Weekly Market & Currency Developments – From Our Bankers

Jobless rate for young Aussies hits 7-year low

Labour force

• Employment rose by 44,000 in August after a revised 4,300 fall in jobs in July (previously reported as a 3,900 fall in jobs). Full-time jobs rose by 33,700 and part-time jobs rose by 10,200. Economists had tipped an increase in total jobs of around 18,000.

• Hours worked rose by 0.03 per cent in August and rose by 2.1 per cent over the year. Trend hours worked rose by 0.1 per cent in August and lifted 1.8 per cent over the year.

• The unemployment rate was steady at 5.3 per cent in August. In trend terms the jobless rate eased from 5.4 per cent to 5.3 per cent – lowest since October 2012. The participation rate rose from 65.6 per cent to 65.7 per cent but was steady at 65.6 per cent in trend terms.

• Unemployment across states in August: NSW 4.7 per cent (July 4.9 per cent); Victoria 4.8 per cent (5.0 per cent); Queensland 6.4 per cent (6.2 per cent); South Australia 5.7 per cent (5.7 per cent); Western Australia 6.4 per cent (6.0 per cent); Tasmania 5.8 per cent (6.3 per cent). In trend terms, Northern Territory 4.0 per cent (4.0 per cent); ACT 3.7 per cent (3.7 per cent).

• Youth jobless: In trend terms the unemployment rate for 15-24 year old persons hit a 7-year low of 11.2 per cent. The jobless rate for 15-19 year old persons was at a 5-year low of 16.2 per cent.

A raft of companies is affected by the employment data but especially those dependent on consumer spending. Amongst stocks affected are Fairfax, West Australian Newspapers, Seek Limited, McMillan Shakespeare and Skilled Group.

What does it all mean?

• The job market remains in strong shape. More people are looking for work, more people are finding work and the jobless rate is slowly falling. The jobless rate is sitting near 6-year lows and there is good scope for it to fall further. Certainly the latest data from SEEK shows job ads up 5.4 per cent on a year ago and the latest NAB business survey also recorded a stronger result for employment. Both these measures are forward-looking, pointing to further job growth.

• While a lift in jobs points to the potential for more spending in the economy, improving the confidence of those already in jobs, may have an even bigger impact on spending. Certainly household spending is currently growing at a 3 per cent annual pace – above the ‘normal’ growth rate recorded over the past decade. The falls in the under-employment rate and under-utilisation rate also suggest more people are happy with the hours being worked and therefore more disposed to spend.

• The improvement in the job market is broad-based. More people are securing the hours of work they desire and the young person jobless rate has fallen to 7-year lows. The strong job market provides good support for retail and housing spending.

• Not enough importance is placed on the workforce participation rate. The proportion of Aussies in jobs or looking for work is only a smidgen below all-time highs. If the participation rate was lower, arguably the jobless rate would also be lower. More people in the workforce suggests fewer people relying on government support, benefitting the budget bottom-line and permitting more money to be spent on other things like schools and hospitals.

What do the figures show?

• Employment rose by 44,000 in August after a revised 4,300 fall in jobs in July (previously reported as a 3,900 fall in jobs). Full-time jobs rose by 33,700 and part-time jobs rose by 10,200.

• Annual job growth stands at 2.5 per cent (decade average 1.6 per cent).

• Hours worked rose by 0.03 per cent in August and rose by 2.1 per cent over the year. Trend hours worked rose by 0.1 per cent in August and lifted 1.8 per cent over the year.

• The unemployment rate was steady at 5.3 per cent in August. In trend terms the jobless rate eased from 5.4 per cent to 5.3 per cent – lowest since October 2012. The participation rate rose from 65.6 per cent to 65.7 per cent but was steady at 65.6 per cent in trend terms.

• Unemployment across states in August: NSW 4.7 per cent (July 4.9 per cent); Victoria 4.8 per cent (5.0 per cent); Queensland 6.4 per cent (6.2 per cent); South Australia 5.7 per cent (5.7 per cent); Western Australia 6.4 per cent (6.0 per cent); Tasmania 5.8 per cent (6.3 per cent). In trend terms, Northern Territory 4.0 per cent (4.0 per cent); ACT 3.7 per cent (3.7 per cent).

• State/territory jobs: In seasonally adjusted terms, the largest increase in employment was in New South Wales (up 43,200), followed by Queensland (up 11,900) Western Australia (up 4,200). The largest decrease was in South Australia (down 8,400 persons) followed by Victoria (down 1,600) and Tasmania (down 300). In trend terms jobs in Northern Territory fell by 100 and ACT jobs rose by 100.

• The working age population rose by 25,700 in August to 20.3 million. Over the year the working age population rose by 322,900 or 1.62 per cent, down from the record 2.36 per cent annual growth in December 2008.

• The underemployment rate fell to a 4-year low of 8.1 per cent (seasonally adjusted) in August with underutilisation at a 5-year low of 13.4 per cent (seasonally adjusted).

• In trend terms the unemployment rate for 15-24 year persons hit a 7-year low of 11.2 per cent. The jobless rate for 15-19 year persons was at a 5-year low of 16.2 per cent.

Why is the data important?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.

• If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.

What are the implications?

• The Aussie job market continues to tighten. Workforce participation is bumping up against the ceiling: the $64 question being how much it can rise further. If it is harder to fill positions, there will be further evidence of skill shortages, pointing to scope for higher wages to attract and retain the ‘right’ workers. Wage growth still has some way to go to prompt a lift in prices and therefore cause the Reserve Bank to question the need for higher interest rates.

• The Victorian economy continues to out-perform with the jobless rate at fresh 7-year lows. Businesses located in that state have potential to ride the good economic fortunes. There are still challenges in the Western Australian and Queensland job markets with unemployment rates at 6.4 per cent.

Dividend bonanza: Payouts hit $28.5 billion

Economic and Financial market perspectives

Cash payouts: Since late August, ASX 200 companies have paid out around $6 billion in dividends to shareholders. But dividend payouts really start to ramp up from next week. Overall, around $28.5 billion will be paid to shareholders with another $22.5 billion distributed in coming weeks.

Dividends still very much in vogue: The majority of companies reporting full-year earnings results (90 per cent) chose to pay a dividend and 90 per cent of these companies lifted or maintained dividends.

Injection into the economy: Dividends totalling $21.4 billion will be paid out by listed companies to their shareholders in the next four weeks.

What does it all mean?

• Dividends remain in vogue. In fact, in contrast to the last reporting period, more companies have chosen to pay out a dividend. But the proportion of companies seeking to pay out dividends is still down from the highs in the 2015 and 2016 financial years. In other words, companies are seeking to strike a balance between rewarding shareholders and ploughing money back into their operations.

• Of the ASX 200 companies reporting for the year to June, around 90 per cent of firms elected to pay a dividend, up from the long-term average of 86 per cent, but down from the record levels of 91-92 per cent recorded in the 2015 and 2016 full-year results.

• There is certainly plenty of cash available to firms. Of the 139 companies reporting full-year results, almost 93 per cent reported a profit, just down from the 94.4 per cent recording a profit in the 2017 half-year results. Aggregate cash holdings rose by 6 per cent over the year to $96 billion. Adding in the 31 companies reporting full-year earnings, cash stood at a record $124.7 billion.

• Over the period from July to October, around $28.5 billion will be paid to shareholders as dividends. A year ago dividend payouts were around $26 billion, while in the full-year earnings season in August 2017, dividend payouts totalled around $26 billion. So shareholders continue to be well rewarded.

• Some shareholders will receive the dividends as cash and others will employ the proceeds through dividend reinvestment schemes. While the majority of the funds will be paid to domestic investors, other funds will go offshore to foreign investors. And while some of the dividends are paid to ordinary investors, other payments are paid to superannuation funds, thus with more limited short-term consequences for the economy.

• While dividends flow at this time every year, the dollars potentially could lift spending. Further, September and October tend to be more challenging months for the Australian sharemarket and investors may be more inclined to spend rather than invest.

The Profit Reporting Season

• To recap, the recent earnings season was impressive. Six months ago, when describing the first-half 2018 reporting season we said results had been ‘solid, not spectacular’. This reporting season – for companies largely reporting full-year results to June 2018 – the macro picture has almost been a carbon copy.

• But then again business surveys have been positive for most of the period – the NAB survey was at record highs in October and has since held near historic highs. Recent softening reflects uncertainty about the impact of tariff wars being played out across the global economy.

• Almost 93 per cent of companies reported a profit, just below the 94 per cent record high in the prior season in February. Aggregate statutory earnings have lifted 8.4 per cent on a year ago. The percentage of companies issuing a dividend is near record highs; expenses have matched sales; and cash levels are at record highs and up 8.5 per cent on a year ago for all ASX 200, half or full-year reporting companies.

Some of the themes of the season:

• The share prices of companies that ‘surprised’ either positively or negatively with earnings results, moved sharply on the day of earnings release. The earlier ‘confessional’ period had been generally quiet, thus the lift in volatility when earnings results beat or missed expectations (eg WiseTech, Pact Group, Speedcast International).

• A number of the ‘heavyweight’ companies reported declines in statutory profits but ‘underlying’ results remain favourable.

• Costs or expenses continue to lift, matching growth of sales as had been the case in the six months to June. Resource companies have especially noted cost pressures.

• Companies exposed to home construction and development have reported early signs of a slowdown. Those effects will be more prominent in the next year.

• Of all companies reporting full-year earnings, almost 93 per cent reported a profit. Sixty-two per cent reported a lift in profit and 38 per cent a decline (long-term average 61.5 per cent). Of those reporting a profit, 60 per cent lifted profits and 40 per cent reported a decline.

• Of all FY reporting companies, 90 per cent issued a dividend and 10 per cent didn’t. Of those reporting a dividend, 70 per cent lifted the dividend, 10 per cent cut and 20 per cent left dividends unchanged.

• Of all companies reporting full-year earnings, 60 per cent lifted cash holdings over the year and 40 per cent cut cash levels.

• Cash holdings of both full-year and half-year reporting companies stood at $124.7 billion at June 30, (full-year companies, up 6.2 per cent on a year ago to $96.3 billion).

The Dividend Timeline

• IRESS provides data on the dividends declared by companies, the number of shares on issue and the pay date of the dividends. So it is possible to derive a dividend timeline. The ASX 200 companies were assessed.

• As always there are complications to the analysis such as where the shareholders are based, whether dividend reinvestment plans operate, special dividend payments and currency translation effects for foreign investors. But the aim is to get a broad idea of the timing and magnitude of dividend payouts.

• CommSec estimates that around $28.5 billion will be paid to shareholders by ASX 200 companies from July to late October 2018. The key period for dividend payments is the four-week period beginning September 17 and ending October 12. Over that four-week period, $21.4 billion will be paid out as dividends by listed companies: in the week ending September 21, dividends totalling $2.4 billion will be paid; in the week ending September 28, $12.5 billion will be paid out as dividends; in the week ending October 5 dividend payments totalling $2.4 billion will be made; and in the week ending October 12 distributions total $3.1 billion.

The importance of dividends

• If you indexed the All Ordinaries index and the All Ordinaries Accumulation index at January 2004 it would show share prices (All Ords) up 90 per cent while total returns have risen by around 255 per cent. The differential (dividend growth) has especially widened from the low point for shares after the global financial crisis in February 2009. So dividends have taken on greater importance.

• There are a few reasons for this. Investors have been more cautious about buying shares, despite the fact that Australian companies have been making money and strengthening balance sheets. So share prices have not fully captured the stronger fundamentals.

• The economy has also continued to mature and the “potential” growth rate has eased from around 3.5 per cent to 2.75 per cent. Many of Australia’s biggest companies operate in mature industries. So while companies continue to generate good returns, growth options are more limited. Add in the fact that inflation has also slowed from around 2.5 per cent to around 2 per cent.

• In recent years Australian companies have also had to compete with heady property markets to secure the affection of investors. With share prices seemingly constrained by a range of influences, that puts more onus on companies to offer attractive dividends or to support share prices with buybacks.

• Until recently there has been some reluctance by companies to plough back cash into the business. And expansion, renewal, replacement or efficiency measures have boosted the funds that can be made available as dividends.

What are the implications for investors?

• Investors have the usual choice over the next few weeks. Those investors who still elect to receive dividend payments direct to their bank accounts can choose to spend the extra proceeds, save the proceeds (leave it in the bank) or use the funds in combination with other savings and reinvest into shares or other investments.

• For companies, retailers and financial firms, the dividends flowing through to shareholders clearly represent opportunities. The Reserve Bank will also monitor the trends in the next few weeks: if confidence lifts, an inflow of funds represents a potential spending boost.

• Of the major bourses across the globe, Australia is the largest payer of dividends. In part this reflects the maturity of Australia’s industry sectors. It also reflects the stability of the companies that dominate the ASX20 and ASX50 indexes. And it also reflects the on-going growth of the Australian economy and corporate profitability.

• Over the past couple of years many companies took the “safe option” of paying out dividends and buying back shares – in other words, keeping shareholders happy. But many companies are now opting for greater balance.

• Adequate cash must be maintained to pay out dividends together with confidence on future profitability. But cash levels as well as modest borrowings are important for reinvestment in the business and applied to new opportunities – entering new markets or engaging in mergers and acquisitions.

• Over the past year, costs or expenses have lifted. Aussie companies have done well to lift revenues, profits and dividends in the current environment. And with competition increasingly becoming global, Aussie companies need to get the balance right in focusing on lifting revenues and restraining costs.

• Shareholders increasingly realize that it is important to select companies with good potential for solid, sustainable growth in total returns – share price plus dividends. And that means paying attention to all aspects of the business.

Investor Signposts: Week Beginning September 16 2018

Australia: Reserve Bank and population data in focus

• It is a quiet week on the economic data front after a hectic start to Spring. The minutes of the Reserve Bank’s September monetary policy Board meeting is issued Tuesday. Demographic (population) data is released on Thursday together with detailed job market figures including industry employment estimates.

• The week kicks-off on Tuesday when the Roy Morgan-ANZ weekly consumer confidence survey and the Bureau of Statistics’ (ABS) quarterly home prices data are both released.

• The ABS releases its publication “Residential Property Price Indexes” each quarter. The data is relatively “old”, focusing on the three-month period to June 30. Apart from home prices there is other data covering the average value of homes and changes in the number of homes in each state. Annual Australian home price growth is the weakest in six years.

• Also on Tuesday the minutes of the last Reserve Bank Board meeting are released. Each meeting there is a special issue or topic that is discussed. And that discussion can prove useful in gauging member views on interest rate sensitivities. Commentary on the housing market will also be keenly observed.

• On Wednesday, the Department of Jobs and Small Business releases the August skilled internet job vacancies data. Vacancies are up by 4.7 per cent over the year to July, led by Western Australia (up 16.3 per cent) and Tasmania (up 13.6 per cent).

• Also on Wednesday the Reserve Bank’s Assistant Governor (Financial Markets) Christopher Kent speaks about “Money Creation” at the Bank’s Topical Talks Event for Educators in Sydney at 11.30am.

• On Thursday the ABS releases population data and detailed labour market figures. The Reserve Bank releases its quarterly Bulletin. And Commonwwealth Bank releases the Business Sales Indicator – a measure of economy-wide spending.

• Australia’s population is growing at a 1.6 per cent annual rate – one of the fastest growth rates in the developed world. And the ABS labour market data will include the latest estimates of industry job creation.

Overseas: US housing data takes centre stage

• There is no major Chinese economic data scheduled this week. Most attention will be on US housing data releases in the week prior to the all-important US Federal Reserve meeting on September 25-26, where interest rates are expected to lift.

• The week kicks off on Monday in the US with the release of the New York (Empire State) Federal Reserve manufacturing gauge. The index unexpectedly rose to 25.6 points in August from 22.6 points in July. But the report showed that 16 per cent of manufacturers and five per cent of service firms identified rising input prices from tariffs as “substantial”. The index for prices paid rose by 2.5 points to 45.2 points in August.

• On Tuesday the US National Association of Home Builders releases its September survey together with the regular weekly data on chain store sales. The monthly index of builder sentiment fell one point to 67 points in August, the lowest level in eleven months and down from highs of 74 points in December. Mortgage applications to purchase a home have been falling as interest rates have lifted. Buyer traffic dropped two points to 49 points in August, the only component of the index in negative territory (below 50 points).

• On Wednesday in the US, housing starts and building permits are issued for August. Despite rising building costs, property prices and mortgage rates, housing demand is supported by the strong labour market, lower taxes and improved finances. Around 175,000 homes were approved, but not yet started in July, the most since February 2008. And single-family permits in the South were the highest since July 2007. Economists tip starts to lift by 5.2 per cent in September. Building permits are forecast to increase by 0.8 per cent for the month.

• Also on Wednesday the June quarter US current account balance – measuring the flow of goods, services and investments – is released with the weekly data on new mortgage applications. The current account deficit widened to US$124.1 billion in the first quarter of 2018 from US$116.1 billion in the fourth quarter of 2017. As a percentage of GDP, the deficit increased to 2.5 percent from 2.4 percent, amid an increase in goods imports.

• On Thursday US existing home sales, the influential Philadelphia Federal Reserve manufacturing gauge, weekly claims for unemployment insurance and the US Conference Board leading economic index are all issued.

• Existing home sales fell for a fourth straight month in July – the longest stretch of monthly declines since 2013. Supply constraints continue to drag on overall sales and push up home prices. The lower inventory and high prices on available inventory are crimping affordability, especially for first home buyers. The median house price increased 4.5 percent from a year ago to US$269,600 in July.

• The Conference Board’s Leading Economic Index increased by 0.6 per cent in July after increasing 0.5 per cent in June. Another 0.5 per cent lift is forecast by economists in August, signalling a sustained pace of economic expansion in the near term.

• Initial jobless claims for the week ending September 1 decreased by 10,000 to 203,000 – the lowest level of claims since December 6, 1969. The US unemployment rate is near 18-year lows at 3.9 per cent.

• The week rounds out with the Markit “flash” purchasing manager index (PMI) survey estimates issued on Friday for the US, France, Germany, the Eurozone and Japan.

• The Markit US PMI remains expansionary (above 50). In fact, the August data indicated a strong overall improvement in the health of the US manufacturing sector. The upturn was supported by additional rises in output and new orders. That said, production rose at the weakest rate for almost a year. And exports remain the key source of weakness for producers, with foreign orders barely rising in August after two months of modest declines caused, in part, by Chinese tariffs.

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