wage costs

Australia’s Reserve Bank lifts cash rate again This latest hike was not totally surprising given the backward steps from inflation according to the monthly data. Further tightening is not ruled out, but we think this may well be the peak for rates as we expect inflation to ease more substantially in the coming months.     Recent guidance has not been helpful We went into this meeting with very low conviction on our call for a further 25bp rate hike, taking the cash rate to 4.1%. This was in contrast to the consensus view, which was about 3:2 in favour of no hike at this meeting.   The Reserve Bank of Australia (RBA) had already delivered a 25bp rate hike at its May meeting, and that was against a backdrop of much better inflation data and came after the bank had hinted that rates may already have peaked. So with their reaction function muddied by recent actions, it was not at all clear whether the RBA would indeed respond to the increase in April inflation from 6.3% to 6.8% year-on-year, or wait for the full quarterly inflation figures to come out - and give more time for the effects of previous tightening to become apparent.   As it turns out, that April inflation increase was too much for the RBA to ignore, and policymakers did raise rates again. The recent increase in the unemployment rate also doesn't yet look like a convincing turn in the labour market, and indeed, disappears completely with just a little smoothing (three-month moving average) of the recent data, though a few more months may provide some more confidence that labour developments are moving in an encouraging direction. Labour data remains a key input into the RBA's rate-setting decision, at least that is what its statement suggests. Though we suspect it will cease to be as instrumental for policy decisions as inflation eases.     Any more? Never say never, but we think not As for whether this marks the peak in rates, we suspect the answer may be "yes". The statement accompanying the decision notes "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve." It feels like the RBA is hedging its bets on whether it will need to hike again, but we believe that inflation will fall more rapidly in the coming months (see chart), and that this will narrow the gap between inflation and policy rates, making real policy rates less negative. Real policy rates at zero tend to be a fairly basic benchmark for the point at which policy shifts from being accommodative to restrictive.   Risks to this view remain firmly on the upside, however. It would only take some acceleration in wage costs, some climate or other supply shock or more notable increases in house prices to shift the balance to one further (and probably final) hike. But as things stand, we believe this latest hike from the RBA should be enough, and still leaves a chance for the RBA to pull off the soft landing that it is clearly aiming for.  

Container liner profitability expected to recover in 1Q Only part of the price increases can be attributed to higher fuel and wage costs, which means container liners will benefit from the sudden mismatch and imbalances between demand and supply, as we have seen previously. Profits skyrocketed in 2021 and 2022. But container rates plummeted in 2022 and trended down over most of 2023, even dropping below pre-pandemic levels last autumn. With locked-in higher contract rates expiring, elevated profitability levels have been declining since the second half of 2022. This continued over 2023 with some liners approaching break-even in the third quarter and ZIM even encountering negative levels. With the current price hikes, profitability is likely to turn a corner, and we may see margin improvement either in the fourth quarter or by the first quarter of 2024.   Sinking margins of container liners will likely turn around in 1Q in wake of the Red Sea disruption Operational profit (EBIT) per container liner, per quarter

Eurozone PMIs show very tentative signs of bottoming out The eurozone economy continues to trend around 0% growth and there are no signs of any imminent recovery. Price pressures are still increasing for the service sector, which provides another argument for the ECB not to hike before June. How you read today’s PMI release for the eurozone reveals whether you’re an optimist or a pessimist. The increase from 47.6 to 47.9 in the composite PMI for January cautiously shows signs of bottoming out but also still indicates contraction. We also note that France and Germany saw declining PMIs, making the increase dependent on the smaller markets. Manufacturing price pressures remain moderate despite the Red Sea disruptions, but the service sector indicates another acceleration in input costs. To us, this shows that the eurozone economy remains in broad stagnation and that risks to inflation are not small enough to expect an ECB rate cut before June. The eurozone continues to be plagued by falling demand for goods and services, although new orders did fall at a slower pace than in recent months. Current production and activity were weaker than in recent months, though, suggesting that January started with contracting output still. The slowing pace of contracting orders does suggest that there is a bottoming out happening though. Whether this is enough to show positive GDP growth in the first quareter depends on February and March. In any case, GDP growth is so close to zero that we still qualify the current environment as broad stagnation anyway. The PMI continues to show some concern around inflation. Even though demand remains lacklustre, services cost pressures are on the rise again due to higher wage costs which are being transferred to consumers. Cost pressures on the goods side remain low despite Red Sea disruptions as energy prices trend lower and demand overall remains weak. This also means that goods inflation continues to trend down according to the survey. So, despite Red Sea problems prominently featuring in the news, inflation concerns currently stem more from services than goods, interestingly. For the ECB, enough worries about inflation not trending down to 2% quickly still remain. We think that makes a first cut before June unlikely.