Weekly Market & Currency Developments – From Our Bankers

Lower home prices boost affordability

Home prices; Manufacturing

  • Home prices: The CoreLogic Home Value Index of national home prices fell by 1.0 per cent in January to be down 5.6 per cent over the year. Prices fell in all capital cities except Canberra. Regional prices fell by just 0.2 per cent.
  • Regional home prices: Home prices are rising in regional Tasmania and Victoria as well as the Riverina and Central West in NSW and Mackay in Queensland. Ballarat home prices are up 8.2 per cent over the year to January.

Home price data is important for retailers, especially those focussed on consumer durables. The manufacturing data provides guidance for companies in the Industrials sector.

What does it all mean?

  • The great unwinding continues. Sydney and Melbourne home prices rose at an unsustainable rate over 2015-17 and now prices are retreating to ‘fair value’. Just where that ‘fair value’ lies for home prices remains to be seen. But the easing of home prices represents great news for first home buyers. First home buyers have more choice currently with a raft of new houses and apartments to choose from. And prices continue to become more affordable.
  • The good news in the NSW and Victorian markets is that the unwinding of unsustainably high prices is occurring at a time when job markets are in the best shape in 40 years.
  • Sydney and Melbourne home prices are still well above the August 2012 lows. Sydney dwelling prices are up 50 per cent from the August 2012 lows, recording 7.8 per cent annual average gains over the period. Melbourne prices are up 44 per cent (6.7 per cent annualised). Hobart is up 40 per cent, Canberra is up 23 per cent and Brisbane and Adelaide prices are both upby around 18 per cent. (Perth and Darwin prices are affected by the ending of the resources boom).
  • Australia’s manufacturing sector continues to expand – defying the negative news from abroad in recent months. The latest data provides reassurance about the broader shape of the economy.

What do the figures show?

Home prices

  • The CoreLogic Home Value Index of national home prices fell by 1.0 per cent in January to be down 5.6 per cent over the year. Prices fell in all capital cities except Canberra. Regional prices fell by just 0.2 per cent (down 0.8 per cent on the year)
  • In capital cities, prices fell 1.2 per cent to be down 6.9 per cent over the Year. House prices fell by 1.2 per cent and apartment prices fell by 1.1 per cent. House prices were down 7.6 per cent on a year ago and apartments were down by 4.9 per cent.
  • In regional areas, both house and apartment prices fell 0.2 per cent in January to be down 0.8 per cent and 0.4 per cent respectively on the year.
  • The average Australian capital city house price (median price) was $641,463 in January and the average unit price was $534,123.
  • Dwelling prices fell in seven of the eight capital
    cities in January. 
    Home prices fell in Darwin (down
    1.7 per cent), from Melbourne (1.6 per cent) Sydney (down 1.3 per cent), Perth (down 1.1 per cent), Brisbane and Adelaide (both down 0.3 per cent) and Hobart (down 0.2 per cent). Prices rose in Canberra by 0.2 per cent.
  • Home prices were higher than a year ago in three of the eight capital cities in January. Prices rose most in Hobart (up 7.4 per cent), followed by Canberra (up 3.8 per cent), Adelaide (up 0.9 per cent). Brisbane prices were broadly flat. But prices fell in Sydney (down by 9.7 per cent); Melbourne (down 8.3 per cent); Perth (down 5.6 per cent) and Darwin (down by 3.5 per cent).
  • Total returns on national dwellings fell by 1.9 per cent in the year to January with houses down by 2.6 per cent on a year earlier and units were down by 0.2 per cent.

Manufacturing Purchasing Managers’ Indexes

  • The Australian Industry Group (AiGroup) Australian Performance of Manufacturing Index rose by 2.5 points to 52.5 points in January 2019. The Manufacturing Purchasing Managers’ Index (PMI) fell from 54.0 to 53.9 points. Any reading over 50 indicates expansion.
  • According to AiGroup, manufacturing concerns were: “Business concerns in January were centred on energy costs, drought and delays in Government contracting arrangements over summer. Concerns about skill shortages are ongoing but do not appear to be worse than in late 2018. A small number of machinery and equipment makers noted difficulties among business customers in obtaining finance for new machinery and equipment, which is affecting sales and orders for some types of equipment manufacturers.”
  • According to the Markit, “While the survey brought further signs of slowing growth momentum in the manufacturing sector, the upturn remained solid, supported by robust expansions in both production and new sales. Export sales also maintained a firm pace of expansion, with reports of increased demand from the US and Southeast Asia.”

What is the importance of the economic data?

  • The CoreLogic Hedonic Australian Home Value Index is based on Australia’s biggest property database. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the CoreLogic Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.
  • The Purchasing Manager indexes (PMIs) for services and manufacturing are released each month. The Australian PMIs are the local equivalents of similar indexes released for other countries. The PMIs are amongst timeliest economic indicators released in Australia. The PMIs are useful not just in showing how the sectors are performing but in providing some sense about where they are heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

  • Home prices are always something of a two-edged sword. When prices rise too much there are concerns about poor affordability and ‘bubbles’. When prices are falling there are concerns about declining wealth and softer conditions for consumer spending.
  • In reality, a third of people rent, a third of people are buying/paying off homes and a third of people own their homes. Also in practice the majority of people say that they aren’t regularly checking home prices unless they are in the market.
  • So when home prices change, there will be variable effects across retail and financial asset markets as well as across regions.
  • The easing of home prices in Sydney and Melbourne is welcome. The unwinding is also occurring against the backdrop of strong job markets, rising wages and record low interest rates. The trajectory continues to be one of a “soft landing” from unsustainable highs.
  • Experts don’t expect a change in the cash rate until later in 2019 with the main focus being the tightness of the job market and the potential for further wage gains.

US signals period of interest rate stability

US Federal Reserve meeting

  • US Federal Reserve decision: As widely expected, the US Federal Reserve Open Market Committee (“FOMC”) left the federal funds rate at a range of 2.25-2.50 per cent.
  • US interest rate outlook: The FOMC now says it can be “patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”

Changes in US monetary policy settings can affect rates in Australia as well as the sharemarket and currency.

What did the Fed decide and what does it all mean?

  • As expected, the Federal Reserve left the federal funds target rate at 2.25-2.50 per cent. The decision was unanimous by policymakers. And in terms of guidance, the Fed says it can be patient as it decides the next move in rates.
  • The statement is considered “dovish” – a leaning to stable rate settings, rather than higher interest rates. But the language when describing the economy is still very positive: “(the) labor market has continued to strengthen”; “economic activity has been rising at a solid rate”; “job gains have been strong”; and “household spending has continued to grow strongly.”
  • On consumer prices, the Fed says “on a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent.”
  • Overall, the Fed believes that the job of lifting rates back to the “normal” or “neutral” range is done. It can now sit back for a time and determines whether it needs to adopt tighter monetary policy settings.
  • But with inflation contained and the economy in good shape, there is no need to lift rates. One or two rate hikes may still be required. For instance if the US-China trade talks end with a positive outcome and the UK can navigate a Brexit outcome, then the outlook will change again – it will be far more positive. And that could be an environment where businesses are more confident of lifting prices.
  • The rates decision has come on a day of encouraging earnings reports from Boeing and Apple. As a result US sharemarkets have posted strong gains. The Dow Jones rose 435 points or 1.8 per cent. And the US dollar has fallen against all major currencies. The Aussie dollar lifted half a cent to US72.50 cents.

What are the implications of today’s decision?

  • The US dollar has eased. As a result the Aussie dollar is now more comfortable near US72.5 cents rather than US70-71 cents. While a firmer Aussie is good news for consumers, it makes it more challenging for exporters and businesses that compete with imports. Currency strategists tip the Aussie dollar to gradually rise to US75 cents over the year.
  • The movement of the Fed to the monetary policy sidelines takes away a source of uncertainty for investors. But it is a case of ‘one down, two to go’. Now the focus is on US-China trade talks and the UK Brexit decision. We continue to expect recovery of the All Ordinaries to around 6,200-6,500 points by mid 2019.

Investor Signposts: Week Beginning February 3 2019

Australia: The Reserve Bank is out of hibernation

  • In the coming week, the Reserve Bank dominates the economic calendar following its summer hiatus. Top tier data releases include retail trade, international trade, building approvals and services sector gauges.
  • The week kicks off on Monday when the Australian Bureau of Statistics (ABS) releases its latest building approvals report. Residential approvals fell by 9.1 per cent in November to sit 32.8 per cent lower over the year.
  • Also on Monday, ANZ releases job advertisements data for January. Ads were flat in December, but are still up by 4.1 per cent over the year at 175,428 – just below 7-year highs of 178,879 ads.
  • On Tuesday, the Reserve Bank Board meets for the first time this year, but no change in the official cash rate is expected.
  • Also on ‘Super Tuesday’, a bevy of economic data is released including weekly consumer confidence, retail and international trade, new vehicle sales and services sector surveys.
  • There were mixed reports about Christmas and post-Christmas spending especially in light of the impact from Black Friday online and grocery sales in November. But spending is projected to lift by around 0.7 per cent in the December quarter, supportingeconomic growth.
  • On Wednesday, Reserve Bank Governor Philip Lowe delivers aspeech at the National Press Club in Sydney.
  • Also on Wednesday, the ABS issues its “Selected Cost of Living”indexes for the December 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. All eyes with be on the Board’s economic growth and inflation forecasts, given the weakening global economic backdrop, tighter credit conditions, falling home prices and the more uncertain operating environment for businesses. And the Board’s projections for unemployment and wages growth will come into sharper focus with the jobless rate hitting 71⁄2-year lows of 5 per cent in November – a level previously estimated as ‘full employment’.

Overseas: US economic growth and inflation data in focus

  • In the absence of major data releases in China, investors will focus their attention on ‘top shelf’ US economic data releases after the re-opening of major US government agencies.
  • The week begins on Monday in the US with retail sales, factory orders and durable goods orders all scheduled for release. Large publicly-traded retailers such as Macy’s and Kohl’s provided disappointing sales updates recently. But e-commerce holiday season sales lifted by 16.5 per cent from a year earlier according to Adobe Analytics, signalling that overall retail sales were positive in December. An increase of 0.2 per cent is forecast.
  • Also on Monday, housing-related data is issued. Building permits, housing starts and new home sales feature.
  • On Tuesday, weekly chain store sales data is issued along with international trade and the ISM non-manufacturing index. The US trade deficit is forecast to fall by US$1.5 billion to US$54 billion in December.
  • On Wednesday, the delayed advance (flash) reading of US economic growth (GDP) is due. The annual GDP growth rate is forecast to decelerate from 3.4 per cent to 2.6 per cent in the December quarter. And the JOLTS job openings report is issued. The number of unfilled jobs in November fell to the lowest level since June, though openings still exceeded unemployed Americans. Weekly mortgage applications are also due.
  • On Thursday, the weekly jobless claims data (claims for unemployment insurance), personal income spending and consumer credit data are all scheduled. Most interest will be in the US Federal Reserve’s preferred measure of inflation – the core personal consumption expenditure deflator – which is expected to remain unchanged at an annual growth rate of 1.9 per cent in December – just below the central bank’s 2 per cent target.
  • Also on Thursday, US Federal Reserve Chair Jerome Powell speaks at the “Conversation with the Chairman: a Teacher Town Hall Meeting” event hosted by the Federal Reserve Bank of Richmond, Charlotte branch.
  • On Friday, wholesale inventories data for December is scheduled.

Financial markets

  • The Australian corporate reporting season shifts up a gear with around 40 companies scheduled to report their results during the first week of February. Earnings per share (EPS) growth of 5 per cent is forecast in financial year 2019.
  • Companies reporting on Monday include Galaxy Resources.
  • On Tuesday: Navitas.
  • On Wednesday: Dexus, Shopping Centres Australasia, BWP Trust, Cimic, Commonwealth Bank, Genworth Mortgage Group and Insurance Australia Group.
  • On Thursday: AGL Energy, Downer EDI, Mirvac, Nick Scali and Newscorp.
  • On Friday: REA Group and Paragon Care.


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