-Higher fixed rates may offset the need for APRA intervention -Several effective vaccines sent global responses above pre-pandemic levels -Cyclical sectors in value, energy and financials both jumped by more than 50% -Retail sales blockade, BNPL on the rise
By Mark Story
Oz housing: Rates will increase in the second half of the year
APRA Chairman Wayne Byres recently informed Senate testimony “that there is no threshold” for higher risk loans at which the regulator would intervene. Byres suggested that it was important to consider additional intervention in the context of who is borrowing, and noted a big difference between first-time buyers (FHBs) and investors.
In light of these comments, Jarden now sees macroprudential tightening – tools for fine-tuning loan regulations – as less likely, and believes higher fixed rates could offset APRA’s need to act.
While Jarden still predicts a 10-15% hike for house prices to come, the broker believes an impending fixed rate hike should take some heat off the market in the second half of calendar year 2021.
With the final draw on the Reserve Bank of Australia’s (RBA) $ 200 billion Term Finance Facility (TFF) on June 30, a cheap source of 3-year fixed rate funding is poised to take end. Jarden believes this will likely lead to an increase in 3-year fixed mortgage rates.
The broker sees higher rates and the impending expiry of the TFF has already seen the last 4 and 5 year fixed rates below 2% disappear. Given the historical relationship between 3-year fixed rates and 3-year swaps, the broker expects fixed rates to increase by 25 to 50 basis points in the coming months.
Jarden estimates that the current spread of 2.04% between 3-year fixed rates (2.14%) and the TFF (0.10%) suggests that fixed rates should increase by 25bp given the 3-year swap. current years (0.35%). But the broker also notes that the spread on fixed swaps, which has averaged 2.27% over the past 10 years, implies a 50 basis point hike in fixed rates to 2.6%.
For longer-term fixed rates (4 and 5 years), Jarden believes even larger increases are likely. The broker expects the current 4 and 5 year swap rates of 0.63% and 0.87% to likely increase as the yield curve control decreases.
Based on Jarden’s borrowing capacity model, a 50 basis point increase in mortgage rates is worth 4-5% of house prices. While this is unlikely to cause prices to drop, Jarden believes the record price growth of recent months may be moderate.
As a result, the broker concludes that the likelihood of a tightening of APRA’s macroprudential policy is reduced.
As higher-risk loans increase, Jarden reminds investors that much of this is driven by first-time buyers, which APRA appears to have little appetite for restraining. As a result, the broker now sees the rebound in investor loan / credit growth as the main risk.
But if APRA were to step in, Jarden believes it would be late 2021 / early 2022 at the earliest.
Raising corporate profits after the Covid
With more than 2.01 billion doses of vaccine administered in 176 countries, rates of covid infection have generally flattened or declined where vaccination rates are highest.
The announcement and subsequent gradual global rollout of several effective vaccines brought actions back to pre-pandemic levels and well above pre-pandemic levels in the case of the US market.
In Wilsons’ weekly view on asset allocation, the broker notes that the rally was supported by a significant recovery in corporate profits after tight lockdowns across much of the world in the second quarter of calendar year 2020. .
However, in much of the world, Wilson adds, economic activity is still not functioning “normally.” As a result, the broker reminds investors that expectations of a significant incremental economic recovery and a significant recovery in earnings over the next 12 months are not without risk.
Cyclical sectors have taken the lead since the vaccine efficacy announcements in early November and now expect a significant recovery. At the same time, Wilsons notes that the secular large-cap growth winners of 2020 also remain relatively dynamic.
Since the post-November efficiency announcement, the Energy and Financials Value Cyclical sectors have both jumped more than 50%. With the exception of utilities, all other sectors experienced growth of 10% or more.
The broker believes there is little room for error in terms of economic overheating or underestimating expectations, due to disappointment over the vaccine rollout and the pace of a global reopening.
So far, 12 vaccines producing a total of 8.7 billion doses have received regulatory approval for use in the countries for which they have been ordered. While this is encouraging, Wilsons also reminds investors that the reluctance to vaccinate, which prevails in both low-income and high-income countries, is a potential challenge for herd immunity.
The best vaccines are thought to be over 95% effective in preventing serious illness. However, it is suggested that vaccinating 70% to 80% of the world’s population would allow herd immunity and a return to some kind of normalcy.
At the current global rate of 35 million doses per day, Wilsons estimates that it would likely take another year to achieve a significant level of global immunity.
Wilson’s baseline scenario is that vaccines will continue to be effective and that the global reopening, led by the developed world, will see stocks increase over a 12-month horizon. However, given that the vaccine rollout and global reopening scenario is a monumental task, the broker believes the risk of setbacks along the way is still worth watching.
Trends in the Australian National Banks (NAB) Cashless Retail Index for May 2021 suggest that Australia’s covid-induced consumer boom has largely run its course. Reflecting the recovery in housing construction, NAB data suggests that the engines of growth are shifting from retail to investment in housing, factories and equipment, and manufacturing.
Signs of consumer spending returning to ‘normal’ pre-pandemic conditions were evident in the NAB data mapping, indicating that the Australian Bureau of Statistics (ABS) retail sales growth measure has stagnated in May, up just 0.1% on a month-over-month basis.
ABS posted monthly growth of 1.1% in April, well below NAB’s forecast of 2.0% at the time.
Weekly tracking data from the NAB suggests that this slowing trend accelerated towards the end of the month, and not just in Victoria. While housewares, department stores and other retail businesses were the main drivers of growth last year, NAB data mapping shows these sectors saw flat to negative monthly growth in May.
Clothing, footwear and hospitality, which suffered badly in 2020, stepped in earlier this year to fill the void, but NAB data mapping indicates a weak impression in these areas, especially for clothing and clothing. shoes.
BNPL: several holders of risky accounts
The latest National Australia Bank (NAB) Consumer Insight Report (June) reveals that nearly one in five Australian consumers held BNPL debt in the first quarter of FY21, making it the fourth form of most common debt.
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