My interest rate prediction + Watch out! Scams on the rise

My Money Digest - 02 August 2024

Hello everyone,

The US sharemarket had another (of what seems to be a regular) Thursday sell off overnight. As a result, it’s pretty ugly on the Australian sharemarket today after it once again touched record highs during the week.

The nervousness in the US is around more economic data showing a real weakening in that economy. Investment house Morgan Stanley is predicting three US interest rate cuts before the end of the year. The financial markets are almost unanimously forecasting the first US rate cut to be in September.

The Bank of England cut its official interest rate overnight for the first time in four years. So central banks around the world are well and truly in the rate cutting cycle. The US and Australia will be among the last to move.

US investors were also spooked by computer chip manufacturer, Intel, announcing it is cutting 15,000 jobs, which has put a dampener on tech stocks.

Our focus this week has been on the CPI figure and the RBA board meeting next Monday and Tuesday.

In this today’s newsletter:

  • No interest rate hike from the RBA next week

  • SA the top economic performer amongst the states

  • Another big increase in financial complaints

  • The two-speed property market. Home units now outperforming houses

  • Shock. Horror!!! Sell CSL?

  • A new app to teach kids about investing  

No interest rate hike from the RBA next week

Australians don’t deserve another interest rate hike and financial markets are almost certain the Reserve Bank will not raise interest rates at its board meeting next Monday and Tuesday.

After Wednesday’s June quarter CPI figures, it’s clear that Australians have been tightening their financial belts to cope with the cost-of-living crisis with the biggest inflation cost drivers being out of our control - costs which our consumer behaviour has absolutely no influence on.

Looking at the breakdown of the figures of the CPI basket, the big drivers of inflation in the June quarter were rents, petrol prices, building costs and fruit and vegetables.

Fruit and veg price rises were not driven by Aussies going overboard eating their greens but by poor weather conditions impacting growing conditions.

Petrol prices didn’t go up because we’re pumping more into our gas guzzlers, but rather by the global oil price and the weak Australian dollar making oil imports even more expensive.

Building costs are rising because of the labour shortage and high cost of building materials, not because we’re building more houses than normal. In fact, governments are the main reason for the shortage of home building workers and more expensive building materials because of their huge infrastructure and renewable energy projects which are sucking up jobs and materials.

As for rents, the surge is because of the housing shortage combined with big migration levels which governments simply didn’t plan for. We desperately need migrants. They are good for the country and good for the economy. But you just can’t turn on the tap without planning on how to house, transport and care for them. 

The only item in the CPI basket which could counter my argument is the strong rise in clothing and footwear prices. This sort of ‘discretionary spending’ has subdued in recent months because of lower demand and retail discounting. The Australian Bureau of Statistics has pointed out though that the higher June figures reflect new winter stock being brought into stores which isn’t yet been discounted.

To reinforce the point, the latest June retail trade figures were also released on Wednesday which showed retail volumes were up, but it was because we were taking advantage of the ‘end of financial year’ sales.

Spending at cafes and restaurants was flat which is the reason so many are going out of business and why there is a plague of ‘For Lease’ signs on empty shops.

The June quarter CPI figure came out right in line with expectations - 1 per cent for the June quarter and 3.8 per cent for the last 12 months, which was slightly higher than the 3.6 per cent for the year to March. But the RBA looks at the ‘trimmed mean’ figure which takes out any volatile elements of the CPI basket of goods and services. That figure dropped from 4 per cent in March to 3.9 per cent in June.

This was seen by economists as a good sign because the results were down slightly, which was widely predicted after a volatile few months of figures surprising analysts. Markets don’t like surprises and are easily spooked.

The sharemarket rose strongly on the back of the predictable result and the Australian dollar dropped below 65 US cents as financial markets now put the odds of an RBA rate hike next week at just one in 10.

It’s obvious the economy has slowed to a crawl, and the RBA is wary of tipping us into a hard recession.

But what I’m wary of is the number of (mainly big) businesses, using inflation as an excuse to put up prices, but then putting them up by MORE than inflation. There should be a public Inflation Shame Register to reveal those companies which fuel even more inflation. Make them prove their costs have gone up by more than inflation to justify their price hike.

I’m looking at you, Telstra. Last year prices went up by 7 per cent because of “inflation” - but the peak inflation figure was picked, rather than the then-current figure of 5 per cent. Telstra customers get another price hike this month which is, again, higher than inflation and will add to the ‘telecommunications’ figure in the August CPI basket.

I always assumed a technology business would benefit the most from the introduction of new technology to make them more efficient and reduce costs.

Big business is treating us like suckers. They believe we’re now so accustomed to inflation that we’ll just accept these price increases as the norm. And Telstra is not the only company ripping us off.

Insurance premiums increased 14 per cent over the past year supposedly to offset an increase in the intensity and severity of natural disasters. If general insurance companies are doing it so tough, why are the share prices of IAG and QBE at two year highs because of strong profit results?

Wage growth is also a contributor to inflation but the biggest growth is in government wages, which is well ahead of business wage growth. Federal and State Governments pass on large wage rises which feed into inflation and put more pressure on interest rates.

Governments need to help in the inflation fight as well by being more prudent in their spending, rather than leaving the heavy lifting to the RBA and us as consumers.

South Australia leads others states in terms of economic performance

Each quarter, financial services group CommSec attempts to find out which state or territory is Australia’s economic leader. Now in its 15th year, the report compares annual growth rates across eight key indicators. 

South Australia continues to lead the performance rankings. South Australia ranked first on three of the eight indicators. Western Australia is still in second spot, fast closing in on first place. Victoria remains in third place with the ACT in fourth position.

Overall, the economic performances of Australian states and territories are being supported by a solid job market and strong population growth at a time of higher-than-desired price inflation.

But their economies have slowed as consumers respond to higher borrowing costs and price pressures. The future growth path will depend on the resiliency of the job market and interest rates.

The previously equal fourth-placed states of Queensland (now fifth), Tasmania (now sixth) and NSW (now seventh) all dropped down the table.

Watch out! Scams drive a big rise in financial complaints

You may not be aware that there is The Australian Financial Complaints Authority (AFCA) with an Ombudsman that tries to follow through with consumer complaints about the financial sector.

In the last financial year disputes reaching the Ombudsman service rose a further 9 per cent to more than 105,000. This followed an unprecedented 34 per cent jump in complaints in the previous year.

The preliminary data showed scams were a key driver, along with a surge in complaints about comprehensive motor vehicle insurance, contributing to record complaints in the banking and finance, and general insurance sectors.

Banking and finance complaints rose 11 per cent to 59,636 while general insurance complaints rose 4 per cent to 29,096.

Scam-related complaints rose 81 per cent to 10,951, averaging 913 a month compared with 504 a month the previous financial year. That was reflected in personal transaction accounts being the most complained about product overall, while transactions that customers considered unauthorised were the most common issue.

In a worrying new trend, AFCA has started to see instances of sophisticated scam activity in the superannuation sector.

A 21 per cent surge in complaints about comprehensive motor vehicle insurance meant it overtook home building cover as the most complained about insurance product. Claim delays accounted for a third of these vehicle insurance complaints, and delay in claim handling remained the top issue in general insurance overall.

Source: AFCA preliminary data snapshot as at 30 June 2024

The latest property market news remains mixed

There have been a couple of big property updates from Ray White and CoreLogic this week which shows a two-speed property market and also that home unit values are starting to outpace the growth rate of houses.

According to real estate giant, Ray White, Perth, Brisbane and Adelaide continue their strong run, all exceeding 13 per cent price growth over the past 12 months. Perth remains red hot, recording an increase of 25.6 per cent over the past 12 months, with no signs of slowing at this point.

In direct contrast, Melbourne and Hobart are seeing weak conditions. Hobart is now recording house price declines over the past 12 months, while Melbourne is increasing only marginally at 1.8 per cent. A similar trend is happening in the unit market for all these cities.

There are likely a number of drivers for the Melbourne decline. Victoria is possibly in recession and additional taxes on property owners to pay back state debt has made investing in property less attractive. This has sparked an increase in properties coming to market and Days On Market (DOM) has also increased dramatically.

Melbourne’s DOM waiting to sell is now at its highest level since December 2020 while Hobart is at its highest since 2015. In comparison, Perth is currently the lowest at nine days.

The market in the middle is Sydney. While not as strong as the smaller capital cities, it is still experiencing relative strength. In all capital cities, the most expensive suburbs are still seeing strength. House prices in Rose Bay increased by $200,000 over the past 12 months, the largest increase of all suburbs. Melbourne price growth is weak overall but Brighton prices have increased in excess of $110,000 over the past year.

Brisbane unit prices are still increasing faster than houses year-on-year, likely driven by high construction costs in this state, as well as fast population growth. Brisbane units are getting expensive, and now exceed Melbourne unit prices.

According to Ray White, the outlook for the rest of the year looks set to continue. At this point, it is likely that rates will not be cut until the start of 2025 and the economy is continuing to slow.

In addition, migration levels will also be lower this year compared to last. However, in contrast, high construction costs will keep the cost of building a new home high which will continue to drive people to buy established homes.

Similar trends were also seen in property research group, CoreLogic’s monthly assessment which saw national home values rise 0.5 per cent in July - the 18th consecutive monthly increase in home values nationally.  Since the beginning of last year, national home values have risen 13.5 per cent to new records.

According to CoreLogic’s figures, three capitals recorded a decline in values over the past three months - Melbourne (-0.9 per cent) Hobart (-0.8 per cent) and Darwin (-0.3 per cent). The rolling quarterly pace of growth has also slowed markedly in Sydney to 1.1 per cent, which is a fraction of the 5 per cent quarterly gain recorded at the same time last year.

But the mid-sized capitals are continuing to buck the slowing trend, with the quarterly pace of growth in Perth tracking at 6.2 per cent, Adelaide accelerated to 5 per cent while Brisbane values rose at a quarterly pace of 3.8 per cent.

Interestingly home unit values are now rising faster than houses in most capital cities.

Source: CoreLogic Home Value Index Released 1 August 2024

Shock! Horror!! Sell CSL?

Global blood plasma and vaccination healthcare giant, CSL, is a darling of the Australian sharemarket. The old Commonwealth Serum Laboratory is a real healthcare success story as a company and for shareholders.

But this week on my daily sharemarket program, The Call, on business streaming network Ausbiz (7plus, Ausbiz.com.au and Samsung Smart TV) Mark Gardner from MPC Markets made the bold call to sell CSL shares.

For many CSL investors that call by Mark would have been seen as investment heresy. CSL has always been seen as one of those invest-and-forget type of stocks.

But Mark made the point that CSL shares have been trading between $250 and $310 for a number of years now. He said when they get to around $310 - like now - the market predicts they are building a new foundation level on the charts and will catapult higher to break out of the range. 

But inevitably they hit that $310 level and then dropped back to $250 (a few months ago it was down to $230). 

He also isn’t a disciple of CSL’s management either and points out they recently scrapped a billion dollar new drug trial, didn’t make the most of Covid vaccines and a new mega takeover has yet to prove itself.

He is recommending his clients sell half their CSL holding and buy back in when it gets down to $250 which he thinks is likely. He draws a comparison with buying BHP around $40 a share and selling at $50, which has happened quite a bit over the last few years.

Having said that, Daniel Ortisi from Stock Doctor was on the same panel as Mark and while Daniel acknowledged Mark’s points, he is a lot more positive regarding CSL and does believe there is the potential for it to go higher from here. His advice to CSL shareholders is to stay put and hold on.

Check out this app that teaches kids about investing in shares

You know I’m passionate about financial literacy and teaching kids about money and investing. So I’m always looking for great ideas on how achieve this.

This week, I came across a new Aussie app, Drip Invest, that teaches kids under 18 about investing using real money, but under the supervision of parents. It’s designed to help under-18s build healthy financial habits and literacy using real investments.

From as little as $5, kids and their parents can make smart, real investment decisions together, turning pocket money into potential profit and helping kids to build the knowledge and confidence needed for financial success in adult life.

Children can choose between 15 different ETFs to invest their money and there are a whole bunch of video explainers and tools for them to do their research.

It’s the brainchild of Aussie Isabelle Charter, who acknowledges she was never taught how to manage money or invest wisely from a young age and this knowledge gap can have long term consequences for financial wellbeing.

Parents create a Drip Minor investing account for their under-18s who can access the app on their devices with a ‘view and request only’ profile. Teens can then explore 15 different investment options, from companies, to metals and even crypto, and can request investments, which parents then approve or decline.  Parents can also set rewards for learning, like weekly money boosters unlocked by answering questions about market updates and investing concepts.

The app uses special features like a plain language dictionary that explains investing lingo, learning rewards, gamification, and a visualisation tool that demonstrates the impact of long-term investing.

There are no transaction fees (which could be huge on a small transaction) but there is a subscriptions fee of $14.99 per month for one child, and they are currently offering the beta version for $6.99. Adult subscriptions are free. An administration of 0.8 per cent a year is also deducted.