Weekly Market & Currency Developments – From Our Bankers

Record trade with China

International trade

Trade surplus: The trade surplus eased from $1,937 million in June (previously $1,873 million) to $1,551 million in July. It was the 12th surplus in 15 months.

Trade with China: Australia’s annual imports from China rose from US$67.77 billion to US$68.75 billion – a record high. Australia’s annual exports to China rose from US$105.44 billion in June to US$106.58 billion in July – a new record high.

The trade data has the potential to affect the Aussie dollar so it may be important for exporters and importers.

What does it all mean?

• Australia continues to pay its way in the world. While the east coast drought may affect trade and regional economic activity over the next six months, at present the annual total of rural exports is only easing modestly from record highs.

• Australia continues to set new records with its Chinese trade. Both exports to China and imports from China hit record highs in the year to July. Of course the data highlights Australia’s dependency on China. It is very much in Australia’s interests that the Chinese economy remains strong.

What do the figures show?

International trade

• The trade surplus eased from $1,937 million in June (previously $1,873 million) to $1,551 million in July. It was the 12th surplus in 15 months. The rolling annual surplus rose from $6.219 billion to $7.408 billion.

• Exports of goods and services fell by 1.0 per cent (goods fell by 1.4 per cent).

• Imports of goods and services rose by 0.1 per cent (goods fell by 0.3 per cent).

• Exports were up by 13.7 per cent on a year ago, while imports were up 9.8 per cent.

• Rural exports fell by 1.8 per cent – the second decline in six months. Non-rural goods fell by 0.6 per cent. Gold exports fell by 9.6 per cent after rising by 5.6 per cent in June.

• Exports were driven lower by a $77 million fall in cereals; $30m fall in wool, $367m fall in metal ores, $275m fall in “other non-rural” exports and $189m fall in gold.

• Within imports, consumer imports fell by 3.7 per cent;capital goods imports fell by 6.5 per cent andintermediate goods imports rose by 5.6 per cent.

• Consumption goods imports were up by 2.5 per cent on a year ago while capital goods imports were down by 0.7 per cent and intermediate goods imports were up by 25.2 per cent.

• The net services deficit widened from a 12-month low of $252 million to $327 million.

• Australia’s annual exports to China rose from US$105.44 billion in June to US$106.58 billion in July – a new record high. Exports to China are up 10.7 per cent on a year ago. Exports to China account for 33.5 per cent of Australia’s total exports, just off record highs.

• Australia’s annual imports from China rose from US$67.77 billion to US$68.75 billion – a record high. Annual imports were up by 11.6 per cent on a year ago. Imports from China accounted for 23.21 per cent of Australia’s total imports, down from a record 23.45 per cent in April 2017.

• Australia’s rolling annual trade surplus with China rose from $37.66 billion to an 8-month high of $37.83 billion.

• Australia’s rolling annual trade deficit with the US rose from $18.07 billion to $18.29 billion. Imports from the US account for 10.11 per cent of total imports, just up from the record low of 9.88 per cent in June.

What is the importance of the economic data?

• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.

What are the implications for interest rates and investors?

• The trade data has few immediate implications for interest rate settings. But the Reserve Bank will keep a close eye on economic activity in China. CommSec expects rate settings to remain unchanged until 2019.

• The solid position of our trade accounts would be viewed positively by foreign investors and thus provide support to the Aussie dollar. But interest rate differentials and export prices currently are the main influences on the value of our currency.

Rates steady, but economy at above-trend pace

Reserve Bank Board meeting

• The Reserve Bank has left the cash rate at a record low of 1.50 per cent for the 25th straight month (23rd meeting). The last rate change was a quarter percent rate cut on August 2, 2016.

What changed since the last meeting?

• The ‘US versus everyone’ trade disputes still dominate attention.

• Retail trade was unchanged in July after gains of 1.3 per cent in the previous three months.

• Business investment rose by 3.1 per cent in 2017/18 to a record $118 billion.

• Almost 93 per cent of ASX 200 companies recorded a profit in 2017/18.

• Average weekly ordinary time earnings rose by 2.7 per cent over the year.

• The wage price index rose by 2.1 per cent on the year; up 2.5 per cent with bonuses

• The Australian jobless rate fell to 5.32 per cent in July – a 51⁄2-year low.

• The Aussie dollar has eased from US74 cents to US72 cents.

• The NAB business conditions index was +12.4 in July (+5.7 points long-term average).

• Annual credit growth has slowed to 4.4 per cent – the slowest rate in 41⁄2 years.

• Dwelling approvals fell by 5.2 per cent in July to be down 5.6 per cent on the year.

• Petrol prices across the nation hover near $1.50 a litre.

• National home prices fell by 0.3 per cent in August to stand 1.6 per cent lower on the year.

The Reserve Bank assessment

• The statement after the August meeting was 699 words. This time it is 678 words. Clearly the thematic hasn’t changed, so need to add extra verbiage. The Reserve Bank expects 3 per cent economic growth, a tighter job market, higher wages and higher prices. But the transition from each step will be gradual. Notably the economy is estimated to be growing at an above-trend rate. The Reserve Bank hasn’t introduced new issues of concern. And while some banks have lifted rates, the RBA says that the average mortgage rate paid is lower than a year ago. The RBA also notes that higher money market rates haven’t boosted retail deposit interest rates.

Perspectives on interest rates

• The Reserve Bank has left the cash rate at 1.50 per cent. The previous move was a rate cut in August 2016 (25 basis points). There have now been 12 rate cuts since November 2011, with the Reserve Bank cutting rates from 4.75 per cent to 1.50 per cent.

• The Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.

What are the implications of today’s decision?

• We expect the first rate hike in the second half of 2019. The economy doesn’t need speeding up or slowing down, so there is no urgency to change rates. Inflation forecasts need to change before the Bank starts tinkering with its rate views.

Investor Signposts: Week Beginning September 9 2018

Australia: Jobs data is the highlight

• A mixture of economic indicators is expected in Australia in the coming week with employment data the highlight.

• The week kicks-off on Monday with a speech from the Reserve Bank Assistant Governor (Financial System) Michele Bullock. The speech to be delivered in Albury is entitled “The Evolution of Household Sector Risks”.

• On Tuesday the weekly consumer confidence survey is released with lending finance data and the NAB business survey.

• Most interest is in the NAB business survey. In July the business confidence index rose from 20-month lows of +5.6 points in June to +6.6 points. And the business conditions index eased from +14.1 points +12.4 points in July. The long-term average of the business conditions index is +5.7 points so it’s clear that Corporate Australia is in good shape.

• On Wednesday, Westpac and the Melbourne Institute release the monthly consumer confidence survey. This is more of a check on the ANZ/Roy Morgan weekly survey – especially as both surveys pose the same questions.

• But each quarter the Westpac survey poses special questions including a poll on the ‘wisest places’ for new savings. And the latest quarterly results are issued on Wednesday.

• Also on Wednesday the Reserve Bank releases the July credit and debit card activity data. In June the average credit card balance rose by $21.30 to a 5-year high of $3,272.70. The average balance was also up by 4.6 per cent over the year – the strongest annual growth rate in almost eight years.

• On Thursday the August Labour Force figures are released by the Australian Bureau of Statistics. In July employment fell by 3,900 after an upwardly-revised increase of 58,200 (previously reported as 50,900) in June. The jobless rate fell to a 51⁄2-year low of 5.3 per cent.

Overseas: Key US and China activity indicators

• ‘Top shelf’ economic data is released in both the US and China in the coming week. Sales, production and inflation data are issued in the US. Meanwhile sales, production and investment data are released in China.

• The week kicks off on Monday in the US with the release of consumer credit data and a gauge of inflation expectations.

• In China on Monday, data on consumer and producer prices are issued together with an estimate on vehicle sales. Annual consumer price inflation is expected to tick higher from 2.1 per cent to 2.2 per cent.

• On Tuesday in the US the National Federation of Independent Business (NFIB) releases the business optimism index for August. And the JOLTS survey of job openings is also issued together with the regular weekly data on chain store sales.

• The NFIB survey of small business was at the second highest level in 45 years in July. The JOLTS survey was also at its second highest level on record in June.

• On Wednesday in the US, the measure of business inflation – the producer price index (PPI) – is released. The core PPI measure (excludes food and energy) was at a 2.7 per cent annual rate in July.

• Also on Wednesday the Beige Book is issued – a survey of economic conditions across the Federal Reserve districts. The Fed has described the US economy as ‘strong’ – justifying the short odds of a rate hike at the September 25/26 interest rate setting meeting.

• The weekly data on new mortgage applications is also released in the US on Wednesday with the monthly Budget statement.

• On Thursday in the US, the consumer price index (CPI) is issued. While not the Fed’s preferred measure of inflation, the results will be closely watched ahead of the next policy-making meeting. The core CPI was up 2.4 per cent on a year ago and a similar result is expected in August. The weekly data on new claims for unemployment insurance is also issued.

• The week rounds out with a raft of data to be released in the US on Friday. Retail sales data is released with industrial production, export & import prices, consumer sentiment and business inventories.

• Economists tip a solid 0.4 per cent lift in retail sales in August after the 0.5 per cent gain in July. The annual rate of sales currently stands at a hefty 6.4 per cent. Production may have lifted by 0.3 per cent in August after the 0.1 per cent increase in July.

• Similarly it’s a big day for new data in China on Friday. Again retail sales and production data are issued, together with investment figures. Lending and money supply figures are also tentatively scheduled for release on Friday.

• On Saturday China’s house price index is released for August. Home prices are currently up 5.8 per cent over the year.


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