of building a new home has increased on average by 28.2 per cent. In Brisbane, the worst affected city, this increase was close to 40 per cent. Any builder who’d committed to a fixed price contract before the rises just couldn’t survive that sort of cost increase.

But it looks like the cycle is thankfully starting to turn with construction cost increases finally starting to slow.

According to Ray White chief economist Nerida Conisbee, construction costs increased just 1.2 per cent in the last quarter… the lowest in almost 2 years and much slower than the 12.7 per cent over the last year.

A big driver of the cost falls has been cheaper materials. Supply chains have been running smoothly for more than a year and many goods produced overseas, like China, are no longer seeing COVID-driven disruptions. Many raw materials are also cheaper. Steel, in particular, has come back in price. And those materials that aren’t yet seeing a decline in prices are likely to come back now that fuel prices are declining.

But a shortage of workers remains a problem. Over the past quarter there were 33,100 job vacancies in the construction industry, but down from the 40,000 vacancies 12 months ago. The number of jobs being created has slowed down. While migration has helped, the shortage remains but will continue to ease over the next year.

Higher interest rates and sharply higher construction costs has meant people haven’t been able to afford to buy or build new homes. Building approvals are currently at a decade low and it will take some time for the pipeline to build. In the meantime, population growth because of migration, is strong.

The housing market is in a real squeeze.

Big tech drives US sharemarket

All this uncertainty in the economic outlook certainly isn’t holding back global sharemarkets which are shooting the lights out, led by the US.

Interestingly it’s big US tech stocks that are dragging the market higher… Meta (Facebook), Amazon, Apple, Microsoft, Google, Tesla and Nvidia. As the chart below shows, the Fab 7 are up 58 per cent since the start of the year while the rest of the 493 stocks in the S&P500 index are up just 4 per cent.

In a good sign, the rally has broadened over the last couple of weeks with US transport and utility stocks rebounding nicely. Hopefully that broadening continues.

Your most common financial leaks

I often talk about plugging the financial leaks in your life to make ends meet; those expenses you lose track of which mysteriously siphon cash.

Comparison site Finder surveyed 1,090 people and found 41 per cent have made a financial blunder in the last 12 months, and I reckon the other 59 per cent are fibbing.

Forgetting to cancel a free trial (17 per cent), letting a gift card expire (14 per cent), and going over data limits (13 per cent) are the top most common financial errors… and classic financial leaks.

The research showed 11 per cent have lent money to a friend without chasing them for a repayment, while 9 per cent have missed out on their bonus savings rate… the difference between the bonus savings rate and the standard rate can be more than 5 per cent

Gen Z are the most likely of all generations to make financial mistakes (66 per cent), compared to Baby Boomers (16 per cent).