A FinSec View – Market Updates, Inflation & Interest Rates, Happiness Index & more….

Australian Market Update

We’re at the end of September but its two data points from August that were released in the past week that are the headline news.

First, the Reserve Bank of Australia’s (RBA) preferred inflation gauge, “trimmed mean inflation”, rose to 3.4% in August, indicating persistent underlying price pressures. The RBA is expecting this gauge to remain above its target band until late 2025.

Second, annual inflation or Consumer Price Index (CPI), was 2.7 per cent in August, down from 3.5 per cent in July, and is the lowest reading since August 2021. Energy rebates and a decline in petrol prices contributed to the lower headline inflation. However, RBA Governor Michele Bullock emphasised the need to focus on underlying inflation and warned against premature expectations of a return to the target band.

The RBA has all but ruled out rate cuts before Christmas, citing ongoing inflation concerns. This puts it out of cycle with most other major developed economies. Forecasts suggest that headline inflation will temporarily fall within the target band but then rise again once government support expires. The RBA is now projecting a sustainable return to the target band by December 2025.

With an election due by May 2025, the timing of any rate cut has become very politically sensitive.

In the past month, the Australian dollar strengthened against several major currencies. It reached its highest level since July 2023 against the US dollar, driven by the RBA monetary policy stance and the US decision to cut rates. The AUD/USD exchange rate reached a high of around 0.6870 in September, representing a significant appreciation from earlier levels. The AUD/EUR exchange rate also strengthened, reaching levels not seen since early 2023 and the AUD/JPY exchange rate saw gains, reflecting the relative strength of the Australian economy compared to Japan.

While the ASX200 rose on the inflation news, investor reaction was muted, with the CPI data largely in line with market expectations. Off the back of the reporting season last month the ASX200 started September down by 1.4%, which is almost exactly what the average decline of the past 24 years has been. According to S&P Market Intelligence, September has been the worst month (by far) over the past 24 years, with an average monthly return of negative 1.35%. However, not to be hamstrung by history the market bottomed on the 5^th and has pushed ahead to deliver a positive month – at the time of writing.

These remain uncertain times for investors as the RBA battles to tame inflation locally whilst there continues to be significant influence from global events. If 2024 has proved anything, it is to remain invested when it feels like bailing out is the answer.

Global Market Update

Following on from US Reserve Bank chief Jerome Powell’s big statement last month that “the time has come for policy to adjust”, the Fed has delivered. It lowered US interest rates by 50 basis points at the September 2024 Federal Open Market Committee meeting, marking the first rate cut in four years. Whilst the cut was forecast, the size wasn’t predicted by many. This decision was aimed at supporting economic growth and stabilising the slowing labor market.

The Fed’s rate cut statement acknowledged progress in reducing inflation and emphasised its commitment to achieving maximum employment. However, the statement also noted that risks to the unemployment rate have increased. The median forecast for the unemployment rate was raised to 4.4%. The Summary of Economic Projections (SEP) indicated that the Fed expects to cut rates further in 2024 and 2025.

Powell also doubled down on his Jackson Hole comment last month:  “The direction of the travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” emphasising that the Fed’s decision on future rate cuts will be data-dependent. Strategists are now predicting there could be two additional rate cuts in 2024.

Market reaction to the Fed’s announcement was positive, as evidenced by the continued rise in stocks over the following days. Falling bond yields also suggested that traders are expecting further rate cuts.

The People’s Bank of China (PBOC) unveiled a significant stimulus package to boost the economy and combat deflation. The stimulus package was the most aggressive since Covid and included interest rate cuts, increased liquidity, and measures to support the property market.

It remains to be seen whether these changes will be enough to get China back on track to achieve its growth targets given weak credit demand and the need for more fiscal stimulus. The property crisis and declining consumer confidence pose additional challenges.

The PBOC’s actions led to a rally in Chinese stocks and bonds and a stronger yuan. It has also led to a stock rotation in Australia from Banks to Miners in anticipation of an uptick in demand for our commodities.

The European Central Bank (ECB) cut its main interest rate by 0.25 of a percentage point, with the deposit rate lowered from 3.75% to 3.5%. This was the second time the ECB has cut rates since its cycle of rate rises ended in September 2023 (the first cut was in June 2024).

Cuts in rates by both the US and China will have the attention of the RBA as they balance their fight against inflation with managing the value of AUD and its impact on our exports.

Bank of England’s Monetary Policy Committee (MPC) announced their decision to leave interest rates unchanged at 5.0% following the 0.25% rate cut in August. This was in part led by inflation returning to an acceptable level of 2.2% in August, but still above the 2% target.

The actions of the central banks globally are predicted to continue to shape markets at least until Christmas. This will be an ongoing battle of managing growth targets while keeping inflation in check. Markets are reacting well to the actions of the central banks but there is still uncertainty as to whether the actions have been enough or too much. The next moves will be critical in shaping ongoing growth or a slide into a recession.

That’s the annual figure Australian financial data company, Canstar, estimates Austalians are paying in credit and debit card fees every time they swipe. It’s a staggering figure, highlighting the often-overlooked fees associated with electronic payments.

EFTPOS, or Electronic Funds Transfer at Point of Sale, has become an integral part of Australian daily life. From supermarket shops and petrol to take away coffees, most purchases are now made using cards. The use of cash has fallen from 69% of transactions in 2007 to just 13% in 2022, according to the most recent RBA calculations. However, behind the convenience lies a complex network of fees that ultimately impact consumers’ wallets.

Should it be the consumer who pays? Especially given that using cash actually requires more human handling, security and transport costs. And where does the extra money we are paying go?

A significant portion is absorbed by banks and financial institutions. They charge merchants a fee for each transaction, and these costs are often passed on to consumers in the form of higher prices. Additionally, card networks such as Visa and Mastercard also impose fees on merchants, which can further contribute to increased costs.

A recent stunt by NSW Labor MP Jereome Laxale in a Federal Parliamentary committee highlighted the issue. Laxale held up a well-used $5 polymer banknote. Why, he asked the bosses of Australia’s major banks facing the parliamentary committee, if he paid for a $5 cup of coffee with his credit card did it cost $5.08? However, should his question have been to the major banks or to the cafe that charged him the $0.08?

It’s often assumed that cash is a free payment method. According to a report by Boston Consulting Group, accepting cash can actually cost a business up to twice as much as accepting a digital payment thanks to factors such as security measures, staff time, and the risk of theft or fraud. If this is accepted to be the case, then why aren’t we as consumers being offered a discount by a  business for paying by card?

The other aspect of the payments landscape that is often unrealised is the massive investment by the banks to provide this modern convenience. Gone are the days of being able to access your money from inside a bank branch only on weekdays between 10am and 4pm. Consumers expect to live in a 24/7 world and to facilitate this, banks and card providers have invested billions to establish and maintain the secure systems we have today. There is an argument they are therefore entitled to get a return on this investment by charging us for this convenience.

Efforts have been made to address the fee issue with government inquiries and industry discussions. However, finding a balance between supporting businesses and protecting consumers remains a challenge. Some have advocated for a more transparent fee structure, while others have suggested capping certain charges. Independent and small businesses also argue they pay a disproportionately higher amount of fees because large retailers such as chains negotiate better deals.

The debate over surcharging in Australia is complex and multifaceted. While businesses incur costs associated with accepting electronic payments, they also benefit from the increased efficiency and security that these payments offer. The RBA, which allowed surcharging to start 20 years ago, is now seeking a solution that balances the interests of banks, card issuers, businesses and consumers. A consultation paper is due for public release by year’s end.

Grandparent Economy: The Bank of Nan and Pop

The wealth set to flow from Baby Boomers to other generations over the next 10 years has been revised up to $4.9 trillion, so it will be no surprise that we at The View and others in the financial services and family law sectors are focussed on estate planning and its legalities.

Given so much wealth to be passed on, it’s not surprising that there is predicted to be a significant uptick in wills being challenged. Recent research by ANZ Private Bank has found that about 70 per cent of intergenerational wealth transfers fail because of dissipating wealth, family conflicts, misaligned family values, delays and bungled execution. Lawyers warn about the potential for bitter, protracted and expensive legal disputes potentially involving grandparents’ estates, adult children and their spouses, grandchildren and stepchildren from blended families.

Last month, The View included “Six questions to ask your adult children before writing a will”. This month, we’re looking at the next generation of beneficiaries. The Australian Financial Review (AFR) recently reported that growing numbers of grandparents were bypassing their already wealthy or comfortably well-off children in favour of their grandchildren, worried they would struggle with the cost of living and extreme house prices. The AFR said the number of wills naming grandchildren as beneficiaries has tripled over the past five years to about 10 per cent, and the share of assets has more than doubled to 12 per cent. CoreData, the financial services research firm, estimates that $2.3 trillion of Baby Boomer wealth will go to their children, $1.7 trillion to charities and other family members and the remaining $931 billion will flow directly to their grandchildren.

Grandparents are wary of having their savings used as part of a settlement in a child’s divorce or blended family disputes involving stepchildren. Some are opting to support their grandchildren now rather than wait – known as the “giving while living” approach – providing them with private school and HECS fees, holidays, help with mortgages and everyday living expenses. “Co-saving” is another approach – matching whatever a grandchild saves towards a major purchase, such as a car or house.

More traditional grandparents who are waiting until their deaths to pass on their wealth are looking at protecting their assets and tax benefits with a testamentary trust, which holds on to assets on behalf of an individual or group of beneficiaries. Income can be distributed to under-age grandchildren or great-grandchildren who earn no other income rather than to adults who might already be on high marginal rates. A testamentary trust can also make loans to a beneficiary, which might be used to buy a house if permitted by the trust’s deeds. The trustees can decide loan terms that do not have to be commercial. The downside is establishment and ongoing costs with testamentary trusts, so the estate would need to be somewhat substantial (at least $500,000) to justify the expense.

The upshot is that grandparents do need to carefully plan their wills to reduce the risk of family conflict. Children, who might initially support a will that skips their generation in favour of grandchildren, can change their minds later in life if they become more needy, ill or have a costly divorce and decide on a legal challenge for a share. When discussing plans and any agreement with your children, be clear about what it means for all parties, and ensure that it is fully documented and reviewed by an experienced lawyer.

A child can challenge a parent’s will because courts still consider the primary moral obligation of a parent on death, to be to the children rather than grandchildren. However, a recent case in the NSW Supreme Court has interesting implications for grandchildren. In the Curtis v Curtis case, two brothers challenged their grandfather’ s estate, which solely went to their uncle. Their father had died in 2003, and the grandsons argued they had a dependent relationship with their grandfather, although not a financial one. While the plaintiffs ultimately had their family provision orders overturned on appeal, the case illustrates several critical points, particularly on the eligibility of grandchildren if they can prove (with credible evidence) partial or whole dependency on the deceased.

The case underscores the importance of careful estate planning and consideration of potential claims from dependents, including grandchildren. If you are involved in estate planning or facing a potential family provision claim, it is crucial to seek professional legal advice to navigate these complex issues.

Friday Funny

It’s been 30 years since Bill Watterson finished writing his Calvin and Hobbes comic strip but it seems the more things change the more they stay the same!