Markets hit the panic button

This week in Talking Finance:

• Annette Beacher, Chief Asia-Pacific Macro Strategist at TD Securities, looks at where interest rates might be going from here on;
• Kyle Rodda, Market Analyst at IG, tells me how the markets have been going;
• Samantha Maiden, Political Editor at The New Daily, runs me through about what's going to happen in politics over the next few years and in particular what's going to happen with the tax cuts; and
• Trevor Long, Technology Commentator, explains if 5G is a big deal or just pure hype.

[Music]

AK: Hello and welcome to Talking Finance, I'm Alan Kohler. Well, this week we've got Annette Beacher, Chief Asia Pacific Macro Strategist at TD Securities telling us about next week's rate cut from the RBA, plus where interest rates might be going from here on. Kyle Rodda, Market Analyst at IG tells us how markets have been going and they haven't been going that well this month. Samantha Maiden, Political Editor at The New Daily, talks to us about what's going to happen in politics over the next few years and in particular what's going to happen with the tax cuts, which she reckons won't be got through by July 1. And Trevor Long, Technology Commentator, takes us through 5G. Is it a big deal or just hype?

[Music]

And now here's Annette Beacher, Chief Asia-Pacific Macro Strategist for TD Securities. Annette, you're saying that GDP, when it comes out on Wednesday, will be 1.5 per cent. Please explain?

AB: 1.5 per cent year on year, I hasten to add, not quarter on quarter. Just the building blocks that we get for GDP, the two main ones we've gotten so far is the consumer, in the form of retail sales, well, that went minus 0.1, and the other puzzle piece we know is construction, which has boiled down to housing investment down about 2 per cent quarter on quarter, and we know engineering investment fell 5 per cent quarter on quarter.

The only puzzle pieces that we actually have baked into the GDP cake are both negative, and so next week, Monday, Tuesday, we do get a few more puzzle pieces, and to be honest the only strength I'm looking for is from the government sector. I'm looking for a good contribution from government, and we find that out on the 4th of June.

If we don't get this fiscal injection, we could very well get a flat reading for the quarter, and if that's the case, my 1.5 per cent year on year may even be on the optimistic side.

AK: Flat. You mean zero for the quarter?

AB: Zero.

AK: Right.

AB: Zero. The only numbers we have definitive information on are negative, and I'm not expecting too much from trade. Now, we've discussed trade before and I'm highly, highly optimistic on trade, but what happened in the first quarter was an exceptional bump in prices, so the terms of trade were very strong, up 4.5, 5 per cent quarter on quarter, but the fallout of that is while that's great for incomes, it wasn't all that great for volumes, and in fact export volumes were probably flat in the quarter, maybe slightly down, some of that being the weather-affected March, and we'll get a rebound in April. We'll find that out next week.

But just in terms of GDP being a volume measure, the volumes are looking particularly weak for the first quarter of this year.

AK: All this is going to be blowing everybody's forecasts out of the water, and particularly the RBA's and treasury's?

AB: Well, exactly. This is why quite a few of us were calling for a rate cut in May because we did expect fairly significant downgrades to the banks' outlook, and that actually did come to pass. I mean, over the last 12 months, the RBA was looking for growth by the middle of this year to be over 3 per cent, and then that's slowly been eroded away quarter after quarter as GDP continues to disappoint, and on my numbers, their last forecast of 1.7 per cent by mid-year, we may even undershoot that.

We did get a bit of a backtrack, I think, from RBA and Lowe when he said, "we'll look at the case for easing." Many of us just thought they should just have gotten on with it last month, early May, but anyway, we do have a bit of a catch-up easing coming sooner rather than later.

AK: What has caused it to erode away?

AB: Well, the inexplicable fact is that consumption is nearly 60 per cent of GDP and most consumers have certainly not spent the last house price cycle, so even though we've been discussing falling house prices for quite some time, the consumers didn't actually spend when house prices were booming. 

Now that's certainly something that us economists haven't seen for many, many decades. Normally consumers are more than happy to spend house price appreciation, particularly through 2014, '15, '16 and peaked in '17. The consumer just didn't catch up, and so when house prices started to fall in the latter months of 2017 and throughout last year, we've seen the consumer running at about 2 per cent annual growth, whereby the long run average is probably closer to 3.5 per cent, so it's very, very hard to achieve strong GDP growth when the consumer is only running at 50 per cent of the pace that it normally does.

AK: It's not just the fact that house prices are falling, it's the fact that the starting point for consumption was not great either?

AB: That's right. The consumer didn't spend on the way up, and they're certainly not spending on the way down. I mean, a factor of that, for example, a quick history lesson, for example, in 2016, every job created was part-time, so that's certainly not conducive to spending. We've all discussed in various iterations that wages growth has been particularly lacklustre, so it's very hard to get out and spend when you're lucky to get a 2 to 3 per cent pay rise, so that's not helping either. 

We've just a headline hit the screens, minimum wage is being lifted by 3 per cent and I'm just looking here. A 3 per cent lift looks like, probably, $19 an hour. So, in fact, that minimum wage at 3 per cent, that's actually less than the last two years, which had been 3.3 and 3.5. So that's good for businesses, probably not so good for consumers.

But I have to say we are now having a discussion about history. I do think Q1 could be the low point in growth and the consumer cycle. There are a lot of anecdotes piling up that a Coalition government win could put a solid floor under house prices and consumers may feel more positive to spend, particularly since the Coalition platform is about tax cuts sooner rather than later. 

Personally, I think tax cuts are more likely to be spent than interest rate cuts, because interest rate cuts tend to be associated with debt and housing as opposed to a permanent tax cut, which just means more dollars in your bank account every week and month and has nothing to do with debt and housing, so I just find historically that tax cuts tend to be spent. 

Let's see how the future unfolds. I do think fiscal policy should assume some of the stimulus for the economy expectations that the RBA should cut the cash rate close to zero I think are completely misguided. I do think there is a fiscal policy platform that could easily be equivalent to 50 basis points of tax cuts, and I think the RBA should be a little wise and not cut aggressively. Cut next week, the meeting is the 4th of June, and then wait a few months and see what is coming through the fiscal pipe in terms of stimulus to the economy.

I think if we rush too much now, I don't think anybody wants to have another discussion about a house price bubble and debt-filled households.

AK: Where do you think the terminal interest rate, the cash rate will be? Do you think it'll stop at 1 per cent?

AB: Well, I have to say this is my third iteration at this question. If you had of asked me during Glenn Stevens' era I would've said 2 per cent was it, and I think he probably would've liked 2 per cent when he left in 2016. Unfortunately, inflation had other ideas, and I think that's the same with Phil Lowe. We thought he should stop at 1.5, and again inflation's disappointing to the downside, so I'm going to have a third go and say it should stop at 1. 

To be honest, I don't even think we should cut at all. I think we should move into an era of fiscal stimulus. We've had years of revenue coming through that I think should be back in the pockets of your average Australian, but nevertheless we have got a rate cut for next week, we have got another one for August that could be delayed to November, so at this stage I'm going to say 1 per cent is it and let fiscal policy assume some of the stimulus.

AK: Good on you, Annette. Thank you very much.

AB: Thanks, Alan.

[Music]

AK: And now let’s catch up on the markets with Kyle Rodda, Market Analyst at IG. Well, Kyle, what have you been seeing in the markets this week – some panic selling or at least some extra volatility, that’s for sure?

KR: Yeah absolutely. I mean markets have certainly woken from their slumber that have characterised it for the most part of this year. The escalation of the trade war has really been behind that largely and I suppose the sell off in global stocks has been largely unabated and we’re seeing a really big flow into safe haven assets. You know, a lot of talk around the bond market rallies as well as a lift in the US dollar land the like. Yeah, I guess, a small level of panic across global markets now and a level of volatility that we haven’t seen for quite some time.

AK: What do you make of the decline in bond yields?  That’s been really characteristic of the markets, particularly here, we saw yesterday the Australian 10-year bond yield go below 1.5 per cent it’s back up above 1.5 per cent now, and US bond yields down below 2.3 per cent. It’s very interesting. What do you make of all that?

KR: Well I suppose there’s the extreme bear case and then there’s probably the more moderate point of view. The extreme bear case is that markets are really positioning, the trade war will have such a material impact in global growth that it might lead to something resembling a recession and in these times obviously there’s never a shortage of people coming out and saying that that’s what it portends. But I really think what you’re looking at now fundamentally if nothing else is that markets are positioning for interest rate cuts, or at least easing monetary policy from central banks across the globe, now that we are coming into some sort of period of economic softness, there’s nothing else.

We talk about the 10-year Australian government bonds, get below the cash rate in the last couple of days, markets are expecting or at least pricing in more than 2.5 interest rate cuts before the RBA before year end now. If you look at what markets are implying about what the Fed will do before year end, we’re expecting a cut and then some from the US Fed as well.

Whatever the degree of the economic slowdown markets are betting that it’s going to result in more accommodative monetary policy and that’s what I think is really driving it at the end of the day, flows into bonds, that expectation now that rates are going to be lower across the globe.

AK: It’s interesting, you look at the chart of the MSCI, the global index and it was definitely a sell in May and go away situation, but not really for the Australian market which has been doing all right, so far in May, largely as a result of the election which caused at least the banks especially to pop up.

KR: Yeah, a quirk of the composition I suppose, isn’t it. I suppose too, you could say as well, the big thing that’s been underpinning the strength in our market for the most part of the year, you know, in line with the global rebound in equities is that iron ore is still looking very strong. It probably hit a little bit of turbulence in the last week or so here and there with the global growth narrative turning to the bearish side. But some of those supply concerns that are really underpinning the iron ore price is keeping the miners well supported. We’ve got that on our side in the bigger picture. But like you alluded to, quirk of the composition, we’ve seen the banks rally after the election result. No one had priced in really, and I think the price action probably speaks as if no one priced in a Coalition victory. They did, the banks had been weighed upon for the last six or eight months or so on the basis that market participants were scared about what a Labor government would mean for the Australian property market, mostly around negative gearing reform and capital gains tax. Once that risk got removed the banks did go on a tear and pushed the ASX obviously to some pretty extraordinary levels.

We're starting to see that come off, so I suppose that sugar hit has diminished in the last week or so since all this bearishness has come through global equities, and global equities have sold off and the ASX has pushed lower this week.

But certainly, we've been probably one of the out-performers in the last week or two, mostly by virtue of that quirk of our composition.

AK: Good on you Kyle, thank you.

KR: No, no. Thank you.

[Music]

[Parliament audio clip]

AK: And now for her take on what's going on in politics, here's Samantha Maiden, who is the Political Editor at The New Daily. And in particular, Samantha has been doggedly on about the tax cuts, and whether they'll be passed, so let's hear what she's got to say about all that.

What do you think we can expect out of the next three years Sam?

SM: Well I think what we're going to have is a reset, right, I mean what we had really, basically since 2010, is non-stop upheaval, right. And clearly Scott Morrison wants the pace to slow down.  He thinks that Australians want to have the government get on with governing and basically not be so dramatically in the face of voters by essentially killing Prime Ministers so often, and having leadership disputes and all of that. 

Now, one of the criticisms of Scott Morrison during the election campaign was clearly that he didn't have a big agenda. What the agenda that he does have is these tax cuts, so in the short to medium term, they need to deliver on the tax cuts, but I think this is a really interesting question. There was a lot of criticism that the Labor Party didn't get enough scrutiny early on, right, and then it got an awful lot of scrutiny during the election. And look, as a journalist, I have some sympathy for this argument because I have, not necessarily recently, but I have found as a journalist sometimes in the past that when you write stories about oppositions, you almost get this kind of reaction from the news desk of "oh, well you know they're the opposition, you know, that's not really going to happen, is it?"

I think media can be lacking in scrutiny of oppositions and governments sometimes until right before an election. I think that many in the Labor Party would laugh at the idea that they didn't have enough scrutiny, right, I mean they obviously had, like the entire election, the Labor Party somehow made it about them.  It certainly wasn't about the government's agenda, because arguably they didn't have a very big one. But I think that the Labor Party certainly, I think, there wasn't quite as much aggressive scrutiny of their agenda in the lead up, and then there was just a really intense scrutiny of their agenda for the four, five week of the election campaign. 

When it comes to the government, I would argue - I mean I very, some would say, slightly obsessively pursued this issue of whether or not the government could legislate it's tax cuts before July 1. And I wrote a lot of stories about it for The New Daily again and again and again, where I basically said I don't think they're going to be able to bring parliament back before July 1, or it's going to be very difficult to do that.  And early on, you had the Prime Minister, from day one of the election, of the budget, sorry, saying “Oh, you know, this is fine.  There's no holdup to these tax cuts. The timetable isn't any issue. Even if it was, the ATO will just wave these tax cuts through if there's bipartisan support.” And during the campaign, I got the statement from the ATO saying that wasn't the case, and that they would require legislation, and that they wouldn't deliver those tax cuts because they're an offset lump sum, unless there was legislation. 

I wrote those stories, they were barely followed up by any major newspaper outlet, and I think there was one day where there was a story that was followed up, and it was untouched by the mainstream media, this issue. 

AK: Why was that?

SM: I don't think people understood it, or they didn't seem to take it seriously, because the Prime Minister kept saying "oh no, this is fine. The ATO will wave it through." And I kept saying well, it's clearly not fine. The ATO is saying that it won't wave it through, and also to be honest, the ATO also released a sort of slightly misleading statement where they made reference - I mean essentially what happened was this. I wrote the story, so I'm going to get very detailed on this. I wrote the story, and they gave me a statement saying no legislation, no tax cuts, full-stop, end of story. 

Now when I wrote that story, clearly the government erupted and rang up the ATO and went berserk because the ATO then put out a second statement claiming that my story was misleading in some way, but not explaining how it was misleading, I simply quoted their statement. 

Then they put out a supplementary statement that they hadn't provided me originally saying "Oh, well, no, we do require legislation, but there are things that we can do administratively." Therefore, implying that the Prime Minister was right, that there were things they could do administratively. But the things that they can do administratively relate to changing the withholding schedules, which you cannot do in June for tax cuts that are due in July. 

So this statement was quite misleading, and everywhere I went back to, including people who'd worked at the ATO, including accountants, including even MPs within the Liberal government, said "no, he can't do anything administratively." No legislation, no tax cuts. 

I don't think people really understood it, and we still have people like [Gerald Anderson] was out the other day saying something like "Oh, the ATO says that you can you know, just do this administratively, so what is everyone talking about?" Well no, you can't, because it's not a normal tax cut that you can do PAYE, or with withholding schedules. It's a lump sum, they won't pay it without legislation. 

Anyway, as soon as the election is over, the Prime Minister has spent the entire election campaign, in my view, fibbing about this, and then he comes out and says "Oh, well, actually...  " Like he slid it into this interview with Paul Murray unprompted, and then wasn't picked up in the interview what he was saying. He sort of says "Oh well, now we've got advice saying it's terribly difficult to get these tax cuts done before July 1", which is exactly what I wrote the entire election campaign, and he’s now saying "Oh, there might be a second - like you might have an amended return if you put your tax return in early, you'll get half of it then and half of it when the laws pass." And now, they're saying of course, which was always going to happen, "Oh it's all one piece of legislation, so unless the Labor Party votes for the entire package including for higher income earners, you won't get your $1,080 for ten million."

Basically, tax cuts that were promised, the centrepiece of their election promise that are due from July 1, are not going to be paid from July 1, and they're being held up in parliament, and nobody is acting like that's a story. I find that extraordinary. I mean I find it absolutely extraordinary.

AK: Why would the Labor Party block it? I don't understand that.

SM: Well look, it's not clear that they necessarily will, right, but I mean the bottom line is why they would block it is this. They don't believe that it is sustainable in terms of the budget and the surplus, to deliver a $158 billion of tax cuts, the bulk of which are from 2022 and 2024. That's their argument. Their argument is of course we support the $1,080 for ten million, but the problem is that the government is making the decision to put all those tax cuts together in one pot. They've just spent an entire election campaign campaigning against tax cuts for the top end of town, campaigning against why should a millionaire get an $11,000 a year tax cut. That's what they'll get under this package in 2024. 

Look, it may well be as one MP describes to me that they just decide to boil a big pot and put the Prime Minister in it by passing the entire tax cuts, and then Morrison's got to fund them, he's got to deal with it. But the other way of looking at that is if they do vote for it, then the Labor Party's potentially got to go to two elections with a policy of winding tax cuts back, like taking money off people, repealing them, basically. I mean look, I think that there is - the election was very close, don't forget, I mean the government looks like they're on a majority of one or two seats. I think the Labor Party could argue that they don't necessarily support in the Senate tax cuts for millionaires.

AK: Right. Well, it'll be very interesting to see what happens. Thanks Sam, I'll have to leave it there.

[Music]

And now to give us a rundown on 5G, here's technology commentator Trevor Long.

Trevor, there's a lot of talk about 5G, particularly in relation to Huawei, but also just in relation to what it's going to do for us. Tell us what's going on with 5G. Start with, what is it?

TL: Well, this is a pivotal time for 5G because we've been talking about it for so long, but finally we're about to get it with Telstra launching their 5G network.

5G in its simplest is the next generation of mobile network, so we've had 2G, 3G, 4G, 5G. Happens every five to 10 years, there's a push forward in technology so that we can do more with the network, and that more is really the challenge because the sales pitch for 5G is that it's faster. But I've got to be honest, I sit here and look at my phone and go, "I'm not really struggling. It's not doing bad things in terms of speed, and I don't really need to download movies in two minutes."

But the idea of a faster network is actually for the networks more than for us as consumers, because one of the biggest problems the mobile networks have is congestion, and especially around large crowds, so if you're at a big football stadium or a big concert or whatever, and people are trying to use their phones with a 4G or a 3G network, because of the speed, even though it's quite fast, when someone's trying to do something like share a video, share an image, they do that and their time on the network stops other people using the network.

Now, if whatever they're doing, sending a photo, sending a video, could be done faster, then they'll be on and off the network quicker and that's what's critical about 5G. We'll be on and off the network quicker, we'll be able to do things faster and the network will be more responsive, and the telcos with not just mobile phones but everything from cameras to connected cows, everything's going to be connected in the future, that connectivity, that speed is critical.

We're literally just seeing the switching on of 5G now with Telstra, Optus is testing it, and it's all you're going to hear about from the telcos over the next kind of six to 12 months.

AK: What does it mean that Telstra switched on 5G?  Will they just automatically switch us over to 5G or we will have to choose it and pay more?

TL: Good point and a great question. Your existing devices won't see the 5G network. The 5G network is literally a completely different network. There's new antennas got to be put on towers. In fact there's more towers that are required, because, I guess, the range of a 5G tower isn't as good as a 4G tower so they need more towers.

There’s a lot of infrastructure to be built by Telstra, billions of dollars to be spent, and right now there's 10 cities around Australia that have 5G, but even those cities, like Sydney and Melbourne, for example, it's very small. We're talking suburbs, not cities, that are covered by 5G.

It's very much in its infancy, it's going to take two to three years before the network is as ubiquitous as what 4G is today, and most importantly, there's only three mobile phones that have 5G built into them now and they're only just going on sale now. The next Apple iPhone release later this year I don't think will be 5G, I think it'll be 2020.

It's a massive journey, it's a good 18-month journey for the devices before we're all getting devices that have 5G. While it's available, it's a very, very early adopter technology right now.

AK: And are the 5G phones more expensive?

TL: They are. Actually, now I think about it, the Samsung phone that's been released is $2,000. I mean, you can spend more on an iPhone if you wanted to, but they are certainly the premium end.

One of the low-cost phone companies OPPO have released a phone, and their big claim to fame, and they haven't even announced the pricing yet, but their big claim to fame is a bunch of research that suggests that people want 5G but they're not really willing to spend more than $1500, which says to me they're going to release a phone that's about 13 or $1400. 

But that's still a very expensive phone, Alan, and I don't think the average Joe is really willing to spend that much extra money to get 5G when it's in its infancy. I think we'll just have to wait for 5G to become a little bit more, I guess, price competitive in the handsets over the next 12 to 18 months.

But I think, for me, the real point here is that you're going to hear a lot about 5G because Telstra's probably going to market it, Optus will go strong on it very soon, and while it is an exciting new development and it will do amazing things in terms of connectivity outside of mobile phones, it's not something you need to stress about, worry about and go rushing out for just yet.

AK: Well, to be honest, doesn't sound that exciting to me, just sounds like another way for them to get more money off me.

TL: And you know what? I think about 3G up to 4G on my mobile phone, you know, streaming Netflix, watching YouTube, whatever it might be, works pretty good on 3G, so I think that's the problem for the telcos is the value proposition for the consumer. Why do I need 5G, when in reality it's more of a network thing? They certainly can't be charging more for it.

One of the other things is 5G, because it's a mobile technology, you can have it in the home, so you can get a little device that you sit in the corner of your home and it gets 5G internet and it spreads that through your home via Wi-Fi, so you might not need a fixed line connection like an NBN. And 25 per cent of Australians won't want or get NBN, and that's according to the NBN's own figures, so this is the kind of solution that will work for many households in terms of getting fast internet into their home too.

AK: Interesting, Trevor.  Thanks.

TL: My pleasure, Alan.

[Music]

And happy birthday to Héloïse Adelaide Letissier, known professionally as Christine and the Queens, who turns 31 on Saturday? Yes, she's very young. She's a French singer, of course. You may not have heard of her, but my daughter Phoebe loves her. I don't know much about her, but I thought it's time that we had a listen to her. So here, here's her hit track, Tilted.

[Music]

And that's all from me. I'll be heading to Scotland for a month next week and taking my place while I'm gone will be InvestSMART’s Chief Market Strategist, Evan Lucas, and he'll be great. Have a great weekend and stay warm. 

[Music]