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Rudi’s View: RBA Dilemma Between Tight Labour And Debt

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Feb 15 2018

In this week's Weekly Insights (this is part two):

Panic Not Invited
Buy Restructuring Stories
Conviction Calls: Wilsons, Macquarie, FNArena's Sentiment Indicator
RBA Dilemma Between Tight Labour And Debt
The Next Index Rebalancing

[Note the non-highlighted items appeared in part one on the website on Wednesday]

By Rudi Filapek-Vandyck, Editor FNArena

Buy Restructuring Stories

Things might still be looking bright and upbeat, from an economic point of view, but each cyclical upswing shall be followed by darker times, and who knows, Australia might have another recession in the next few years ahead, as it has been such a long time since the last one.

In Credit Suisse's view, this might be a good time to start zooming in on those companies that are actively restructuring. Leaner businesses will be better positioned when the macro backdrop becomes less supportive, is the underlying thesis.

The strategy team at CS has selected 13 companies that fit the mould. On average, they trade at a -5% valuation discount vis a vis the broader market while offering a 4.4% average dividend yield (versus circa 4% for the broader market).

Selected List:


RBA Dilemma Between Tight Labour And Debt

Will they or won't they? And when exactly?

The public debate that is being repeated just about every day in newspapers and on Finance TV at its core boils down to: a tightening labour market versus stretched household budgets of heavily indebted Australians.

Something's gotta give.

If you are an eternal optimist, and you rely on history, you are now a hawk. You believe a tightening labour market is soon going to translate into average wage increases and that'll be the excuse for the RBA to lift the official cash rate.

If you zoom in on stretched household budgets instead, you wonder whether the RBA can even contemplate increasing pressure on discretionary budgets; you are firmly in the no change camp.

Within this context, Macquarie economists picked up that Australia's labour market might be tightening faster than anticipated, as signalled by the NAB business survey. This survey, states Macquarie, has consistently been the best leading indicator for predicting Australia's unemployment rate stretching as far back in time as three decades.

The most recent NAB survey indicated the availability of suitable labour is now a constraint on output for many a local business (17%) with the numbers now suggesting the situation is most difficult post-GFC.

Yet, Macquarie continues to warn against expectations of an outbreak in wage inflation in Australia anytime soon. Officially, the in-house view is for an RBA hike in August, but the accompanying fine print explains the risks are skewed to "later".

If anything, point out the economists, neither the RBA or the businesses themselves are expecting much in terms of near term improvement. The NAB survey shows businesses are expecting wage outcomes in enterprise bargaining agreements (EBAs) to average 2.6% over the next year, up from around 2.25% a few quarters ago.

It'll have to be more to move the RBA from its current we wait and see approach.


Analysts at Morgan Stanley, who are firmly in the no change camp of the discussion, have been publishing some excellent research into the matter of inflation and stretched household budgets. Their findings are essentially summarised in the two graphics below.

Firstly, the chart below shows the RBA's targeted band for consumer price inflation (2-3%) in the form of a rose tinted sideways channel (ahem). The inflation component that is trending well above the channel are "essentials". Think monthly rent, school fees, electricity and water, et cetera.

The fact this part of the CPI basket is trending with upward momentum is keeping the discretionary part of consumer spending under constant and severe pressure. Hence why the latter part of the CPI is trending well below the RBA's target range.


The result for households, as opposed to the RBA, is there is virtually no room left for discretionary spending. The chart below shows a steady decline since 2008 and even with a recent uptick, Morgan Stanley's assessment remains not far off the zero level.


ANZ Bank, until late last week predicting a May rate hike from the RBA, has now changed its view and no longer anticipates any action from the Reserve Bank in 2018.

On Friday, the bank's team of economists explained the move as follows:

"Greater clarity about the RBA's reaction function most likely rules out a rate hike in 2018, in our view. This is a shift from our previous expectation of two rate hikes.

"In a speech on 8 February, the RBA Governor emphasised the need to make progress toward the mid-point of the target band before tightening policy. Previously we had thought stabilisation around the bottom of the band would be enough for the RBA to start removing the additional accommodation it put in place in 2016.

"We think it important to note that the RBA emphasis is on “further progress,” rather than actually reaching the mid-point. This implies to us that the RBA doesn’t need inflation at the mid-point before it tightens. We think wages will be the key input into its assessment of whether sufficient progress is being made.

"Our forecasts have the Wage Price Index (WPI) above 2.5% by the end of 2018. We think this will provide the evidence of progress that the RBA requires. But we won't know if this is right until the latter part of February 2019. Which points to May 2019 as the earliest likely timing for the first rate hike, in the absence of wage pressure emerging earlier than expected. We are refraining from making an explicit call on timing in 2019, for now, other than to say we think two rate hikes are more likely than not.

"The RBA has lowered its forecast for unemployment in what was otherwise a largely unchanged set of forecasts in the February Statement of Monetary Policy. We would highlight its underlying inflation forecast of 2¼% for June 2020."

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, Trading Day Live, noon-2pm
-Friday, 11.10am Skype-link to discuss broker calls

Rudi On Tour

-Presentations to ASA members and guests Gold Coast and Brisbane (2x), in June
-Presentation to ASA members and guests Wollongong, in September

(This story was written on Monday 12th February and Tuesday 13th February, 2018. This first part was published on the Monday in the form of an email to paying subscribers at FNArena, and will be published again on Wednesday as a story on the website. Part two shall be published on Thursday).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: or via the direct messaging system on the website).



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(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

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