“Strong” jobs market keeps Reserve Bank sidelined
Reserve Bank Board meeting
- The Reserve Bank has left the cash rate at a record low of 1.50 per cent for the 30th straight month (27thmeeting). The last rate change was a quarter percent rate cut on August 2, 2016.
What changed since the last meeting?
- The Australian economy grew by 0.3 per cent in the September quarter to stand 2.8 per cent higher over the year. The Australian jobless rate fell to a 71⁄2-year low at 5 per cent in December.
- The key underlying inflation measure was 1.75 per cent in 2018, below the Reserve Bank’s 2-3 per cent target.
- The CoreLogic national home price index fell by 5.6 per cent over the year to January 2019.
- Building approvals are down by 22.5 per cent over the year to December.
- Annual credit growth stands at 4.3 per cent – the slowest rate recorded in 5 years.
- The rolling annual budget deficit has fallen to 91⁄2-year lows at $1.6 billion or 0.1 per cent of GDP.
- Australian business conditions fell by 8.4 points in December – the biggest monthly decline since October 2008. The iron ore price has risen by US$19.40 or 28.7 per cent to US$87.00 a tonne.
- The Australian dollar has fallen by around 1 per cent to US72.50 cents.
- The IMF has downgraded its global growth forecast from 3.7 per cent to 3.5 per cent in 2019.
- Chinese economic growth slowed to 6.6 per cent in 2018 – the slowest annual growth rate in 28 years.
- The US Federal Reserve lifted the federal funds rate by 0.25 per cent to 2.25-2.50 per cent in December.
- The Reserve Bank remains patient. Continued job market strength remains critical to the economic and interest rate outlook. The Board has described the labour market as “strong” with “a further decline in the unemploymentrate to 43⁄4 per cent expected over the next couple of years.” It expects “the improvement in the labour market should see some further lift in wages growth over time” as “the vacancy rate is high and there are reports of skills shortages in some areas.” While the Reserve Bank acknowledges that the “main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities”, it is hoping that ongoing solid jobs growth will cushion Aussie consumers from the property downturn. Of course, the ‘wildcards’remain China and the banks/regulators’ response to the Hayne Royal Commission, particularly due to the tightening in credit availability. Chinese policy stimulus could boost demand for Australia’s resources. And the Australian Federal government and opposition Labor Party could both announce further stimulatory tax cuts and infrastructure spending in the lead up to the election, given Australia’s improving fiscal position.
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 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 from 3.00 per cent to 4.75 per cent.
What are the implications of today’s decision?
- The Reserve Bank is walking a tight rope on interest rates, but remains on the sidelines for now. On one hand, jobs growth is strong and economic growth is at long-run trend levels. Wages growth is the strongest in three years with unemployment rates in NSW and Victoria the lowest since 1978. But falling home prices, tighter credit availability, slowing global growth and the potential impact of political uncertainty on business investment all present downside risks. We expect the Reserve Bank to adjust its growth and inflation forecasts in Friday’sStatement of Monetary Policy. Governor Philip Lowe will likely lay the groundwork in a speech tomorrow.
Aussies are spending, but cautiously
Economic trends & issues
- The Australian Bureau of Statistics (ABS) yesterday released retail spending data for the December quarter. We obtained detailed spending data from the ABS in nominal and real (inflation-adjusted) terms. The data provides insights on how spending has been changing across the economy.
- Spending rose by just 0.1 per cent in real terms in the December quarter. But spending slowed over the last six months of 2018 in response to higher prices for imported goods. Retail prices rose by 1.4 per cent in the year to December, the fastest rate in almost two years.
- In 2018 as a whole, Aussies spent just almost $321 billion on retail goods and activities like food and clothing and spending at cafes and restaurants. The volume of goods lifted 2.2 per cent in 2018 as a whole with prices up 0.7 per cent. Population growth in 2018 was around 1.5 per cent.
- In terms of actual goods bought (volume), Aussies bought more electrical goods; clothing; food from specialised outlets like butchers and bakers; and cosmetics. Fewer newspapers & books were purchased as well as sporting goods, toys & games and take-away food.
- The average Aussie spent, on average, just over $245 a week on retail goods in 2018, up just $3.31 a week over the year. Over the same period the average wage is estimated to have lifted around $30 a week.
What does it all mean?
- Aussies are still spending, but differently and cautiously. In the past, December was the big spending month. But Aussies – just like their US cousins – are now embracing online sales events held in November. As a result some of the usual Christmas has been brought forward to November.
- Retail trade rose by 0.5 per cent in November and fell by 0.4 per cent in December. In trend terms annual growth stands at 3.2 per cent, just above average growth rate over the past three years.
- With spending patterns changing, it pays to stand back and look at the big picture. Over 2018 as a whole, Aussies bought 2.2 per cent more goods (higher volumes) and spent 3 per cent more on those goods, the difference being higher prices.
- There are a number of ways to look at spending – on a per capita (per person), in real (price-adjusted) terms and the actual dollars outlaid (reflects goods bought and prices paid).
- Courtesy of lower prices we are buying more electrical goods but they are taking up less of our weekly spending. Similar situation with clothes. But the data indicates that clothes took up more of our spending budgets because we bought more items at the cheaper prices. Items like newspapers, sporting goods and department store items also took up a smaller share of the average Aussie’s spending in 2018 compared with a year ago.
- With population up 1.5 per cent and prices up 0.7 per cent, it is clear that Aussie shoppers, on average, bought more retail goods. In fact, each Aussie spent $3.31 more per week on retail items.
- With the average weekly wage estimated to have lifted $30 a week, it is clear that Aussies are utilising their funds in different ways. When the final figures on broader household spending are released in early March, they will likely show that more is being spent on services. Aussies also continue to buy goods overseas, either online or on overseas trips. And some of the weekly wage is devoted to saving and loan repayments.
What are the implications for investors?
- Retail spending accounts for just 31 per cent of total household spending. So while spending rose just 0.1 per cent in the December quarter, it is possible that more dollars were spent on other goods and services in the quarter. Certainly the job market remains strong and wages are lifting modestly. The December national accounts, including broader household consumption data, will be released on March 6.
- Over 2018 though it is clear that Aussie consumers continued to spend, albeit cautiously, especially given that some imported goods were more expensive due to the lower Aussie dollar. The Aussie dollar began the year at US80 cents and ended the year around US70-71 cents, pushing up the cost of imported goods.
- In this increasingly more globalised environment, it is clear that Aussie retailers need to stand out with an offering that meets needs or provides a better experience than other goods and services – domestic or foreign.
- While it may have been possible a few years ago to extrapolate the experience and results of one retailer across the broader retail sector, that is no longer the case. Recent guidance from retailers highlights this, with messages varying markedly across businesses.
- Latest data indicates that consumer confidence is above longer-term averages. The job market is strong – especially in the two most populous states. That means increased job security as well as more people finding work. Petrol prices have come down from highs, proving less of a constraint on spending. Interest rates remain low and stable. And while in some regions home prices are easing, affecting perceived wealth, in contrast share prices are rising, adding to household wealth.
- While there are a number of positive macro drivers for consumer spending, at a sector or industry level, conditions are likely to prove more fragmented. Retailers must continue to research, invest and innovate to be successful in the current environment.
Investor Signposts: Week Beginning February 10 2019
Australia: Business and consumer confidence in focus
- In the coming week an eclectic mix of economic data and events is expected.
- The week kicks off on Tuesday when the Australian Bureau of Statistics (ABS) releases the new publication, Lending to Households & Businesses. The data includes all new lending commitments and may show further softening of home loan demand.
- Also on Tuesday, the January business survey will be issued from National Australia Bank. There was a pronounced softening of conditions and subdued reading on sentiment in the December survey.
- The business conditions index fell from +10.6 points in November to four-year lows of +2.2 points in December. The long-term average is +5.8 points. The NAB business confidence index eased slightly from +3.4 points to near three-year lows of +2.8 points in December, below the long- term average of 6.0 points.
- The weekly reading of consumer confidence is also issued on Tuesday with Reserve Bank figures on credit and debit card lending.
- On Wednesday, Reserve Bank Head of the Economic Analysis Department, Alexandra Heath, delivers remarks at the Australian Business Economists Forecasting Conference.
- Also on Wednesday, the Westpac/Melbourne Institute monthly survey of consumer confidence. This report is more of a “check” on the weekly consumer sentiment data.
- On Friday a speech is expected from Christopher Kent, Assistant Governor (Financial Markets), Reserve Bank at a breakfast event hosted by foreign exchange provider XE.
Overseas: Focus in Chinese economic data
- The US Government shutdown is still playing havoc with the release dates for key economic data. Still, investors will also have to contend with Chinese data over the week including trade and inflation. And trade talks continue between the US and China.
- The week begins on Tuesday in China with the January reading on foreign direct investment. In 2018, investment rose by 0.8 per cent in yuan terms with analysts estimating that this equated to a 3 per cent lift in US dollar terms over the year. Data on vehicle sales for January is also expected.
- On Tuesday in the US, weekly chain store sales data is issued along with the JOLTS job openings report and NFIB business optimism index. The number of unfilled jobs in November fell to the lowest level since June, though openings still exceeded unemployed Americans.
- On Wednesday in the US, the monthly budget statement is released with weekly data on home loan applications and the consumer price Index. The core rate of inflation may have eased from 2.2 per cent to 2.1 per cent in January.
- On Thursday in the US, the weekly jobless claims data (claims for unemployment insurance) is issued alongside producer prices and durable goods orders. The annual rate of core producer prices may have eased from 2.7 per cent to 2.6 per cent in January.
- On Thursday in China the January data on exports and imports is expected with lending growth figures.
- On Friday, retail sales, industrial production, consumer sentiment, export/import prices, construction spendingand the Empire State index are all scheduled for release.
- According to Adobe Analytics, e-commerce holiday season sales lifted by 16.5 per cent from a year earlier signalling that overall retail sales were positive in December. Retail sales may have lifted 0.2 per cent.
- And on Friday in China the latest inflation data is due – consumer and producer prices. Consumer prices are seen expanding at a 2 per cent annual rate in January.
- The Australian corporate reporting season moves into top gear with a bevy of major companies expected to release earnings results.
- Companies reporting on Monday include Amcor, Bendigo & Adelaide Bank, Aurizon, GPT, Charter Hall Long WALE REIT and JB Hi-Fi.
- On Tuesday results include: Challenger, Reckon and Transurban.
- On Wednesday results include: Aveo Group, Bapcor, Computershare, CSL, Skycity Entertainment Group, and Tabcorp.
- On Thursday, earnings include: AMP, ASX, Evolution Mining, Goodman Group, IPH Limited, Magellan Financial Group, Newcrest, Suncorp, Tassal, Telstra, Treasury Wine Estate and Woodside Petroleum.
- On Friday, reports include: Abacus Property Group, Domain, Medibank, Healius, URB Investments and Whitehaven.
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