The RBA now has a reason to keep rates on hold

1. Inflation rises - but it's not all bad news

2. Rex is too important to be grounded

3. Rio kicks off high-pressure earnings season

4. Investors look for safety

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- Sean Aylmer

Inflation rose by 1.0 per cent in the June 2024 quarter, and 3.8 per cent for the full year, according to the Australian Bureau of Statistics. The annual figure is the first uptick since late 2022. That's the bad news. The good news is that the trimmed mean annual inflation rate, which takes out some of the volatile items, fell slightly to 3.9 per cent. Depending on their view going into the ABS release, economists will argue the figures support another rate hike, or support the view that rates will remain on hold. I'm in the latter camp. The tough bit for the Reserve Bank is that the economy is slowing. While the employment market has remained remarkably resilient, unemployment is trending higher. We have seen a sharp slowdown in the retail sector and in the construction sector. The number of insolvencies hit a record last financial year. There is a bit of a catch-up post COVID but still businesses are going broke. On a per capita basis, we are in a recession already, even though the last economic growth figures suggest an expansion just over one per cent. The Reserve Bank doesn't want to put the economy into recession. The inflation figures show that price rises remain too high, but the trimmed mean measure gives the central bank a reason not to move.

Australia's greatest aviator, Charles Kingsford-Smith, taught our second-greatest aviator, Nancy Bird Walton, how to fly a plane. (Feel free to argue my rankings of aviators). Nancy Bird, as her husband called her, got her first commercial job flying between towns in regional and remote NSW for the Far West Children's Health Scheme (now Royal Far West) primarily delivering medical supplies and looking after mothers and newborns. Kingsford-Smith was a big supporter of the Scheme, giving a grant of £1100 to keep the service running. The story highlights that the bush has always been central to the airline business in Australia. The demise of Regional Express (Rex) is sad, and probably inevitable given some dumb management decisions, like taking on Qantas and Virgin in the Brisbane, Sydney, Melbourne triangle. At this early stage, it looks like Rex, assuming it comes out of administration, is going back to its knitting - servicing regional towns. Shareholders have lost out, particularly Singaporean businessman Lim Kim Hai and private equity group PAG. Together they own the large majority of the airline. Generally I don't support government intervention in market dynamics, but this is different. Rural Australia deserves the support of Canberra. It is important that Rex keeps flying.

The Chinese are back buying Aussie wine. That should be something to celebrate. But I'm not sure it is. Since Beijing dumped prohibitive tariffs, effectively restarting the trade, sales to China have surged from about $8 million in the 2023 financial year to $400 million worth last financial year. That's 33 million litres of wine. Almost all the sales occurred in the June quarter. Mid-priced wine - worth at least $20 a bottle - drove the increase. Wine Australia, which provided the figures, said most of the jump reflects restocking of retailers, rather than consumer sales. Read a little deeper and the news isn't great. Consumption of wine in China, domestic and imported, is less than a third of what it was six years ago. It's early days, but the number of Aussie exporters to China is only about one-quarter the level of pre-tariff imposition. Looking beyond China, exports to the rest of the world last financial year fell by four per cent to 587 million litres, reflecting a drop off to North America. It's the lowest volume in twenty years. There still isn't much to celebrate in the wine industry.

There is an almost audible flight to safety going on in investment markets at the moment. The immediate reason is Israel's overnight attack on Lebanon's capital, Beirut, which killed a military commander of Iranian-backed Hezbollah. The threat of all-out war in the Middle East is real. Beyond the geopolitical crisis, the uncertainty around interest rates is weighing on markets, and favoured Wall Street stocks have fallen sharply - Nvidia is off 23 per cent in the past three weeks, Microsoft is off nine per cent and Apple has fallen back six per cent. There's also the China problem - the recent Third Plenum did little to engender confidence about further stimulus from Beijing. Equity markets in Australia and the US are below their peaks of two weeks ago while commodity prices are generally lower. Meanwhile gold, considered a safe haven, has rallied and is now fetching over $US2400 an ounce. The other major safe haven asset is the US dollar. Having depreciated earlier in the month, it is again strengthening against many currencies, and the Aussie dollar has fallen back to 65.4 US cents. The flight to safety could go on for the rest of the year, and if the Middle East escalates, it will be time to batten down the hatches.

Australia's third largest miner, Rio Tinto, made a net profit of $US5.8 billion ($8.9 billion) over the six months to June, with the result close to expectations. The result was driven by improved earnings in its copper and aluminium operations. Its iron ore business remains the dominant breadwinner, although profits were down ten per cent on a year earlier. In response to this morning's announcement, Rio's share price initially rose more than two per cent. Rio is the first major to report this June half earnings season on the ASX. The response from investors was positive, but I don't think that will be the case with many companies. Given how hard the sharemarket has run, "close to expectations" might not be enough. The market is priced to perfection, meaning to support the current high valuations, companies need to report near flawless results. That is almost impossible and we might see some big sell-offs over the month of August. The trend in the US and Europe for the June quarter earnings season, which is about 40 per cent complete, is results have been on expectations, but there are plenty of warnings about a softer outlook. Many stocks have been sold off. That is likely to be the case here as well. 

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