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Fraser Jack
You’re listening to the money market highlights brought to you by Milford.

Roland Houghton
Good morning. It’s Monday the 28th of September, and I’m rolling from Milford. Australian RBA governor Philip Lowe gave a pretty dovish speech last week. He claimed he couldn’t reconcile why the forward curve was implying rate hikes in 2022 and early 2023. essentially saying he didn’t expect to raise rates in the next 18 months. They said they won’t increase the cash rate until actual inflation is sustainably within the two to 3% target range, sustainable for them as defined as comfortably in the middle of the range iE 2.5%. For a couple of quarters, Australian employment data was released and was weaker than expected but the 146,000 less jobs in August compared to July. Despite this, the unemployment rate fell to 4.5%. However, this was entirely due to the participation rate falling, holding the participation rate and labor force flat month and month would yield an unemployment rate closer to 5.7%. Turning to the US August inflation data was released with core inflation growth slowing to 0.1% month on month compared to 0.3% in July. We like to also look at core inflation lists a range of highly volatile more discretionary measures such as vehicle prices, airline fares, hotel costs, etc. And on this measure, core inflation remain quite sticky, increasing 0.24% month on month. It’s also important to note that core inflation excludes food and energy prices. However, these are obviously very important costs for any individual or family. food prices increase 0.4% month on month, slowing from 0.7% in July, but this is still quite high. energy costs also increased 2% month on month, which is a substantial increase. Turning to equity news, Australian companies exposed to iron had a very tough week with Fortescue, for example, falling 11.5% on Friday. This was on the back of iron ore falling another 18% last week, and it has now more than half from its peak earlier this year. evergrande is the culprit and I think it’s worth digging into this a little bit more. evergrande is China’s second largest property developer they had a market cap of almost $230 billion at the start of the year. However, it is now trading at a market valuation of 31 billion. They the most indebted property developer in the world with around 300 billion of liabilities given the highly indebted position they’re in, they’ve had to stop construction on unfinished properties with the equivalent floor space to cover three quarters of Manhattan Island. This has lifted 1 million potential homeowners in limbo. Now in China real estate accounts for 40% of household assets. So obviously a correction in the housing market will be quite devastating. Also, just over a quarter of China’s steel demand is related to housing construction. So clearly a material reduction and construction could see a sharp decline in iron ore demand. Now bear in mind this is on top of concerns China was already slowing. So this just exacerbates the issues. Now crunch time is coming for evergrande as they’ve $84 billion bond interest you on September the 23rd. I just like to highlight one of the more damning comments in the release the market on the 31st of August. The company expects significant continuing decline and contract sales in September, thereby resulting in the continuous deterioration of cash collection by the group, which would in turn place tremendous pressure on the group’s cash flow and liquidity. Some market commentators are saying this is China’s Lehman Brothers moment. But China will of course do everything it can to avoid a drastic collapse of this business as the ramifications would be far reaching. We also had a mix of m&a updates the consortium bidding for Sydney Airport sweeten the offer to $8.75, which is the third bid for Sydney and as they say Third time’s a charm as the Sydney board finally granted due diligence to the consortium. aq tea group, however, walked away from their bid for Rs, which saw Iris for 11% on Friday. Finally, Telstra hosted this strategy day enjoying the 2025 target club, releasing a number of financial targets they hope to achieve by fy 25. Some of the key ambitions are for mid single digit EBITDA growth and high teens EP s growth each year if by 25. They’ve also begun to change their messaging around Capital Management. The reason for this is that Telstra will generate more free cash flow per share than earnings per share for a number of years. This is driven by much less capex than depreciation and amortization. We would expect higher and franked dividends or buybacks with this excess capital. Thanks for listening. We’ll see you next week.

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