Evidence is mounting of a recession here - but why not in the US?

Hi everyone,

Welcome once again to my Friday round up of the most important things you need to know each week when it comes to looking after your money.

This week I want to look at the growing evidence we’re headed for an economic recession (and why the US isn’t); where to get the best rate on your savings; why CSL shares are being hammered and what to do; identifying and protecting yourself from financial abuse; why Melbourne is the new property hot spot; the latest superannuation performance results… and a whole lot more.

But first, the evidence is mounting of an economic recession here… but not in the US.

As I explained last week, the prospect of an economic recession in Australia is very real – not certain, but a good chance.

And the economic data this week is reinforcing the possibility.

I often say we make the mistake of talking about the economy as an inanimate object of financial theory. But an economy is a measure of a bunch of living, breathing human beings; what they’re producing and how they’re feeling. And it’s fair to say they’re not feeling too flash at the moment.

The latest consumer sentiment figures out this week remained at very low levels, while business confidence and conditions deteriorated further. The sentiment data is showing increasing signs that the job market is easing, with consumers’ unemployment expectations ratcheting higher and businesses expecting to reduce headcount.  

The Westpac–Melbourne Institute Survey of Consumer Sentiment Index remained in the doldrums in June at 79.2 points, well below the 100 mark that separates optimists from pessimists.  

The NAB Consumer Sentiment Survey revealed that both business confidence and business conditions fell last month. Confidence fell from 0 to ‑4 and conditions decreased from +15 to +8. While +8 is still a solid result, the series is on a solid and steepening downward trajectory. 

Business conditions across the board fell; trading (down 7pts to 14), profitability (down 5pts to 7) and employment (down 6pts to 4) all registered solid declines. Forward orders, which typically leads other activity components, fell 6pts to ‑4 in the month. This indicates that conditions are likely to continue to soften this year. NAB also noted forward orders were particularly weak in the consumer sectors of retail and wholesale trade. 

So, employers are doing it tough across the board and a gloomy boss usually translates to job and spending cuts.

But then we had yesterday’s jobs figures which show 70,000 new jobs created and the unemployment rate dropping back to 3.6 per cent. You could be forgiven for thinking things aren’t that bad. Remember though that unemployment usually lags economic decline, but when it turns it turns quickly.

These stronger employment figures will play into the RBA’s interest rate decision, which is to say wage rises and a tight labour market are keeping inflation stubbornly high, so interest rate rises are needed.

So, what are the bank economists now expecting rates to peak at?

NAB’s economic team has now revised its forecasted cash rate peak to 4.60 per cent, the highest of the big four banks’ predictions, with more rate rises expected next month and August.

If this happens, the average variable owner-occupier who hasn’t negotiated their loan since the hikes began could be paying a rate of 7.36 per cent by mid-August.

Big four banks’ current cash rate forecasts: 

• CBA: Hike in July to peak of 4.35 per cent. Then 1.25 per cent worth of cuts in 2024 to a cash rate of 3.1 per cent.

• Westpac: Hike in July to peak of 4.35 per cent. Then 1.5 per cent of cuts in 2024 to a cash rate of 2.85 per cent.

• NAB: Hike in July and August to a peak of 4.6 per cent. Then 1.5 per cent worth of cuts in 2024 to a cash rate of 3.1 per cent.

• ANZ: Hike in August to cash rate peak of 4.35 per cent, although one additional hike is possible. One cut in late 2024 to 4.1per cent.

If the cash rate reaches 4.60 per cent, the average borrower with a $500,000 loan could see their repayments rise, in total, by $1,288.

Impact on monthly mortgage repayments if the cash rate gets to 4.60%

Why has the US Federal Reserve paused their rate hikes?

Simple: their inflation rate is coming down quickly and ours isn’t.

This week the Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index, rose just 4.4 per cent in April from a year earlier, down from 5.4 per cent in January. Core prices, which exclude volatile food and energy prices, have been more stubborn, but are still well below Australia’s inflation rate of 6.8 per cent.

So America is heading to its 2-3 per cent inflation target a lot quicker than us. The difference is that the US doesn’t have big wage growth like we do which, in turn, keeps inflation higher for longer and therefore pushes up interest rates.

I had my little rant last week about how our Federal Government and Treasurer have to stop being the good guys promising wage rises to everyone. They can’t blame the RBA for putting up rates if they’re causing the inflation problem. The Federal Government has to do some of the heavy lifting as well.

As rates rise what are the top savings account earners?

Bank of Queensland this week increased its Future Saver account to 5.5 per cent.

This increase puts it on par with ING’s Savings Maximiser. Both now have the highest ongoing savings account rates in the market. However, BOQ’s Future Saver is only available to Australians aged 14 – 35 on balances up to $50,000, whereas the ING account is available to all adults on balances up to $100,000.

As part of the BOQ Group, Virgin Money’s Boost Saver will increase to a maximum ongoing rate of 5.35 per cent, while BOQ’s Smart Saver for over 35s will increase to 5.1 per cent.

Updated - highest ongoing savings rates (excludes kids accounts)

How your super fund is performing

I always cover the monthly performance of superannuation funds because it gives you a general benchmark on which to judge the performance of your individual fund. Hopefully it becomes a monthly reminder to check on your fund.

The SuperRatings research compares the median performance across the balanced, capital stable and growth options. 

Superannuation fund returns are expected to be slightly negative over the month of May, with SuperRatings estimating the median balanced option generated a return down 0.2 per cent for May. Despite the uncertain outlook for inflation, SuperRatings estimate financial year-to-date returns on a balanced option to be 7.9 per cent as at the end of May. Depending on returns throughout June, super funds are on track to manage a return above inflation for the past 12 months.

The median growth option fell by an estimated 0.3 per cent over May, while the median capital stable option is estimated to decline by 0.2 per cent.

Accumulation returns to May 2023

Pension returns saw a similar fall over May with the median balanced pension option estimated to decline by 0.3 per cent. The median growth pension option is also estimated to fall by 0.3 per cent, while the median capital stable pension option fell by an estimated 0.2 per cent over May.

Pension returns to May 2023

In dollar terms, members with $100,000 invested in the balanced option at the start of July last year would have an estimated $107,833 in their account at the end of May, not accounting for administration fees or any insurance premiums they may pay. Members investing in the more defensive capital stable option would have an estimated $104,677 with smaller ups and downs throughout the year, while members that limited their investments to cash would have a lower overall balance of $102,358 while seeing small gains each month.

Plenty of property bidders pushing up prices, but for how long?

Constantly rising interest rates don’t seem to have dampened buyer enthusiasm… so far.

Bidding at auction gives us a real-time measure of housing activity. If someone actually bids on a property, you can be reasonably assured that they are in the market and ready to buy.

Last year, nationally the average active bidders at an auction hit a low of 2.2 in November 2022. This was the lowest level since April 2020, the first full month of the pandemic. At a more localised level, the trough occurred much earlier in Sydney where it hit a low in June 2022. Sydney average active bidding is now back to where it was in November 2021.

The city with the most active bidding is Adelaide. Adelaide barely had a downturn last year and house prices are now back to their 2022 peaks. Average active bidding hit 3.7 in May. All cities however are continuing to show a steady increase in bidding activity.

Is the Melbourne property market the best value in Australia? 

According to Property research group CoreLogic, Melbourne residential property looks to be a screaming buy right now. The most undervalued capital cities for property used to be the likes of Adelaide and Perth, but not anymore. 

In March 2020, at the onset of COVID, Melbourne house values were 19.2 per cent cheaper than Sydney’s, but last month Melbourne’s median house value was 29.6 per cent behind Sydney or $382,500 cheaper.

Every capital city other than Canberra has significantly closed the house value gap to Melbourne. At the onset of COVID, Brisbane houses were 47 per cent cheaper than Melbourne… now they’re just 15 per cent cheaper.

Melbourne was 85 per cent more expensive than Adelaide at the start of COVID but the gap has narrowed to just 29 per cent and in Perth, where the gap was 88 per cent, Melbourne house values are now 50 per cent higher.

During COVID Melbourne was the most locked city in the world, which saw a huge drop in overseas migration and an exodus of Victorians moving interstate. But with conditions starting to get back to normal, Victoria is expected to welcome a positive inflow of residents for the first time since 2020.

That’s good news for housing demand and values.

According to CoreLogic, with housing affordability remaining stretched, this improvement in Melbourne’s value proposition could place it in a more competitive position to attract a greater share of housing market buyers.

But while housing demand could rise, supply is still tight. The city’s advertised supply level is trending lower and is 13.4 per cent below this time last year and 7 per cent below the previous five-year average.

Also, Melbourne’s rental vacancy rate of 0.8 per cent in May is also one of the lowest in the country and another potential factor encouraging renters to go out and buy. 

Increasing demand plus lack of housing supply always underpins rising values.

Words of investing wisdom 

As most of you know, I often have Carl Capolingua from ThinkMarkets on my share investment show The Call (www.ausbiz.com.au) . I love the way he thinks and analyses stocks.

I’m always looking for words of investment wisdom from people I admire, which is why this advice caught my eye from Carl during the week.

Stock of the Week: CSL

Yikes, Australia’s biggest and most prestigious healthcare stock, CSL, issued a profit warning this week which sent the stock down over 10 per cent. It was a severe reaction because CSL traditionally overshoots market expectations and never downgrades.

The global blood plasma and vaccine giant warned short term profits were being hit by currency fluctuations and rising costs of collecting blood in the US (in the US you get paid for donating blood, unlike in Australia where you donate as a community service).

CSL is a darling of the Australian market and its share price over recent months has been rising rapidly. So, what to do as an investor?

Joining me on my daily share investment program The Call (midday www.ausbiz.com.au) were Andrew Wielandt from DP Wealth Advisory and Henry Jennings from Marcus Today. They both reinforced that CSL is arguably amongst the premier stocks on the Australian market and if you’re a long-term investor don’t panic and stay with it.

For those looking at the share price pullback as a potential buying opportunity, both Andrew and Henry recommend waiting until the dust settles and the broker downgrades come through. They both reckon if the CSL share price gets down to the $260-270 level then it’s an attractive buy.

Financial abuse is insidious and rampant

Wednesday was World Elder Abuse Awareness Day with older Australians being encouraged to stay alert for the warning signs of financial abuse and scams, coinciding with new CommBank research which found this age group may be at higher risk.

According to a CommBank survey of almost 2,000 Australians aged 65+, more than 1 in 4 (28 per cent) have experienced financial abuse or know someone who has. Of those who are experiencing financial abuse, more than half (52 per cent) believe they can deal with the behaviours of financial abuse themselves.

Financial abuse is a powerful and dangerous form of intimidation which is a lot more common is Australia than you think.

What makes financial abuse even more insidious is that that the abuser often justifies their actions as caring. But the bottom line is that financial abuse can leave you extraordinarily exposed. 

This sort of abuse often takes the form of a partner in a relationship, or a parent over a child, or an adult child over an elderly parent where the abuser completely controls the finances of the other person and refuses to share any of that responsibility or information.

Financial abuse could be:

• Having sole access to bank and online accounts.

• Controlling PIN codes.

• Taking out joint loans without a partner’s consent.

• Restricting access to insurance, superannuation and estate planning documents.

• Limiting access to cash and credit cards.

• Making investment decisions without consultation.

• Asking you to sign financial documents without explaining what they are.

We’re not talking about a situation where a couple has agreed one partner takes primary responsibility for running the finances but is always happy to keep the other partner informed. Or an adult child willingly and transparently helping a parent.

Secrets and control 

A financial abuser is a partner who has insisted on controlling the finances, is secretive about what they’re doing and will not share information.

To test which sort of partner you have, simply ask for them to explain the state of your finances, provide access to all accounts and let you know where insurance and investment documents are kept.

If they refuse, you need to worry.

If they say, “you don’t need to worry about, I have it all under control”, you should worry.

Explain that you’re concerned if they drop dead you’d have no idea where anything was and that is just too risky and you’re feeling vulnerable.

If they refuse after that, you’re in real strife and must do something about it. Your partner either has something to hide or they have such a controlling personality it will put you at risk in the future.

What if your partner does die… or leaves you?

Sexually Transmitted Debt

Sexually Transmitted Debt is another of the many risks. It’s where one partner in a relationship is lumbered with the debts of the other. You’d be amazed just how common this problem is.

One partner will rack up debts on the joint credit card, refuse to pay or skip out and the other partner is left with the responsibility of paying the whole debt. Joint cards or loans don’t mean you’re only responsible for your half. It means both people are responsible for the whole debt if the other can’t pay.

Take steps to protect yourself 

Here are some steps to protect yourself from financial abuse:

• Base financial decisions on economics, not emotions. If you trust each other then there is no problem with formalising that trust by keeping each other informed about financial decisions.

• Don't dismiss it, read it. When you have to sign papers it is better to be one day late than to lose everything in five years’ time, just because you were too busy to read the small print.

• Be careful of going guarantor. If the bank doesn’t have confidence in the principal applicant, why should you? Remember, when you sign as guarantor, you are indicating you are prepared to take over the whole debt if the borrower defaults.

• Be involved. Know where the money is coming from and where it is going.

• Set a limit on joint accounts. If you have a joint account with your spouse, make sure the bank does not allow transactions above a certain amount to be paid unless there is joint agreement.

• Look carefully at how you buy assets. Single names, joint names, their name, your name? It could all be extremely relevant for both tax purposes and if the relationship splits.

• Check the books. If you are a director of a family company you have a right to see the books. Insist on the accountant showing them to you. If stopped from doing so, you can take action under the Companies Code.

• Agree on a financial plan. This way both partners have common goals and know where they are heading.