Weekly Market & Currency Development – From Our Bankers

Positive international travel; China inflation

Air travel statistics; Chinese inflation

  • Air travel: Growth of domestic air travel is “soft” but international travel is “positive”.
  • Chinese inflation: Chinese consumer prices rose by 2.5 per cent over the year to April, up from 2.3 per cent in the year to March and the highest result in six months. Annual growth of producer prices rose from 0.4 per cent to 0.9 per cent.

The Chinese data have implications for the currency markets and therefore exporters and importers.

What does it all mean?

  • China has high food inflation at present with prices up 6.1 per cent over the year. But non-food inflation is 1.7 per cent as is the measure of consumer prices that excludes volatile food and energy prices.
  • In Australia, the CPI excluding food and energy is up 1.3 per cent on the year. And the same core price measure in the US is 2 per cent. Simply, inflation is not an issue around the globe. And a key reason is the global nature of competition for consumer wallets rather than the more local focus a few years ago. As a result, central banks are paying more attention to other “social” economic variables like jobs and wages to guide policy.
  • Fewer Aussies are flying around the country at present. But that is hardly a surprise – it happened three years ago when the election was being held. Businesses especially are more reluctant to meet and chase deals until they know which party will be in power the next three years. Normal service should be resumed after the election. But note that Qantas reports “increased softness” in local business travel into May and June.
  • Fortunately for the tourism sector, there are still plenty of Aussies taking holidays abroad and more foreigners coming to Australia to travel, work and study. As Qantas highlighted today, international travel is still healthy.

What do the figures show?

Aviation: February

  • There were 8.9 million passengers carried on domestic and regional flights in February (sum of inbound and outbound) movements. Passenger numbers were down 0.9 per cent on a year ago – the third consecutive annual decline.
  • For the full year to February, domestic passenger numbers totalled 121.1 million, up 1.2 per cent on a year ago, the slowest rate in three years and half the annual rate of growth recorded five months ago.
  • There were 3.26 million passengers carried on international flights in February (inbound and outbound). Passenger numbers were up by 2.2 per cent ion the year (inbound +3.5 per cent and outbound +0.6 per cent).
  • For the full year to February, international passenger numbers (inbound and outbound) totalled 41.1 million, up 4.9 per cent over the year. Annual growth has hovered near 5 per cent for the past year.

Chinese inflation

  • Consumer prices rose by 2.5 per cent in the year to April, in line with forecasts, after lifting by 2.3 per cent in theyear to March. It was the highest annual rate for consumer prices in six months.
  • Consumer prices rose by 0.1 per cent in April after falling by 0.4 per cent in March. Food prices fell by 0.1 per cent to stand 6.1 per cent higher than a year ago. Non-food prices rose by 0.1 per cent to stand 1.7 per cent higher than a year ago. Excluding food and energy, prices were up 1.7 per cent on the year.
  • Annual price changes: food, tobacco & alcohol (up 4.7 per cent); clothing (1.8 per cent); living costs (2.4 per cent); daily necessities (1.1 per cent); transport & communication (-0.5 per cent); education, culture & entertainment (2.5 per cent); health care 2.6 per cent; other supplies & services (1.9 per cent).
  • Pork was up 14.4 per cent over the year with vegetables up 17.4 per cent.
  • Producer prices rose by 0.9 per cent in the year to April (forecast +0.6 per cent), the highest reading in fourmonths and up from 0.4 per cent in year to March. Producer prices rose 0.3 per cent in the month.
  • Annual price changes include: production materials (up 0.9 per cent); mining (5.3 per cent); raw materials (flat); machinery (0.9 per cent).

What is the importance of the economic data?

  • The Bureau of Infrastructure, Transport and Regional Economics (BITRE) releases data on domestic and international aviation each month. The data is useful in tracking consumer spending and airline performance as well as broader economic activity.
  • China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for interest rates and investors?

  • Core inflation in China is above that in Australia and slightly below the US rate. Inflation tends to soften when economic activity slows. The Chinese result is broadly encouraging. Core inflation has been stable for five months but still hovering at the lowest growth rate in two years. Also broadly encouraging is that producer price inflation is lifting from lows.
  • China is Australia’s largest trading partner, so it is important to constantly monitor trends in the country.
  • Qantas shares have risen today by around 3 per cent in response to the latest trading update. The airline notes that international travel “is positive and continues to improve.” The lower Aussie dollar supports tourism inflows from abroad.
  • Experts expect the cash rate to remain unchanged in coming months but wage and job indicators will be watched carefully.

Reserve Bank remains confident on outlook

Statement on Monetary Policy

  • Reserve Bank Statement: The Reserve Bank has trimmed near-term forecasts for economic growth and inflation, but held the medium-term forecasts. In a year’s time, economic growth is seen running at the 2.75 per cent “speed limit” with underlying inflation around 2 per cent.

The Statement on Monetary Policy can affect financial market pricing and it provides a roadmap for businesses.

What does it all mean?

  • Three months ago we said “It all gets down to jobs.” And that point has clearly been emphasised by the Reserve Bank in the period since. If the Reserve Bank is tempted to cut interest rates in coming months it will be because there is clear evidence that the jobless rate is trending higher, while at the same time there is disappointment on the wages paid by employers.
  • You have to admire the Reserve Bank’s stoicism with its forecasts. Over the past six months the Reserve Bank has downgraded short-term economic growth and inflation forecasts and pushed-out its expectations by around a year.
  • Confusingly Reserve Bank “domestic forecasts are conditioned on the technical assumption that the cash rate moves in line with market pricing, which implies two 25 basis point cuts to the cash rate.” Despite that, inflation struggles to get to 2 per cent and the jobless rate stays at 5 per cent. The Reserve Bank needs to provide a clearer explanation of his views and assumptions.

Key messages from the Reserve Bank report

  • Below are some additional key messages from the Reserve Bank’s latest quarterly review. The full Statement on Monetary Policy can be found here: https://www.rba.gov.au/publications/smp/2019/may/pdf/statement-on-monetary-policy-2019-05.pdf
    • Key Paragraph: “At its recent meeting, the Board focused on the implications of the low inflation outcomes for the economic outlook. It concluded that the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings.”
    • Growth & inflation: “Growth in the Australian economy has slowed and inflation remains low.”
    • Spending: “The near-term outlook for consumption growth has been revised lower because weaker housing market conditions and income growth are likely to continue to drag on spending.”
    • Household spending: “Subdued growth in household income and the adjustment in the housing market are affecting consumer spending and residential construction. Despite this, the labour market is performing reasonably well, with the unemployment rate steady.”
    • Incomes: “Some recovery in income growth is likely, because employment growth is expected to remain solid, wages are expected to increase and the tax offset for low and middle-income taxpayers is set to come into effect in the second half of this year.”
    • Incomes: “Disposable income growth is also expected to be supported by lower net interest payable owing to the lower cash rate assumption.”
    • Home prices & spending: “The deterioration in housing market conditions is expected to continue to weigh on consumption in coming quarters.”
    • Home building: “There is a risk that dwelling investment declines by more than currently forecast in the near term.”
    • Home building: …“information from the liaison program points to a significant slowdown in activity in the early stages of residential development.”
    • Inflation: Core inflation is “expected to remain low in coming quarters, largely because the weakness in housing- related items is expected to persist for a while.”
    • Global: “The global growth outlook has been revised slightly lower and the risks remain tilted to the downside.”
    • China: “The outlook for China continues to be an important source of uncertainty for the external environment facing Australia’s economy. The Chinese authorities face significant policy trade-offs and it is unclear how various policy changes will play out.”
    • “The outlook for trade policy remains uncertain and negative developments could harm global growth.”
    • Wage pressure: “…there has been some upward pressure on inflation as a result of the decline in labour market spare capacity.”
    • Wages: “The moderate increase in wages growth forecast over the next year is consistent with information from the Bank’s liaison program.”
    • Jobs: “A number of other indicators suggest that labour market conditions remain positive and that spare capacity is being absorbed. There has been a notable decline in the rate of medium-term unemployment (between 13 weeks and one year)…”

What is the importance of the economic data?

  • The Reserve Bank releases its Statement on Monetary Policy each quarter. The Statement is the Reserve Bank’s assessment of economic and financial conditions and also contains the latest inflation views. The Statement is crucial in assessing the short-term outlook for interest rates.

What are the implications for interest rates and investors?

  • Experts don’t expect a change in interest rates for a few months yet. But a cut in rates is factored into Reserve Bank forecasts, presumably on a softer job market.
  • The Reserve Bank says that “The domestic forecasts are conditioned on the technical assumption that the cash rate moves in line with market pricing, which implies two 25 basis point cuts to the cash rate.” While the RBA always notes that forecasts are based on technical assumptions, this time it is quite explicit with the rate cut assumptions.
  • The Reserve Bank is no doubt hoping that fiscal stimulus is applied over the next year through tax cuts and targeted spending. The infrastructure boom will also be fundamental in driving the economy.

Investor Signposts: Week Beginning May 12 2019

Australia: Wage and jobs data in focus before Election Day

  • In the coming week, the economic data spotlight is firmly on wages (Wednesday) and the job market (Friday) –the last key indicators released before the election.
  • The week kicks off on Monday when the Australian Bureau of Statistics (ABS) releases March data on overseas arrivals and departures.
  • Tourist arrivals rose by 0.9 per cent in February, the strongest gain in five months while departures fell by 3.3 per cent, the biggest fall in almost two years. Net permanent and long-term arrivals stood at a 5-year high of 299,100 in the year to February, up 11.4 per cent on the year.
  • Also on Monday the ABS issues home loan data within the publication “Lending to households and businesses” while the Reserve Bank issues the credit and debit card statistics for March.
  • The value of home loans rose by 2.6 per cent in February with the share of first home buyers in the market at 6-year highs.
  • On Tuesday, National Australia Bank issues its April business survey. In March the business conditions index rose from +4.2 points to +7.0 points, above the long-term average of +5.9 points. The business confidence index fell from +1.8 points to – 0.4 points in March – a 51⁄2-year low and below the long-term average of +5.8 points.
  • Little change in key results is expected in April as businesses await the election result.
  • The Roy Morgan-ANZ weekly measure of consumer sentiment is also released on Tuesday – a measure that has tracked a zig-zag course in recent months.
  • On Wednesday the all-important wage price index (WPI) is
    released – the main measure of wages in AustraliaWage growth has been edging higher over the past year and we expect that this continued in the March quarter. Wages may have lifted 0.6 per cent in the quarter to be up 2.4 per cent on the year.
  • Also on Wednesday the May consumer sentiment index is released. The sentiment gauge rose by 1.7 per cent in April following the Budget but a flat reading is expected ahead of the election.
  • On Thursday the April job market data is expected. In March employment rose for the eighth straight month (only one fall in 30 months), up by 25,700. The unemployment rate rose from 4.9 per cent to 5.0 per cent in seasonally adjusted terms. In trend terms the jobless rate remained steady at a 10-year low of 5.0 per cent.
  • In April, we expect that 20,000 jobs were created with the jobless rate stable at 5.0 per cent.

Overseas: Chinese activity data in the spotlight

  • In China, the key monthly business activity data is the highlight (released Wednesday). While in the US there are no stand-outs. Over the week five Federal Reserve presidents deliver speeches.
  • The week begins on Monday in the US when data on consumer inflation expectations is released.
  • On Tuesday in the US, the National Federation of Independent Business (NFIB) releases its business optimism gauge. In March the index edged up to a three-month high but readings are well down from mid-2018.
  • Also on Tuesday, data on export and import prices are released with the regular weekly reading on chain store sales.
  • On Wednesday in the US, a bevy of data is released: retail sales, industrial production, and the Empire State manufacturing index, the National Association of Home Builders housing market index and capital flows data. The former two indicators are the ones to watch.
  • Retail sales may have lifted just 0.1 per cent in April after a 1.6 per cent gain in March. Excluding autos though a more significant 0.8 per cent increase in sales is expected. In terms of industrial production, a 0.2 per cent increase is tipped for April after the 0.1 per cent fall in March.
  • On Wednesday in China, the monthly activity indicators are released – retail sales, production and investment. Each of the indicators was surprisingly strong in March.
  • Also in China the house price index is scheduled for release on Thursday with lending indicators slated forFriday.
  • On Thursday in the US data on housing starts & building permits is issued with the influential Philadelphia Federal Reserve manufacturing index and weekly figures on new claims for unemployment insurance. Starts were flat in March after a 12 per cent fall in February. Economists tip a 6.5 per cent lift in April starts.
  • On Friday in the US the Conference Board releases the leading index for April. A 0.4 per cent increase is expected in the month.
  • Also on Friday the University of Michigan releases the preliminary consumer sentiment index for May. The index is healthy, just off four-month highs.

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