Weekly Market & Currency Developments – From Our Bankers

Home building hits 3-year low

Consumer sentiment; Building activity

  • New starts: The number of dwelling starts fell by 16.3 per cent in the December quarter. Currently, 216,948 homes are being built – the lowest level in three years. And $72.9 billion of residential and commercial building work was yet to be done (completed), down from the record high of $76.4 billion in the June quarter.
  • Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index rose by 1.9 per cent to 100.7 in April, up from 98.8 points in March. But the sentiment index is below its long-term average of 101.3 and down 1.7 per cent over the year to April.
  • ‘Time to buy a dwelling’: The ‘time to buy a dwelling’ index rose by 2.4 per cent to 4-year highs of 119.4 in April.

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. Building & building material companies are affected by dwelling starts including Boral, James Hardie, Adelaide Brighton, Lend Lease, CIMIC, Dulux and Brickworks.

What does it all mean?

  • While there is still a bevy of homes to be completed, Australia’s residential property boom is well and truly over. The number of homes currently being built are at the lowest level since December 2015. Property prices, housing finance, foreign investment and the amount of work entering the pipeline are all declining.
  • Consumer sentiment has been volatile at the beginning of 2019. Measures of confidence have increased in two months (February and April) and fallen in two months (January and March) as consumers balance concerns over falling property prices, slowing economic growth and modest wages growth against better job security and stronger sharemarket returns.
  • The sentiment index on family finances for those individuals earning $80,000-$100,000 lifted by 3.2 per cent to 109.4 in April following the announcement of tax relief for low-middle income earners in the Federal Budget. In percentage terms over the month, however, sentiment for those earning $20,000-$80,000 actually fell by around 0.5 per cent.
  • The property downturn and tighter lending conditions – especially for investors – hasn’t dampened consumers’enthusiasm towards the housing market. In fact, falling home prices and better affordability in Sydney and Melbourne appear to have boosted sentiment if the latest survey is any guide. The ‘time to buy a dwelling’ index rose to its highest level since March 2015. Sentiment towards Perth property is the best in 15 months.

What do the figures show?

Dwelling starts & work done

  • The number of dwelling starts (commencements) fell by 16.3 per cent in the December quarter to 46,706 dwellings after falling by 3.8 per cent in the September quarter.
  • House starts fell by 7.6 per cent in the December quarter and apartment starts fell by 26.8 per cent.
  • Work started on 221,606 new dwellings over the 12 months to December, up 2.4 per cent on the year, but fell from the record high of 234,179 dwellings in the year to December 2016.
  • Across Australia, starts in the December quarter fell in seven states/territories: NSW (down by 15.6 per cent); Victoria (down by 10.5 per cent); Queensland (down by 29.7 per cent); South Australia (down by 4.5 per cent); Western Australia (up by 14.9 per cent); Tasmania (up by 3.9 per cent); Northern Territory (down by 24.6 per cent); and the ACT (down by 53.1 per cent).
  • In the year to December, dwelling starts were higher than the decade average in all of the states & territories except for the Northern Territory (down 53.9 per cent), and Western Australia (down 30.8 per cent). Starts in NSW were 43.2 per cent above the decade average. Next highest was the ACT where starts were up by 42.7 above the decade average with Victoria up 22.5 per cent; Queensland up 12.4 per cent; Tasmania up 12.0 per cent; and South Australia up 8.5 per cent.
  • In the December quarter $72.9 billion of residential and commercial building work was yet to be done(completed), up 5.6 per cent on a year ago.
  • The value of residential and commercial building work in the pipeline stood at $94.9 billion at the end of December, down by 0.7 per cent on a year ago but down from a record $99 billion at the end of June.
  • Across Australia, 216,948 homes are being built, down from a record 230,573 homes in March.

Consumer confidence

  • The Westpac/Melbourne Institute survey of consumer sentiment index rose by 1.9 per cent to 100.7 in April.But the sentiment index is below its long-term average of 101.3 and down 1.7 per cent over the year to April. A reading above 100 denotes optimism. The survey of 1,200 people was conducted from April 1-5.
  • The current conditions index fell by 3.2 per cent, but the expectations index rose by 5.4 per cent.
  • Three of the five components of the index rose in April:
    • The estimate of family finances compared with a year ago fell by 5.0 per cent to 80.2;
    • The estimate of family finances over the next year rose by 4.1 per cent to 105.6;
    • Economic conditions over the next 12 months rose by 6.2 per cent to 101.8;
    • Economic conditions over the next 5 years rose by 5.9 per cent to 100.2;
    • The measure on whether it was a good time to buy a major household item fell by 2.0 per cent to 115.5.
  • Housing outlook: A good time to buy a dwelling? The index rose by 2.4 per cent to 119.4, and was up 14.9 per cent on the year. House price expectations rose by 11.9 per cent to 95.6, but were down by 26.5 per cent on a year ago.
  • Unemployment expectations: Unemployment expectations fell by 2.5 per cent to 127.4 in April to be up by just 1.4 per cent over the year.

What is the importance of the economic data?

  • Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According toMelbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.”Confident consumers may be more inclined to spend, especially on major items.
  • The Australian Bureau of Statistics releases data on dwelling commencements (starts) each quarter. The figures provide guidance on future construction activity. If construction begins on new houses or apartments, it signifies work for building trades.

What are the implications for interest rates and investors?

  • Council approvals to build new homes may have eased from record levels, but there is still plenty of work to be done over the next year. Dwelling starts in ‘boom’ state of Tasmania are particularly strong. At the other end of the spectrum, building in the ‘Top End’ is at record lows due to weak population growth.
  • And it’s not all ‘doom and gloom’ for building materials’ companies. In fact, the growing pipeline of public transport-related infrastructure projects could ‘fill the gap’ for residential builders, while boosting demand for building products. If re-elected, the Federal government has committed to $100 billion worth of rail, roads and other transport projects over a 10-year period.
  • Consumer spending and the jobs market are both key to the interest rate outlook. Spending at supermarkets and on food have both been solid. As the Easter holidays approach, retailers will be hoping that Aussies feel chipper about their tax cuts. That said, it appears the reaction from low income earners has been fairly muted.
  • Experts expect interest rates to be unchanged for the foreseeable future. But the loss of momentum across global economies means central banks are skewed to more accommodative monetary policies.

Investor Signposts: Week Beginning April 14 2019

Australia: Reserve Bank and jobs data ahead of Easter holidays

  • It’s a shortened week in Australia due to the Good Friday public holiday. The all-important jobs report is released.And minutes of the April 2 Reserve Bank Board meeting are issued.
  • The week kicks off on Tuesday when the weekly consumer sentiment index is issued from ANZ and Roy Morgan. The survey will be closely monitored in the lead up to the Federal election in May.
  • Also on Tuesday, the Reserve Bank will release minutes of the April 2 monetary policy meeting.
  • The Board changed the last sentence of their April Statement for the first time since Governor Philip Lowe was appointed in September 2016. The Statement said, “The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”.
  • Our view is that Reserve Bank policymakers are now edging towards implementing an explicit easing bias, but remain data-dependent and will await consumer and business responses to the outcome of the May Federal election and the implementation of tax cuts from July 1.
  • On Wednesday, the Business Sales Indicator for March is issued.
  • And on Thursday, the “flash” purchasing managers survey results are issued.
  • Also on Thursday, the March employment report is released. Leading indicators of jobs growth have been mixed. That said, on average, 23,700 job have been added on a monthly basis over the 12 months to February. The national unemployment rate fell to 4.9 per cent, a rate that hasn’t been bettered in a decade. Economists’ forecast 20,000 jobs to be added, but the unemployment rate is expected to edge up to 5 per cent with the participation rate at 65.6 per cent.

Overseas: China economic growth data in focus

  • The much-anticipated Chinese economic growth and monthly activity data are released on Wednesday. In the US, consumer and manufacturing surveys, together with retail and international trade data are of most interest.
  • The week begins on Monday in the US when the New York Empire State Manufacturing Index is issued with capital flows data. In China, money supply and lending data are scheduled.
  • On Tuesday, the regular US weekly data on chain store sales is scheduled along with the monthly readings on industrial production and homebuilding sentiment. Factory output is tipped to lift by 0.3 per cent in March. The National Association of Home Builders’ index is tipped to lift by 1 point to 63 points in April.
  • On Wednesday attention turns to China when the March quarter economic (GDP) growth data is released. The annual growth rate is expected to decelerate to 6.3 per cent, down from 6.4 per cent in the December quarter.
  • Recent fiscal stimulus has focused on tax cuts and infrastructure spending and is expected to be represented in an improvement in the March monthly fixed asset investment, industrial production and retail spending data. Infrastructure spending is forecast to lift from 6.1 per cent to 6.3 per cent; industrial production to increase from 5.3 per cent to 5.6 per cent; and retail sales to be up from 8.2 per cent to 8.4 per cent over the year to March.
  • On Wednesday in the US, the Federal Reserve’s Beige Book is released. In the March report, 10 of 12 districts reported growing economic activity, while the remaining two saw flat growth. At the same time, the Beige Book reported that “Labour markets remained tight for all skill levels, including notable worker shortages for positions relating to information technology, manufacturing, trucking, restaurants, and construction”.
  • Also on Wednesday, the February update on the US international trade balance is reported. The US trade deficit in goods and services fell to US$51.1 billion in January, down US$8.8 billion compared to December due to a 14 per cent drop in imports from China ahead of potential tariff increases on March 1 (which didn’t materialise).
  • On Thursday in the US, figures for retail sales, the leading index and the usual weekly data on claims for unemployment insurance are all issued. The influential Philadelphia Federal Reserve manufacturing index is also released. Retail sales are tipped to rebound by 0.8 per cent in March after cold winter weather and the US government shutdown constrained consumer spending in February.
  • Also on Thursday, IHS/Markit releases ‘flash’ purchasing manager indexes for April. Manufacturing activity has stabilised in China and the US, but continues to weaken in major European economies.
  • On Friday, leading US housing market indicators, such as housing starts and building permits data, are expected to rebound in March, supported by falling mortgage rates and a still-solid jobs market.

Financial markets

  • The US earnings (profit-reporting) season moves up a gear in the coming week. Companies expected to report earnings, include:
  • On Monday: Citigroup and Goldman Sachs.
  • On Tuesday: Bank of America, BlackRock, Charles Schwab, IBM, Johnson & Johnson, Netflix and UnitedHealth Group.
  • On Wednesday: Alcoa, Bank of New York Mellon, Morgan Stanley and PepsiCo.
  • On Thursday: American Express, Schlumberger and Travelers.

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