IMF warns the Reserve Bank may need to lift interest rates again, ASX records strong gains despite retail worries — as it happened

Australian investors took their lead from Wall Street in what started as a buy everything session and ended as a buy most things day.

Just over three-quarters of stocks on the ASX 200 saw gains, while only 31 companies finished in the red.

That saw the ASX 200 index rise 1% to 7,421 points.

General optimism was helped by the US Congress easily passing a bill to avert a partial government shutdown that had been looming by the end of this week — although the move only funds the US government through to early March when the shutdown threat will again raise its ugly head.

Tokyo's Nikkei index continued its strong run, but Chinese markets continued to struggle amid pessimism about that nation's economic outlook.

However, the Australian dollar held firm at 65.75 US cents.

I'm outta here to go get some exercise and watch Sydney FC beat the Jets. Hope you have a fun weekend lined up too!

With Australia's population surging over the past 18 months or so following the reopening of international borders, the International Monetary Fund (IMF) has weighed into the discussion over the net benefits of big migration inflows.

It has done this through a "Selected Issues" research paper on the macroeconomic impact of migration.

Here's the key conclusion:

"Disentangling macroeconomic effects of migration from drivers of migration is challenging, but within Australia, migration surges have historically been associated with higher growth and favorable labor market outcomes, with negligible price pressures except in the housing market.

"Cross-country analysis using instrumental variables confirms a positive impact of migration on macroeconomic outcomes—output, employment, and productivity—without significant inflationary impact.

"While housing affordability is impacted at the margin, this could represent structural supply shortages and would be best addressed by boosting supply."

The IMF noted that Australia has one of the OECD's highest share of residents born overseas.

"Around 30 percent of Australia's population was foreign-born in 2019, which is more than twice the OECD average of 14 percent and higher than other major migrant-receiving OECD countries such as Canada (21 percent), France (13 percent), Germany (16 percent), the UK (14 percent), and the US (14 percent).

"In Australia, migrants constitute 40 percent of the total population in large metropolitan regions, i.e., regions that contain a metropolitan area of more than 1.5 million inhabitants, such as greater areas of Brisbane, Melbourne, Perth, and Sydney."

The IMF also noted that recent migrants to Australia tended to have higher levels of educational attainment than existing residents and than the migrant intake of most other nations.

"An estimated 69 percent of recent migrants held a non-school qualification before arriving in Australia, of whom 79 percent had a bachelor's degree or higher and 13 percent had a diploma."

It suggested this was a key factor in migrants boosting Australia's productivity, an area where the nation has been struggling for the past couple of years.

The Albanese government overhauled the so-called Safeguard Mechanism last year as the centrepiece of its policies to reduce carbon dioxide emissions.

Although the International Monetary Fund welcomed those moves, it also warned Australia might need to do more to meet its targets.

"While highlighting the important role that the Safeguards Mechanism could play in reducing emissions, Directors recognized that meeting the 2030 climate target will be challenging," it noted in its annual Article IV Consultation with Australia.

"They thus encouraged the authorities to consider additional efforts to achieve the net zero emission target by 2050."

The International Monetary Fund (IMF) has released its annual assessment of the Australian economy.

Overall, the scorecard is positive, but the Fund does warn that Australia's economic growth rate this year (forecast at 1.4%) is likely to be even weaker than last year (1.8%).

If those forecasts are accurate, that means Australians are likely to endure a per capita recession for almost two whole years running.

Despite this slowdown in the economy, IMF directors warned that inflation may not fall into the RBA's 2-3 per cent target range until 2026.

"Directors highlighted the potential need for further monetary tightening to achieve the targeted inflation range by 2025 and recommended a data‑dependent approach," the report noted.

The IMF is forecasting the cash rate to average 4.4% this year, implying no cuts from the current 4.35% level.

It is also expecting Australians to have a negative savings rate of -5.1% of their disposable income this year, before further dipping into our savings slightly next year.

Despite acknowledging the federal government's return to surplus last financial year, the IMF — renowned for its historical advocacy of fiscal austerity — has urged further restraint in government spending.

"Directors welcomed the authorities' progress on fiscal consolidation and commitment to debt sustainability," the statement noted.

"They underscored the need for a tighter fiscal stance to support disinflation. In that context, Directors saw merit in a comprehensive tax reform and highlighted that rebalancing the tax system from direct to indirect taxes, while addressing regressive impacts, would promote greater efficiency.

"Directors also recognized the measures taken to contain spending growth and underscored the importance of well‑targeted support for vulnerable households.

"Implementing public investment projects at a more measured pace would also support disinflation efforts."

Another key focus for the IMF was Australia's soaring home prices, which it noted hit a recent high of 4.9 times incomes across the capital cities and which it forecasts to keep rising at more than 5% per year for the next five years.

"Noting the renewed increases in house prices, Directors recommended the adoption of additional borrower‑based prudential tools," the report noted.

"They supported the initiatives to boost housing supply to improve affordability and emphasized the criticality of supportive planning and land‑use policies."

• ASX 200: +0.9% to 7,378 points
• Australian dollar: +0.2% to 65.82 US cents
• Nikkei: +1.6% to 36,027 points
• Hang Seng: +0.6% to 15,491 points
• Shanghai: -0.2% to 2,840 points
• S&P 500: +0.9% to 4,781 points
• Nasdaq: +1.4%% to 13,056 points
• FTSE: +0.2% to 7,459 points
• EuroStoxx: +0.6% to 470 points
• Spot gold: +0.1% to $US2,024/ounce
• Brent crude: -0.3% to $US78.90/barrel
• Iron ore: +1.5% to $US127.70/tonne
• Bitcoin: -0.2% to $US41,000

Prices current around 2:00pm AEDT

Live updates on the major ASX indices:

Good question.

I looked up the list of signatories to the open letter, and it appears there is only one Australian on there, Richard Barnes.

The list is mainly dominated by US and UK signatories, although I don't know how widely it has been promoted — nor, indeed, how you promote things like this to billionaires.

For those wanting more info on what the letter said, here is the "Proud to Pay More" original text and below is the link to the ABC News story:

While the blockbuster retail sales events like Black Friday and Boxing Day seem to have fared reasonably well, it looks like that might have come at the expense of people going out for festive season lunch or drinks.

Westpac's senior economist Matthew Hassan has analysed his bank's card spending data.

"The Christmas-New Year period has been a sporadic one for consumer-related card activity with bursts around key sales weeks followed by sharp pull-backs," he observed.

"Through this, the underlying trend still looks to be weak albeit with volatility making trends less certain.

"Overall, the Westpac Card Tracker Index has posted a net 3pt gain since our last report in mid-December. At 137.2 the latest index read for the week ending January 13 is slightly above the four week average, a relatively good result given the absence of special sales events. However, quarterly growth remains negative after moving back into contraction in December."

So, what's driving the weakness?

The chief culprit appears to be a sharp decline in hospitality and travel spending in Victoria and New South Wales, at least when compared to usual trends for the Christmas/New Year period.

"The category and state detail continue to show weakness centred on discretionary services, especially hospitality, and in NSW and Victoria," Hassan noted.

"That said, in both cases the quarterly pace of contraction has levelled out with some tentative signs in the last few weeks that the pace of decline is slowing, particularly in NSW."

It'd be interesting to compare the decline in hospitality spending with a chart of COVID cases and see what the correlation is, given the latest outbreak appears to have peaked around the Christmas period.

The Australian share market's stellar start to the day has faded slightly, perhaps as 'profit taking' replaces 'bargain hunting'.

A couple dozen more companies have slipped into the red, although more than three-quarters of stocks on the ASX 200 are still gaining.

Lottery Corporation Limited is the biggest winner so far today, up 5.6% to $4.91.

Coal miners are also strongly on the up, leading gains in the energy sector, notably Whitehaven up 5% on a positive production update.

Local tech names have also basked in the glow of an overnight rally for US tech stocks — with Weebit Nano (+4.4%) and Xero (+4.2%) the two standouts on the ASX 200.

Some of the smaller miners, particularly in the uranium sector, are down today. Uranium has been on a tear higher lately, so this does seem to have an element of profit taking to it.

JB Hi-Fi was also among the biggest losers (-1.2% to $57.19). As I posted earlier, retail analyst Phillip Kimber at E&P Capital has a sell rating on the company after its 26% rise since the Black Friday sales period. His price target is $43.31, which implies a further 24% fall, taking the stock back to its pre-Black Friday levels.

Overall, the ASX 200 is still 0.8% higher on yesterday's close at 7,405 points and the Australian dollar has edged up to 65.8 US cents.

#ICYMI last night, David Chau focused on yesterday's official jobs numbers showing employment growth slowing in the face of population still rapidly growing.

With unemployment likely to rise as a result, the money markets are pricing in a 100% chance of interest rates falling by September.

But, as we've been reminded over the past four years or so, there's really no such thing as a certainty in finance, or in life.

While tiny homes might work for some people, are they really a major part of the answer for housing affordability?

Kudos to Maddy and her partner for living with a one-year-old in such a small dwelling, although I wonder how it will go when the one-year-old starts properly running around and there's a baby as well...

Aside from that, the cost of land is the major part of the housing affordability challenge across most of Australia.

In Maddy's case, it sounds like she essentially has free land rent for her tiny home on family-owned property, and most people don't have that advantage.

So, while tiny homes might work for some people, I can't see it being a silver bullet to put an affordable roof over every Australian's head unless there's a way for many more people to access free/cheap land to put them on.

In some contrast to the caution E&P analyst Phillip Kimber has over some major players in the retail sector, the analysts at UBS are reasonably bullish, at least about parts of the sector.

"Ongoing cost of living pressures, which have caused the Australian consumer to become more discerning, are being managed by trading down in food (to lower $ gross profit private label in grocery and some away from out of home consumption), in apparel & general merchandise (to lower price points) and in big ticket (reduced participation)," they noted.

"A more discerning consumer has been offset by population growth (JBH & WOW key beneficiaries), a strong labour market, and a buoyant baby boomer & property-owning consumer.

"We retain a preference for older & younger consumers (teens & non-renters), the affluent consumer, and beneficiaries of trade down (e.g. Kmart, grocery).

"Consumer discretionary retailers now enjoy a consumer that in aggregate has been able to manage the peak of cost of living pressures (although headwinds remain), with the outlook for 2024 improving (stage 3 tax cuts, RBA rate cuts)."

The UBS evidence lab survey of around 1,000 adults taken towards the end of last year indicates that middle income households expect to increase their spending next year.

Albeit this increase in spending is still skewed towards essentials, which are rising steeply in cost and driving inflation.

Consumers are also optimistic about saving more over the next 12 months, whereas most dipped into savings to keep spending over the past year.

• ASX 200: +0.9% to 7,378 points
• Australian dollar: +0.1% to 65.77 US cents
• S&P 500: +0.9% to 4,781 points
• Nasdaq: +1.4%% to 13,056 points
• FTSE: +0.2% to 7,459 points
• EuroStoxx: +0.6% to 470 points
• Spot gold: -0.1% to $US2,022/ounce
• Brent crude: +1.4% to $US78.96/barrel
• Iron ore: +1.5% to $US127.70/tonne
• Bitcoin: +0.4% to $US41,245

Prices current around 10:35am AEDT

Live updates on the major ASX indices:

Like a Black Friday sale, traders seem to be a swarm of 'bargain hunters' today, buying up almost anything on the ASX.

Overall the benchmark ASX 200 index was up 1.3% to 7,443 points around 10:30am AEDT.

Only eight of the top 200 stocks were lower in the first 20 minutes or so of trade, with 190 gaining ground.

That means that not even all of the bottom movers on the ASX 200 are in the red:

That means all sectors are in the black too, with energy gaining 1.7% and consumer cyclicals (discretionary retailers mostly) up 1.6%.

Healthcare, tech and real estate were also leading the gains.

It's perhaps surprising, given that key bond yields generally edged up overnight on positive US economic data and comments from a voting Fed official that suggested firm hopes of a March rate cut might be too optimistic.

Then again, the US House of Reps just voted to approve a bill that will delay any potential shutdown of the federal government, kicking the can down the road until next month.

So perhaps this is all just feeding into the narrative of the Goldilocks scenario where interest rates fall but economic growth continues.

As we've discussed before, given the scale of the inflation challenge and the rate rises used to try and tame it, such an achievement looks a little bit like the financial equivalent of …

Some interesting analysis out today from E&P's retail analyst Phillip Kimber, based in part on some consumer spending data out from ANZ.

"Since the completion of the Black Friday weekend (ended Monday 27th November), the share prices of JB Hi-Fi and Harvey Norman have risen 26% and 20% respectively," Kimber observed.

"We understand the overall consumer electronics market (different to the ABS category) had been tracking down ~10% pa in the months leading into November, however, was only down ~2% in the month of November."

"Our recent channel checks now indicate sales trends in the overall Consumer Electronics category in December / January YTD has returned to similar growth rates levels as seen prior to November (ie. down ~9%)."

The ANZ spending data Kimber was referring to tracks the payments going through the bank's platforms.

ANZ economists Madeline Dunk and Adelaide Timbrell said, while major sales events generally held up well, trading outside of sales periods was weak.

"ANZ-observed spending on non-food retail was up 1% y/y over the four-day Black Friday extended weekend and was down just 1% y/y on Boxing Day," they noted.

"Electronics performed reasonably well across key sales dates and was up 6% y/y over the Black Friday weekend and+1% y/y on Boxing Day. Although over Q4, spending was down 2% y/y.

"Like electronics, spending at department stores was solid over the Black Friday weekend and on Boxing Day, up 5% y/y and 7% y/y respectively. Over the Q4 period, spending at department stores was down 4% y/y.

"Spending on fashion has been consistently weak, down 10% y/y during the Black Friday period, -16% y/y on Boxing Day and -13% y/y in Q4."

Overall, ANZ-observed spending on non-food retail was down 8% year-on-year for the fourth quarter, which was a slight improvement from the -9% recorded in the third quarter.

"These low levels of ANZ-observed spending highlight how higher interest rates, increased tax payments and higher prices are curtailing spending," the economists noted.

"We expect this trend to continue throughout the first half of 2024."

And that, combined with their share price run-ups, in why Kimber currently has sell ratings on JB Hi-Fi (which also owns The Good Guys) and Harvey Norman.

There are quite a few billionaires who think they ought to be paying more tax.

Warren Buffett famously observed the injustice that he regularly pays a lower tax rate than his secretary.

And it's worth remembering that this isn't pure altruism.

The more astute billionaires realise that their wealth won't protect them if global inequality becomes so severe that civil society breaks down — they rely on the population's widespread acceptance of the legal and financial system to maintain their wealth.

This is some of what the open letter at Davos had to say:

"If elected representatives of the world's leading economies do not take steps to address the dramatic rise of economic inequality, the consequences will continue to be catastrophic for society," the open letter said.

"Our request is simple: we ask you to tax us, the very richest in society."

"This will not fundamentally alter our standard of living, nor deprive our children, nor harm our nations' economic growth. But it will turn extreme and unproductive private wealth into an investment for our common democratic future."

It said inequality "has reached a tipping point", risking economic, societal and ecological stability.

Australia's financial laws could be set for a major overhaul amid warnings the current system is burdened by too much complexity, with the cost being passed on to consumers.

A report by the Australian Law Reform Commission noted just one chapter of the Corporations Act is similar in length to Ulysses by James Joyce, with the whole Act totalling some 800,000 words.

Having had to suffer through Corporations Law (my equal most hated law subject alongside contracts law), I wholeheartedly concur. The Corporations Act makes a great laptop stand or doorstop, but a terrible piece of legislation.

The ALRC has made 58 recommendations for change in a report tabled to the federal parliament yesterday — it must be noted that report itself runs to 356 pages.

Justice Mordy Bromberg, President of the ALRC, spoke to RN Breakfast's Sally Sara about the need for reform to an act one prominent lawyer described as "porridge".

• ASX 200 futures: +0.9% to 7,378 points
• Australian dollar: +0.2% to 65.65 US cents
• S&P 500: +0.8% to 4,779 points
• Nasdaq: +1.3%% to 15,050 points
• FTSE: +0.2% to 7,459 points
• EuroStoxx: +0.6% to 470 points
• Spot gold: +0.8% to $US2,022/ounce
• Brent crude: +1.5% to $US79.07/barrel
• Iron ore: +1.5% to $US127.70/tonne
• Bitcoin: -3.5% to $US41,160

Prices current around 7:50am AEDT

Live updates on the major ASX indices:

Tech stocks, particularly the major chip makers, have advanced strongly, pushing Wall Street higher, despite lingering interest rate concerns.

Taiwan Semiconductor Manufacturing Company was up more than 9% after it projected revenue growth of more than 20% due to demand for high-end AI chips.

Its rosy outlook drove gains across related companies, with Nvidia the most traded stock on Wall Street, rising 1.4% to $US568.30 a share.

The Philadelphia semiconductor index was up 3.3% overall, and other big tech stocks such as Meta (+1.9%), Apple (+3.3%), Microsoft (+0.9%) and Alphabet (+1.6%) also gained.

Those gains came despite positive US data showing jobless claims falling which, combined with a speech by one of the Federal Reserve's voting members, again dampened hopes of a first US rate cut in March.

While saying he was open to earlier cuts if inflation fell faster than expected, the Fed's Raphael Bostic said his base case was for rates to start falling in the second half of this year.

"In such an unpredictable environment, it would be unwise to lock in an emphatic approach to monetary policy. That is why I believe we should allow events to continue to unfold before beginning the process of normalizing policy," he said.

"My outlook right now is for our first cut to be sometime in the third quarter this year, and we'll just have to see how the data progress."

Westpac's head of NZ strategy Imre Speizer noted a bounce in key bond interest rates overnight.

"The US 2yr treasury yield rose from 4.31% to 4.38% before retracing to 4.34%, while the 10yr yield rose from 4.07% to 4.15%," he wrote.

"Markets currently price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 1 February, with a 50% of a cut in March.

"Australian 3yr government bond yields (futures) rose from 3.80% to 3.82%, while the 10yr yield rose from 4.25% to 4.31%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 6 February, with a 30% chance of a cut in June."

Stick with me as I track the day's trading action.