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Post Market Wrap | RBA says inflation has increased in many parts of the world

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This Post Market Wrap is presented by KOSEC – Kodari Securities

  • Resilient economy and low unemployment likely to push inflation higher in coming months. 
  • 10-year bond yield hits 6 year high at 2.96 percent.
  • Investors should brace for higher RBA interest rates this year.  

RBA on hold … for now

The Reserve Bank of Australia (RBA) at its April 5 Board meeting decided to leave the official cash rate unchanged at 0.1 percent. It has been at this level since November 2020, when the RBA reduced the official rate in anticipation of an economic slump resulting from enforced lockdowns arising from the COVID pandemic.  

The RBA indicated that it is closely monitoring emerging inflationary pressures in determining the timing around an increase to the official cash rate. The RBA noted that supply chain disruption has led to shortages of goods and materials, resulting in higher input costs. The Bank is also cognisant of the inflationary impact of soaring petrol prices. Rising house purchase costs and grocery inflation related to flood damaged crops, are other factors contributing to the rising inflationary outlook. The potential for higher inflation is exacerbated by the tight labour market that may see higher wages, adding further pressure to input costs. The latest ANZ monthly job advertisement survey pointed out that job ads are at a 13 year high. The survey supports the RBA’s forecast that unemployment will fall below 4 percent this year and remain low into next year. The Federal budget papers go further and have forecasted unemployment to remain below 4 percent for the next 3 years. Australia hasn’t experienced this level of unemployment for 48 years! 

The RBA observed in its April 5 statement that periods of low unemployment correlate with an increase in real wages, implying wage increases at a rate above the inflation rate. This prospect has elevated the inflationary concerns shared by the RBA Board.  

The inflation outlook is further complicated by the $8.6 billion cost of living relief package announced in the Federal Budget, at a time when the economy is already performing strongly. The cash injection is aimed at low to middle-income workers, who tend to spend any money received. 

The Australian economy is strong

The RBA’s announcement referred to the strength of the Australian economy following an easing of forced lockdowns introduced at the onset of the Omicron variant. The Bank also stated that household and business balance sheets are strong, and the construction work backlog is supporting employment growth. 

The RBA acknowledged that while inflation is increasing in Australia, it is less than the level in other countries. According to the RBA, underlying inflation in Australia is 2.6 percent, while the headline rate is 3.5 percent. The RBA will publish its revised inflation forecasts in May and has recently stated it expects annual headline inflation to exceed 4 percent in the months ahead. 

The impact of higher interest rates is more readily absorbed by the economy during periods of strong employment and wages growth, than in times of a weakening economy. Moderately higher interest rates at this stage of the economic cycle, should enable economic growth to be sustained at a rate consistent with near full employment, without embedded consumer price inflation, that may generate a wages spiral. This implies that an interest rate rise in the near term should have a less adverse outcome for investment markets and households, than if left until inflation is entrenched within the economy.

A strong domestic economy has given the RBA grounds to respond to an expected acceleration in the rate of inflation in the period ahead. The response will be an increase in interest rates. The question is – when, and by how much?       

Investment Implications 

RBA interest rate policy is determined by underlying inflationary expectations and not the headline inflation rate. Interestingly, the 10-year bond rate is widely considered to be a useful pointer to the direction of future interest rates. This is because bond market participants on both sides of the trade must agree a bond price that reflects the direction and quantum of the interest rate (yield) payable over the duration of the bond. Accordingly, trends in long-dated bond yields represent the real-time collective wisdom of bond market participants, making changes in long-dated bond yields a useful marker that illustrates where interest rates may be headed.    

The Australian Government 10-year bond yield has been steadily rising in recent months. The 10-year bond yield rose to 2.95 percent today, well up from 1.67 percent on 1 January 2022. The message from the Australian bond market is clear -Australian interest rates are set to move higher, on the back of higher inflation. 

The forecast continuing low level of unemployment below 4 percent, strong economic growth forecasts, and emerging signs of inflation, all indicate the need for historically low interest rates no longer exists.

The evidence suggests that the RBA is likely to announce higher interest rates soon. This may occur in June after the RBA’s revised inflation forecasts are announced in May.  

A major implication of higher interest rates for investors is the impact on equity and property valuations. The all-time low interest rate environment has supported equity and property valuations for a lengthy period. 

In response to a changing interest rate environment, now is the time for investors to evaluate their portfolio in terms of withstanding the headwinds likely to accompany a gradually increasing cost of money over the coming 12-18 months.

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

Boeing CEO to depart with lucrative exit package despite chaos

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Boeing CEO Dave Calhoun is set to step down from his position at the end of the year, walking away with a substantial payout despite challenges faced during his tenure.

Here are the key points:

  • Massive Payout: Despite Boeing’s stock price plummeting by 43% since Calhoun took over as CEO in 2020, he is poised to receive a $24 million payment upon his departure.

  • Additional Compensation: Calhoun holds options that could potentially earn him an additional $45.5 million if his successor manages to boost Boeing’s share price by 37%.

  • Comparative Compensation: Calhoun’s compensation during his tenure exceeds that of CEOs in similar industries, despite Boeing’s stock underperforming in comparison.

Boeing CEO Dave Calhoun’s impending departure at the end of the year has sparked controversy as he stands to walk away with a substantial payout, despite the company’s tumultuous journey under his leadership.

READ MORE: Boeing CEO to step down

Despite inheriting a company reeling from the aftermath of two deadly 737 Max crashes, Calhoun’s tenure has been marred by further setbacks, including the recent Alaska Airlines door blowout incident that further tarnished Boeing’s reputation.

Boeing offers CEO $5.3 million incentive to stay through recovery …

With Boeing’s stock price plummeting by 43% during Calhoun’s time at the helm, questions arise about the correlation between executive compensation and company performance, especially in the face of such significant challenges.

‘Raised eyebrows’

Calhoun’s lucrative exit package, valued at $24 million, has raised eyebrows among shareholders and industry observers alike.

Additionally, the potential for Calhoun to earn an additional $45.5 million based on the future performance of Boeing’s shares has intensified scrutiny over executive compensation practices.

This sizable payout contrasts starkly with Boeing’s stock performance, which has significantly underperformed compared to both industry peers and broader market indices, highlighting the dissonance between executive rewards and shareholder value creation.

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Money

It’s been a record year for CEO compensation

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In 2023, Broadcom’s CEO Hock Tan was granted a stock award worth $161 million, propelling him into the realm of highest-paid CEOs.

However, as the company’s share price surged, the value of Tan’s award skyrocketed to approximately $1.3 billion, outpacing even the shareholders’ annual returns.

Tan’s compensation reflects a broader trend among top executives in the tech sector, where awards of restricted stock and stock options surged in value alongside company share prices.

Notably, CEOs like Charles Robbins of Cisco Systems and Shantanu Narayen of Adobe also saw substantial increases in their compensation, doubling in some cases.

The disclosure of such equity growth in executive compensation is a new requirement by the Securities and Exchange Commission (SEC), providing shareholders with insights into the changing value of executives’ awards throughout the year.

CEO pay is on the rise.

New heights

Overall, CEO pay at major S&P 500 companies reached new heights in 2023, rebounding from slower growth in the previous year. The median pay for these CEOs rose to $15.6 million, up from $14.1 million in 2022, reflecting a surge in equity awards.

Broadcom clarified that Tan’s stock award is designed to span five years, with no plans for additional equity grants or cash bonuses during that period.

Tan’s compensation, which amounts to approximately $33 million annually over five years, is contingent upon his continued tenure and specific share price targets.

While the initial valuation of Tan’s restricted shares stood at $160.5 million, the surge in Broadcom’s share price prompted the company to reassess the likelihood of meeting vesting conditions.

This reassessment suggests that Tan may not receive all the shares initially granted.

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Money

Market forecast: weather whirlwinds influencing investments

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Prime conditions for commodity investments arise from global weather shifts, geological tensions, and rising interest rates.

With global weather patterns causing disruptions in traditional supply chains, coupled with geopolitical tensions over natural resource access, and the anticipation of higher interest rates impacting financial markets, the conditions for commodity investments have reached exceptional levels.

Amidst this backdrop, Farrer Capital has emerged as a standout player, leveraging its unique ‘blue ocean’ approach to capitalize on price dislocations and scarce competition in the market.

Mark Wyld from MW Wealth joins the show to share his insights on the inclement weather impacting the market.

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