AUSTRALIAN MARKET WRAP
In Australian economic news this week, the new Federal Government’s first budget was revealed. Commentators suggested that the Treasurer has ‘laid the groundwork for an agenda of tax increases and spending cuts’ with a federal budget that forecasts debt and deficits over the next decade to be worse than thought six months ago.
The budget included economic forecasts by the Treasury that have been downgraded since the previous government published them in April. Australia is set to grow at 3.25 per cent this financial year (previously 3.5 per cent), decelerating to only 1.5 per cent in the financial year 2023-24 (previously 2.5 per cent). The softening in growth expectations was said to be off the back of expected significant falls in household spending as interest rate rises start to bite, and the impact of the slowing in the global economy on business and trade.
The budget forecasts also assume power prices will soar by 20 per cent this year and a further 30 per cent in 2023-24, for a compounded increase of 56 per cent. These high energy prices will contribute 0.75 percentage points to inflation this financial year and 1 point next year. As such, interest rates are now assumed to peak sooner and higher than previously expected, with the cash rate (now 2.6 per cent) expected to reach 3.35 per cent by the middle of next year.
The were $21 billion in spending cuts (or reallocation) over the next four years in the budget, despite the fact that the fiscal situation has benefited from increases in revenue from rising commodity prices; the additional revenue being taken to pay down the deficit. There were few additional cost of living measures. However, there was significant new spending to fulfill the election promises of extending childcare subsidies, increasing paid parental leave to 26 weeks, more money for the National Disability Insurance Scheme, and pay rises in the Aged Care sector.
In other news, data suggest that the unemployment rate held steady at the near-record low of 3.5 per cent in September. Underlying this figure, participation also held, at 66.6 per cent, while employment grew by a smaller-than-expected 900 jobs.
Political turmoil in the UK has intensified this week with the resignation of Liz Truss who had only been Prime Minister for six and a half weeks. The former Chancellor of the Exchequer, Rishi Sunak, officially became Prime Minister on Tuesday. It was reported that bond and currency markets gave him ‘a vote of confidence’, but all coverage detailed the significant test he has in front of him to turn around ‘the stuttering economy and shaky public finances’ in the face of the global slowdown and surging inflation.
Meanwhile, the latest inflation data in the UK show that it remained at a 40 year high of around 10 per cent, in September, for the third straight month. Much of the price pressure is said to be in food, with prices rising nearly 15 per cent over the year. There are concerns that inflation will accelerate from here, as government control of energy prices rolls off.
New data show China’s economic growth rebounded in the third quarter. Growth was higher than expected at 3.9 per cent year-on-year for the quarter to end-September. However, China’s currency tumbled on Monday, while stock markets on the mainland and in Hong Kong fell to their lowest levels since the 2008 financial crisis. Traders were said to be concerned about crack downs on technology companies and the ongoing zero-COVID-19 strategy, as well as a wider reassessment of the country’s value to investors. In that context, it was reported that wealthy Chinese are looking to leave as pessimism increases about the country’s future under the extended rule of President Xi Jinping.
Australian indices
ASX 200: Fell 0.29 per cent over the week, to 6798.6 points at the close on Tuesday.
All Ordinaries: Rose 0.25 per cent in the past week, closing at 6993.7 points on Tuesday.
Currencies
As at the close on 25 October, AUD/USD was little changed, rising 0.05 per cent on last week, to 0.6325. The AUD/RMB rose 1.61 per cent, in the week to 4.6211.
Government Bonds
Government Bond Yields (Source: Bloomberg)
|
NAME |
COUPON |
PRICE |
YIELD |
1 DAY |
1 MONTH |
1 YEAR |
|
GTAUD2Y:GOV Australia Bond 2 Year Yield |
0.25
|
93.64 |
3.45% |
-5 |
+8 |
+334 |
|
GTAUD5Y:GOV Australia Bond 5 Year Yield |
2.75 |
95.44 |
3.73% |
-6 |
+5 |
+256 |
|
GTAUD10Y:GOV Australia Bond 10 Year Yield |
1.75 |
80.95 |
4.07% |
-7 |
+17 |
+229 |
|
GTAUD15Y:GOV Australia Bond 15 Year Yield |
3.25 |
86.71 |
4.36% |
-9 |
+30 |
+221 |
Reserve Bank of Australia Rates (Source:RBA)
|
RBA CASH RATE TARGET (RBATCTR:IND) CURRENT (per cent) |
MOST RECENT DECISION (percentage points) |
MOST RECENT CHANGE (percentage points) |
1 YEAR PRIOR (per cent) |
|
2.60 |
+0.25 (4 October 2022) |
+0.25 (4 October 2022) |
0.10 |
|
|
Property
Modelling released by the Reserve Bank of Australia suggests that housing prices could fall 20 per cent from their peak if people become increasingly pessimistic about the property market, either due to rising interest rates or because falling prices spark a downward spiral in the market. This drop would wiped out the gains made during the record house price growth last by the end of 2024.
Venture capital
Stoic Asset Management has called on the government to maintain the Significant Investor Visa in order to support funding of the venture capital industry, and its resultant deeptech outcomes, as the global economy turns down and other forms of investor become more cautious.
Alongside this, The Australian Financial Review carried a feature setting out the way the startup funding environment has changed for this year, as the world economy has changed, risk has come off, and global interest rates have risen.
Cardihab
Stoic investee Cardihab has received $740,153 in matched funding from the Australian Government’s Targeted Translation Research Accelerator, to codesign a new technology-enabled program in partnership with the Baker Heart and Diabetes Institute. The program will set out to improve the clinical management of people living with heart failure
Wildlife Drones
Stoic investee Wildlife Drones have announced a new partnership with Island Conservation. Island Conservation is focused on preventing extinctions and working to expand the boundaries of island conservation efforts worldwide.
Uniseed
Stoic’s investment partner Uniseed has sponsored a new podcast series - From University To Unicorns! In it, academics and industry professionals try and answer the question: How can Australia turn great research into future tech giants, and get great research out into the world.
