The Point

Crispin Murray: What’s driving Aussie equities this week

Confidence in China continues to weaken.

High youth unemployment is deterring consumer spending. Fears about the solvency of private developers are discouraging new home purchases.

Investment trust defaults such as Zhongrong risk triggering redemption requests, leading to a potential liquidity squeeze.

A number of incremental policy initiatives have been unable to reverse deteriorating sentiment.

Despite the bearish portrait, our head of equities Crispin Murray notes that some China-related stocks and ASX sectors have held up – notably the miners.

The bulls are taking the view that things are so bad, they’re good – which increases the chance of a more convincing policy response such as the one we saw in 2015, says Crispin.

“They are drawing a comparison with the period prior to the reversal of the Zero-covid policy, where there were incremental signals before a major policy change,” says Crispin.

If a major policy response doesn’t materialise, Crispin sees some risk around bulk commodity producers at these levels.

Tim Hext: Wage growth remains under control – for now

Wage growth – a key indicator that the RBA watches when weighing up rates decisions – was surprisingly benign in the June quarter.

The latest Wage Price Index, which measures salary changes across 18 industries, shows overall wages grew by only 0.8% in the period.

That’s three quarters in a row at 0.8%, suggesting an annual run-rate of only 3.2%, points out our head of bond strategies Tim Hext. (The official number is 3.6% due to a 1.1% result in September).

“Wages across the economy are likely to settle on 4% rises for several years yet,” predicts Tim.

That continues to buy time for the RBA – the market expects one more hike towards year-end or early 2024.

The outlook for bond investors?

“Short-end bonds should remain rangebound for now. Longer bonds remain vulnerable to higher long-end rates globally.”

Another Chinese property developer is in trouble. Here’s what it means

China’s property sector woes continued this week as another big property developer found itself in trouble.

Country Garden – China’s biggest property developer based on last year’s contracted sales – missed US$22.5 million in payments on two bonds.

The company is described as facing “periodic liquidity stress“.

Country Garden will probably find enough money to pay the coupon within the 30-day grace period, says our head of income strategies Amy Xie Patrick.

But it needs another $US2 billion for other payments, plus cash to complete pre-sold projects.

As the confidence crisis in the property sector deepens in China, levered property developers need strong new pre-sales to complete older pre-sales.

But monthly sales are well down on 2021 down and still falling.

“This is what is causing the ‘periodic liquidity stress’ – though I would describe it as existential rather than periodic,” says Amy.

Here Amy explains the detail and what it means for the global outlook

Tim Hext: What to pay attention to in the RBA’s latest monetary policy statement

When the RBA releases its quarterly monetary policy statement, our head of bond strategies Tim Hext first reads through the forecasts and then goes to the boxes.

“Box A” and “Box B” are typically special interest topics, offering an insight into what our central bankers are discussing and investigating internally.

Box B in the latest statement covers insights from the RBA’s business liaison program, including recent chats with 230 Australian businesses and organisations.

“Box B reveals a growing view that businesses are seeing an easing in demand and costs, consistent with an increasingly neutral RBA,” says Tim.

It also shows businesses expect an easing of wage rises in the year ahead – even though the Wage Price Index isn’t forecast to peak until the end of the year.

“This shows the RBA will likely stare down commentators who talk about higher wages meaning further rate hikes,” argues Tim.