Weekly Market & Currency Developments – From Our Bankers

Reserve Bank keeps the faith; Chinese imports soar

Reserve Bank Governor speech; China trade

• China trade: Over the year to July exports lifted by 12.2 per cent with imports up 27.3 per cent. As a result the trade surplus narrowed from US$41.47 billion to US$28.05bn.

• Reserve Bank Governor speech: Reserve Bank Governor Philip Lowe delivered a speech: “Demographic Change and Recent Monetary Policy.”

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

What does it all mean?

• The Reserve Bank Governor is not deviating from the script. Governor Lowe expects the economy to grow by around 3 per cent over 2018 and 2019. That will lead to a tighter job market with unemployment near 5 per cent. As a result there will be upward pressure on wages and prices and therefore higher interest rates. That is the most likely scenario in the Reserve Bank’s view. And the Governor has seen nothing recently to change that view.

• The Reserve Bank Governor has also highlighted a raft of demographic changes to explain a number of trends such as the slower growth of wages. One reason to explain slower wage growth is increased competition with more senior Australians staying in, and returning to, the job market.

• China says it wants to buy more imported goods. It is certainly living up to its side of the bargain. Imports are soaring as Chinese consumers seek a standard of living more on par with that of Western nations like the US and Australia. Chinese authorities also want to improve and enhance infrastructure such as the ‘One Belt, One Road’ initiative and as a result continues to lift demand for commodities. China is also focussed on phasing out inefficient producers and that also means taking on more foreign goods.

What happened?

Speech by Reserve Bank Governor:

Key quotes:

…In summary, we see reasonable prospects that the economy will record good growth, the unemployment rate will come down gradually and that inflation will increase over time. This is a favourable outlook.

If this is how things evolve, you could expect the next move in interest rates to be up, not down. As the economy strengthens and income growth and inflation lift, it would be natural for interest rates to return towards more normal levels.

The timing of any future change in interest rates is dependent upon the speed of the progress that is made in reducing the unemployment rate and having inflation return to around the midpoint of the target range on a sustained basis. If we were to make faster progress than we currently expect, any future increase in interest rates is likely to be earlier. Conversely, slower progress would likely see a longer period without an adjustment.

For the time being, the Reserve Bank Board’s judgement remains that the best course is to maintain the cash rate at its current level. Given that the progress in reducing unemployment and lifting inflation is expected to be only gradual, the Board does not see a strong case for a near-term adjustment in monetary policy. The Board is seeking to be a source of confidence and stability to support the progress that the Australian economy is making.

Inflation: “Over the forecast period, we expect inflation to increase further to be close to 21⁄2 per cent in 2020. In the short term, though, we would not be surprised if headline inflation dipped a little, reflecting declines in some administered prices in the September quarter.”

Unemployment: “We also still expect the unemployment rate to move lower over time and to reach 5 per cent at some point over the next few years. An unemployment rate of 5 per cent is the conventional estimate of full employment in Australia, but it is possible that we could go lower than this on a sustained basis.”

Financial risks: “In terms of the financial risks facing the economy, things have also been broadly moving in the right direction.”

China International trade

• Chinese exports in July were up 12.2 per cent over the year (forecast +10 per cent). Chinese imports rose by 27.3 per cent (forecast +16.2 per cent). The trade surplus narrowed from US$41.47 billion to US$28.05 billion.

• From Trading Economics: “The trade surplus with the US, China’s largest export market, narrowed slightly to US$28.09 billion from a record-high of US$28.97 billion in June. For the first seven months of 2018, the trade surplus narrowed to US$172.46 billion from US$231.39 billion in the same period 2017.”

• From Reuters:
» Copper: China imported 452,000 tonnes, versus 440,000 tonnes in June
» Crude oil: China imported 36.02 million tonnes, versus 34.34 million tonnes in June
» Iron ore: China imported 89.96 million tonnes, versus 83.24 million tonnes in June
» Soybeans: China imported 8.01 million tonnes, versus 8.70 million tonnes in June
» Coal: China imported 29.01 million tonnes, versus 25.46 million tonnes in June

What is the importance of the economic data?

• 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?

• China is determined to maintained firm economic growth, and that is clearly encouraging for a key raw material supplier like Australia.

• The determination of China to lift economic growth and lift demand for imports will be a key factor in defusing trade tensions with the US.

• The Reserve Bank is in no rush to change rates. CommSec expects official interest rates to be stable until at least early 2019.

Investor Signposts: Week Beginning August 12 2018

Australia: The wait for wages is over

• The release of the June quarter Wage Price Index dominates the local agenda in the coming week. The semi- annual update on average weekly earnings will also be keenly observed together with the July jobs report.

• The week kicks off on Monday with the Reserve Bank estimates of credit and debit card lending.

• On Tuesday the NAB business survey is issued. Business confidence fell to the lowest level in 20 months in June. But business conditions are just below the best levels on record, supported by the lower Aussie dollar, with profits near all-time highs.

• Also on Tuesday, the latest weekly reading on consumer confidence is issued by Roy Morgan and ANZ.

• On Wednesday arguably the most important data release for the inflation and interest rate outlook is scheduled – the wage price index (WPI). The WPI rose by 0.5 per cent in the March quarter. Annual wage growth remained steady at 2.1 per cent. But wages including bonuses rose to a 3-year high of 2.7 per cent over the year to March. An increase in the minimum wage and new Enterprise Bargaining Agreements are expected to push wages up by around 0.6 per cent during the quarter.

• Also on Wednesday, the monthly Westpac and Melbourne Institute consumer confidence reading is released. The gauge rose by 3.9 per cent to 106.1 in July – the highest level in 41⁄2 years – with improving job security a key influence.

• On Thursday the ABS issues the July employment report. The unemployment rate is at 51⁄2-year lows of 5.37 per cent with a blockbuster 50,900 jobs created in June. Strong population growth and a robust labour market have pushed the participation rate to near record highs of 65.7 per cent.

• The average weekly earnings data is released every six months by the ABS. The figures, also released on Thursday, are important as they provide dollar estimates of wages in the economy across states and industries.

• On Friday the Reserve Bank Assistant Governor (Economic), Luci Ellis, delivers a speech at the Sir Leslie Melville Lecture Series Event in Canberra.

Overseas: China monthly activity data in focus

• Over the coming week China investment, production, retail sales and house price data are all issued. In the US, retail spending, housing, industrial production, business and consumer activity gauges will be in focus.

• The week kicks off on Tuesday when China issues its monthly retail sales, investment and production activity data. During July, the Chinese government announced a “more proactive” fiscal policy stance, pledging to deliver additional tax cuts and quicken the issuance of local governments’ special bonds to support infrastructure spending. But domestic demand was hampered by extensive flooding and US auto import tariffs took effect on July 6, likely impacting sales.

• Also on Tuesday the US export and import prices, weekly data on chain store sales and the small business sentiment gauge – the NFIB business optimism index – are all released.

• On Wednesday China house prices data are issued by the National Bureau of Statistics. New house prices rose by 1.1 per cent in June, up from 0.8 per cent in May. It was the strongest growth rate in 21 months.

• Also on Wednesday in the US, industrial production and retail sales data are issued. Household consumption rose by 4 per cent in the June quarter, boosting overall economic growth to 4-year highs of 4.1 per cent. Retail sales and industrial production are both tipped to lift by 0.3 per cent in July. Also the National Association of Home Builders releases its August survey with the New York Federal Reserve manufacturing gauge and weekly data on new mortgage applications.

• On Thursday US housing starts and building permits data are issued for July. US homebuilding eased to a 9- month low in June and permits declined for a third successive month amid an acute shortage of homes available for sale. The weekly data on new claims for unemployment insurance is also issued, together with the influential Philadelphia Federal Reserve manufacturing gauge.

• On Friday the US Conference Board leading economic index and the University of Michigan consumer confidence survey are both released.

Financial markets

Amongst the Aussie companies expected to report earnings:

• On Monday are: Baby Bunting, Bendigo & Adelaide Bank, Bluescope Steel, Domain and JB Hi-Fi.

• On Tuesday: Aurizon, Challenger, Cochlear, GPT Group, SG Fleet Group and Whitehaven Coal.

• On Wednesday: Aveo, CSL, Dexus, IAG, Iluka Resources, Wesfarmers and Woodside Petroleum.

• On Thursday: ASX, Computershare, Charter Hall REIT, Downer EDI, Origin Energy, OZ Minerals, SEEK, Sonic Healthcare, Seven West Media, Telstra and Treasury Estate Wines.

• On Friday: Breville Group, Goodman Group, Infigen Energy, IPH and Primary Health Care.

 

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