Weekly Market & Currency Developments – From Our Bankers

Strongest lift in non-bank lending in 11 years. Weakest annual personal lending in 81⁄2 years.

Private sector credit; China data

Lending: Private sector credit (effectively outstanding loans) rose by 0.4 per cent in September after a 0.5 per cent rise in August. Credit was up 4.6 per cent over the year, up from the 4.5 per cent in August.

Investor housing: Investor housing finance rose by 0.1 per cent in September with annual growth at the slowest rate on record of 1.4 per cent.

Non-banks: Loans and advances by non-bank financial intermediaries rose by 11.4 per cent over the year to September, up from 10.3 per cent in August and the strongest annual growth in 11 years.

Personal loans: Personal credit was flat in September, but was down 1.5 per cent over the year – the equal weakest annual growth rate in 81⁄2 years.

China purchasing managers’ indexes: China’s official manufacturing purchasing managers’ index fell by 0.6 points to 50.2 points (survey: 50.6 points) in October – the lowest level since July 2016. And the services gauge fell by 1 point to 53.9 points (survey: 54.9 points) in October. A level above 50 denotes in expansion in activity.

Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending. The Chinese data have implications for the currency markets and therefore exporters and importers.

What does it all mean?

– The continued slowdown in housing credit will continue to hog the headlines as bank lending standards tighten amid greater regulatory oversight. The overall flow of new lending is moderating, led lower by reduced investor appetite for Sydney and Melbourne property. In fact, the annual growth rate of investor credit was at record lows in September.

– And credit to owner-occupiers is easing, despite some support from first home buyers, to the slowest annual growth rate in 21⁄2 years. The proportion of overall financing commitments to first home buyers – at around 18 per cent – is near six-year highs. So falling home prices and better affordability are encouraging younger Aussies to buy their first abode with the average variable mortgage rate around 5.3 per cent – still near the lowest level since the 1960s.

– Given modest wages growth and elevated mortgage debt, Aussies are becoming increasingly cautious about adding to their debt loads. Personal credit growth fell by 1.5 per cent over the year to September, the equal weakest pace of growth since November 2009. Also, credit card usage and other lines of credit, together with loan offset accounts often provide individuals with greater loan flexibility.

– Non-bank lending continues to pick-up. Annual lending growth at over 11 per cent is now the strongest since October 2007. While greater competition in the financial sector is welcomed, Reserve Bank Assistant Governor Michele Bullock recently said that “lending in the less regulated sector could increase macro-financial risks.” With non-bank lenders increasingly filling the lending gap amid a tightening supply of credit by the major banks, average non-bank issuance of residential mortgage backed securities is around $4 billion.

What do the figures show?

Private sector credit

– Private sector credit (effectively outstanding loans) rose by 0.4 per cent in September after a 0.5 per cent rise in August. Credit was up 4.6 per cent over the year, up from the 4.5 per cent in August.

– Housing credit grew by 0.3 per cent in September after lifting by 0.4 per cent in August and July. But the annual growth eased from 5.4 per cent to 5.2 per cent – the lowest growth rate for 41⁄2 years.

– Owner occupier housing credit rose by 0.5 per cent in September to stand 7.3 per cent higher over the year –the weakest growth rate for 21⁄2 years.

– Investor housing finance rose by 0.1 per cent in September with annual growth at the slowest rate on record of 1.4 per cent.

– Personal credit was flat in September, but was down 1.5 per cent over the year – the slowest annual growth rate in 81⁄2 years.

– Business credit rose by 0.6 per cent in September after lifting by 0.8 per cent in August. Annual growth lifted from 3.8 per cent to 4.4 per cent – the strongest pace of growth in 13 months.

– Both the M3 money aggregate and Broad Money were up by 0.1 per cent in September to be up 2.2 per cent and 2.1 per cent, respectively, for the year. Previously in June and July, Broad Money and M3 were growing at the slowest annual growth rates in 26 years.

– Term deposits with banks fell by $2.1 billion to $600.6 billion in September. But annual growth rose from 6.0 per cent to 6.1 per cent, a 15-month high.

– Loans and advances by banks grew by 4.9 per cent in the year to September, up from 4.7 per cent in the year to August, both up from 4.6 per cent in July, the equal slowest growth rate in 26 years. And loans and advances by non-bank financial intermediaries rose by 11.4 per cent over the year to September, up from 10.3 per cent in August and the strongest annual growth in 11 years.

– Deposits at banks fell by 0.2 per cent in September to stand 2.1 per cent higher than a year ago. Previously in June and July the 1.9 per cent annual growth of deposits was the equal slowest rate in 26 years.

What is the importance of the economic data?

– Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

What are the implications for interest rates and investors?

– There has been a lot of talk about a ‘credit crunch’ emanating from the slowing housing market due to the tightening supply of credit amid greater regulatory oversight of bank’s borrowing criteria by APRA. Lending volumes may be down, but the size of mortgages continues to increase. In fact, the latest AFG Mortgage Index for the March quarter of 2019 the national average loan size increased to a record $509,736, led by increases in NSW, South Australia and Victoria.

– The recent lift in business credit growth is encouraging. Non-mining business investment is being supported by a weaker Aussie dollar and still-positive global and domestic economic activity. Business conditions are near record highs, but US-China trade tensions, rising input costs and upcoming elections in Australia may impact capital equipment spending and labour hiring in the coming months.

– China’s manufacturing activity is the weakest in over two years. Slumping export orders reflect waning external demand from the US following the implementation of tariffs. President’s Trump and Xi are scheduled to meet at the G20 meeting next month in Argentina. Who is going to blink first? Global growth is slowing on the back of trade tensions and China’s attempts at fiscal stimulus, including tax cuts, reduced red-tape for businesses and increased infrastructure spending will take time to work through the real economy.

– Experts expect Australia’s official cash rate to remain unchanged until late 2019.

Lowest inflation in 50 years

Consumer price index

– Inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.4 per cent in the September quarter, broadly in line with expectations. The annual rate of headline inflation eased from 2.1 per cent to 1.9 per cent. Over the past decade inflation has averaged 2.18 per cent – the lowest decade- average inflation result since September quarter 1967.

– Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 per cent in the September quarter (1.8 per cent annual); the weighted median rose by 0.3 per cent (1.7 per cent annual) and the CPI less volatile items rose by 0.4 per cent (1.2 per cent annual). Overall, underlying inflation rose by 0.4 per cent in the quarter and by 1.6 per cent over the year. Market goods and services less volatile items was up by 0.5 per cent in the quarter to be up 1.1 per cent on the year.

– Main changes: International holiday travel and accommodation (+4.3 per cent), domestic holiday travel and accommodation (+2.4 per cent), tobacco (+1.8 per cent), and automotive fuel (+1.4 per cent). The most significant offsetting price falls this quarter are child care (-11.8 per cent), and telecommunications equipment and services (-1.5 per cent).

What does it all mean?

– The Reserve Bank Governor recently remarked on our good economic fortunes. And quite rightly. When was the last time that inflation was near 2 per cent with economic growth above 3 per cent, unemployment near 5 per cent and all this with interest rates at 1.5 per cent? So it is quite timely that this week’s The Economist magazine cover states “What Australia can teach the world”.

– The Reserve Bank won’t be touching interest rates any time soon. The Board’s preferred underlying inflation rate remains low and it is still struggling to get anywhere near the mid-point of the Board’s 2-3 per cent target. Reserve Bank Governor Philip Lowe says he would like to see inflation at a 2.5 per cent annual rate with wage growth at 3.5 per cent, but it may take a little more time to achieve this.

– The Reserve Bank expects underlying inflation of 1.75 per cent in the December quarter and then expects inflation to hold between 2-2.25 per cent from March 2019 through to the end of the 2020 year. The Bank will revisit these forecasts in the next quarterly Statement on Monetary Policy on November 9. Certainly we aren’t expecting any major changes in forecasts.

– The bottom line is that the Reserve Bank can continue to “push the envelope” by leaving interest rates low despite economic growth exceeding the 2.75 per cent “speed limit”.

– The business sector has effectively been given a rate cut via the lower Australian dollar. But consumers have been given a de-facto rate hike via higher petrol prices. Note however that global oil prices are now in retreat, so we need to watch this carefully.

– Three of the 11 CPI categories recorded deflation in the September quarter and three recorded deflation over the year. Wage growth is ahead of inflation and consumers are key winners from the strong retail competition occurring across the globe. Cars, shoes, clothing, phones and TVs are the cheapest in over 30 years.

What do the figures show?

– The Consumer Price Index – the main measure of inflation in Australia – rose by 0.4 per cent in the September quarter, broadly in line with expectations. In seasonally adjusted terms the CPI rose by 0.1 per cent. The annual rate of headline inflation eased from 2.1 per cent to 1.9 per cent.).

– The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 per cent in the September quarter (1.8 per cent annual); the weighted median rose by 0.3 per cent (1.7 per cent annual) and the CPI less volatile items rose by 0.4 per cent (1.2 per cent annual). Overall, underlying inflation rose by 0.4 per cent in the quarter and by 1.6 per cent over the year. Market goods and services less volatile items was up by 0.5 per cent in the quarter to be up 1.1 per cent on the year.

– Most notable price rises: International holiday travel and accommodation (+4.3 per cent), domestic holiday travel and accommodation (+2.4 per cent), tobacco (+1.8 per cent), and automotive fuel (+1.4 per cent).

– Most notable price declines: child care (-11.8 per cent), and telecommunications equipment and services (-1.5 per cent).

– Prices of tradables: The tradables component of the ‘All groups’ CPI rose 0.8 per cent in the September quarter 2018. The tradable goods component rose 0.4 per cent due to automotive fuel (+1.4 per cent), fruit (+2.4 per cent), furniture (+1.9 per cent), and vegetables (+1.6 per cent). The tradable services component rose 4.0 per cent due to international holiday travel and accommodation (+4.3 per cent).

– Prices of non-tradables: The non-tradables component of the ‘All groups’ CPI rose 0.3 per cent in September quarter 2018. The non-tradable goods component rose 0.5 per cent due to tobacco (+1.8 per cent), beer (+0.9 per cent) and takeaway and fast foods (+0.7 per cent). The non-tradable services component rose 0.1 per cent due to domestic holiday travel and accommodation (+2.4 per cent) and property rates and charges (+2.3 per cent).

– Over the twelve months to the September quarter 2018, the tradables component rose 1.4 per cent and the non- tradables component rose 2.2 per cent.

– Tradable goods are those items whose prices are largely determined on the world market. Non-tradable pricesare more affected by domestic economic conditions.

– Capital cities: Sydney +0.6 per cent in the quarter (annual +2.0 per cent); Melbourne +0.2 per cent (+2.2 per cent); Brisbane +0.4 per cent (+1.8 per cent); Adelaide +0.3 per cent (+1.8 per cent); Perth +0.5 per cent (+1.2 per cent); Hobart +0.6 per cent (+2.7 per cent); Darwin +0.6 per cent (+1.3 per cent); Canberra +0.6 per cent (+2.5 per cent).

– Across the capital cities the largest contributors to price gains over the September quarter:

– Sydney – international holiday travel and accommodation (+4.4 per cent);

– Melbourne – international holiday travel and accommodation (+3.3 per cent);

– Brisbane – international holiday travel and accommodation (+5.3 per cent);

– Adelaide – international holiday travel and accommodation (+6.5 per cent)

– Perth – electricity (+7.3 per cent);

– Hobart – petrol (+3.9 per cent);

– Darwin – domestic holiday travel and accommodation (+11.4 per cent);

– Canberra – electricity (+9.4 per cent).

Why is the data important?

– The Consumer Price Index (CPI) is regarded as Australia’s premier measure of inflation. The CPI is published quarterly and measures price changes for a ‘basket’ of goods and services that dominate expenditure of metropolitan households. The “All Groups” index is the main focus, but other inflation measures are also published such as so-called ‘underlying’ measures. These include measures that abstract from price changes in volatile price items such as fresh food and petrol.

– The Reserve Bank aims to keep the headline inflation rate between 2-3 per cent over an economic cycle. If inflation is high and expected to rise, the Reserve Bank may elect to raise interest rates in order to constrain price pressures. Conversely, if inflation is low and expected to remain low, the Reserve Bank may elect to cut interest rates if it believes the growth pace of the economy is in need of strengthening.

What are the implications?

– If interest rates were to rise over the next 6-12 months it would require a tighter job market to show up in higher wages and therefore higher interest rates. So the job market will occupy attention in coming months. There are certainly more reports of businesses finding harder to attract and retain staff. Experts expect official interest rates to remain stable until well into 2019.

Investor Signposts: Week Beginning November 4 2018

Australia: Reserve Bank meets on Melbourne Cup Day

– The Reserve Bank dominates the local agenda in the coming week. The Board meets on Melbourne Cup Day, but no change in interest rates is expected. The quarterly update on monetary policy follows on Friday. Data releases are predominantly second-tier with monthly job advertisements, construction activity and housing finance all issued.

– The week kicks off on Monday in Australia when the Commonwealth Bank (CBA) and Australian Industry Group (AiGroup) both release their services gauges for October.

– Also on Monday the ANZ measure of job advertisements is issued. Vacancies have been choppy in recent months after peaking at 7- year highs of 178,787 in May.

– And new vehicle sales are issued for October. In September, 94,711 new vehicles were sold, down by 5.5 per cent over the year. In the twelve months to September, sales totalled 1,180,953 units, up just 0.1 per cent on a year ago. A record 495,872 Sports Utility Vehicles (SUVs) were sold over the year to September.

– The nation stops for the Melbourne Cup on Tuesday but the Reserve Bank Board convenes for the second last time this year to hand down its interest rate decision. No change in rates is expected, but commentary on financial market volatility, inflation, the Aussie dollar and developments in the housing and labour markets will be keenly observed.

– Also on Tuesday, the regular weekly reading on consumer confidence is published by ANZ and Roy Morgan.

– On Wednesday, the AiGroup’s Performance of Construction Index is released. The index fell to 49.3 points in September –the first contraction in construction activity in 20 months.

– Also on Wednesday the Bureau of Statistics (ABS) issues its “Selected Cost of Living” indexes for the September quarter, detailing changes over time in the purchasing power of the after-tax incomes of Aussie households.

– On Friday the Reserve Bank releases its Statement of Monetary Policy. While all eyes with be on the Board’seconomic growth and inflation forecasts, the projections for unemployment will come into sharper focus with the jobless rate hitting 6-year lows of 5 per cent in September – a level previously estimated as ‘full employment’.

– Also on Friday the Bureau of Statistics’ releases data on housing finance. Investor lending continues to decline due to weakening demand for homes (and falling home prices) in Sydney and Melbourne following greater regulatory oversight of bank lending practices. And the value of owner-occupier home lending is forecast to decline by 2 per cent in September, despite a pick-up in lending to first home buyers.

Overseas: US midterm elections, US Federal Reserve meeting and China trade data in focus

– In the US in the coming week the focus will be on the midterm elections on Tuesday and the US FederalReserve’s interest rate decision handed down on Thursday. Chinese trade and inflation data are also issued.

– On Monday in China, Caixin releases its services sector gauge for October. Sentiment improved in September, but firms reduced hiring after two years of expansion and profit margins came under increasing pressure.

– Also on Monday, the US services gauge is issued by the Institute for Supply Management. The non- manufacturing index rose to 61.6 points in September – the highest level since 2008.

– On Tuesday, Americans head to the polls with the midterm elections considered to be a referendum on the Trump Administration. All 435 seats in the US House of Representatives are up for grabs. Thirty-five seats in the 100-member Senate are on the ballot this year as well. The outcome could influence future policy direction.

– Also on Tuesday in the US, the JOLTs job openings report and the regular weekly chain store sales figures are issued. The number of job openings rose to a record 7.14 million in August as the labour market tightened.

– On Wednesday the US Federal Reserve Open Market Committee (FOMC) begins its monetary policy meeting. While interest rates are not expected to be lifted, economists are expecting a rate hike in December. Policymakers’ commentary on recent sharemarket fluctuations, the neutral rate of interest, housing market weakness, trade tensions, softening business investment and labour market strength will be closely observed.

– Also on Wednesday in the US, monthly consumer credit and the regular weekly data on mortgage applications are released. And on Thursday data on claims for unemployment benefits (jobless claims) is issued.

– On Thursday in China, international trade data is scheduled. Exports were up by 14.5 per cent over the year to September, boosted by the weaker renminbi currency, producing a record trade surplus with the US.

– On Friday, consumer and business inflation data for October are issued in China. Rising food prices – boosted by surging pork prices due to a swine flu outbreak – lifted consumer prices by 2.5 per cent over the year to September. But annual business prices fell to a 3.6 per cent growth rate as US trade tensions weighed on demand.

– Also on Friday, data on producer prices, consumer confidence and wholesale inventories’ cap-off a busy week in the US. Producer prices increased by 0.2 per cent in September, while a revision to wholesale inventory estimates for August showed the biggest jump in nearly five years, beating forecasts.

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