Weekly Market & Currency Developments – From Our Bankers

Upbeat Reserve Bank sees stronger growth

Reserve Bank Board meeting

  • The Reserve Bank has left the cash rate at a record low of 1.50 per cent for the 31st straight month (28thmeeting). The last rate change was a quarter percent rate cut on 2 August 2016.

What has changed since the last meeting?

  • The Australian jobless rate remained at a 71⁄2-year low at 5 per cent in January.
  • The NSW jobless rate fell to a record low of 3.9 per cent in January.
  • The CoreLogic national home price index fell by 6.3 per cent over the year to February 2019.
  • Building approvals rose by 2.5 per cent in January.
  • Annual credit growth stands at 4.3 per cent – the slowest rate recorded in 5 years.
  • Australian business conditions rose from a 4-year low of 2.6 points to 6.6 points in January.
  • The Australian sharemarket has lifted, with investors digesting results for the earnings season.
  • Business investment rose 2.0 per cent in the December quarter.
  • Construction prices are rising at the fastest rate in 9 years.
  • Company profits hit record highs in 2018.
  • Wages rose 2.3 per cent over the year to December. Including bonuses: 2.8 per cent – highest in four years.
  • The Australian dollar has fallen from US72.50 cents to around US71 cents.
  • Investors are encouraged by reported progress on a US-China trade agreement

The assessment

  • The Reserve Bank remains sidelined. Continued job market strength is critical to the economic and interest rate outlook. While the Board acknowledged that “the slower pace of [economic] growth has continued into 2019”, it still expects “growth of around 3 per cent this year”. The Bank continues to note that the labour market is “strong”.One key uncertainty is consumer spending, but even on this point the Reserve Bank expects spending to be supported by “a pick-up in growth in household income.”

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?

  • It’s important to stress the Reserve Bank is forward- looking. If the Bank believes that current settings will produce stronger growth, then there is no need to alter policy. Watch the job market and consumer spending as they are keys to any change in rates in months ahead.

Aussie exports soaring across the globe

Large retailers lift sales in January

Retail trade; International trade

  • Retail trade: Retail trade rose by 0.1 per cent in January. But the more consistent grouping of ‘larger retailers and chain stores’ shows that sales rose by 0.4 per cent in January.
  • Foreign trade: The trade surplus rose to a two-year high of $4,549 million in January from $3,769 million in December. Exports lifted 5 per cent, outpacing a 3.3 per cent in imports and providing a solid start to the March quarter.

Retail trade data is important for consumer-focussed companies. 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?

  • The large retailers and chains are included in the retail sales survey every month. As a result they provide a consistent source of information on consumer spending. The data on ‘completely enumerated retailers’ shows that consumer spending remains healthy. The flukiness of the broader measure of retail trade raises questions whether the Bureau of Statistics should persist with its sampling approach.
  • It’s always important to remember that retail trade accounts for just 30 per cent of broader household consumption. And retail trade is dominated by ‘goods’ rather than services. The Aussie consumer has been spending more on ‘experiences’ in the past two years, highlighted by the marked slowdown in retail trade compared with broader household spending. Household consumption actually grew by 2.6 per cent over 2018 – in line with ‘normal’ or the decade average. Retail trade rose 2.2 per cent in real terms.
  • Real household spending in 2018 was strongest for medicines and other Pharmacy-type goods (up 15.2 per cent) with recreation/culture up 7.6 per cent and communications up 5.2 per cent. Transport, catering, financial and education services all recorded firm growth in 2018. Less was spent on newspapers & books, cars, cigarettes, and electricity, gas & other fuel.
  • Australia continues to pay its way in the world with another bumper trade surplus providing solid support for the Aussie dollar. Exports are going gangbusters, with double-digit annual growth of goods to China, the US and Japan, Trade with China is at record highs with the trade surplus also a record. At face value the strong lift in net trade in January is setting up a solid lift in economic growth in the March quarter.

What do the figures show?

Retail trade

  • Retail trade rose by 0.1 per cent in January after falling 0.4 per cent in December. Annual growth fell from 2.8 per cent to 2.7 per cent (3-year average 3.0 per cent).
  • Non-food retailing was flat in January and annual growth fell from 1.9 per cent to 1.7 per cent.
  • Sales by chain-store retailers and other large retailers rose by 0.4 per cent in January with annual growth lifting from 2.8 per cent to 3.2 per cent.
  • Nine of the 15 retail subgroups rose in January.
  • Spending rose most in January in Hardware, building and garden supplies retailing (up 1.5 per cent) and Cafes, restaurants and catering services; and Newspapers & book retailing (both up 1.0 per cent); Liquor retailing (up 0.9%); and Pharmaceutical, cosmetic and toiletry goods retailing; and Other retailing (both up 0.8 per cent)
  • Spending fell the most for Furniture, floor coverings, (down 2.4 per cent); Department stores (down 2.1 per cent) and Takeaway food services (down 0.8 per cent).
  • Spending rose in four Australian states and territories in January: NSW (up 0.7 per cent); Victoria (up 0.1 per cent); Queensland (down 0.5 per cent); South Australia (up 0.1 per cent); Western Australia (down 0.3 per cent); Tasmania (up 0.4 per cent); Northern Territory (down 1.2 per cent); ACT (down 0.4 per cent)International trade
    •   The trade surplus rose to a two-year high of $4,549 million in January from $3,769 million in December. It wasthe 13th successive surplus and just off the record surplus of $4,673 million in December 2016.
    •   The rolling annual surplus was a record $25.029 billion in the year to January.
    •   Exports of goods and services rose by 5.0 per cent (goods exports rose by 6.2 per cent).
    •   Imports of goods and services rose by 3.3 per cent (goods imports rose by 5.1 per cent).
    •   Exports were up by 15.9 per cent on a year ago, while imports were up by 6.3 per cent.
    •   Rural exports rose by 2.4 per cent. “Other rural” and meat rose 6 per cent with wool up 16 per cent
    •   Non-rural goods rose by 1.6 per cent. Gold exports rose by $1,373 million to $2,163 million.
    •   Within imports, consumer imports rose by 5.8 per cent; capital goods imports rose by 12.4 per cent andintermediate goods imports rose by 1.4 per cent.
    •   Consumption goods imports were up by 6.6 per cent on a year ago,capital goods imports rose by 7.5 per cent, but intermediate goodsimports were up by 3.9 per cent.
    •   The net services deficit improved from $482 million in December to a 12-month low of $245 million in January.
    •   Australia’s annual exports to Chinarose from $117.54 billion in December to $119.31 billion – a new record high. Exports to China are up 20.0 per cent on a year ago. Exports to China account for 34.2 per cent of Australia’s total exports – a new record high.
    •   Australia’s annual imports from China rose from $74.54 billion to a record $76.08 billion. Annual imports were up by 18.4 per cent on a year ago. Imports from China accounted for 24.9 per cent of Australia’s total imports – a record high.
    •   Australia’s rolling annual trade surplus with China rose from $43 billion to a record high of $43.24 billion in January. Including Hong Kong, the trade surplus is a record $52.8 billion.

International trade

  • The trade surplus rose to a two-year high of $4,549 million in January from $3,769 million in December. It was the 13th successive surplus and just off the record surplus of $4,673 million in December 2016.
  • The rolling annual surplus was a record $25.029 billion in the year to January.
  • Exports of goods and services rose by 5.0 per cent (goods exports rose by 6.2 per cent).
  • Imports of goods and services rose by 3.3 per cent (goods imports rose by 5.1 per cent).
  • Exports were up by 15.9 per cent on a year ago, while imports were up by 6.3 per cent.
  • Rural exports rose by 2.4 per cent. “Other rural” and meat rose 6 per cent with wool up 16 per cent
  • Non-rural goods rose by 1.6 per cent. Gold exports rose by $1,373 million to $2,163 million.
  • Within imports, consumer imports rose by 5.8 per cent; capital goods imports rose by 12.4 per cent and intermediate goods imports rose by 1.4 per cent.
  • Consumption goods imports were up by 6.6 per cent on a year ago, capital goods imports rose by 7.5 per cent, but intermediate goods imports were up by 3.9 per cent.
  • The net services deficit improved from $482 million in December to a 12-month low of $245 million in January.
  • Australia’s annual exports to China rose from $117.54 billion in December to $119.31 billion – a new record high. Exports to China are up 20.0 per cent on a year ago. Exports to China account for 34.2 per cent of Australia’s total exports – a new record high.
  • Australia’s annual imports from China rose from $74.54 billion to a record $76.08 billion. Annual imports were up by 18.4 per cent on a year ago. Imports from China accounted for 24.9 per cent of Australia’s total imports – a record high.
  • Australia’s rolling annual trade surplus with China rose from $43 billion to a record high of $43.24 billion in January. Including Hong Kong, the trade surplus is a record $52.8 billion.

What is the importance of the economic data?

  • The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
  • 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?

  • Over the earnings (profit reporting) season there were mixed results from retailers. Department stores are still struggling. But Lovisa, JB Hi-Fi, Noni B and Harvey Norman are still lifting sales in a very competitive sector. Retailers need to find the point of difference. The job market is strong, job security is high and wage growth is outpacing prices, so there are opportunities for retailers.
  • Aussie exports are soaring – recording double-digit annual gains to a number of countries, notably China, but also Japan and the US. The quality of Australian goods is well regarded and the lower Australian dollar is providing a competitive boost for exporters. The strength of both exports and imports highlights the underlying strength of the Australian economy.
  • Experts expect interest rates to be unchanged for the foreseeable future.

Investor Signposts: Week Beginning March 10 2019

Australia: Slowdown in key events

  • A quieter week lies ahead in terms of the release of new economic data in Australia.
  • The week kicks off on Tuesday when National Australia Bank releases its February business survey. In January the business conditions index rose from a four-year low of +2.6 points to +6.6 points (long-term average +5.8 points). And the business confidence index rose from +2.7 points to +3.6 points in January, below the long-term average of 6.0 points. But rolling annual averages for both business conditions and confidence were above long-term averages.
  • Also on Tuesday, the Australian Bureau of Statistics (ABS) releases its publication “Lending to households and businesses”. In December, lending commitments to households fell by 4.4 per cent. But more positively, data showed that the share of first home buyers eased only modestly from a 6-year high of 27 per cent in November to 26.5 per cent in December.
  • On Tuesday, the regular weekly reading on consumer confidence is published by ANZ and Roy Morgan. Sentiment has been fluky from week-to-week but the index is still above longer-term averages.
  • Also on Tuesday the Reserve Bank Deputy Governor Guy Debelle delivers a talk: “Climate Change & the Economy” at a Public Forum hosted by the Centre for Policy Development in Sydney.
  • On Wednesday Westpac and the Melbourne Institute release the March monthly consumer confidence report. The monthly consumer sentiment data is more of a check on the more frequent weekly series. But the monthly report will be of interest this month as it contains the latest quarterly views of households on the wisest place to put new savings.
  • On Thursday, the ABS issues a longer-term report: “Household and Family Projections, Australia, 2016 to 2041.” The report is of interest for governments and businesses for planning purposes.
  • On Friday the ABS issues the January report: “Overseas Arrivals and Departures” While there is much interest in the tourism arrivals and departures data, the report also contains figures on overseas migration.
  • Tourist arrivals rose by 0.6 per cent to 782,700 in December. Arrivals rose 4.9 per cent over the year. Tourist departures rose by 1.2 per cent in December to be up 8.0 per cent over the year – the strongest annual growth rate in 19 months.
  • And in terms of migration flows, net permanent and long-term arrivals stood at 291,250 in the year to December – a fresh 41⁄2-year high.

Overseas: US and Chinese ‘top-shelf’ indicators

  • A bevy of ‘top-shelf’ indicators are due in the US and China in the coming week.
  • The week begins on Monday in the US when the retail sales data for January is released. The December figures came as something of a shock, with sales down 1.2 per cent, although after rising 1.1 per cent in the two previous months. Economists tip a 0.1 per cent lift in January sales.
  • On Tuesday in the US, the February data on consumer prices is released with the NFIB business optimism index and weekly chain store sales. Economists estimate that the core measure (excludes food and energy) rose by 0.2 per cent with the annual rate dropping from 2.2 per cent to 2.1 per cent.
  • On Wednesday in the US, the equivalent inflation data for business (producer prices) is released with durable goods orders, construction spending and the weekly measure of mortgage finance. Economists estimate that the core measure (excludes food and energy) rose by 0.2 per cent with the annual rate steady at 2.6 per cent.
  • And durable goods orders (a measure of business investment) are estimated to have fallen 0.7 per cent in January.
  • On Thursday in the US, data on export and import prices are released with new home sales data and the weekly figures on new claims for unemployment insurance.
  • On Friday in the US the February data on industrial production is released with the Empire State manufacturing index, consumer sentiment, JOLTS job openings and capital flows. Economists tip a 0.1 per cent lift in production after a 0.6 per cent fall in January.
  • In China, foreign direct investment data is issued on Tuesday with vehicle sales figures on Wednesday.
  • On Thursday in China the January and February readings on economic activity – retail sales, production and investment – are released. Given the variable timing of Lunar New Year, January and February data need to be read together. Money supply and lending data are also scheduled for Thursday.
  • And on Friday in China, data on house prices is released – the February reading was up 10 per cent on the year.

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