Almost fell out of my chair, CommSec has reduced its fees on lower value transactions.

Nothing to get too excited about, but on smaller trades (and when using CDIA account) its now

• $5 (up to and including $1,000)
• $10 (Over $1,000 up to $3,000 (inclusive))
• $19.95 (Over $3,000 up to $10,000 (inclusive))

rather than

• $10 (Up to and including $1,000)
• $19.95 (Over $1,000 up to $10,000 (inclusive))

I cant decide which is more surprising, this change or Victoria dropping the Commonwealth games.

Good overview of the majors - Bank reporting season scorecard (firstlinks.com.au)

The below graph is a bit scary being so low - good but gets worse/normalises? Been a really good few years for the banks in terms of bad debts and now reaping higher NIMs at the moment. Do bad debts come back to bite with higher rates?

The major 4 banks face relativley slow growth prospects so I think you can for the most part expect the future returns is likley to come from dividends.

What doesn't make much sense is that you can get a similar and in some cases better income return from major bank hybrids as the equity - see below. (the yield to reset uses the futures curve which may or may not be what does occur - but the running yield is the forward 12 month return). From what I've heard you can even get Tier 2 bank notes nearing yields on hybrids.

There's some interesting (risk/return) mispricing going on in bank capital stacks at the moment.

19-June-2022: CBA is Australia's second largest company (behind BHP) and is currently rated #283 here on Strawman.com (as I type this), having moved up the rankings a fair bit since their share price has reduced lately. It does say something about our primary focus here that a company like CBA rates so low in terms of people here who hold the company in their Strawman.com portfolio.

CBA is currently held here by only 4 Strawman Premium members. And I am not one of them. I have never held any of the big 4 banks in my SM portfolio.

Being the clear leader of the big 4 in terms of size and quality (and management also IMO), CBA is starting to look interesting from a price perspective:

$87.26 looks like a great price when you look at that, however when you zoom out and look at the 5-year chart...

...the pullback in 2022 hasn't been nearly so deep as the one in 2020, and I feel there is plenty of scope for that SP decline to continue further before they recover, purely based on sentiment around an impending Australian recession, and the rest of it. I think CBA is probably a decent BUY here, with a 5-year-plus view, but I think they're going lower and we'll be able to buy them even cheaper in the future, possibly the near future.

I found it interesting what FMG founder and major shareholder Andrew "Twiggy" Forrest said last week about the likelihood of a global recession this year - Andrew Forrest says no recession, but expects years of choppy markets (afr.com)

by Hans van Leeuwen, Europe correspondent

Last updated Jun 17, 2022 – 11.26am, first published at 10.36am

London: Fortescue Metals Group boss Andrew Forrest says there is “not a snowflake’s chance in hell” of a global recession this year, but warned that markets could be “choppy and uncertain” for up to three years.

Speaking to AFR Weekend during a visit to London, Australia’s richest man said Fortescue’s low cost base and its green energy plans left it well-placed to weather the storm of rising borrowing costs, soaring inflation and slower growth.

Andrew Forrest visited France this week to sign a deal for zero-emission trucks with manufacturer Liebherr. 

He also shrugged off reports that China might create a centralised purchasing cartel to drive down iron ore prices, saying this was “a story which gets trotted out every three years”.

The Russia-Ukraine war has spurred sharp increases in energy and food prices. This has combined with rebounding post-pandemic labour markets and issues with supply chains and transport costs to fuel inflation.

“I don’t know of a better industry to be pivoting towards when fuel prices are going through the roof than an industry where you can make all your own fuel,” he said, referring to Fortescue’s ambitious plans to make hydrogen from renewable energy.

The prospect of rampant inflation has pushed central banks to start aggressively raising interest rates, sapping stock prices. Companies’ cost of capital may climb, deterring them from investing and expanding.

But Dr Forrest said Fortescue was relatively immune to these cyclical forces: it should still be able to raise capital, and could withstand any downturn in commodity prices.

“We smoke $3.5 billion worth of fossil fuel into the atmosphere every year. That is one hell of a pool of capital annually to invest into your own fuel production and green iron systems,” he said.

He also said there was still an abundance of capital looking for investible projects. “The largest part of that is for green projects, by a country mile. That’s not going to change.”

And even if the cost of capital rose or fell, “so does the commodity price”, giving him the revenue base he needs to push forward with his green transformation.

Fortescue plans to spend $800 million-plus to build an end-to-end supply chain for hydrogen and ammonia produced using only renewable energy, and is also investing in technology for hydrogen-powered or zero-emission ships, trucks and trains.

The biggest risk to Dr Forrest’s ambition would appear to be a drop in the price of iron ore, but he is not overly worried.

“Demand for our product has remained strong,” he said. “And if global demand for iron ore goes down, the last man standing will be the lowest cost producer. And that is Fortescue.”

‘Not a snowflake’s chance in hell’

Dr Forrest was not anticipating the kind of global recession that might sap demand for iron ore. He said there was “not a snowflake’s chance in hell” of that happening.

“From country to country, yes. But there’s pent-up demand from COVID and that’s now been exacerbated by the Russian invasion. And I think that demand is still going to be there,” he said.

“You are going to have a choppy two or three years; not recession, nothing hugely dramatic like a global recession. But markets are going to remain choppy and uncertain for two or three years.”

The other great uncertainty is geopolitical: the ever-lingering prospect of worsening relations between the US and China, with the potential for economic decoupling that might sweep up Australia even further.

Dr Forrest welcomed the Albanese government’s more temperate approach to relations with China as “a breath of fresh air”.

“I’ve really resented China being used in [Australian] politics,” he said.

He urged both Beijing and Canberra to “check their language” and make sure they were not creating an enmity by treating each other as enemies.

But his support for a détente with Beijing was based on “the public interest”, he said, as geopolitical tension was not a material concern for his business.

--- ends ---

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So back to CBA. There will likely be further downside from here, but at some point they will become worthy of serious consideration as part of a diversified portfolio, particularly one like mine that currently has zero banking exposure.

The sell-down of the banks (including CBA) is not entirely unjustified. They WERE quite expensive, especially CBA, and the outlook is changing, however they are NOT going broke, they are very well managed, and at some point I will likely buy some if the price keeps falling.

Also, while the banking landscape will continue to evolve, I would back CBA to keep themselves at the cutting edge of banking here in Australia, as they have done so far.

Source: AFR Banking Summit | Deloitte Australia

The RBA next week: Bond buying to end and inflation narrative to change

? We expect the RBA to announce the cessation of the bond buying program (QE) at the upcoming February Board meeting. The cash rate target will be left unchanged at 0.1%.

? The RBA Governor is likely to preview the RBA’s updated economic forecasts in his post-meeting Statement which will be more fully fleshed out in his speech on Wednesday 2 February to the National Press Club.

? The RBA will publish their full suite of updated economic forecasts in the February 2022 Statement on Monetary Policy (SMP) on Friday.

? We expect the RBA to significantly upwardly revise their profile for underlying inflation and more modestly downwardly revise their profile for the unemployment rate (this should also result in a small upward revision to their forecast profile for wages).

? The RBA’s newly painted central scenario for the economy is likely to be consistent with a first hike in the cash rate in mid-2023.

? But as has been the case over the past year, we expect the RBA’s updated inflation and wages forecasts to remain conservative relative to our forecasts, which are consistent with a rate hike in August 2022 (the risk lies with an earlier hike in June or July).

Overview

Market participants will have a lot to digest over the coming week. The RBA end a six week communication hiatus in abrupt fashion with three major events. The old adage when it rains it pours springs to mind!

The Board holds the first meeting of 2022 on Tuesday 1 February. Governor Lowe will deliver a speech the following day to the National Press Club (this has now become an annual event on the RBA calendar). And the week ends with the RBA’s February 2022 Statement on Monetary Policy (SMP) that will contain updated economic forecasts.

The Governor’s speech, which will be followed by an extended Q&A session, is likely to be the standout of the three RBA events.

RBA inflation forecasts have missed the mark

It is fair to say that the RBA forecasts for underlying inflation have missed the mark by a significant margin over the past year. By extension, this means that their central scenario for the inflation outlook is not playing out as they expected.

Of course no economist has a crystal ball. And forecasting through a pandemic has been an incredibly tough assignment for anyone tasked with trying to predict the future. But the RBA have been quite dogmatic in their message that inflation pressures would only emerge modestly and “gradually”. Indeed they went out of their way to argue why the inflation dynamics would be different in Australia compared to many other comparable countries where inflation has risen significantly.

Regular readers will know that over the past year we assessed the inflation outlook through a different lens to the RBA. More specifically, we put less weight than usual on our models that forecast inflation based on spare capacity in the economy. Instead we put more weight on how the massive fiscal stimulus financed by money creation would generate demand pull inflation. This meant we expected to see inflation rise before wages growth. So far our thesis has playing out.

The latest data on consumer prices in Australia indicates that inflationary pressures have emerged quickly and sharply over the past six months (very much in contrast to the RBA’s “gradually” narrative).

The big inflation print this week did not surprise us (recall the Q4 21 trimmed mean rose by 1.0%/qtr; our forecast was 0.9%/qtr; the consensus amongst the forecasters was 0.7%/qtr; and the RBA’s forecast was ~0.6%/qtr).

Business surveys indicate the inflationary pulse is continuing to gather steam, so further strong reports are forthcoming. However, the drivers of firm inflation are likely to shift. More specifically, the impact of fiscal stimulus and money printing

on inflation will wane. But that will be replaced by inflation that is driven by a very tight labour market and higher wages growth – exactly the type of inflation the RBA wants to engineer.

What does the RBA forecast and say next week?

Our working assumption is that the RBA will recognise that the inflation outlook has changed. This means we expect them to make a solid upward revision to their forecast for underlying inflation in 2022. We think they will forecast underlying inflation to be around 3.0%/yr over 2022 (i.e. the top of their target band).

Optically that appears high. But it’s a relatively conservative forecast given the six month annualised pace of core inflation is 3.5% and some low numbers will drop out of the annual calculation over the next two prints (the Q1 21 trimmed mean rose by 0.4% and the Q2 21 trimmed mean increased by 0.5%). Quarterly growth rates from here of 0.7% will see core inflation print around 3.0%/yr in 2022. We think that any forecast below 3.0%/yr for underlying inflation in 2022 isn’t particularly credible. For point of comparison, we expect core inflation to be above 3.5%/yr by mid-22).

That all said, we anticipate that the RBA will make only a very modest upward adjustment to their forecast profile for wages growth. This will simply reflect a lower starting point for the unemployment rate which printed at 4.2% in December. We think the most likely outcome is that the RBA upwardly revise their wages forecast from 2.5%/yr at end-2022 to 2.75%/yr and from 2.75%/yr mid-2023 to 3.0%/yr).

Forecasts of this configuration will mean the RBA can continue to emphasise their current reaction function to the market. This also means they can broadly keep their message unchanged from last year around what it will take for them to raise the cash rate despite making a solid upgrade to their forecast profile for underlying inflation.

More specifically, they can simply reiterate what they said at the end of last year: “the Board will not increase the cash rate until actual inflation is sustainably within the 2-3% range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the Board is prepared to be patient.”

If the RBA takes this approach then the Governor will likely signal next week in his speech that the most probable outcome based on their new forecasts is a rate rise in mid-2023 with the slim chance of a rise in 2022. This is not a ‘policy pivot’.

The CBA view

We think that ultimately the RBA’s new updated forecasts will still miss the mark and we expect two strong wages prints coupled with core inflation above 3.5% by mid-2022 to be the catalyst for a first hike in the cash rate in August 2022. Put simply, the RBA’s objectives will be achieved by then and the appropriate policy response will be to commence normalising the cash rate. On the bond buying program, we expect the RBA to announce the cessation of purchases at the Board meeting next week, as per our call in late December.

CBA latest thoughts on what the increase in COVID-19 cases means for the Australian economy and the policy outlook.

What does the explosion in COVID-19 cases mean for the economy?

? The flood of new daily cases of COVID-19 since late 2021 has caused significant economic disruption that looks likely to be sustained over the next few months.

? Production, hours worked and consumption will all be hit over early 2022 due to COVID-related isolation requirements and illness which impact both the demand and supply sides of the economy.

? But we expect the unemployment rate to remain low and for inflation pressures to continue to build through this period which will keep the RBA on track to commence normalising the cash rate in late 2022.

Overview Official data to be released over the next month will confirm that the Australian economy ended 2021 with exceptionally strong momentum. Household consumption bounced very quickly in NSW and Victoria when restrictions were eased and employment surged. Indeed the latest job vacancy data indicates the labour market is incredibly tight and the unemployment rate will continue to move lower over 2022.

Put simply, the medium term picture remains very good. But right now the Australian economy is being significantly disrupted by an explosion in COVID cases. To be clear, public officials indicate that despite this surge, the overall health situation does not appear particularly worrisome– high vaccination rates have put us in good stead. But COVID-related illness and isolation requirements are having a temporary negative impact on both the demand and supply sides of the economy.

In addition, concerns around catching the virus given the high number of new daily cases may also be weighing on the demand for some services. This note takes a look at the near term economic implications from the surge in COVID cases. It also discusses the medium term outlook and why we retain our view the RBA will commence normalising the cash rate in November 2022.

The current state of play Daily new COVID cases have risen extraordinarily quickly over the past month. Government figures indicate that national daily new cases have surged to ~65k (7 day average). But this figure is likely to understate the actual number of cases given the significant lags between PCR testing and results. In addition the scarcity of rapid antigen test kits means less cases are being detected and reported than would otherwise be the case. Individuals who test positive to COVID must isolate for a minimum of 7 days. Close contacts are also required to isolate for 7 days (a person is considered a close contact if they live in the same dwelling as someone who tests positive or spent at least 4 hours with someone in a home or health or aged care environment). Over the past week there has been some loosening around close contact requirements for some industries.

This will alleviate some pressures on the supply side of the economy, but it will not eliminate them. Right now we do not know how many people are currently in isolation or the number of people who have been required to isolate over the past month. But based on the number of recorded positive cases over the past week coupled with an assumption that each person who tests positive has 1 close contact we estimate that around one million people are currently likely to be in isolation. There is of course a huge degree of uncertainty around this estimate. A person in isolation can still purchase goods online. But they cannot leave their home to consume goods or services.

This has an immediate short term negative impact on demand in the economy, particularly for services. Our internal credit and debit card data indicates spending has dropped sharply on services over the past few weeks (last data to 14 January). Spending on goods, however, has held up well. There is always a high degree of volatility around spending over the Christmas / New Year period. But our assessment at this stage based on our internal data is that the surge in COVID cases over the past three weeks has resulted in ~3% less spending over the period than would otherwise have been the case. This is not a bad result considering the huge number of people that have been required to stay at home. Isolation requirements, as well as illness associated with COVID, also impacts the supply side of the economy. A person in isolation who is employed but cannot work from home is simply unable to work.

The ability to calculate lost hours as a result of COVID illness and isolation requirements is incredibly difficult right now. But based on our estimates for the number of people required to isolate coupled with an assumption around the proportion of people who can work from home means we think that hours worked may be down by around 3-4% in January. Forced isolation and illness means that many businesses are operating at either reduced capacity, shorter opening hours or may even be closed. The temporary weakness in spending therefore is reflecting both supply and demand factors. Policy is fluid at the moment and requirements around isolation are likely to be further tweaked. But it remains the case that large numbers of COVID cases will continue to have a negative impact in the short run on the supply of labour. The uncertainty created by the explosion in COVID cases means that it is not possible right now to forecast Q1 22 GDP with much conviction. But market economists need a quarterly GDP profile and at this stage we have pencilled in a lift of 1.0% for the March quarter (downwardly revised from our pre-Omicron forecast for an increase of 2.3%/qtr). Note that we expect Q4 21 GDP to rise by 2.6%/qtr following the 1.9%/qtr decline in Q3 21. We will of course refine our Q1 22 GDP estimate as more data becomes available and a clearer picture emerges of when we are likely to hit the peak in COVID cases.

Beyond the next few months The next few months are without a shred of doubt going to be difficult and testing for the economy. Our working assumption is that more policy support will be forthcoming, particularly stimulus that is targeted towards businesses most adversely impacted by the surge in COVID cases and isolation requirements. But beyond this challenging period we expect the economy to do very well. Economic activity and hours worked should snap back in Q2 22 which means we have made no adjustments to our profile for the economy in H2 22 (we retain our forecast for GDP growth to be 5.5%/yr at Q4 22 – chart 6). The old adage that every cloud has a silver lining rings true when thinking about the medium term outlook. The speed and size of the current outbreak of COVID lowers the probability that the virus negatively impacts the economy over the second half of the year. That is, the rapid spread of COVID now may see us reach herd immunity by the middle of the year.

What to watch from a monetary policy perspective An economist will generally tell you that all economic data matters. But some figures of course matter more than others when assessing the outlook for monetary policy. In the current climate the spending data that pertains to January and February should not in and of itself be cause for concern. The data will be soft. But it will not be indicative of a shift in underlying demand. Rather it will simply reflect the short term impact of the rapid spread of COVID on supply and demand in the economy. Consumption will improve once infections peak and start to decline – indeed spending should accelerate quite quickly once total infections are on a downward trend given the extraordinary level of household savings accumulated over the pandemic. It is also likely to be the case that many individuals required to isolate will consume more in the weeks following isolation (i.e. their spending will simply be deferred).

The key to the monetary policy outlook as this stage is the data that pertains to inflation, wages and progress towards full employment. In that context, the current short term negative shock to spending does not change our forecasts for core inflation, wages growth or the unemployment rate. More specifically, we expect core inflation to be tracking around the top of the RBA’s 2-3% band over the bulk of 2022; we expect wages growth to be close to 3% by end-2022 and for the unemployment rate to end the year at 4%. These forecasts are consistent with the RBA raising the cash rate in late-2022 based on their reaction function. As such, we retain our view that the RBA commences normalising the cash rate in November 2022.

The upcoming RBA February Board meeting is a very important one from a policy perspective. Indeed it could be pivotal not just because the Board will make a decision on the bond buying program, but also because the RBA may be required to shift their narrative on inflation if we get a big upside surprise in the Q4 21 CPI relative to their implied profile. The December labour force survey will also feed into the policy debate (due 20/1). Our expectation is that the Q4 21 trimmed mean CPI, due 25 January, will come in a lot stronger than the RBA expects. We believe this will underpin the RBA announcing the cessation of the bond buying program at the February Board meeting. And it will lay the groundwork for an RBA rate hike in late 2022.

We will publish our point forecasts for the Q4 21 headline and trimmed mean CPI with our full preview later this week.

Australian Economic Outlook.pdf

worth a read for where they expect inflation to head and the RBA response