Weekly market wrap up - 12 May 2023
Released on Tuesday night, the 2023 Australian Federal Budget came with a few surprises, including a surplus for the first time in 15 years and a forecast for inflation to fall significantly over the next 12-months. The Federal Budget explains the Australian government’s plan to allocate spending for services and operations across the country. In particular, this Budget focused on the low-income households likely to me most keenly affected by elevated inflation, providing them with a one-off energy rebate (after energy bills increased by 18.3% last year), cheaper medicines from GP visits, and a lift in the jobseeker rate of $40 a fortnight. For the first time since the Global Financial Crisis, the Budget declared a surplus, of $4.2b, a sharp improvement on the $36.9b deficit announced in the mini-Budget last October. This pivot to positive stems predominantly from additional tax generated from low unemployment, higher wages, and a commodities boom.
With inflation sky-high in the Australian economy, this Budget appears to strike a balance between alleviating cost of living pressure for the vulnerable in the community without further fuelling of inflation.
Only days after the Federal Reserve (Fed) signalled that its current monetary policy tightening cycle was drawing to a close, US labour market data showed that its fight against inflation was far from over. Despite adding 500-basis points to the overnight cash rate since early 2022 in an effort to restrict activity and dampen demand, labour market data continues to depict a US economy that is firing on all cylinders. April data showed a bumper 253,000 jobs added to the US economy, with the unemployment rate dropping to 3.40%.
While the market continues to err on the side of caution, suggesting that the US hiking cycle is indeed (probably) over, the Fed will retain a strong focus on the inflationary implications of a red hot US labour market.
The debate surrounding the level of the US debt ceiling continued to over the past week. Essentially, the US will run out of money if the limit is not lifted. As it stands, the current debt ceiling (the maximum level of borrowing allowed by Congress) sits at $31.4 trillion, and Treasury Secretary Janet L. Yellen expects this figure will be exceeded soon, potentially as early as next month. Even so, this wouldn't be the first time this year where the limit has been exceeded. In January, "extraordinary measures" were taken by the Treasury to supply the government with cash whilst it debated how to address the approach debt cap. It’s likely that the ceiling will again be raised in June, a strategy Congress has employed many times in the past. Since the 1960’s, the ceiling has been lifted an average of 1.25 times per year. President Joe Biden and congressional leaders are set to meet next week to discuss the situation.
Should the ceiling remain at its current level, and spending not be reduced, the creditworthiness of the world’s largest economy may come under scrutiny.
In April, the annual inflation rate in the US dropped to 4.9%, a level slightly below consensus market forecasts (5.0%) and a two-year low. This decline was accompanied by a slower growth rate in food prices (7.7% compared to 8.5% in March) and further decreases in energy costs, including significant declines in gasoline (-12.2%). Moreover, the cost of shelter, which constitutes over 30% of the total Consumer Price Index (CPI) basket, experienced a slowdown for the first time in two years (8.1% compared to 8.2%). Digging into the detail, the annual core consumer inflation rate, which excludes volatile items such as food and energy, declined as expected to 5.5% in April from 5.6% in the previous month, mainly driven by a decrease in the cost of rent. All in all, the fall represents another victory in the fight against inflation, though it is notable that the pace of slowing is itself slowing.
The April CPI battle has been won, but the inflation war will rage on for some time to come.
Authors: Nancy Wu, Finn Wilkinson, Ganan Jeyakumar and Duncan Roff.
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