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Post Market Wrap | Budget Forecasts Confirm Robust Economic Outlook

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This Post Market Wrap is presented by KOSEC – Kodari Securities

  • Cost of living payments and infrastructure expenditure positive for the economy 
  • Full employment + strong GDP growth = Inflationary pressure
  • RBA response to inflation will see interest rates rise
  • Bond yields currently reflect higher future interest rates, but economy to remain strong 
  • Equity markets most likely to follow the economy and remain positive

Federal Budget Economic Boost

Full employment, strong economic growth and high commodity prices for Australian exports, support continuing positive momentum for the Australian share market. This is because household consumption remains buoyant following a cut in fuel excise and the announcement of cash payments for low and middle income earners, to alleviate cost of living pressures. Targeting low and middle income earners delivers an immediate cash boost to the economy because that money usually gets spent quickly. Consumer stocks are likely to benefit immediately from this budget initiative. 

Infrastructure expenditure featured prominently in the budget outlays, with $17.9 billion set aside for various projects. Far North Queensland will see a $5.4 billion dam constructed while $0.7 billion has been set aside for the Melbourne international terminal at a cost of $3.1 billion. $0.7 billion will be spent on inland roads and $0.5 billion on NBN upgrades. 

This expansionary budget, at a time of full employment, is supportive of business earnings growth and that should underpin the share market at current levels, at least for the foreseeable future.

Robust Economic Growth

A key feature of the budget forecasts is the markedly improved growth outlook for the Australian economy. Economic growth, as measured by Gross Domestic Product (GDP), has been revised upwards from the government’s mid-year economic and fiscal outlook statement. GDP for 2022 is now estimated at a very robust 4.25 percent (previously 3.75 percent) and for 2023 GDP is estimated to increase by 3.50 percent before easing slightly to 2.50 percent in 2024. These are strong growth numbers. 

The equity market will follow the economy. This is another reason to be confident that the share market and other asset prices, including property, should remain buoyant in the period ahead.

Strong economic growth is conducive to strong employment growth. Unemployment now sits at 4 percent. At this level, there have never been more Australians in a job than at present. The budget anticipates unemployment to fall to 3.75 percent in 2023 and remain at this level for the following 3 years. This represents a tight labour market, not seen in nearly 50 years. 

Although full employment is generally positive, a note of caution is warranted. Strong economic growth at a time of full employment can lead to higher wages, which in turn creates inflationary pressure. The appropriate response by the Reserve Bank (RBA) under these circumstances, is to increase interest rates. This is aimed at curtailing consumer demand to a level where inflation is contained within RBA parameters. Currently, the RBA inflation target band is between 2 and 3 percent, on average, over time. The 2022 budget forecasts provide for inflation to move 3 percent in 2023. This, being at the high end of the RBA’s target range, implies higher interest rates from late 2022 and into 2023. The 10-year Australian government bond yield heading toward 2.9 percent in reaction to the Federal Budget, confirms that interest rates are set to rise.

Image: File

It is important however to recognise that interest rates are set to rise for the right reason and is a reflection of the confluence of domestic and global events that have recently tilted in Australia’s favour. This includes historically high commodity prices for Australian exports of LNG, coal, iron ore and for agricultural products like wheat and beef. High export volumes have accompanied these high commodity prices, resulting in Australia presently running a current account surplus with the rest of the world. Coupled with full employment, this outcome is unambiguously positive for all Australians. 

What is good for Australians is also good for our equity market. The current economic and financial state appears likely to persist for the foreseeable future, which implies a continuation of the positive trend in Australia’s share market.  

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.

"Michael Kodari is one of the world's most consistent, top performing investor. A philanthropist and one of the prominent experts of the financial markets, he has been referred to as ‘the brightest 21st century entrepreneur in wealth management' by CNBC Asia and featured on Forbes. Featured on TV as the "Money Expert", on the weekly Sunday program "Elevator Pitch", he is recognised internationally by governments as he was the guest of honour for the event "Inside China's Future", chosen by the Chinese government from the funds management industry, attended by industry leaders, when they arrived in Sydney Australia, on April 2014. Michael and George Soros were the only two financiers in the world invited and chosen by the Chinese government to provide advice, and their expertise on Chinese government asset allocation offshore. With a strong background in funds management and stockbroking, Michael has worked with some of the most successful investors and consulted to leading financial institutions. He was the youngest person ever to appear on the expert panel for Fox, Sky News Business Channel at the age of 25 where he demonstrated his skillset across a 3 year period forming the most consistent track record and getting all his predictions right over that period. Michael writes for key financial publications, is regularly interviewed by various media and conducts conferences around the world."

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Money

RBA cuts cash rate, easing pressure on homeowners

RBA cuts cash rate from 4.35% to 4.10%, marking first reduction since November 2020, benefiting struggling homeowners.

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RBA cuts cash rate from 4.35% to 4.10%, marking first reduction since November 2020, benefiting struggling homeowners.

In Short

The Reserve Bank of Australia has reduced the official cash rate from 4.35% to 4.10%, marking its first cut since November 2020 due to declining inflation. Homeowners are set to benefit, but experts warn the effects may take time to be felt.

Homeowners have awaited this decision more than a year, hoping for financial relief. The RBA stated that declining inflation justified this cut, indicating that it is beginning its rate-cutting cycle.

Due to falling inflation metrics, the Board expressed confidence that inflation rates are moving towards the target range of 2-3%. They noted that underlying inflation was recorded at 3.2% in the December quarter, suggesting pressures are easing faster than anticipated.

However, the Board also cautioned about potential upside risks, especially with recent strong labour market data, leading to uncertainties in economic activity and inflation outlooks.

Further cuts

Despite the rate reduction, the Board remains cautious about further cuts. They highlighted the need for careful assessment of inflation data, consumption growth, and global economic conditions before making new policy decisions.

Mortgage holders will benefit from the cut, with potential savings estimated at over $1,000 annually.

Market expectations indicated a high likelihood of this reduction, with forecasts suggesting more cuts in 2025 and early 2026.

Economic experts warn that it typically takes time for the impacts of rate cuts to fully materialise in the economy, suggesting homeowners may experience delayed benefits.

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Money

Interest rates impact investments, housing, and economy

Interest Rate Cuts: Implications for Borrowing, Housing Prices, and Australia’s Economy Post-COVID

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“Interest Rate Cuts: Implications for Borrowing, Housing Prices, and Australia’s Economy Post-COVID”

In Short

Interest rates in the US and Australia are under scrutiny as the impact of COVID-19 fades, raising concerns about investments and borrowing capacity. Experts are debating the long-term effects of Australia’s recent rate cut on housing prices and the cost of living crisis.

This development raises questions about its implications for investments, repayments, and savings.

To discuss these issues, we have Andrew Woodward from the Investor’s Way.

The rate cut has raised concerns about its impact on Australians’ borrowing capacity and the potential for rising housing prices.

There is also speculation about how this rate cut could affect the ongoing cost of living crisis in Australia. Experts are considering the possible long-term consequences of this reduction on Australia’s economy.

Many are asking whether this signals the start of a series of rate cuts by the Reserve Bank of Australia.

It’s important to examine how this shift in Australia’s monetary policy aligns with broader global economic trends.

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Money

Hainan’s hidden paradise is transforming the global economy

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Once a quiet island, now a booming gateway—how Hainan is becoming a powerhouse of trade, innovation, and opportunity

The Big Picture unveils the incredible story behind China’s newest economic powerhouse. Host Mark Llewellyn explores a tropical island that has been transformed into a thriving hub for Australian and international businesses. As part of the Fortune Bay economic zone, this region is poised to drive China’s economy—and global growth—over the next decade. With ambitious plans in place, the opportunities for innovative and successful Australian businesses could be immense.

In this episode, discover China’s best-kept secret, where the rapidly evolving, visa-free, and largely tax-free island of Hainan is unveiled to the world for the first time. With its booming economy and vast untapped potential, Hainan presents a golden opportunity for Australian businesses looking to break into the world’s largest market. Journey through breathtaking landscapes, meet visionary leaders, and explore bold innovations shaping this emerging economic powerhouse—one poised to drive global growth for the next decade.

 

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