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While the ASX has been doing what it does best lately – track Wall Street, more or less – there’s been no real movement on the broader macro stage.
I argue it’s felt a bit directionless the last few weeks. Russia and Ukraine are stagnant; the Middle Eastern situation is stagnant, and, the world is waiting for the U.S. election in just over two weeks.
As wars linger and America stands at a very interesting crossroads that’ll surely shape the future broadly, it’s no wonder gold has been going up and up (though, it also tracks inflation, which has risen by more than +20% in major economies over the last few years).
Locally, however, everybody is waiting for the next big Australian economic catalyst – quarterly CPI data for the September quarter, due out on Wednesday, October 30. That’s exactly seven days away.
I don’t want to try and put people in a bad mood, but there’s a good reason we should perhaps brace ourselves – and prepare for a possible tumble on the ASX200.
More than one indicator suggests Australian inflation could remain sticky.
The first is our labour market – unemployment remains at 4.1%. More people with jobs means more people spending.
Secondly, the IMF has on Wednesday forecasted Australian inflation will remain above 3% by the end of 2025. If that eventuates, it would only put us in front of Slovakia in terms of developed economies with persistent inflation (also assuming the IMF’s Slovakia forecast is correct).
Then there’s the TradingEconomcis forecast, which predicts Australia’s CY2024 Q3 inflation will basically remain unchanged at 3.8% compared to that CPI read for Q2.
That would be enough to tank the local share market – especially given Australia’s quarterly CPI data is by far the superior dataset when compared to the fairly volatile month-on-month reads. Sticky quarterly inflation basically guarantees RBA rate cuts in the second half of next year, with what data is available.
But then it gets worse. If we look at large ASX200 companies in the construction and building materials space, there’s more cause for worry.
Why that matters is because the ABS has long been pointing out the “shelter” category of CPI – in other words, housing – now remains Australia’s largest driver of inflation.
Property prices keep going up and up, like gold – I’d argue property values in this country are wholly irrational – but given this country feels to many to base success on whether you own property or not, people keep buying.
And that’s keeping inflation high.
So, it’s not particularly reassuring that Brickworks (ASX:BKW) and Fletcher Buildings (ASX:FBU) have both this week reported persistent weak demand for their building products.
Fletcher pointed to a weak Q3 with demand down between 10 to 15%.
And Brickworks has a more bleak view: It sees demand for its construction products remaining weak into 2026.
Seeing as low demand for materials implies low construction volumes, and that property prices are rising due to low supply – as immigration continues to increase, CPI is only set to disinflate slower and slower. And that’s not even considering labour markets.
(That would also match up with recent analysis suggesting good news for retail stocks, except for Wesfarmers’ Bunnings division.)
In something of a poetic twist: Australia’s fascination with owning homes could be a prison that’s locked us in for more difficulty yet. Let’s hope that isn’t the case, but, the signs are there.
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