A rate cut could be on the way. Why that could be a problem
This weakness is surprising. Economists had expected that, by now, lower inflation and lower mortgage repayments would have fired up spending. What has held back the spending rebound?
IFM Investors chief economist Alex Joiner points out that consumers measure the cost of living not through the inflation rate but how expensive doing the shopping feels. And on that front, he says prices are still 20 to 25 per cent higher than they were in 2019.
The recovery in wages and slowdown in inflation of recent years has not yet made up for the hit that households took from the post-COVID surge in inflation. 'Household incomes are starting to grow, but there's a long way for them to catch up,' Joiner says.
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The Commonwealth Bank says there appears to have been 'scarring' from the cost-of-living crunch, so households now appear more focused on saving and paying down debt.
CBA senior economist Belinda Allen says this looks like the result of how households are feeling, as opposed to a change in their financial capacity to spend. 'They are just more wary to unleash that spending potential,' she says.
That wary attitude can cause problems for the economy because household consumption accounts for more than half of gross domestic product.
What can the Reserve Bank do about this cautious household mindset?
It really has only one weapon – moving interest rates – and the market is convinced that there are significant rate cuts coming. Financial markets are betting there will be three or four interest rate cuts over the next year in an attempt to convince households to open their purse strings.
The challenge is that cutting interest rates clearly has all sorts of other economic impacts aside from its effect on household cashflows. Most obviously, rates can have a big influence on house prices.
House prices have risen for five months in a row, and analysts say the February rate cut was a turning point for the market. Prices are rising at an annualised rate of almost 6 per cent a year, and it wouldn't be surprising if that growth rate accelerated in response to more central bank rate cuts. In short, rate cuts appear to be affecting the housing market much more quickly than they're affecting household spending.
The Reserve Bank has distanced itself from the issue. In May, Bullock said there was nothing the Reserve Bank could do about the affordability of housing, which is related to an 'imbalance' between housing supply and demand.
All the same, some economists believe the Reserve Bank faces a puzzle in balancing the effects of interest rates on housing and consumer spending.
UBS economist George Tharenou last month called it an 'RBA conundrum': that interest rate cuts are having only a muted impact on household cashflows while giving asset prices (mainly houses) more of a boost.
The Reserve Bank says it doesn't set interest rates based on house prices, and that's fair enough. But it can't entirely ignore them either. Indeed, Tharenou says the risk of putting upward pressure on house prices should limit how willing the Reserve Bank is to cut interest rates too aggressively.
In the past, the Reserve Bank has generally raised concerns about the housing market when prices are booming and when it's coupled with a sharp lift in credit growth or more risky borrowing. There are no signs of that happening now – the latest figures showed housing credit growth was 5.8 per cent, which is hardly a boom.
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Even so, the central bank faces a tricky balancing act in how deeply it can cut interest rates to perk up gloomy consumers without also adding fuel to a housing market that is already showing firm signs of warming up.
It's a puzzle that reflects the nation's sky-high house prices, which have built up over decades – and it's one that the central bank board will continue to face whatever it decides on Tuesday.
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Sydney Morning Herald
13 hours ago
- Sydney Morning Herald
Fast food fixer: 83-year-old Hungry Jack wants a five-minute plan for Domino's Pizza
But the conditions for success during that era were some of the best the pizza chain could have wished for. COVID-19 lockdowns keeping everyone at home created huge – but temporary – demand for food delivery. Fast-food customers and investors alike were grabbing a slice of Domino's, which reached a share price record high of nearly $160 in September 2021. Since then, however, it hasn't capitalised on their flash-in-the-pan success. Pizza sales have stalled. Profit predictions were downgraded three times in a year. 'It has been this huge growth story for a long time. The last two or three years hasn't [delivered] any growth,' said investment banking firm Barrenjoey's head of consumer research, Tom Kierath. Investors fled the stock after van Dyck's resignation was announced, sending the share price to little over a tenth of that peak to $16.96. Cowin was aware of the need to reassure rattled shareholders, with van Dyck's departure coming so soon after Meij's. The billionaire businessman has a personal stake – 25.7 per cent – in fixing this. 'The business has got to do better. We're custodians of other people's money,' he said. 'But to make this business successful, we have to have growth, and we have to do it now, rather than on a long-term basis.' What's gone wrong at Domino's? Domino's problems didn't appear overnight. Many of the competitive edges that once made it a market leader have eroded over years. Meij sought to make Domino's website and app best-in-class, spending nearly $23 million in half a year alone on digital platforms. The investment doesn't appear to have generated high returns. 'You had the Peloton bubble, you had the Lululemon bubble with everyone buying casual wear, and we had this Domino's bubble because they were digitally well advanced beyond anyone else,' said food industry consultant and Titanium Food director Suzee Brain. 'That gave them inflated confidence that they were the new flavour of the month. So they started some really massive expansion off the back of a false economy.' The rapid store roll-out across Europe and Asia, once a major sales driver, was reversing. In Australia, Domino's couldn't keep the sales spurt they enjoyed during the pandemic. 'They weren't able to keep a lot of those customers, because there's another problem: the product is not all that great,' said Brain. 'They've never marketed it because they make great pizza … But now, it actually needs to be about the pizza.' Domino's is now facing a more competitive and diverse fast-food landscape, where players such as Guzman y Gomez and El Jannah are attracting younger customers and US chains Five Guys and Wingstop are keen for their slice of the market. As Australia's dominant pizza chain, industry watchers believe Domino's must advocate more effectively for the entire pizza category. Loading 'As part of your, 'what we do for the kids, for a family eating Sunday evening dinner' [considerations], does Domino's become part of the conversation more than it currently is? That's the opportunity,' said one industry analyst who declined to be named. The business must become more profitable, Cowin has told investors. Ideally, this would happen through a sales uplift, but as there's no guarantee of that, costs need to be pulled out of the business. As delivery aggregators Uber Eats and DoorDash eat Domino's lunch, IT spending has been an early target. 'Our technology is not any better than the Uber's and the other people that we have to deal with,' said Cowin. 'If you don't have a competitive advantage, let's stop trying to recreate the wheel.' Franchisee profitability is now a key priority for Domino's, with weekly store sales ranging from $30,000 a week to $100,000, Cowin revealed. But margins were eroded by the spurt of high inflation across ingredients such as cheese as well as wages, fuel and electricity. Meij tried to pass this on by imposing a 6 per cent delivery fee, which backfired with customers who punished the move by buying fewer pizzas. 'Relative price point becomes very important,' said Ten Cap co-founder and lead portfolio manager Jun Bei Liu. 'This price increase for the fast food category was just so wrong.' Several fund managers, stock pickers and analysts believe at least some dead weight needs to be shed. Domino's should sell France and exit Japan, said outspoken stockbroker Angus Aitken. Barrenjoey's Keirath agrees. 'If they get Taiwan, right, is it going to move the dial? No, it's becoming a distraction. The same in Malaysia,' he said. 'What you do by staying in those markets is you dilute the core markets.' Who's up for the job? Recruitment is under way for Van Dyck's replacement. But they will have to be someone who will have to play by the rules laid out by Cowin, who has made it clear he wants to see rapid change. Loading 'If you have a strong chair in place [who has] already said to the market, 'well, that guy is not there because he's not delivering on costs', then the next person has to subscribe to that view,' said Ten Cap's Liu. 'When you have to focus on costs, you got to be a tough person. You can't be a nice guy.' And there are plenty who think Domino's is still a good deal, such as Morningstar equity analyst Johannes Faul, who said the leadership instability has injected uncertainty in the short-term but described the pizza chain as 'a robust brand of the future'. 'We do think Domino's still has growth ahead of it. Quite significantly so,' Faul said. Aitken said there was still a 'huge mass market' for Domino's products. 'The demise of Domino's as a product is not apparent to us,' he said. 'We think backing the number one [quick-service restaurant] money-maker over 50 years, when he has no friends, is a great time to back Jack Cowin and Domino's.' Turning things around could take three years. 'Jack might be in his 80s, but is hands-on and can fix this with the right team.'

The Age
13 hours ago
- The Age
Fast food fixer: 83-year-old Hungry Jack wants a five-minute plan for Domino's Pizza
But the conditions for success during that era were some of the best the pizza chain could have wished for. COVID-19 lockdowns keeping everyone at home created huge – but temporary – demand for food delivery. Fast-food customers and investors alike were grabbing a slice of Domino's, which reached a share price record high of nearly $160 in September 2021. Since then, however, it hasn't capitalised on their flash-in-the-pan success. Pizza sales have stalled. Profit predictions were downgraded three times in a year. 'It has been this huge growth story for a long time. The last two or three years hasn't [delivered] any growth,' said investment banking firm Barrenjoey's head of consumer research, Tom Kierath. Investors fled the stock after van Dyck's resignation was announced, sending the share price to little over a tenth of that peak to $16.96. Cowin was aware of the need to reassure rattled shareholders, with van Dyck's departure coming so soon after Meij's. The billionaire businessman has a personal stake – 25.7 per cent – in fixing this. 'The business has got to do better. We're custodians of other people's money,' he said. 'But to make this business successful, we have to have growth, and we have to do it now, rather than on a long-term basis.' What's gone wrong at Domino's? Domino's problems didn't appear overnight. Many of the competitive edges that once made it a market leader have eroded over years. Meij sought to make Domino's website and app best-in-class, spending nearly $23 million in half a year alone on digital platforms. The investment doesn't appear to have generated high returns. 'You had the Peloton bubble, you had the Lululemon bubble with everyone buying casual wear, and we had this Domino's bubble because they were digitally well advanced beyond anyone else,' said food industry consultant and Titanium Food director Suzee Brain. 'That gave them inflated confidence that they were the new flavour of the month. So they started some really massive expansion off the back of a false economy.' The rapid store roll-out across Europe and Asia, once a major sales driver, was reversing. In Australia, Domino's couldn't keep the sales spurt they enjoyed during the pandemic. 'They weren't able to keep a lot of those customers, because there's another problem: the product is not all that great,' said Brain. 'They've never marketed it because they make great pizza … But now, it actually needs to be about the pizza.' Domino's is now facing a more competitive and diverse fast-food landscape, where players such as Guzman y Gomez and El Jannah are attracting younger customers and US chains Five Guys and Wingstop are keen for their slice of the market. As Australia's dominant pizza chain, industry watchers believe Domino's must advocate more effectively for the entire pizza category. Loading 'As part of your, 'what we do for the kids, for a family eating Sunday evening dinner' [considerations], does Domino's become part of the conversation more than it currently is? That's the opportunity,' said one industry analyst who declined to be named. The business must become more profitable, Cowin has told investors. Ideally, this would happen through a sales uplift, but as there's no guarantee of that, costs need to be pulled out of the business. As delivery aggregators Uber Eats and DoorDash eat Domino's lunch, IT spending has been an early target. 'Our technology is not any better than the Uber's and the other people that we have to deal with,' said Cowin. 'If you don't have a competitive advantage, let's stop trying to recreate the wheel.' Franchisee profitability is now a key priority for Domino's, with weekly store sales ranging from $30,000 a week to $100,000, Cowin revealed. But margins were eroded by the spurt of high inflation across ingredients such as cheese as well as wages, fuel and electricity. Meij tried to pass this on by imposing a 6 per cent delivery fee, which backfired with customers who punished the move by buying fewer pizzas. 'Relative price point becomes very important,' said Ten Cap co-founder and lead portfolio manager Jun Bei Liu. 'This price increase for the fast food category was just so wrong.' Several fund managers, stock pickers and analysts believe at least some dead weight needs to be shed. Domino's should sell France and exit Japan, said outspoken stockbroker Angus Aitken. Barrenjoey's Keirath agrees. 'If they get Taiwan, right, is it going to move the dial? No, it's becoming a distraction. The same in Malaysia,' he said. 'What you do by staying in those markets is you dilute the core markets.' Who's up for the job? Recruitment is under way for Van Dyck's replacement. But they will have to be someone who will have to play by the rules laid out by Cowin, who has made it clear he wants to see rapid change. Loading 'If you have a strong chair in place [who has] already said to the market, 'well, that guy is not there because he's not delivering on costs', then the next person has to subscribe to that view,' said Ten Cap's Liu. 'When you have to focus on costs, you got to be a tough person. You can't be a nice guy.' And there are plenty who think Domino's is still a good deal, such as Morningstar equity analyst Johannes Faul, who said the leadership instability has injected uncertainty in the short-term but described the pizza chain as 'a robust brand of the future'. 'We do think Domino's still has growth ahead of it. Quite significantly so,' Faul said. Aitken said there was still a 'huge mass market' for Domino's products. 'The demise of Domino's as a product is not apparent to us,' he said. 'We think backing the number one [quick-service restaurant] money-maker over 50 years, when he has no friends, is a great time to back Jack Cowin and Domino's.' Turning things around could take three years. 'Jack might be in his 80s, but is hands-on and can fix this with the right team.'


Perth Now
14 hours ago
- Perth Now
The piece of data that could decide next rate decision
Traders, economists and mortgage holders will be locked into the Australian Bureau of Statistics website this week for a piece of data that could determine whether the Reserve Bank cuts interest rates next month. Minutes from the RBA board's last meeting confirmed the central bank was holding out for more signs inflation was on track before cutting again, highlighting the importance of Wednesday's quarterly consumer price index. AMP chief economist Shane Oliver believes an annualised result of 2.8 per cent or below for the RBA's preferred trimmed mean measure would clear the way for another rate cut in its August 11-12 meeting. But anything higher and we could be in for another hold. Dr Oliver predicts the trimmed mean will come in at 2.6 per cent year-on-year, down from the 2.9 per cent figure in the March quarter and close to the midpoint of the RBA's 2-3 per cent target range. "Expect solid increases in prices for clothing, health and travel with a modest rise in new dwelling costs offset by softness in transport and petrol prices, communication, education and insurance," he wrote in a research note. "However, as the RBA has noted, some of the components in the recent monthly CPI suggest upside risk to the trimmed mean inflation." The market consensus is for a rise of 2.7 per cent, which would be higher than the RBA's forecast of 2.6 per cent. Even higher than that and it could cause the market to rethink its near certain odds of an August rate cut. "The money market sees a 98 per cent chance of an August rate cut, which is probably a bit too high," Dr Oliver said. "We would put it at around 80 per cent." On Thursday, economists will gorge on a feast of data as the ABS releases retail trade, building approvals and international trade price figures. The retail print is the last the bureau will produce before it switches over to a more comprehensive measure of consumption, the monthly household spending indicator. "Appropriately, monthly sales look set for one 'last hurrah' with the June update expected to see a robust one per cent gain - the best monthly result since Jan 2024," said economists from Westpac. But the gain mainly reflects a bounce back from soft sales in previous months, they said, as consumers struggle to gain momentum following the loss of purchasing power during the post-pandemic inflation spike. Property analytics firm Cotality will update its home value index on Friday, with prices expected to continue to be propelled upwards as falling interest rates boost buyer demand. Investors on Wall Street are meanwhile optimistic the US will soon reach a trade deal with the European Union. Indices notched record high closes on Friday ahead of European Commission President Ursula von der Leyen's meeting with Donald Trump in Scotland on Sunday. The S&P 500 climbed 0.40 per cent to end the session at 6,388.64 points. The Nasdaq gained 0.24 per cent to 21,108.32 points and the Dow Jones Industrial Average rose 0.47 per cent to 44,901.92 points. Australian share futures were down 5.0 points, or 0.05 per cent, to 8,360. The benchmark S&P/ASX200 index on Friday dropped 42.5 points, or 0.49 per cent, to 8,666.9, while the broader All Ordinaries was down 45.1 points, or 0.5 per cent, to 8,934.3.