Weekly Market & Currency Developments – From Our Bankers

Fastest growth in import prices in four years

Export & import prices

Export & import prices: Import prices rose by 3.2 per cent in the June quarter and were up by 6.0 per cent on a year ago – the fastest annual growth rate in four years. Export prices rose by 1.9 per cent in the quarter and were up by 6.6 per cent over the year.

Terms of trade: Based on today’s data we expect that the ratio of export prices to import prices (terms of trade) fell by around 1.0-1.5 per cent in the June quarter after rising by 3.3 per cent in the March quarter.

The terms of trade data is useful in assessing the outlook for the Australian dollar and therefore trade-exposed businesses.

What does it all mean?

• Australian incomes, as measured by the terms of trade (ratio of export prices to import prices), eased in the June quarter after solid growth in the previous quarter. We estimate that incomes fell by around 1.0-1.5 per cent after a 3.3 per cent lift in the March quarter. Overall though, the terms of trade is still holding at much higher levels than in the period before the mining boom started in 2008.

• In terms of implications for inflation, import prices are certainly worth watching – especially across the business sector. The quarterly lift in import prices in the June quarter was the biggest in four years. And annual growth of import prices was also the fastest in four years. The key question is whether Australian businesses are confident enough to pass on the higher import cost to consumer and business products.

• While the lift in import prices was dominated by higher oil prices, eight of the ten price groupings reported higher prices in the quarter. The price of imported consumption goods also posted the strongest quarterly and annual growth in two years.

What do the figures show?

Export & import prices

• The Bureau of Statistics (ABS) reported that import prices rose by 3.2 per cent in the June quarter after rising by 2.0 per cent in the March quarter. Import prices increased by 6.0 per cent over the year – the fastest growth rate in four years. Overall, import prices were driven by higher crude oil prices.

• The ABS said: “The rise was driven by higher prices paid for Petroleum, petroleum products and related materials (+13.7 per cent), reflecting tight worldwide supply due to global production restrictions and capacity constraints.

• General industrial machinery rose 3.3 per cent, reflecting rises in metal prices.

• Electrical machinery, apparatus and appliances rose 1.7 per cent, driven by rises in prices of primary cells and batteries.

• These rises were partly offset by falls in Metalliferous ores and metal scrap (-5.6 per cent).

• Through the year to the June quarter 2018, the Import Price Index rose 6.0 per cent, driven by Petroleum, petroleum products and related materials (+38.2 per cent) and Inorganic chemicals (+40.8 per cent).”

• Eight of the ten broad import categories recorded price increases in the June quarter.

• Export prices rose by 1.9 per cent in the June quarter after a 4.9 per cent rise in the March quarter. Export prices were up by 6.6 per cent over the year.

• The ABS said: “Prices received for many of Australia’s mineral fuel commodities rose in the June quarter 2018. Gas, natural and manufactured, rose 10.8 per cent, in response to strong demand for LNG in northern Asia. Export contract prices for LNG are also influenced by the international crude oil price with a two to four month lag.

• Petroleum, petroleum products and related materials rose 8.5 per cent, reflecting tight worldwide supply due to global production restrictions and capacity constraints.

• Cereals and cereal preparations rose 6.9 per cent, reflecting the impact of dry weather globally in many wheat- growing regions.

• Meat and meat preparations rose 3.8 per cent, influenced by strong demand in Asia and the United States.

• Coal, coke and briquettes rose 0.9 per cent, reflecting demand from China.

• Offsetting the rises were falls in Metalliferous ores and metal scrap (-1.7 per cent), driven by falls in iron ore as demand from China slowed.

• Through the year to the June quarter 2018, the Export Price Index rose 6.6 per cent, driven by Coal, coke and briquettes (+8.5 per cent), Gas, natural and manufactured (+18.8 per cent), and Petroleum, petroleum products and related materials (+34.2 per cent).”

• Nine of the ten broad export categories recorded price increases in the June quarter.

• The ratio of export prices to import prices (a proxy for the terms of trade) rose by around 1.0-1.5 per cent in the June quarter after rising by 3.3 per cent in the March quarter.

What is the importance of the economic data?

• The Australian Bureau of Statistics (ABS) provides quarterly estimates of export and import prices. The figures assist in gauging inflationary pressures in the economy.

What are the implications for interest rates and investors?

• Cost pressures exist in the construction sector with iron and steel prices up 11.8 per cent on a year ago with metal prices generally higher. Also across imports, prices of plastics were up by 20.8 per cent, with prices of chemicals also generally higher together with prices for paper products, cork/wood, fertilizers, machinery and photographic equipment. The good news is that food and clothing items continue to get cheaper together with computers, mobile phones, furniture and leather products like handbags.

Investor Signposts: Week Beginning July 29 2018

Australia: Which state will come out on top?

• The handover from July to August occurs with a data deluge. The CommSec State of the States quarterly report is followed by housing, manufacturing and service-sector gauges, new vehicle sales and the retail trade report.

• The week kicks off on Monday with the release of the CommSec State of the States report. The report tracks the economic performance of the states and territories across eight key indicators.

• On Tuesday, building approvals, private sector credit, new home sales and the regular weekly gauge on consumer confidence from Roy Morgan and ANZ are all released.

• On Wednesday, CoreLogic releases the July data on home prices. Based on daily data released so far, home prices have fallen by 0.5 per cent in the five mainland capital cities to stand 2.3 per cent lower than a year ago.

• Also on Wednesday both AiGroup and the Commonwealth Bank release survey results on manufacturing activity. And the Bureau of Statistics (ABS) issues its Selected Cost of Living indexes for the June quarter, detailing changes over time in the purchasing power of the after-tax incomes of Aussie households.

• On Thursday Australia’s international trade balance for June is issued. The trade surplus rose from $472 million in April to $827 million in May. It was the tenth surplus in 12 months. Annual exports to China rose to US$102.65 billion in May – a new record high.

• On Friday the Federal Chamber of Automotive Industries releases the July sales data for new vehicles. And the ABS issues June data on retail trade. The growth in retail spending has lifted over the past nine months, led by the food and clothing categories. And as tax return time draws closer, the end of financial year new car sales will be closely monitored. SUV sales are at record highs, but passenger vehicles sales are declining.

• Also on Friday both AiGroup and Commonwealth Bank release their services sector activity gauges.

Overseas: The US Federal Reserve and jobs data trumps China manufacturing activity

• Over the coming week the US Federal Reserve meets to hand down its latest interest rate decision. And the US non-farm payrolls (employment) report is released. The Chinese manufacturing survey is also a key release.

• The week kicks off on Monday in the US when the June index of contract signings to purchase previously-owned homes (pending sales) and the influential Dallas Federal Reserve manufacturing index are issued.

• Also on Tuesday, the influential Chicago manufacturing survey and the personal income/spending report are issued. The Fed’s preferred measure of inflation – the personal consumption expenditure deflator – will be keenly observed. The deflator is expected to increase by 0.2 per cent for a second successive month in June.

• On Tuesday China’s official purchasing manager’s indexes are released. A further slowdown in manufacturing activity is tipped. In the US, attention will turn to the S&P/Case-Shiller 20-city home price gauge, the Conference Board’s consumer confidence index and the regular weekly data on chain store sales.

• On Wednesday policymakers at the US Federal Reserve hand down their interest rate decision. No change in the Federal Funds rate target range of 1.75-2.00 per cent is expected by economists after June’s increase. Additional rate hikes are forecast in September and December.

• Also on Wednesday weekly data on new mortgage applications, the ISM manufacturing index and the ADP private sector employment report are issued. Earlier in the day, China’s Caixin manufacturing survey is released.

• On Thursday US factory orders are scheduled for June. Manufacturing activity has been supported by strong domestic demand. But growing worker shortages and import tariffs are starting to strain the supply chain. The regular weekly data on new claims for unemployment insurance and the ISM New York index are also issued.

• On Friday China’s Caixin services gauge is released for the month of July, together with the June international trade data (exports and imports), the ISM services index and the all-important US non-farm payrolls (jobs) report. In June, 213,000 jobs were created and economists expect a further 195,000 jobs were generated in July. Average hourly earnings are tipped to lift by 0.3 per cent, with annual growth remaining at 2.7 per cent.

Financial markets

• The Australian earnings season is approaching, coming at a time when the Aussie sharemarket has been trading at 101⁄2-year highs. With a valuation of 15.5 times estimated earnings, the ASX200 index is trading around its 5-year average. And at 4.1 per cent, dividend yields for the benchmark are twice that of equivalent US benchmarks.

• Corporate balance sheets are in good health, profits are near record highs and the lower Aussie dollar may boost the offshore earnings of some companies. Earnings growth expectations are broadly improving, supported by the resources sector.

• On Tuesday Credit Corp Group and Alacer Gold report. On Wednesday, BWP Trust, Genworth Mortgage Insurance and Rio Tinto all report. On Thursday, earnings are due from ResMed.

Weekly Global Currency Outlook

• USD will likely trade firm this week underpinned by favourable US inflation and employment dynamics. Judging from the US Q2 price deflators, the policy relevant core PCE deflator (Tue) is expected to remain sticky in June near the Fed’s 2% target. On Friday, leading indicators point to above average non‑farm payrolls gains of roughly 195k in July (consensus: 185k) and faster average hourly earnings growth of 2.8%/yr from 2.7%/yr the previous month.

• Meanwhile, the Fed is widely expected to make no policy changes and keep the range for the federal funds target rate at 1.75‑2.00%. It will be interesting to note if the post meeting statement includes comments on ongoing trade disputes or the flatter US yield curve.

• AUD/USD has been stuck in a 0.7300‑0.7500 range since mid‑June. AUD/USD will be guided this week by China’s manufacturing PMI (Tue) and JP Morgan’s global manufacturing PMI (Thu) for July. Further evidence of softer global and/or Chinese economic growth can weigh on AUD/USD.

• NZD/USD will likely trade towards the top end of its July 0.6700‑0.6850 range this week supported by encouraging New Zealand employment conditions. Our ASB colleagues expect a 0.5%/qtr (or 3.7%/yr) increase in Q2 employment from the Household Labour Force Survey (HLFS). Also, increases in the minimum wage in April are expected to help deliver a 0.6% increase in wages during Q2, with private sector annual wages inflation rising to 2.1% (the most since Q3 2012).

• JPY will be driven by Tuesday’s Bank of Japan (BoJ) meeting and the BoJ’s new macroeconomic outlook. Our base case scenario is for the BoJ to make no policy change. But there is increasing speculation the BoJ may tweak its yield curve control settings in part because of concerns about lower bank profitability.

• Specifically, the risks are the BoJ drops the negative interest rate of 0.1% applied to the policy rate balance in current accounts held by financial institutions at the BoJ. The BoJ could also abandon its annual objective of accumulating ¥80 trillion of JGBs and/or lift its target yield for 10‑year JGBs from currently “around” 0%. Any of these policy changes would be interpreted as step towards less monetary policy accommodation, dragging USD/JPY and AUD/JPY lower.

• GBP/USD can edge lower this week. UK interest rate futures have virtually fully priced in (90%) a 25bps Bank of England (BoE) rate hike to 0.75% on Thursday. However, we believe the BoE will remain on hold, and instead signal a rate hike for its November meeting, which will follow the EU UK October summit. If the BoE stays on hold, GBP/USD may re‑test its recent lows near 1.3000.

• EUR/USD will consolidate over the coming week, with risks skewed to the upside resulting from Tuesday’s Q2 Eurozone GDP and July CPI reports. If the data surprise to the upside of expectations, it will result in an upward revision to ECB interest rate expectations in favour of EUR.

 

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