Market Commentary - April

Glenmore Asset Management

May 2024

Funds operated by this manager:

Glenmore Australian Equities Fund

Hedge Clippings | 17 May 2024

The next federal election is not due for another year, but the budget handed down on Tuesday had all the hallmarks of a government preparing for the polls without actually setting the date.

Jim Chalmers won't admit it, but based on this comment from Chris Richardson during the week: "If the enemy is inflation, the IMF says you should cut spending and raise taxes. Instead, we're getting a very big tax cut and almost matching that with large increases in spending," then we're heading for trouble.

If Richardson is correct, and we're certainly not going to doubt him, then Chalmers is at odds with the IMF, as well as one of Australia's top economists.

Meanwhile, Treasury (presumably the advice he's relying on) is at odds with the RBA's estimate of inflation as pointed out in this piece:

"Treasury has inflation heading in one direction - down - while the Reserve Bank says the opposite. They can't both be right, and what happens will play an outsized role in deciding when, or if, the central bank cuts interest rates. The government claims the budget has been designed to take three-quarters of a percentage point off inflation this year and another half a percentage point next year, while unemployment will rise slightly to 4.5 per cent next year. Time will tell if Treasury or the central bank - which has forecast inflation to be 3.8 per cent in December this year - is correct. Without a rate cut, there is close to zero chance of an early election."

So Jim's budget is increasing spending via handouts across the year, topped up by Stage 3 tax cuts due in July, and wage increases already announced or in the pipeline, hoping inflation will reduce to 2.75% mid next year (around the scheduled election time) while the RBA's own forecast is for it to still be 3.2%.

Given the RBA's stated driver of interest rates is taming inflation, there's a chance of a rate cut - or possibly more than one - by this time next year, but only if their forecasts are correct, and it's a big IF based on the stickiness of inflation to date.

In the government's favour, this week's employment figures (along with some positive signs from the US) showed unemployment creeping up to 4.1% on a seasonally adjusted basis. The RBA's other role of maintaining full employment is secondary to inflation, but it is noteworthy that the number of unemployed people has risen 13.7% from one year ago, and Michele Bullock is on record as saying an unemployment rate of 4.5% or above would be required to have a significant effect on reducing inflation.

You can't blame the Treasurer for pitching the budget and blowing the "surplus" trumpet towards the next election - whether in December or in the first half of next year, but he is ignoring the longer term deficits. He'll worry about those in due course, or leave them to his successor.

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Quarterly consumer price index update

Montgomery Investment Management

May 2024

The long-awaited quarterly consumer price index (CPI) figure was reported this week. Over the March quarter, CPI rose by 1.0 per cent, which follows the previous 0.6 per cent December quarter increase. Over the 12 months to March 2024, CPI rose by 3.6 per cent. Whilst the annual rate of inflation is trending downwards, the quarterly figure increased by 0.4 per cent and poses ongoing challenges.
The leading drivers behind the quarterly increase:

Education fees rose by 5.9 per cent. This uplift was the strongest quarterly rise reported since 2012.
Housing rose by 0.7 per cent. The rental market is incredibly tight, with a 2.1 per cent increase due to an ongoing mismatch between supply and demand. Property prices also rose by 1.1 per cent. This was an improvement from the 1.5 per cent read in the December quarter. High material and labour costs continue to contribute to the housing pricing pressure.
Food and non-alcoholic beverage increased by 0.9 per cent.
The most recent quarterly results have presented a slight blip in the data, however, on an annualised basis the inflation figure is heading in the right direction, approaching the Reserve Bank of Australia's (RBA's) 2-3 per cent target range. Despite this, markets are now concerned that these latest figures have potentially pushed out the RBA's timeline, and there is not enough data to warrant an RBA rate cut in the coming months. The latest read is stoking fears that inflation is sticky and there is an ongoing battle in achieving a consistent path to their inflationary target range, within the expected timeframe.

Similarly, the U.S. faces ongoing inflationary challenges. The annual inflation rate rose by 3.5 per cent in March, a 0.4 per cent increase from the 3.2 per cent reported in February. The market anticipated 3.4 per cent. Both central banks require confidence that inflation is steadily slowing back within their respective target ranges. Widely speaking, it is evident that there is economic turbulence with ongoing geopolitical uncertainty having widespread global economic affects. Back home, other factors to consider are the strong labour market and upcoming tax cuts. The labour market remains relatively tight with the unemployment rate at 3.8 per cent in March. This coupled with the incoming stage three tax cuts, provides more turbulence and adjustment in the RBA's economic outlook and monetary policy decisions.

Author: Natalie Kolenda

Funds operated by this manager:

Montgomery (Private) Fund, Montgomery Small Companies Fund, The Montgomery Fund