Taken from the CBA Global Markets Research report, ‘December Month in Review’; first published on 2 January 2019.

Summary: Financial Markets in December

• Money markets now pricing an RBA cut
• A strong risk off tone saw large rallies (falls in yields) in US and Australian bonds. There was widening in credit spreads.
• Falling underlying yields ensured credit finished the month with largely positive total returns.
• The US Dow Jones fell by 8.7 percent and the S&P 500 was down 9.2 per cent in December– their worst December performances since 1931 and biggest monthly losses since February 2009.

The dominant story of markets in December was the significant risk-off move – most obvious was the collapse in US equity prices. The US S&P Accumulation index was down 9.03% in December and that was after a strong recovery late in the month. (The intra-month result was as bad as -15% on 27 December.)

The Australian equity market outperformed massively by only falling 0.12% (accumulation) or 0.37%.

US bond markets reflected the risk-off tone and rallied strongly with yields falling.

On the FX side the risk-off move resulted in a 3.44% fall in the AUD against both the USD and an even larger fall of 4.11% on a trade-weighted basis.

The overall performance of commodities was relatively good (one reason that the materials sector could rise 5.29%) but oil prices fell sharply. Oil closed December at $US45.41 a barrel, down 10.84% on the month (and 40.6% from the peak in October).

Money Markets (Cash)

Market pricing for a move in cash rates by the Reserve Bank of Australia shifted course in December, as measured by Overnight Indexed Swap (OIS) rate. It’s only small, but for most of December the OIS rates were pricing a small risk of a rate cut and by month end the priced expectation of a rate cut had risen to 40%. In November there was a 60% chance of a rate hike priced. At end-December there was a 40% chance of a rate cut.

The move was noteworthy that the market was pricing a risk of a rate cut despite the RBA insisting that they felt it was likely that the next move in rates was higher. The Australian data was on the weaker side in December, but not particularly poor. The weakest print was the GDP, which had been expected to rise 0.6% on the quarter but only managed 0.3%. That saw the annual rate fall to 2.8%. The labour force result was better, though not across the board. There were +37.0K jobs created but split as – 6.4K full time and +43.4K part time. The unemployment rate ticked up to 5.1% on the back of an increase in the participation rate to 65.7%.

Australian and Global Fixed Interest

December was again a volatile month in markets.

While underlying economic developments were fairly typical, the US equity markets had two appalling weeks and one solid recovery very late in the month. Volatility was the order of the day, but the deterioration in sentiment was marked too. US bonds rallied each time there was a wobble in equity markets but have not sold-off far (if at all) in the late equity recovery.

There has also been major flattening pressure at some points.

The US 2Y yield closed the month at 2.52% which was a rally (fall in yields) of 29bp. The US 10Y closed the month at 2.725% which was a rally (fall in yields) of 29.5bp. The US curve finished the month unchanged, but had flattened abruptly mid-month (from 20bp to 10bp), only to recover back late in the month as the 2Y rallied to steepen the curve.

The second of the two large risk-off weeks appeared to be triggered (or at least worsened) by the FOMC’s decision to raise interest rates on December 20.

The market behaved as if there were widespread fears the FOMC was making a policy mistake. The bond yields rallied (fell) on a rate rise that was only 75% priced.

The local market had to contend with a weak GDP result (only +0.3% compared to 0.6% expected) and a mixed labour force (+37K but a rise in unemployment to 5.1%). At the same time, the fall in house prices continues in multiple data series.

Australian rates have also rallied (yields fallen) and yield curve flattened. The 3Y physical bond has rallied 23.75bp to 1.8275%, while the 10Y physical has rallied 27.75bp to 2.3350%.

As well as the financial volatility there were still ongoing developments of a geopolitical nature that added to the movement in markets.

In Europe, UK Prime Minister May has failed to pass her Brexit legislation through parliament (yet). She survived a leadership challenge, but it seems very hard, at this point, to see how she can pass the deal she has made with the EU through the UK parliament. The other European story was the disagreement between the Italians and the EU about the Italian deficit. Negotiations were progressing well at month-end, but there was definite agreement yet.

In a side-meeting at the G20 Presidents Trump and Xi agreed a 90 day cease-fire in the US China trade war. The Chinese have also deemphasised some of the elements of the Made in China 2025 policy that were causing the most consternation in the US. However, the overall stability of the Trump Presidency remained in question throughout the month as the potential Government Shutdown dominated news. The potential became the actual and the Government shut on 21 December. At month-end, there was no clear sign of the Government re-opening.

The Democrats take control of the House on 3 January following last November’s election.

The Federal MYEFO on December 17 showed a significant fall in the budget deficit of $9bn and an improved trajectory across the forward estimates.

Chart 1: Australian vs US 10Y bond yield

Source: Bloomberg, CBA

Chart 2 – Main Australian Yields

Source: Bloomberg, CBA

Global Credit Markets (Cash)
The December G20 meeting ended on a positive note with China agreeing to purchase a substantial amount of products from the US in exchange for the US not to increase tariffs in January. Yet there is a general lack of confidence that a meaningful deal will be reached by the end of the agreed 90 day ceasefire period. The arrest of Huawei CEO on US criminal charges was seen by markets as a signal that the US will not back down easily from its campaign against Chinese tech firms seeking global dominance.

US non-farm payrolls expanded by only 155,000 in November vs consensus of 198,000, but growth in average hourly earnings met expectations of 3.1% YoY. Despite weak data and market jitters, the Fed hiked rates at the December FOMC meeting and signalled another two hikes in 2019. A deadlock over funding for the wall on the US/Mexico border led to a partial shutdown of the US Federal government with the second half of the month witnessing heightened market volatility with VIX spiking at 36%.

Offshore credit spreads continued to widen, although US$ spreads across Financials and Non- Financials were the standout underperformer, +18 bps wider on the month. EUR Financials and Non-Financials were +1 bps and +3 bps respectively wider. A$ credit spreads continued to feel widening pressure from offshore, +5 – 6 bps across Non-Financials and Financials. Liquidity was subdued because of the holiday season, which exacerbated widening pressures.

Equity Markets
In 2018, global sharemarkets recorded their worst annual performance since the Global Financial Crisis. The US Dow Jones (-5.6 per cent), S&P500 (-6.5 per cent) and Nasdaq (-3.9 per cent) indexes all fell. In Europe, Germany’s Dax (-18.3 per cent) and the UK FTSE (-12.5 per cent) bourses tumbled. In Asia, Japan’s Nikkei fell by 12.1 per cent and the Australian ASX200 index was down 6.9 per cent – its worst year since 2011 – led lower by Telecom (-17.4 per cent) and Banks (-15.5 per cent) shares.

Global equities commenced December positively after US President Donald Trump and Chinese President Xi Jinping agreed to a trade war truce at the G20 summit in Buenos Aires. However, investors quickly became pessimistic that a broader trade agreement would be secured in the 90-day period beginning January 1. Such a broader agreement is necessary to stop President Trump’s threat to raise tariffs on US$200 billion worth of Chinese goods from 10 per cent to 25 per cent. And the arrest of Huawei’s chief financial officer Meng Wanzhou in Canada on allegations that she violated US sanctions against Iran lowered market expectations for a trade deal even further. US sharemarkets were down by as much as 4.9 per cent in the first week of December, but the Aussie ASX200 index was up by 0.3 per cent.

In the second week of December concerns over the lingering US-China trade dispute, weaker Chinese economic activity data and continued flattening of the US Treasury yield curve (often considered a US recession indicator) dampened market sentiment. Reports that China was considering removing US car tariffs, watering down its ‘Made in China 2025’ plan and restarting US soybeans purchases, failed to sway sceptical investors. US sharemarkets fell by up to 1.3 per cent. However, the London FTSE lifted by 1.0 per cent as British Prime Minister Theresa May survived a leadership challenge over her proposed Brexit deal.

The sell-off in global shares intensified during the third week of December. US shares fell by up to 8.4 per cent, led lower by the technology-focused Nasdaq index. And the US S&P500 index posted its worst weekly performance since August 2011, down by 7.1 per cent. The US Federal Reserve’s interest rate hike, the looming US government shutdown over budget funding and weaker US company earnings forecasts dragged shares lower. The European Commission reached a deal with Italy over the 2019 budget. And China’s annual Economic Work Conference signalled additional fiscal and monetary stimulus in 2019. But Germany’s Dax (down 2.1 per cent), Japan’s Nikkei (down 5.7 per cent), the UK FTSE (down 1.8 per cent) and the ASX200 (down 2.4 per cent) all fell.

There were more declines for global sharemarkets ahead of the Christmas holiday period as the US government was partially shutdown. US shares fell on Christmas Eve as investors were rattled after US Treasury Secretary Steven Mnuchin announced that he had called US bank heads in attempt to shore up confidence in the US financial system. US President Trump also tweeted that the US Federal Reserve was “raising interest rates too fast”, increasing investor concerns that Federal Reserve chair Jerome Powell could potentially be fired. The S&P500 index fell by 2.7 per cent, dipping within a couple points of a bear-market correction. Japan’s Nikkei index fell by 5 per cent on Christmas Day.

US sharemarkets, however, posted their biggest post-Christmas Day rally ever and best day in nearly a decade with the Dow Jones up by 1,086 points on Boxing Day – its largest one-day gain in history. The S&P500 (up 5.0 per cent) and the Nasdaq (up 5.8 per cent) both lifted by the most since March 2009. The S&P500 retailing index rose by 7.4 per cent after data released by Mastercard showed that holiday sales were the best in six years. Amazon shares rose 9.5 per cent after it sold a record number of items. The Dow rose by 449 points in its final three trading sessions of the year.

In December, the US Dow Jones fell by 8.7 percent and the S&P 500 was down 9.2 per cent – their worst December performances since 1931 and biggest monthly losses since February 2009. The US Nasdaq Composite declined by 9.5 per cent. In Asia, Japan’s Nikkei fell by 10.5 per cent, but the Australian ASX200 fell by just 0.4 per cent. In Europe, both the German Dax (-6.2 per cent) and the London FTSE (-3.6 per cent) declined.

For the December quarter, the US S&P 500 and Nasdaq dropped 14.0 per cent and 17.5 per cent, respectively, their worst quarterly performances since the fourth quarter of 2008. The Dow Jones recorded its worst period since the first quarter of 2009, falling 11.8 percent. The ASX200 was down by 9.0 per cent.

In December, seven of Australia’s 22 subindustry sectors posted gains. The Materials sector rose most (up 5.3 per cent) from the Pharmaceutical & Biotech sector (up 3.9 per cent). But the Media sector fell by 10.9 per cent and Automobile & Components fell by 9.6 per cent. The ASX50 index was up by 0.3 per cent, while the Small Ordinaries fell by 4.5 per cent. Smaller companies were the worst performer in 2018, with the Small Ordinaries down by 11.3 per cent.

Chart 3- Smaller Companies underperformed: Rolling performance: percentage change, Annual 2018

Source: IRESS, CommSec

 

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State).

The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Global Markets Research has given Colonial First State its permission to reproduce its information, opinions, and commentary contained in this document.

This information was first made available to CBA clients on 2 January 2018 in a CBA Global Markets Research report publication titled, ‘December Month in Review’.

Colonial First State is a wholly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is the issuer of super, pension and investment products. The Bank and its subsidiaries do not guarantee the performance of Colonial First State’s products or the repayment of capital from any investments.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State, Global Markets Research, or any member of the Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

This document provides information for the adviser only and is not to be handed on to any investor. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of Global Markets Research at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units, other interests, or to enter into an investment agreement.

Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks.

This document cannot be used or copied in whole or part without Colonial First State’s express written consent.

Copyright © Commonwealth Bank of Australia 2018.

Want more information?
Please speak with your financial adviser Mark Giles Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Alternatively visit our website at completefinsol.com.au or contact Colonial First State Investments Limited at colonialfirststate.com.au or phone 13 13 36. © Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 6 October 2016. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

Taken from the CBA Global Markets Research report, ‘October Month in Review’; first published 1 November 2018

Summary: Financial Markets in October

• There was a sharp sell-off in global shares in October.
• US Bond markets sold-off (yields rose) early inthe month, but rallied back (yields fell) in therisk-off tone late in the month. Australianbond yields fell on the month.
• In credit markets, A$ cash credit was resilientto offshore widening.
• Australia’s trade-weighted index eased by0.5% in October. AUD was mixed against thecross rates.
• In commodity markets, iron ore and cokingcoal prices rose in October.

There was a large fall in equities this month and the risk-off tone from that move dominated bond markets. The US SPX accumulation was down 6.84% while the Australian version lost 6.05%. The falls were widespread, with the financial sector losing 5.96% and the materials index lost 5.18%.

The risk-off tone caused rallies (yields fell) in bond markets.

In an unusual occurrence there has been rises in commodity prices (other than oil) and falls in the AUD.

Offshore credit spreads succumbed to widening pressure with US$ and EUR Corporate spreads both widened over the month. A$ spreads across both corporates and financials however held firm.

Money Markets (Cash)
The pressure in short term funding markets eased slightly in September but remain very highly elevated compared to normal levels.

Once again, the RBA remains completely on hold.

The Australian data this month was a continuation of themes that have been clear for a while now. The Labour Force result on 18 October was fairly strong, with a fall in the unemployment rate to 5.0%. There was a small rise in jobs of +5.6K, but a large fall in the participation rate to 65.4%.

However the October 31 CPI confirmed that the RBA is on their hands for a good period yet. The headline CPI rose only 0.4% on the quarter and 1.9% on the year, while the underlying CPI recorded 0.35% on the quarter and 1.75% on the year.

The difficult month in equity markets was felt in bond markets (see below) but largely didn’t affect the Australian money market.

Australian and Global Fixed Interest
The US bond market actually sold-off over October (yields rose). Although the latter part of the month was full of doom and gloom in equity markets and a major bond rally (yields falling), there had been a strong sell-off in the first week of October. Overall, US yields finished marginally higher, with the US 2Y selling-off 4bp to 2.865 and the US 10Y sold-off 9bp to 3.14%.

The Australian market didn’t match the early sell-off in the US, so when the late-month rally got going the Australian yields have rallied overall on the month. The Australian 3Y and 10Y both fell to 1.99% and 2.63% respectively.

Not surprisingly, the Aus-US 10Y spread has continued to invert consistently and had reached -50bp at month-end (a 12bp inversion over the month).

For most of the month the bond markets were volatile, but largely at the whim of equity markets. The US S&P fell 6.9% over the month with a worse performance avoided thanks to a mild recovery in the last couple of days. The peak-to-trough loss was 11.4% between October 4 and October 30 (intraday).

The cause of the correction in US equities isn’tentirely clear but is an amalgam of the following factors. In the US, the equity correction came after a major run-up in prices. The market has a growing fear that the FOMC will over-tighten and trigger a reversal of the US economy. The USChina Trade war has been simmering along in the background. Finally, the US mid-terms have been identified as a concern given the hyperpartisan US political situation.

The global political situation continues to throw up market relevant stories. The global shift toward populism intensified in October with Brazil electing right-wing candidate Jair Bolsonaro and German Chancellor Merkel announcing she will not contest the next election. Brexit is closing in on the end-game with no clear resolution yet.

Global Credit Markets (Cash)
October has always been a ‘black cat’ month for equity markets with many a crash through history occurring in the month that contains Halloween. October 2018 was not different. There was no new news flow per se, or any specific catalyst to trigger the sell-off, rather it was a culmination of themes and events coming together, causing investors to universally question the validity of valuations. Themes remain Brexit uncertainty, US vs China trade war, Italian fiscal policy, fear of Fed policy error, and upcoming US elections. The month was dominated by heightened volatility and a minicorrection across global stock markets, which saw key indices down 8% – 10%.

Offshore credit spreads succumbed to widening pressure with US$ and EUR Corporate spreads both +14 bps wider on the month. Financials offshore also widened some +7 bps and +13 bps across US$ and EUR respectively. Unlike the last equity volatility inspired spread widening in March earlier this year, this correction didn’t come with a steady stream of primary activity. A saving grace that muffled spread widening pressure. A$ spreads across both corporates and financials however held firm, remaining resolutely unchanged over the month (plus or minus half a basis point).

Two thirds of US Q3’18 reporting season is behind us as at the end of October, with 65% S&P 500 companies now reported. Aggregate sales growth has reached just over 8.0% YoY, while aggregate earnings growth is north of 23.0% YoY. Most sectors at this stage are exhibiting solid sales and earnings growth momentum, however there is some doubt on growth sustainability without further stimulus – a contributor to recent market malaise.

Equity Markets
Global shares were sold down in October as investors reacted negatively to ongoing US-China trade tensions, rising US interest rates, slowing global growth and worse-than-expected September quarter earnings results of some US technology giants, prompting a reassessment of asset values.

Global sharemarkets began the month on the back foot. The new US-Mexico-Canada trade agreement was overshadowed by rising global bond yields. The US 10-year Treasury yield hit a 7-year high at 3.25 per cent during trading onOctober 5. The yield lifted by 17 basis points inthe first week of October after US FederalReserve Chairman Jerome Powell signalled thatUS interest rates “may go past neutral” – thepoint at which the rate neither helps nor hurtseconomic growth.

US economic data releases were mostly positive. The US unemployment rate fell to a 48-year low of 3.7 per cent and annual average hourly earnings rose by 2.8 per cent in September, supporting market expectations for a rate hike in December. Global sharemarkets generally fell by 1-3 per cent in the first week of October, ledlower by the US Nasdaq (-3.2 per cent) onchipmaker cybersecurity concerns.

In the second week of October, risk sentiment deteriorated after the IMF downgraded its global growth forecasts for the first time in two years due to intensifying US-China trade tensions. And investors continued to fret about the impact of rising borrowing costs on economic activity and company profits. High-flying technology shares came under acute selling pressure after investors appeared to scale-back their expectations for continuing double-digit revenue growth in 2019.

Over the second week of October, US shares fell by 3.7-4.2 per cent. The Dow Jones lost 1,378 points and the Nasdaq fell by 409 points on October 10-11. Germany’s DAX index was the worst performer, down by 4.9 per cent. The Japanese Nikkei (down 4.6 per cent), London FTSE (down 4.4 per cent) and Australia’s ASX200 (down 4.7 per cent) indexes all declined.

During the third week of October, US investors focused on corporate earnings results. The Dow Jones surged by 548 points on October 16 after banks Morgan Stanley and Goldman Sachs’ profits beat market expectations. Health care companies Johnson & Johnson and UnitedHealth also posted better-than-expected earnings.

Global share markets finished the week broadly flat, but the Nasdaq fell 0.6 per cent and the ASX200 was up 0.6 per cent.

Global shares continued to fall in the final week of October following the release of the weakest annual Chinese economic growth data in 9½ years in the September quarter (6.5 per cent). But annualised US economic growth remained strong, up by 3.5 per cent in the September quarter.

Sharemarket volatility increased amid mixed US earnings results. Over the week, global shares fell by 1.6-4.6 per cent. The ASX200 was the worst performer falling to its lowest level in 12 months on October 25. The Nasdaq fell by 329 points on October 24 – its biggest decline since November 24 2008.

To-date, almost half (48 per cent) of the companies in the US S&P 500 have reported earnings for the third quarter. Of these companies, 77 per cent have reported actual Earnings per Share above the mean estimate, which is above the five-year average of 71 per cent, according to FactSet.

In October, the US Dow Jones fell by 5.1 percent and the S&P 500 lost 6.9 per cent – its biggest monthly fall since September 2011. And the US Nasdaq Composite posted its worst monthly pullback since November 2008, down by 9.2 per cent. In Asia, Japan’s Nikkei fell by 9.1 per cent and the Australian ASX200 fell by 6.1 per cent – the biggest monthly drop since August 2015. In Europe, the German Dax fell by 6.5 per cent and the London FTSE declined by 5.1 per cent.

All 22 sub-industry sectors in Australia fell in October. Media fell by the most (down 16.2 per cent) from Auto & Components (down 12.1 per cent). Transportation was the best performer (down 2.5 per cent). The Small Ordinaries underperformed, down by 9.7 per cent.

Australian Dollar
Australia’s trade-weighted index eased by 0.5% in October. AUD was mixed against the cross rates.

AUD/USD dropped by about 2 US cents in the first week of October. More evidence the RBA is in no rush to raise the cash rate weighed on AUD. In its post-meeting statement, the RBA highlighted that “credit conditions are tighter than they have been for some time”. Softer global economic activity also weighed on AUD/USD. The global manufacturing PMI fell to near a two-year low in September. And the IMF cut its global GDP growth outlook in its October World Economic Outlook.

Also weighing on AUD was increased volatility in emerging market asset prices. The Australia-US two year interest rate spread decreased heavily to 90bps in early October, the most negative since October 1997.

AUD/USD consolidated in the middle of October before mounting a modest recovery. Firmer commodity prices helped AUD. Iron ore swaps increased almost continuously in October from $US68 per ton at the start of the month to $US73 per ton by the end of October. But capping the recovery in AUD were falls in global equity markets.

Commodities
Commodity prices finished mostly lower in October as demand concerns escalated on the back of falling global equity markets and rising US China trade tensions. A strengthening US dollar also weighed on commodity prices. Iron ore, coking coal and gold were notable exceptions.

Iron ore prices rose significantly through October as rising steel prices encouraged steel mills to purchase the steel making ingredient. Mills also looked towards medium grade ores (62% Fe) as higher grade ores (65% Fe) proved too expensive. Steel prices lifted on the back of actual and proposed cuts to steel output as policymakers look to ensure cleaner air. Steel mills in northern China are facing potential output restrictions from 1 October 2018 to 31 March 2019. While the restrictions are expected to be more severe and widespread than last year, authorities have chosen to be more selective in their capacity cuts. Mills, for instance, that have met environmental standards should be exempt from any curtailments. In any case, iron ore prices will likely be supported over the next few months, like they were when the cuts were enacted last year.

Stronger steel prices prompted coking coal prices higher too, but to a lesser extent than iron ore.

The lift in the gold price was a surprise last month as it occurred alongside a rise in the US dollar. Over the last year, the strengthening US dollar has proven the most accurate predictor of falling gold prices. We think safe haven demand, triggered mostly by falling equity markets, helped keep gold prices supported more than otherwise.

Oil prices declined over 10% in October as demand concerns combined with oversupply fears. Compliance with an accord to sideline 1.8% of global supply amongst OPEC and allies fell to its lowest level in September. That is expected to only have worsened in October. Saudi Arabia and Russia have led production higher, in hopes of offsetting lower production in Iran, Venezuela and Angola. US production also looked stronger than expected, with rising US crude oil stockpiles signalling oversupply.

In the agriculture commodity space:
• Wool prices, continue to fall in October, by about 7%, but still leaves prices at very high levels;
• Cattle prices jumped 10% because rainfall in some dry weather stoked some optimism about more feed being available; and
• And, in the largest move, sugar prices jumped 27% as the worst fears of a heavily oversupplied market receded and investors exited their hefty short futures positions.

Australian house prices
Taken from the CBA Global Markets Research report, ‘CoreLogic Dwelling Prices – October 2018’; first published 1 November 2018.

Dwelling prices in the eight capital cities fell by 0.6% in October. Prices have fallen for 12 straight months and are down 4.6% from their peak.

The falls were driven by Sydney (-0.7%), Melbourne (-0.7%) and Perth (-0.8%) (see table 2). Prices were flat or higher in the other capital cities. Hobart was the standout with prices up 0.9% in the month and 9.7% over the year. Sydney dwelling prices are now down 8.2% from their peak in mid-2017. This takes prices back to where they were in late 2016. Prices in Melbourne are down 4.9% from the peak in November 2017, taking prices back to early 2017 levels.

An interesting feature of the latest dwelling price decline is that prices are falling much faster at the top end of the market. Prices for the most expensive quarter of properties are down 6.9% from their peak late last year. Prices in the middle quartile are down 1.7% from their peak in April and the prices for the least expensive quartile are down just 0.9%. An increase in first home buyer activity is supporting the lower end of the market. The fact that cheaper property prices are falling less than the most expensive is a positive for consumer spending. Households in cheaper properties tend to have lower incomes and their spending is more sensitive to dwelling price falls.

Sales volumes have dropped off sharply since late last year. Sydney sales volumes are back at levels last seen in the early 1990s. This is weighing on state government stamp duty revenues. The auction clearance rate has fallen sharply too and is currently just under 50%.

The RBA don’t seem too concerned about the falls in dwelling prices so far. The falls are occurring alongside a favourable backdrop of above trend global growth and a falling unemployment rate. In a speech earlier this week, Assistant Governor Michele Bullock suggested that steady falls in dwelling prices over a year or more, as we are currently experiencing, is preferable to a short and sharp drop. So far households are taking things in their stride and we haven’t seen signs of a pullback in spending.

In terms of monetary policy, below target inflation and falling dwelling prices mean that the RBA is in no hurry to raise interest rates. CBA economists don’t expect a rate rise until November 2019.

 

 

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State). The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Global Markets Research has given Colonial First State its permission to reproduce its information, opinions, and commentary contained in this document. This information was first made available to CBA clients on 1 November 2018 in a CBA Global Markets Research report publication titled, ‘October Month in Review’. Colonial First State is a wholly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is the issuer of super, pension and investment products. The Bank and its subsidiaries do not guarantee the performance of Colonial First State’s products or the repayment of capital from any investments. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State, Global Markets Research, or any member of the Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This document provides information for the adviser only and is not to be handed on to any investor. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of Global Markets Research at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units, other interests, or to enter into an investment agreement. Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks. This document cannot be used or copied in whole or part without Colonial First State’s express written consent. Copyright © Commonwealth Bank of Australia 2018.

Want more information? Please speak with your financial adviser Mark Giles Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Alternatively visit our website at completefinsol.com.au or contact Colonial First State Investments Limited at colonialfirststate.com.au or phone 13 13 36. © Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 6 October 2016. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.