Business Now | 10 September

0:00This is business now with Ingrid Willing. Hello and a warm welcome to Business Now. Thanks for your company. I'm Ingrid Willing. Coming up on the programme and a dive for the Australian share market to a seven week low as oil pushes above the $100 mark. Thanks to an escalation of intentions between the US and Iran, we'll chat with Vivek Dar from CBA for his take on just how much higher it could go in just a moment. Classed just a couple of weeks out from the RBA's next interest rate decision where the chances of a rate hike are rising, we'll chat with Harry McCauley from Oxford Economics about just how the RBA expects to balance the latest downturn in housing with inflation that just won't budge. An Australian 10 year yield hit a fresh 15 year high as US Treasury yields also climbed to their highest level since 2023. We'll get more with Johnson Sheridan at FIG Securities a little later in the programme. That's all coming up. First though, let's take a look at some of the other stories you should know about.

1:00And the government has confirmed it will soften its 20% gas reservation plan by requiring Australian gas producers to supply up to 20% of the domestic gas market rather than a set commitment. But Energy Minister Chris Bowen insists it's no back down. No, we don't see that way at all. We see a sensible calibration taking on board feedback from players. The 20% figure is still the absolute core of the policy, but there's no point reserving gas to the Australians don't need. A government release suggests volume would more than cover the potential shortages forecast by the Australian and Energy Market operator. The scheme also reflects a six-month delay to the policy announced earlier this year, now beginning on January 1st, 2028, rather than January 1st July of 2027. Well, the video is making a big investment into Australia, signing deals with data centre operators locally for extra capacity. The tech behemoth will deliver two gigawatts of capacity by 2027, collaborating with firmness,

2:02air trunk, next DC, CDC, Sharon AI, iron, reset data and mega port. The way it will work is the providers will operate the AI factories while Nvidia will deliver the DSX compute infrastructure. Nvidia says it will give Australian businesses greater access to accelerated computing and support global demand for AI compute. And Queensland could see a credit rating downgrade as early as tomorrow, according to the AFR, a downgrade by S&P to AA could be in the works due to the bond market meltdown where global bond yields have pushed levels not seen since 2011. It hit to stamp duty would also be in focus after the government's federal budget tax overhaul earlier this year. Of course, the AA plus credit rating has been on negative outlook by S&P global ratings since February of last year. Let's head to the boards now and take a look at how markets have tracked and it's been an absolute horror session to be Australian market today with the ASX diving at one point it was heading for its worst day in six months with about $45 billion.

3:07Why, it did come off the lows though to close down just over a percent. So certainly close to the highs the day you could say it comes as the oil price surges above $100 and concerns around rate hikes take over. All but one sector ended in the red today. Taking a look at the best performance today, only a handful of stocks in the black, EGAs automotive was higher by about 3.1%. After announcing it would acquire a 50% stake in Zagame Auto Group, which generates about $600 million in annual revenue. So looking at Santos today, it was stronger by about 0.1% after the government back down on its gas policy now requiring Australian gas producers to supply up to 20% of the domestic gas market rather than the second stone percentage. This of course benefits Santos and a lot of those other gas players and Ramsey healthcare stronger as well was up by about 8% at the end of the session today. Looking at some of the worst performers on the market a lot to choose from today, West Gold was down by close to 6% as investors disappointed with its FY27 guidance and three

4:10year outlook which was released. Nine entertainment also weaker. It was close to 5.5% weaker after spending $830 million on a new six year streaming and broadcasting contract with the English Premier League and Grand Corp weaker by 4% after pushing back a major tech overhaul, also cutting 80 jobs. It did though confirm its earnings guidance for 2026 financial year. It wasn't enough though to get investors on board in the stock today. Well, as we've been hearing, the price of oil is broken through a key psychological barrier topping $101 a barrel. It wreaked havoc on equity markets globally and left investors concerned about inflation risks going forward. It comes as tensions between the US and Iran have no signs of easing and energy supply continues to be in focus. Let's get more now which I'm going to have a vector ahead of commodities at CBA for the next week. Pleasure to have your company on the program today. So above that $100 mark, even getting to $101, this is all about the war commentary from Donald Trump doesn't like attending anytime soon.

5:11Look I think that's exactly what's driven it particularly recently because what we're seeing is the talk that this conflict could be resolved, you know, until after the mid terms in November. I think the market is now having to price in weeks of potential high tensions between US and Iran and that has really opened the door to worries at one. We're not going to get that much flow through the straight of our moves and two that global oil and refined stock piles may face the pleasian risks. And I think that's why the market has reacted as it has and we are now nearly on the cusp of crossing the previous highs which were touched on the 24th of July. So we are very much in that zone. Yeah, it's interesting that you mentioned in your research when it comes to pre-war oil flows, you don't actually need full capacity of shipments to keep global oil and refine product inventories unchanged. Can you just talk us through what we need to see then? Sure. So look, in terms of what has almost been the the midigence in terms of what's happened to the oil market so far is that one, we have pipeline bypasses through the straight

6:15of who's the main one being the Saudi pipeline. On top of that, we have more X, a Middle East and supply growth, particularly from the US. And then on top of all that and perhaps the biggest surprise for this year was we've seen China come in as a major stabilizer and meaningfully reduce their imports. Now that's a function of them buying a lot of oil last year for building a stock pile, but that has given the market enormous reprieve. And it means that if we want to get to a balanced market this year, we only need to see flows through the straight of who moves to be about 40 to 45% of pre-war levels. And so that's really the equation that everyone's trying to match and trying to figure out, is that what's coming through the straight or are we seeing something materially less? We are though hearing talk of China actually increasing its imports at the moment going forward. What does that do then to the level of the oil price? And I think that's the big question. Is that what has given risk to a lot of these factors is one and the big one is China. There is evidence that their buying has reemerged.

7:17The way near as what it was at pre-war levels, but enough to spook the market that maybe we can't rely on them as being the stabilizer that they were just a few months ago. So that is certainly one factor that is pushing up that oil price. The second one which really got released this morning was the supply growth projections from X-Middle East and supply. So supply outside the Middle East. It's actually been downgraded for 2026. And that has meant this market is now facing increasing risks of shortfall. So we still think 40 to 45% is the number. But clearly the risk is that that might be higher and that's coming at the wrong time. So how much higher can the oil price get from here? What's the next sort of leg up, I guess, if we do see those catalysts come to fruition? So the major worry right now is if we do see inventory depletion happening, right? And that would really be a function of flows through the straight overmoose being closer to 20% of pre-war levels. Then we have to face the reality that emerging Asian economies might see uncontrolled demand

8:20destruction. That's when prices are so high they cannot afford to pay for oil, but they'll bid up oil and refined products even higher. And that in our calculation, if we want to see in history when that had been repeated, we'd have to see oil basically get up to about $150 dollars a barrel. So that is what you're playing with if this conflict keeps going on. But I should warn that US policy is very difficult to predict. And if we go back to the 24th of July, when prices got to $100 and particularly when the WTI, oil benchmark got close to $100, we saw US policy pivot from aggression due to diplomacy. And that's something to keep watching because that's something I could play out this time too. Yeah, it's interesting. And I guess that comes into my next question of it. If a resolution was to come for the war, is there a flaw on this price? Is there a lag, I guess, to get everything back to pre-war normal? So I would split this in two ways. One is I think there is enough oil globally. So we could see oil prices fall very quickly and it could get down to words that $70 to

9:25$80 dollars a barrel level. If we started seeing flows through the straight of humours, which was even equivalent to 50% of pre-war levels. So if the market has confidence around that, we could see that little of falling oil. But what is probably more sticky is that diesel price. Because what we're seeing is you have all these potential bypasses for crude oil, but you don't have that for refining products in particular diesel. And so that market may take longer to recover. Just briefly, obviously the government today here locally softening its 20% gas reservation plan. So that just how it plays out for the gas players here at home. So look, I think that 20% strict domestic supply obligation was a scenario, but I think everyone saw it as most likely a cap. And like we've modeled this in a lot of detail. And what we found was the most likely outcome was it was only going to be about 11 to 13% until 2030 and then ratchet up to 13 to 15% from 2031 onwards until 2035.

10:27So we had that expectation built in. So I don't think that's a huge surprise to market analysts, but really the devil will be in the detail because right now there's a lot that's unknown, but clearly there's been an attempt to make sure that any new gas that comes in is additional and forcing and oversupplying the domestic market. And as I said, we've seen mild gains in some of those players today. Great to have you company Vivek. Thank you so much for joining us on the program. No, it's thank you. Time for quick break. Coming up, a fourth interest rate hike for the year looking more and more likely when the RBA meets this month. We'll talk the chance of a recession off the back of it with Harry McCauley from Oxford Economics next. Welcome back to the program. It's been a tough week for the housing industry with the collapse of property developer Bathler, a number of economists downgrading their forecast for property prices and inflation, pushing construction costs higher. And now we're staring down the barrel of another interest rate hike from the RBA at the end of the month. Has investors wondering is a recession coming? Well, for more on this and how the RBA is set to balance the risks of the meeting in

11:29a couple of weeks time, I'm joined by Harry McCauley. He's from Oxford Economics in the studio with me now. Harry, pleasure to have you on the program. Thanks for joining me. So RBA meeting in a couple of weeks. Just a few weeks ago, it was basically price that we'd be on hold. A lot of economists have shifted their view now expecting a hike in a couple of weeks time. Where do you sit? Yeah, we think we're definitely thinking there'll be a hike by the end of the year. If not September, then definitely in November. There's been a few things come through since the board last meeting in August. I mean, there was an unanimous decision to hold, but the sort of tone from the statement and from the meeting notes was incredibly hawkish. That was kind of a lot of focus on the fact that inflation is still too high. And these kind of comments have been reiterated even as sort of recently as this week with a couple of very senior members of the bank coming out and re-emphasising this. On top of that, we've had plenty of data that can add it sort of another bullet in the chamber, I suppose, for the bank should they decide to go in September.

12:31Most recently, national accounts, we got growth, annualised growth, was 2.1% to the second quarter of this year, which is above banks' expectations and probably a little bit above their estimates of potential output. Are you surprised growth is holding up so well and even to an extent household spending? I mean, we obviously did, you alluded to Andrew Houser, who spoke, of course, on ABC earlier in the week, talking, saying, you know, inflation is making consumers furious. I think that's pretty strong language from him there. But are you surprised that we are seeing this sort of growth continue? Yeah, it's been interesting to see the household spending data be so resilient. But I do think we need to look at the composition a little bit. If we just take what happened in Q2, looking at volumes, two-thirds of consumer spending was on new vehicles, which realistically is just spending being brought forward. And we don't expect that to be a persistent theme kind of through the rest of the year or into next year. You know, at the same time, we have seen a lot more price in price terms, spending on discretionary

13:34categories. But it is a surprise. You know, we have had 75 basis points of highx already this year. Property prices are falling. There's a lot to suggest that households would tighten their belts, but they've proven to be pretty resilient. It's such a balance. And the RBA has got to strike that balance with a very blunt instrument, such as monetary policy, which really hits, you know, some of the economy and other parts it doesn't hit. You've got house prices, if you say plunging, there is a multiplier effect of that, right? So how does the RBA balance, you know, this talk that the next type could cause a recession from some, you know, analysts in the market? What's your take on that? I mean, how, how finely balanced is that towards a recession? We don't think a recession is particularly likely. And there's a couple of reasons for it. I mean, like you know, we've said private consumption has slowed and we don't really see, you know, households bending being the big driver of the economy in the short term. Same thing with government consumption. It's also slowed. They're not really expecting to see it being a big contributor to growth. But the other thing that is starting to play out now is investment.

14:36Business investment has exploded. We've got generational kind of work to be done in data centers, in utilities, in residential, of Brisbane, Olympics, early works are all about to start. So there's a huge pipeline of work to be done just within business investment. And that's kind of where we see the main chunk of the growth coming up. It's really interesting you mentioned that because AI has been a big thing and all this spending on AI data centers, you know, billions of dollars being spent, obviously as the inflation picture. But do you almost see this as sort of good inflation in a way? Because it does turn to be deflationary eventually. Yeah, I mean, good inflation's a tricky one. I think at this point we don't need any more inflation. We've got more than we need. But yeah, I suppose it's for the greater good. If we're thinking about it in the longer term, you know, a big challenge that we have at the moment is it's kind of around capacity and really around having a really tight, you know, unemployment is kind of still tight. It's softening, but when we look at things like vacancies in trades, it's not uniform everywhere.

15:39But generally speaking, we do have a structural under supply of trades people. The kind of leading indicators of apprenticeships and starters is weakening, which is a bit of a problem. When we're thinking we're trying to do three, four, five things if we, you know, add in defense, you know, later in the decade, all of this work needs to be done. On a pretty similar timeline and it's pulling from a relatively similar pool of trades. So that is a big challenge. Yeah. And as you mentioned there, you know, the RBA has got dual mandate, right? Jobs and inflation, but it does seem like inflation takes priority at the moment. Yeah. Look, I mean, I think with the looking at the kind of like estimates of where unemployment sits relative to kind of natural unemployment, it's still probably a little bit tight in the market. And you know, inflation is unambiguously above kind of the target band. I mean, headline has come down, you know, it's three and a half percent in July down from sort of 3.8 the month before. But really the issue is trim and inflation still at 3.6 percent annualized, which is way

16:44too high. And that's stripping out things like fuel prices. So it's amazing to see. But anyway, we'll get more detail on that in a couple of weeks time when the RBA meets Harry. Appreciate your time on the program. Thanks so much. Thanks for having me. All right, we've got to take quick break coming up next. The yields continue to soar as expectations for rate hikes in both Australia and the US look more likely. So is this why investors ignored Scott Bessent $6 billion move overnight? We'll get more details with big securities next. Welcome back to the program. Well, the bond market was hotly anticipating US Secretary of Treasury Scott Bessent's intervention overnight, waiting to see just how much he was willing to pull strings to curve the exponential rise in bond yields. And in the end, it just wasn't good enough. Despite Bessent actually expanding the buyback program in a larger volume than originally committed with a plan to buy back $6 billion US dollars worth of government debt, the market wanted to see a more drastic move. What does this mean for bond markets going forward and here in Australia too with 10 years surging today for more? I'm joined in the studio by Jonathan Sheridan at FIG Securities.

17:44Jonathan, great to have you company on the program today. Thanks so much for joining us. I guess Bessent's move didn't have the desired effect. He did say he was the house, but it hasn't proved to be that way. So, what do you think investors have come out on top? Yeah, absolutely. Look, I think a couple of important things to understand about this is that $6 billion sounds like a lot of money, but in terms of the US Treasury market, it really is not a lot of money at all. They've got about $5.5 trillion outstanding in the 10 to 30-year tenor, which is where this buyback program is targeted at. So it's sort of half of 1% of the outstanding stock in that longer end of the yield curve where he's targeting these buybacks. So, I mean, given his background, he was at Quantum Fund with Soros and Druck and Miller when they broke the Bank of England. So they know what the other side of that trade looks like. I think he was maybe hoping for a bit of a reaction, but I can't see that he actually thought it was ever going to do anything with it. So, drop in the ocean, a grandstanding type move, but do you think he'll want to move further

18:44now to see if he can actually make a mark? Look, I mean, clearly they want to get yields lower. Trump has been very, very vocal about wanting rate cuts. You know, new Fed chair warship is under a lot of pressure to deliver those. The problem is that in the US, mortgages, for example, are priced off the 30-year government bond. And so that's where the yields are really rising at the moment. So I think they're trying to use a lot of tools around, you know, not the actual physical tools they have because they're quite blunt instruments like the Fed Funds rate, for example, similar to our RBA cash rate here. They need to try and influence the market. But, you know, you can't really talk the US Treasury market into doing what you want it to do. So, I think this is a liquidity operation, as they said. In the Treasury market, they have two different types of treasuries. They call them on-the-run and off-the-run, which are the most recently issued ones and the most liquid, the on-the-run bonds. It's the other ones that they're trying to target with these buyback operations. So just to improve the liquidity, I think if there was a side benefit of getting yields lower, then they would have taken that.

19:46Because, as I said, you know, with the 30-year yield influencing mortgage rates and so on, they don't want to see that higher. But, yeah, I think in this instance, certainly that hasn't worked. And, strictly at odds, we've got the Fed needs to do, which is hike rates and that obviously impacts yields. But can we take it back to basics? What is creating such a big move in the bond market? Is it a mixture of inflation and higher interest rates? Is that... Yeah, look, I think there's a bit of a perfect storm that's happening at all at the same time. You've got the Gulf situation, of course, with the inflationary expectations that higher oil price brings. You've got essentially uncontrolled government spending way over, you know, fiscal deficits of 6% and 7% per annum in the US. And then you also got these hyperscalers coming to market, borrowing, you know, I think it's forecast to be the spend on debt... A data center's next year is 1.3 trillion US. They'll borrow probably at least half of that. And given the ratings of these companies, you know, Google's, Microsoft's and so on up there, with the same rating as the US government, they're crowding out that market.

20:48So there's a massive amount of supply coming to the market and basic economics when supply goes up. Price has to rise to meet it. So... Yeah. Or sorry, price has to fall, but that means yields rising, which is what we're seeing. So there's two or three things, you know, majorly material things that are impacting the market at the same time. So... It's pretty miraculous how AI is touching every single, you know, class, asset class in the market. But what about bond yields here at home? It's Australian 10-year bond yields climbing to 5.27%. It's the highest, it's 2011. Look, it's obviously tracking a similar jump to what we're seeing in the US. How does it impact us here at home? Well, how are Australian yields differing to sort of US treasuries? Yeah, it's been very interesting because structurally we're about 1% higher than the US at the moment across the yield curve. I think we have a similar impact from the global situation. So, you know, if you're a global allocator of capital and you want to place some money into government bonds to get a really, you know, safe, essentially credit risk-free yield,

21:49then you can put those in any government bond market around the world. So if you want to... I mean, you obviously want to diversify as well because you need to manage that geopolitical risk, for example. Australia looks really good on that front. So I'm sure that there's allocations coming our way, but we also have similar issues. You know, we have an economy that's at capacity that's being stimulated by government spending again in the same way. We've got the same inflation repressures as the previous guest was talking about, you know, inflation is just too high here. And long bond yields, if you really want to get to the basics, a long bond yield is growth plus inflation. So, you know, growth of one to one and a half inflation of three and a half ish, you're looking at a long bond yield of somewhere over 5%. That's where we are, you know. I don't think it's rocket science. I think that, you know, it's to be expected. It looks like it's here to stay for a little bit at times. Yeah, Ben Johnson, Sheridan, Fick Security, appreciate your time. Thank you so much. Thank you. All right, that's all for today's program. Thanks for your company. It's now time for the Kenny Report.

22:55With the American Express Platinum Card, I can unlock experiences like no other. Since I'm always booking my next trip, I'd love that I can earn points on travel. Plus, I get a resi benefit, so you know I'm hitting the restaurants everyone's talking about. And you can find out your welcome offer after you apply, which could be as high as 175,000 points. For experiences like no other, there's nothing like platinum. Learn more at americanexpress.com slash explore dash platinum terms apply.