The ASX All Ords has begun to claw back some of the ground lost over the last week, rising above last Friday’s low of 6,609 points, but only recovering 0.98% over the last five days to hit a weekly high of 6,728 points at time of writing.
The S&P ASX200 also made some marginal gains, recovering 1.1% this week but remaining at a 12% loss for the year to date.
The Small Ordinaries took a beating over the week, falling to its lowest point since March 20, 2022, at 2,615 points yesterday before recovering 2.59% today.
On the commodities side, oil and gas have been sliding over the week, with Brent Crude Oil falling 9.1%, WTI crude oil dropping 12.2% and natural gas shedding 17.7% over the last five days.
Corn, soybean and wheat prices have also eased below their 52-week average ranges, although the food crisis has certainly not abated just yet.
Industrial metals have also arrested their steep climb in the face of market disruptions, with nickel (-5.2%), copper (-6.3%) and tin (-16.8%) taking the most damage to their spot prices over the week.
Zinc bucked the trend to rise 2.6%.
RBA sets wage growth “anchor” at 3.5%, warning against wage-price spiral
RBA governor Philip Lowe has laid out a path he believes will bring inflation under control, although the RBA has been quick to highlight that this is uncharted territory.
Governor Lowe has predicted inflation will peak at 7% by the end of the year, after which it will slowly ease in the new year after a further series of interest rate rises.
If all goes well, we’ll avoid a recession and employment will remain high.
"I don't see a recession on the horizon,” Lowe said.
"If the last two years has taught us anything, it's that you can't rule anything out. But our fundamentals are strong, the position of the household sector is strong, and firms are wanting to hire people at record rates.
"It doesn't feel like a precursor to a recession."
Unfortunately, part of Lowe’s plan involves keeping wages low even as it becomes clear wages in Australia have had no real growth since 2013.
While minimum wage earners – arguably the most affected by inflation pressures – will receive a pay increase of 5.2% following a decision by the Fair Work Commission last week, RBA governor Lowe argues the rest of the economy should not seek to mirror those gains.
"3.5% is kind of the anchoring point that I want people to keep in mind," Lowe said, advocating for an increase of just half of the 7% inflation expected by the end of the year.
While the federal government hasn’t exactly thrown its support behind the idea, many commentators are pointing to the risk of a wage-price spiral should wages begin to climb.
The concept involves rising wages contributing to rising prices, which in turn push wages in an ever-expanding upward spiral.
Is a wage-price spiral possible under current conditions?
While concerning as an idea, the chance of a wage-price spiral occurring depends largely on collective bargaining power rivalling that of market price-setting abilities, a balance of power which has long fallen on the market’s side.
ACTU secretary Sally McManus has been the first to criticise the wage-price spiral doom and gloom, arguing that the current inflation level "has absolutely nothing to do with wages".
"We're not achieving 3.5% [wage growth], let alone 5%, let alone 7%. And so, to think somehow that the system is going to deliver across-the-board pay increases of 5 or 7% is boomer fantasy land," she said.
"Not realising that whole system would be incapable of delivering that. We do not have centralised bargaining in this country. It would not be possible for that to happen.
“Business profits are driving inflation, not workers’ pay increases. Businesses are passing on price increases and some are gouging.”
McManus has called for union representation on the RBA board, suggesting the board has “very little idea how things work” when it comes to how wages are set.
A former RBA board member who spoke to the AFR on condition of anonymity hit back at McManus, claiming:
“It is obvious that most RBA board members have or have had roles which have necessitated them being very involved in wage negotiations and, even more relevantly, having to manage the consequences of cost pressures.
“McManus has never had to produce an operating profit or justify any major capital investments. Producing enough profit to justify capital investments almost inevitably requires recouping cost increases.”
On the other hand, Bernie Fraser, an RBA governor during the Hawke Labor government, said: “The business sector is very keen to put a cap on wages below the inflation rate, but no desire to put a cap on profits.”
“I was thinking back about Kelty and how bloody great it would be to have someone from the ACTU such as Sally McManus on there,” he said, harking back to Clive Kelty’s time on the RBA board where he was purported to be the most reliable forecaster of wages during his tenure.
“It would be better than some academic pontificating on things.”
RBA board member Alison Watkins, speaking in a personal capacity, struck a more even tone.
“Sluggish wage growth has been a concern and it’s good to see wages are now on the move, especially for our low-paid roles,” Watkins said.
“However, it’s very clear we need to strike the balance.
“It’s dangerous to now adopt a quasi-wage indexation mentality because the risk is we chase our tails and perpetuate high rates of inflation.”
Treasurer Jim Chalmers will have the opportunity to appoint two new board members over the next year, aided by the federal government’s expected review into the central bank and its board make-up.
Housing market begins to lose momentum
After over a year and a half of scrambling to get into the market before the prices rose ever more, the housing market has begun to normalise.
According to data from Domain, property search volumes have dropped as much as 38% year-on-year, and current listings have risen as high as 33% in some states.
Domain chief of research and economics Dr Nicola Powell said that “homes are coming onto the market quicker than they are purchased”, and “they’re taking longer to sell”.
This data is too new to take into account recent rate hikes, which are having a significant effect on interest rates – and mortgages – already.
While we’re certainly not approaching a bubble-bursting moment just yet, Canada, the US and New Zealand are also experiencing a downturn in real estate turnover, pointing to a slowdown in the market as debt-service ratios begin to rise, increasing the risk of ‘bad’ loans.
An analysis by Bloomberg Economics has highlighted that threat, placing Australia as the fourth riskiest housing market in the OECD based on price-to-rent and price-to-income ratios, which are higher today than they were during the GFC in 2008.
Only New Zealand, the Czech Republic and Hungary outdid us in property risk, with Canada, Portugal and the US following close behind.
While Bloomberg isn’t predicting a price crash, the data does highlight an “obvious vulnerability” in an already precarious economy.
“That’s another burden for a global economy already slowing down and in danger of falling into a recession,” Bloomberg’s analysis said.
“Falling home prices erode household wealth, dent consumer confidence and potentially curb future development.”
Those hoping falling house prices might allow greater access to the market won’t be rewarded either; analysts at Moody’s Investor Service have argued that even a 20% fall in housing prices would not solve Australia’s affordability crisis.
“We expect housing prices to decline over the rest of this year and into 2023 as rising interest rates weigh on property market sentiment,” Moody said.
“Based on our assessment of different housing price and interest rate scenarios, we expect that prices will not decline to the extent that housing affordability improves while interest rates are rising this year.”
Australian Energy Market to return to normal operation at 4am
On May 15, 2022, the Australian Energy Market Operator made the unprecedented decision to suspend the wholesale energy market in Australia.
AEMO’s hand was forced by an unreliable, volatile spot market exacerbated by some questionable responses from energy producers, some of which opted to shut down production in the less-than-ideal market in order to garner government subsidies when they were formally requested to resume operation.
With a lack of reliable power threatening blackouts on the east coast, AEMO slammed on the breaks.
After a staged return to normal operation, AEMO has now made the formal decision to lift the market suspension, in effect from 2pm today (AEST).
“The current energy challenge in eastern Australia is the result of several factors across the interconnected gas and electricity markets,” AEMO said in a statement this morning.
“This includes periods of high electricity demand, coupled with a large volume of generation unavailable due to maintenance or unplanned events, planned transmission outages and high energy commodity prices.
“Returning to regular operations of the NEM is now possible, as we are currently seeing more normal electricity bidding and dispatching through AEMO’s automated resources, along with reduced electricity shortfalls and fewer manual interventions needed by AEMO.”
The operator has cautioned that it “expects conditions to remain dynamic in the short term once the suspension is lifted”.
Small cap wins for the week
It’s been a hard few weeks for the market, but some small caps have shone through the darkness, all the more impressive for their gains in such a bearish market.
Anteris Technologies Ltd (ASX:AVR, OTC:AMEUF) is one of the brighter lights in the gloom, having smashed a 52-week high to gain 34.64% on its share price over the week.
The company’s shares are peaking (so far) at $28.49 – up 292.97% over the last 52 weeks – after a six-month follow-up review of the company’s heart valve replacement revealed an 86% improvement in haemodynamics.
Resource Mining Corporation Ltd (ASX:RMI) similarly reached a five-year high today, gaining 25% over the week to finish at a share price of $0.175 after beginning due diligence on Finnish Nickel and Lithium projects.
Hartshead Resources NL (ASX:HHR) also made some big gains this week, the company’s share price rising 42.8% over the last five days on news of a resource upgrade markedly lifting the value of its Anning and Somerville gas fields.