Container Prices Increase

Something to keep an eye on...

Drewry’s World Container Index increased by 61% to $2,670 per 40ft container this week, putting container prices 88% above the pre-pandemic average.

While a lot of this is driven by the recent instability in the Middle East and in particular the Red Sea becoming less safe for shipping, the ongoing drought in Panama is also having an impact.

Both of these issues are likely to persist for some time, forcing ships to take longer routes and lowering the overall shipping capacity in the global market.

I don't see this having a huge impact at the moment, but it could get a lot worse if the situation deteriorates in the Middle East and Panama guess less rain than anticipated, leading to another supply chain crunch.

PJC Enquiry into Corporate Insolvency Reports

The Parliamentary Join Committee into Corporate Insolvency in Australia issued their report today and while their recommendations are generally all rowing in the right direction, its disappointing that the vast majority of them boil down to 'this committee recommends the government form another committee to undertake another review and make further recommendations'.

On the bright side, immediate recommendations around clarifying the treatment of trusts in insolvency, the collection of better data by the ASIC, and the ATO publishing model creditor guidelines are all welcome reforms, that if implements, will help right now.

And while I'm also happy to see the idea of a comprehensive review finally gain some traction, given all the time and effort that went into this enquiry, I had hoped to see a few more concrete recommendations that could be implemented immediately.

Overall, it was great to see the government devote this level of attention to a niche area of law like insolvency, but I think there is significant risk that as the current government gets further into this term, competing priorities will divert their attention and the proposed comprehensive review will just never happen.  There are, frankly, a lot of bigger issues that are worth many more votes for them to devote their attention to, so it would have been better to bank a few more wins now, before there's any risk of the process losing momentum.

You can read the full report at: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/CorporateInsolvency/Report

The RBA should increase rates today

The RBA should increase interest rates by a further 25bp today.

For most of the month, the data has been pretty finely balanced and I was leaning towards a 'wait-and-see' pause. But two pieces of late arriving data clearly tip the scales towards another rate increase being the appropriate move.

First, the CoreLogic Home Value Index was up 1.1% for June. This is the fourth consecutive monthly increase and should deeply concern the RBA. Both the wealth effect from rising house prices, and the ability to release equity are factors that can keep consumer spending higher for longer. The way our economy is structured, we really need to see house prices falling as part of the equation to bring down consumer demand.

Second, ABS secure housing finance was up a significant 4.8% in May. Coupled with rising housing prices this is a significant concern. As interest rates increase we want to see lending fall. Lending is injecting new money into the economy, generating more demand that will put further upward pressure on prices. Lending increasing is a clear indicator that rates have not gone high enough.  

The housing market is showing pretty significant resilience in the face of higher borrowing costs, and coupled with sticky core inflation and a surprise jump in consumer spending, a rate rise this afternoon is the only responsible option.

Greedflation?

There seems, to me, to be a fundamental issue at the heart of the Greedflation argument.

If you don't know, the core of the Greedflation argument is that Australia has too much market concentration and, as a result, a lot of companies have been able to force through outsize price increases, both fuelling inflation and growing their profits.

However, for the last decade there haven't really been any significant changes in the competitive landscape for our major markets. A few companies have dominated markets like groceries, telecommunications, or electricity the whole decade, and for most of that decade, we had significantly below target inflation.

Did these companies only realise in the last 18 months that they had a dominant market position and could force up prices?

I'm yet to see anyone from the Greedflation camp adequately explain why, all of a sudden, we have a market concentration problem, despite it being just fine for the majority of the last decade.

Retail Turnover and Job Vacancies

Two new bits of economic data out yesterday and neither of them are particularly encouraging.

First, retail turnover figures came in unexpectedly strong. Retails turnover was:
🛍️ Up 0.7% MoM
🛍️ Up 4.2% YoY

This beat expectations by quite a bit and was significantly stronger than recent card spending data out of the big four would have suggested. Discretionary retail spending and eating out where the big drivers of the spending growth.

The ABS attributed some of the growth to sales events in May stimulating spending, but if that is the case, I have concerns about the June figure as big end of financial year sales have been prominent this year.

In any event, consumer spending still trending upwards will not be welcome news to the RBA. Especially when spending remains more than 15% above trend.

...
Second, job vacancy figures also came in stronger than expected, falling only 2% from February 2023, meaning there were still 431,600 vacant jobs in May 2023.

This one was way stronger than I was expecting. It's pretty remarkable that Australia has created more than 465,000 jobs this year and we still have more than 400,000 job openings.

These aren't the kind of job vacancy numbers you see from an economy that is about to roll over into a recession and they imply that unemployment may be staying low for a long time yet.

We normally have around 120,000 vacant jobs (just from the usual turnover process) and are adding about 36,000 people to to workforce a month. On that basis, we are around 8 months away from unemployment stating to rise significantly. The only heartening thing about all this, is we've had this situation essentially a year now and we aren't seeing wage growth get out of hand.

It still won't be welcome news for the RBA, who've been clear they want to see unemployment rise as a clear indicator of a slowing economy.

Both these prints turn the dial towards a further rate increase in July and I think its now a finely balanced choice with no real wrong option. Given the data over the last few weeks good arguments can be made for pausing to wait and see, or increasing again. June house price data might provide the tipping point next week.

May 2023 Inflation

We got a misleading monthly inflation print today.

For May 2023: 
💙 Headline inflation was 5.6% (⬇️ 1.2%)
💙 Core inflation was 6.1% (⬇️ 0.7%)
💙 Inflation excluding volatile items was 6.4% (⬇️ 0.1%)

The big fall in headline inflation is certainly encouraging, and what the media will focus on, but it was driven by large moves in volatile categories like transport fuel and holiday travel. Inflation excluding those volatile items saw very little movement.

There is still a lot of stickiness in underlying inflation and big increases in electricity, insurance and rents still to flow through to the CPI next financial year mean we are a long way from getting inflation back into the target range.

That being said, this print does show things heading in the right direction and strengthens the case for the RBA sitting on their hands in July and waiting for another month of data. In particular I'd be keen to see what unemployment does next month before making a call on further rate rises.

May 2023 - Corporate Insolvency Appointments

There were 1070 corporate insolvency appointment in May 2023, pretty much bang on the long term average of 1069.

With May’s numbers now in, and June numbers tracking to also come in around the long term average, it’s clear that through the second half of 2023, appointments have recovered to where we would expect them to be. However, there certainly hasn’t been any huge wave of insolvencies yet, just a return to normal levels.

With economic conditions tipped to deteriorate next year, it’s highly likely that we will see appointments rise to historically ‘high’ levels next year (and we’ll see a whole new round of hysterical media articles).

Of the major appointment types, Voluntary Adminstrations, Voluntary Liquidations, and Receiverships have all returned to normal levels, while Court Liquidations reman at less than half their long term average. The new Restrucutruing appointment typy is making up the shortfall and to me this is a positive story, replacing the most terminal of appointments, with one designed to rehabilitate small businesses. Hopefully that trend can continue into next year.

Labour Force Report

We got a blockbuster labour force report this month!

In May 2023: 
🔥 Unemployment was back down to 3.5%
🔥 Participation was up to 66.9% (a record 🎉)
🔥 75,900 more people found work
🔥 14,011,800 people were employed (a record🎉)
🔥 Underemployment was up slightly to 6.4%

Despite the slowing economy and interest rate pressure the labour market remains incredibly strong. We have a rapidly growing labour force, mostly fuelled by immigration, and jobs growth continues out outpace it. We saw a record number of Australians employed and a record participation rate in May, and we got this result with a relatively weak sample group rotating in.

These are not the labour force numbers we expect to see from a slowing economy, so they definitely increase the odds of further RBA rate increases in the coming months. That being said, while there are consistent sighs of labour force strength, we have been hovering around this level of unemployment since June last year with little sign of wage growth getting out of check, and strong immigration is preventing unemployment from falling further.

On balance, even with the records, I don't think this print will overly concern the RBA and they're most likely to keep rates at 4.1% next month. 

April Retail Sales

Retail sales were flat in April, continuing the trend of easing consumer demand. However, retail sales still remains well above the long term trend.

In April:
💵 Retails sales were flat MoM and up 4.2% YoY. 
💵 Clothing, Footwear, and Personal Items spending was up 1.9% MoM
💵 Department Store spending was up 1.5% MoM
💵 Household Goods spending was down 1.0% MoM

As usual, the headline number can be misleading, with a big fall in durable household goods spending masking strong growth in personal items and department store spending.

Durable household good spending is more closely linked to housing turnover that consumer demand, meaning flat consumer spending in April is more to do with the slowing housing market than consumers closing their wallets.

This is backed up by data out of the CBA and Westpac, who both saw card spending grow in April.

Consumer spending isn't rolling over under the pressure of falling real wages and rising interest rates just yet.

Attorney General Enquiry into Personal Insovlency

Great to see personal insolvency also getting some government attention. Personally, I think reform here is more needed and urgent than in the corporate insolvency space.

The six key areas I'd like to see looked at:

1: Shortening or eliminating the 'term' of bankruptcy

The current bankruptcy term of three years is far too long and punitive. There have been proposals floating around for at least half a decade to shorten that term to one year, but I question whether a 'term' of bankruptcy is required at all. Changing bankruptcy to a point-in-time event that capture current debts and assets seems the cleanest solution to me.

2: Remove all prohibitions on managing a company

Currently bankrupts cannot be directors of a Company. This is arbitrary and should be removed. ASIC has the power to ban individuals from being a director if their conduct warrants it, and that is the better way for this outcome to be achieved.

3: Allowing cross appointments

Often business and personal dealing are intertwined and this can necessitate the liquidation of a company and bankruptcy of the directors. Currently that requires engaging and paying for two different professionals to complete these roles.

The law should allow the same professional to act as both liquidator and trustee in bankruptcy to simplify these kind of appointments, especially for small businesses.

4: Fix or Remove Income Contributions

A combination of low wage growth, high inflation, and indexing now means that only very high income earners now pay income contributions. This was clearly not the intention of the original scheme. We either need reform to fix contribution thresholds, or the removal of the scheme (which would fit well with a rethinking of bankruptcy as a point-in-time event rather than a period).

5: Make is cheaper and easier for creditors

Currently, making an individual bankrupt is a time consuming and expensive process for creditors. This process should be streamlined and simplified so that creditors can quickly and cheaply enforce their debts. This would go hand in hand with a reduction or elimination of most of the punitive aspects of the current bankruptcy regime (a move to a point-in-time bankruptcy), allowing both creditors and debtors to quickly resolve debt issues and get on with their lives and businesses.

6: An SBR style process for individuals

Personal insolvency laws currently have two 'restructuring' options. But neither are currently fit for purpose. The PIA process is too cumbersome and expensive, and the Debt Agreement process too rigid and inflexible. We need a flexible, SBR style process to allow individuals to cheaply and quickly deal with business debts.

https://www.afr.com/companies/financial-services/dreyfus-to-explore-urgent-changes-to-insolvency-laws-20230131-p5cgvp