RBA's rate cut strategy + Why it's a good time to invest in international markets

Happy Friday everyone,

I’m feeling inspired after hosting this year’s Australian Export Awards in Canberra. It’s the sixth year I’ve hosted the awards and it is one of my favourite nights of the year.

So many wonderful stories of Australian companies, big and small, succeeding in overseas markets. I love being involved.

On the financial and economic front, there is a lot happening ...

In this week’s newsletter:

• Reserve Bank Minutes: A clear insight into their rate cut strategy.

• What is Jim Chalmers’ mission?

• RBA Governor not a crypto fan.

• The outlook for Australia’s two-speed property market.

• Victorian incomes take a hit.

• Why you should be investing in international markets.

• Warren Buffett invests in Domino’s Pizza (US).

• Can Trump afford to deport all illegal migrants?

Reserve Bank Board Minutes stray from convention

This week’s RBA Board Minutes had a lot more variety in the comments than usual. Usually, they are a bit boring with the slightest minor nuances poured over by economists. It’s a bit like reading the economic tea leaves of the future of interest rates.

I like reading them because they give an indication of what the RBA is looking for to cut rates. We can do the same when we’re making our investment decisions.

While keeping interest rates on hold, the RBA made some interesting observations which, according to economic gurus at CommSec, imply they are becoming a little more forward thinking in their policy-setting process.

The Minutes state, “It is important to remain forward looking, avoiding an excessive reliance on backward-looking information that might lead the Board to react too late to a change in economic conditions.”

This is the first time this language has appeared in recent RBA communication. By contrast, the August Minutes stated that, “Members noted that it was appropriate to continue placing somewhat greater-than-usual weight on the flow of data.”

Taken together, the shift suggests the Board is placing more weight on the economic outlook rather than the lagging incoming data.

However, the November Minutes make it unclear just how ‘forward looking’ the Board is willing to be when compared with still being highly dependent on backward-looking data.

For example, the Minutes this week note, “Members recognised it was important to be ready to adjust the future stance of monetary policy as the economic outlook evolves.”

It was also stated that in response to a scenario where inflation fell more quickly, “This could warrant an easing in the cash rate target, but that they (i.e. members) would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.”

The important comment here is, “More than one good quarterly inflation outcome.”

If we assume that the 0.8 per cent increase in the September quarter trimmed mean CPI was not deemed ‘good’, the Board will not have had visibility on more than one ‘good’ quarterly CPI until the May Board meeting at the earliest.

And, just out of interest, the federal election must be held before 27 May.

On inflation, the Minutes noted headline consumer prices had, "fallen sharply in the September quarter" but underlying inflation, "remained too high" and "was declining more slowly."

Among scenarios for a potential rate cut, the bank highlighted: “If consumption proved to be persistently and materially weaker than the staff forecast and this was judged to lower inflation significantly, a reduction in the cash rate target could be warranted.” And: “Members discussed scenarios in which the judgement about the labour market proved incorrect and conditions eased materially more sharply than expected, in turn lowering inflation more rapidly and warranting a looser monetary policy stance.”

The RBA said that credit and debit card data from banks showed consumer spending had been weaker than expected even with the government's personal income tax cuts, while the labour market had stayed surprisingly strong, with the unemployment rate staying at 4.1 per cent for six months or so.

The RBA’s meeting was held on the same day as the US presidential election on 5 November. Given the political uncertainty around US President-elect Trump’s tariff proposals, policymakers’ highlighted three major global risks, including:

• The potential for “major changes” in US economic policy,

• the prospect of the size or composition of China’s stimulus package differing from expectations and,

• the general risk of unsustainable growth in government debt.

So, plenty of guidance from the RBA on how they’re thinking.

Just for perspective, central banks around the world have already started cutting interest rates, but their core inflation rates are generally lower than ours. That’s why we’re behind the global trend.

Jim Chalmers’ mission

Federal Treasurer Jim Chalmers is on a mission: To break the recent global trend of incumbent governments losing elections because of their economic credentials.

Kamala Harris is just the latest incumbent to be rolled by an electorate wanting a scapegoat for the significant deterioration of their lifestyle, ravaged by high inflation and high interest rates.

With a federal election scheduled for the first half of next year, Chalmers is on the offensive to highlight Labor’s economic management skills and to showcase why they should be given another term in office. The reality is there may not be a cut in interest rates before the May election deadline and the Government would go to the polls with Australian households under the same financial strain as they are now.

Yesterday's economic update from the Treasurer was a way of getting ahead of the voter’s concerns, softening us up that circumstances beyond his control are impacting the Government’s budget - falling commodity prices and lower corporate tax revenue as profits slow because of a weak economy.

Cost of living and the economy are still the biggest concerns of voters, and you can be sure the Government will be promising more rebates in return for your vote. Since the Labor election win in 2022, the Government has delivered generous cost of living relief, including childcare subsidies, rent assistance, electricity rebates and tax cuts.

It has already flagged student debt relief, and there is an expectation another round of electricity and rental rebates will be announced.

All of these measures have not only saved Australians cash, but also reduced the headline inflation rate. The energy bill rebate of about $300 a year (more if you’re a Queenslander because of their recent state election) reduced the headline inflation rate by 0.5 per cent.

The problem is the Reserve Bank ignores the headline CPI rate when determining interest rate policy and, instead, focuses on the ‘trimmed mean’ which ignores any short-term government rebates as artificial influences.

That’s the reason for the feud between the Treasurer and Reserve Bank Governor, Michele Bullock. He wants an interest rate cut to ease the cost of borrowing (and win votes) because the headline inflation rate is down within the RBA target range.

Bullock is basically saying governments just can’t rig the inflation rate with short-term handouts which skew reality.

So, let's run a quick check on the Federal Government’s role in the cost-of-living crisis. How much is it contributing to inflation and keeping rates high?

There is no doubt prices on ‘goods’ have come down significantly as the post-pandemic supply chain issues have been sorted. International trade is back to some sort of normality, our favourite imports are back in good supply and there have been few natural disasters to spike fruit and veg prices. That’s all great news.

But the price rises of the ‘services’ element of the inflation figure are not slowing as quickly as expected. This is what the RBA is referring to when they talk about inflation being “stickier” than expected.

The biggest cost for companies in the services sector is wages. So, when the Treasurer brags about giving everyone a pay rise, the ripple effect of that is it’s adding to the cost base of services companies, which then pass it on to customers as higher prices. That is the reason inflation is sticky and the reason why interest rates aren’t being cut.

The Treasurer constantly says governments don’t set prices. They don’t. But they have a huge influence on prices with decisions such as wages.

This week CreditorWatch reported business insolvencies were reaching the same levels as during the pandemic. This is because businesses were being hit with increased wage and energy costs and were unable to pass this on to consumers who are bargain hunting to cope with cost of living.

The biggest drivers of inflation have been rents (because of the housing shortage), insurance premiums (don’t get me started ... there is no justification for it) and building costs. With supply chains back to normal, the major driver of building costs is wages.

Why? Governments.

Ask any builder and they’ll tell you they have to be paying more to attract staff because federal and state governments are raiding their workforce for their massive infrastructure and energy transition projects. They are creating a shortage of workers.

For builders to attract staff away from government projects they have to offer more money, which then gets passed on to consumers through higher building costs which, in turn, adds to the ‘sticky’ inflation and stops the RBA cutting interest rates.

If a builder or services company can’t pass on these government-induced cost rises, they go broke - and become the reason why the Treasurer was yesterday talking about a drop in business tax revenue.

As I say, the Treasurer is right. Governments don’t set prices. But they do influence prices by the economic environment they create.

It is a tricky six months for the Treasurer:

• The fall in commodity prices and tax revenue is predicted to put the Federal Budget in deficit.

• A reduction in migrants and international students (the only reason we’ve scraped into positive economic growth over the last year) will likely push the economy into recession.

• There is the possibility there won’t be a cut to the official interest rate before the election.

RBA Governor not a crypto fan

Since the Trump election, the value of cryptocurrency, Bitcoin, has headed toward $US100,000 in value. Donald Trump has also said he’s a fan and will look to regulate it so it can integrate into the US financial system.

We’ll watch that closely.

As you’re aware, I’m not a fan of cryptocurrencies as I don’t think they stand the governance and transparency tests to be a legitimate investment option. I’m not alone.

Just last week, the Reserve Bank of Australia’s Governor, Michele Bullock, dismissed the idea of integrating cryptocurrencies into the Australian economy saying, “It’s not a currency, it's not money, it’s being used as some sort of asset. I don't understand it but I don't really see a role for it, certainly not in the Australian economy or any advanced economy.”

Can’t get much clearer than that.

Australia’s two-speed residential property market

A terrific research report this week from Ray White chief economist, Nerida Conisbee, about the outlook of Australia’s two-speed property market.

There are two distinct markets at the moment, although both are showing signs of slowdown. The coolest markets are Sydney, Canberra, Melbourne and Hobart with these cities having increased on average by 2.9 per cent over the past 12 months. This is much less than the peak 6.7 per cent experienced in the 12 months to February 2024.

The markets that are continuing to remain much stronger are Perth, Adelaide and Brisbane. Annual growth is currently at 13.2 per cent. While this is much less than the 18.9 per cent experienced in the 12 months to May 2024, the increase is still extremely strong.

Sydney is feeling the impact of higher interest rates more than most, particularly at the premium end of the market. While more affordable properties are still seeing decent growth, the luxury market has notably softened. Any significant market revival will likely need to wait for interest rate cuts, expected in early 2025.

Canberra is also affected by interest rates, however the capital has another dynamic at play - substantial housing supply. Unlike many Australian cities, Canberra isn't facing a housing shortage. The ACT Government's efforts to make Canberra an affordable city through high levels of housing supply appear to be working.

Melbourne faces multiple challenges. Beyond interest rate sensitivity, the Victorian economy shows signs of recession, and property owners are dealing with the country's highest property taxes. While strong migration continues to provide some support, the market needs broader economic improvement to regain momentum.

Meanwhile in Hobart, the main hurdle is demographic. With population growth at low levels and forecasts suggesting this trend will continue, particularly as a result of plunging interstate migration, the market faces ongoing pressure. While interest rate cuts would help, the fundamental population challenge remains significant.

Growth slowing but still strong

South-east Queensland continues its impressive run. The golden arc from northern New South Wales through to the Gold Coast, Brisbane, and up to the Sunshine Coast keeps attracting both interstate and international migrants. With housing supply falling short of demand and strong market confidence, prices continue to rise across all segments.

Perth's market also remains remarkably robust, with both prices and rents continuing to climb. While some of this represents catch-up growth, the combination of population increases and rising construction costs continues to limit supply. Interestingly, recent softening in iron ore and lithium prices may be starting to impact momentum slightly with the rate of change starting to come back marginally.

Adelaide shares Perth's positive outlook, benefiting from mining sector strength while enjoying additional advantages. Strong state government leadership has boosted confidence, driving investment and tourism growth. Perhaps most significantly, Adelaide's median house price - at half of Sydney's - makes it increasingly attractive for interstate migrants seeking value, as well as investors.

Looking toward 2025, Nerida Conisbee says this two-speed market looks set to continue. Local economic conditions, population trends, and housing supply are playing crucial roles in determining each city's path. As we head into a lower interest rate environment, it's becoming increasingly clear that understanding these regional differences is key.

What's next? 2025 property market predictions

If you’re wondering what’s going to happen to property in 2025, you should be tuning in to our 2025 property market predictions webinar coming up next Wednesday 27 November at 11AM AEDT.

Join me and a team of experts, Ray White Chief Economist Nerida Conisbee and WLTH CEO and co-founder Brodie Haupt, who are going to polish their crystal balls and tell us what’s next for potential buyers, current homeowners and property investors.

Register now to save your spot.

Why Victorians are doing it tough

The longest lockdown in the world during the pandemic hit Victorians psychologically and, it now seems, financially as well. Sate government finances but also household finances have been impacted.

The whole country feels for Victorians. What they went through and the ongoing consequences.

Take a look at this from the Australian Bureau of Statistics. Gross household income in Victoria is now the second lowest in Australia.

And, for the first time, household income per capita is higher in Tasmania than Victoria.

Why you should invest overseas right now

If you’ve been keeping an eye on the stock market lately, you’ve probably noticed it’s been on a bit of a tear. From tech giants to commodities, international markets are delivering jaw-dropping returns in certain places. Tesla added $300 billion to its market cap since the US election. Bitcoin’s market cap surged beyond $1 trillion earlier in the year. The S&P 500 has ballooned by $13 trillion in 13 months, while Nvidia alone has added $2.4 trillion to its value in the past 17 months.

By comparison, the Australian sharemarket, while chalking up record highs itself, has not performed nearly as well as the US. The Aussie market is dominated by resource stocks which have been hit by falling commodity prices, while the US market is being driven by technology stocks.

It's some really incredible growth, and it’s indicative of the opportunities that are within reach for investors who are willing to look beyond our local shores. But before you dive in, there are a few things to consider.

Our economy might punch above its weight most of the time, but when it comes to the global markets we’re just a small fish in a pond that’s much larger than we sometimes like to imagine. That’s why acquiring international stocks can expose you to some of the world’s biggest and fastest-growing companies.

“Australia is a small part of a very big pond when you look at global markets,” says Ben Nash, Founder of Pivot Wealth. “Investing in Australian shares is important because they’re denominated in Australian dollars, and you can’t buy your morning latte with US dollars. But if you confine yourself to Australian investments, you’re really missing a trick in terms of the global markets and the growth that’s there.”

Take the US. It’s home to the ‘Magnificent Seven’ - tech powerhouses Meta, Amazon, Google, Apple, Microsoft, Tesla and Nvidia - which have grown 13.5 times larger in value since they were all public entities in 2012. They’re dominant in their respective sectors and are driving the incredible growth we’ve seen in the stock market recently.

How much of your portfolio should head overseas?

It’s the million-dollar question: How much of your portfolio should you funnel into overseas investments? The answer, as always, is it depends on your risk tolerance and your long-term financial ambitions.

“For a high-growth investor who has 90 per cent of their portfolio in stocks, we typically look at a 35 per cent allocation to Australian shares and 55 per cent to international shares,” says Nash. He explains that this lopsided split makes sure that your portfolio benefits from the growth of global markets while still keeping a good amount of exposure to the stability of local investments.

That said, investing overseas of course comes with risks. Currency fluctuations can have a big impact on your returns, not to mention geopolitical events that can quickly become volatile. We’ll just have to wait and see how the new administration in the US affects the markets over the coming years.

But these risks are part and parcel of any investment strategy. Share investments are long-term investments for most average investors. You’ve got to think in terms of a seven- to ten-year timeframe to ride out the ups and downs of the market.

The stock market boom

It’s hard not to be impressed by the numbers we’re currently seeing in the stock market. But this isn’t just a fluke - it’s a reflection of global economic trends and shifting investor sentiment. Falling interest rates in the US and growing investor confidence has been a real boost to investor confidence.

When interest rates fall, we see asset values increase and with rates in the US to come, plus proposed tax cuts, this should be good for their market.

But be cautious about getting swept up in the hype. A lot of investors are sitting on the sidelines, nervous about a market correction even though they’re currently missing out on the current run up in values.

Arguably the world’s best investor, Warren Buffett at Berkshire Hathaway, is sitting on a record amount of cash in his portfolio waiting for a correction. For us mere mortal investors you need to stick to your strategy and not try to time the market.

How to make the most of the opportunity

If you’re ready to take the plunge into overseas investing, here are a few tips to keep in mind:

• Start small: You don’t need to allocate half of your portfolio (or more) to international stocks straight away. Start with a manageable percentage and increase it as you get more comfortable with it.

• Use ETFs: Exchange-traded funds are a way to invest in overseas markets without exposing yourself to just one or two international stocks. In other words, they’ll give you instant diversification and expose you to global giants like the Magnificent Seven.

• Keep costs low: Watch out for fees, especially when investing internationally. High fees can really eat into your returns if you plan on trading fairly regularly, so shop around for low-cost brokers and funds.

• Get advice: If you’re unsure about where to get started or how to manage the risks, a financial advisor will be your best advocate.

Buffett buys Domino’s Pizza in the US

Wow. Speaking of the world’s best investor, Warren Buffett recently took a big stake in Domino’s Pizza. Now while the Aussie Domino’s Pizza is a disappointment for investors, Buffett bought a stake in America’s Domino’s which is a different company.

While Aussie Domino’s controls the brand in Australia, New Zealand, parts of Europe and Asia, US Domino’s controls most of the rest of the world.

Most of the headlines on Berkshire recently have been about its stock selling, lowering its stakes in both Apple and Bank of America. And sitting on a record amount of cash.

Can the US afford to deport illegal immigrants

When Donald Trump campaigned hard on deporting illegal migrants in the US, it did make me wonder what it would do to the economy. Could they afford to deport illegal migrants who seem to be the backbone of so many sectors?

This infographic puts it into perspective. 13.7 per cent of the workforce in the US construction industry are illegal migrants. They also make up 12.7 per cent of the agriculture workforce and 7 per cent of the hospitality workforce.

Those industries would be devastated if they lost such a big chunk of their labour force.

I would suggest Trump followed the old political strategy of saying whatever you like to get elected and then, once in power, do whatever you like.

Particularly when Trump has such a big spending program ahead …