Weekly Market & Currency Developments – From Our Bankers

Airfares drop; China data encourages

China activity data; Airfares; Household & Family Projections

  • China data: In the year to February, Chinese retail sales grew by 8.2 per cent with production up 5.3 per cent and investment up 6.1 per cent.
  • Domestic airfares: Airfares can be volatile on a month-to-month basis. But the smoothed measures show that business class airfares are falling at the fastest annual rate in six years with discount fares dropping at the annual fastest rate in three years.
  • Household projections: The Bureau of Statistics has released long-term projections through to 2041. Four years ago it was assumed that there would be 10.25-10.32 million households in 2022. Now it is estimated that there will be between 10.10-10.23 million households – almost 150,000 fewer.

The Chinese data is important for exporters, especially rural producers, consumer goods, mining and energy companies. The household projections are important for business planning. The airfares data provides a guide on inflationary pressures as well as giving an insight into operating conditions for airlines.

What does it all mean?

  • Using the projections made four years ago, today we should have around 9.75 million households. The latest projections assume there are 9.65 million households. The latest projections are clearly important for planners in government as well as businesses devising longer-term projections. If the latest projections hold, household formation will proceed at a slower pace, suggesting reduced demand for new homes and economic infrastructure.
  • The latest data for December 2018 showed that fewer Australians were travelling on domestic air routes than a year ago – matching the slowdown of the domestic economy in the second half of the year. But airlines appear to be responding. Business and discount airfares are lower than a year ago. It remains to be seen if the easing in fares has the desired effect of putting more passengers in seats. Passenger activity on domestic flights has provided a good indicator of the performance of the broader Australian economy.
  • In China, production growth slowed in the first two months of the year but investment lifted – especially residential investment – while Chinese consumers continued to spend. Overall the readings are of an economy that continues to defy the gloomsters. Retail sales grew by just over 0.8 per cent in both in January and February – the fastest growth pace since April last year.

What do the figures show?

Chinese economic data

  • Chinese retail sales rose at an 8.2 per cent annual rate in the year to January/February, (forecast: +8.1 per cent), and unchanged from December. Online retail sales grew at a 13.6 per cent annual rate.
  • Sales were up 0.81 per cent in February and 0.82 per cent in January – the fastest rates of growth since April 2018.
  • Chinese industrial production rose at a 5.3 per cent annual rate in January/February, below the forecast average (+5.5 percent). Production had risen by 5.7 per cent in the year to December.
  • Steel output in January/February was up 9.2 per cent on a year ago.
  • China’s refiners processed 102.49 million tonnes of crude oil during January and February. According to Reuters calculations that processing rate works out at about 12.68 million barrels per day (bpd), exceeding the previous daily high hit in September at 12.49 million bpd. It compares to average rates recorded for all of 2018 at 12.07 million bpd.
  • Chinese fixed-asset investment rose by 6.1 per cent in January/February (forecast: +6.0 per cent), up from 5.9 per cent in the 2018 year.
  • Chinese property investment rose by 11.6 per cent in the year to January/February, up from 9.5 per cent in 2018 and the strongest January/February growth rate in five years. Residential investment lifted 18 per cent in the year to January/February while commercial building was down by 9 per cent over the year.
  • The unemployment rate of urban surveys in 31 major cities was 5.0 per cent in February with the nationwide survey-based jobless rate at 5.3 per cent. Over the two-month period 1.74 million new urban jobs were created.

Domestic Airfares

  • Business class airfares rose by 1.7 per cent in March – the biggest increase in 18 months. But business class airfares are still down 1.5 per cent on a year ago. In smoothed terms, business class airfares fell 0.5 per cent in March to be down 2.6 per cent on the year.
  • Discount airfares are volatile month-to-month. In March, fares rose by 1.6 per cent but were down 21.2 per cent over the year. In smoothed terms, discount airfares fell 4.8 per cent in March to be down 5.8 per cent on the year.
  • Restricted economy airfares rose by 0.4 per cent in March to be up 5 per cent on the year. In smoothed terms, restricted economy fares rose just 0.1 per cent in March to be up 4.4 per cent on the year.

Household & family projections

  • The projections extend through to 2041. But looking at the shorter run projections, four years ago it was assumed that there would be 10.25-10.32 million households in 2022. Now it is estimated that there will be between 10.10- 10.23 million households.
  • Melbourne is tipped to have the largest growth and largest increase in family numbers over time.
  • The Australian Bureau of Statistics (ABS) notes that in 2016, 49 per cent of Australians lived in a couple family with children (24 per cent were partners, 24 per cent were children.) In 1996, 54 per cent of Australians lived in a couple family with children (27 per cent were partners, 27 per cent were children.)
  • People living in single-parent families increased from 11 per cent in 1996 to 12 per cent in 2016. People living alone increased from 9 per cent in 1996 to 10 per cent in 2016. Group households remained stable from 1996 to 2016, with 4 per cent of Australia’s population living in a group household.
  • The ABS project that the share of couple families with children will fall from 49 per cent in 2016 to 48 per cent in 2041.

What is the importance of the economic data?

  • China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.
  • The Australian Bureau of Statistics releases long-term Household & Family Projections once every five years. The data is important for business and government planning.
  • The Bureau of Infrastructure, Transport and Regional Economics (BITRE) releases data on domestic and international aviation each month. The data is useful in tracking consumer spending and airline performance.

What are the implications for interest rates and investors?

  • China is determined to prevent a marked slowing of the economy. Stimulus is being applied and the efforts look to have been largely successful – residential property looks to be the new growth engine. Production growth continues to ease but that will reflect the impact of the trade dispute with the US as well as the ongoing structural change from a manufacturing to a services-driven country.
  • Lower airfares may reflect an easing of jet fuel prices from October 2018 highs as well as a response to softer passenger numbers. The trends bear watching in terms of airline margins and profitability as well as an indicator of the broader health of the domestic economy.
  • The new household projections are important for a raft of businesses. But the slowdown in household formation may have longer-term implications for home builders and utilities.
  • Experts expect Australian official interest rate settings to remain on hold for the foreseeable future.

Real estate sentiment hits 46-year low

Consumer sentiment

  • ‘Wisest place for savings’: In the latest March quarter survey only 8.8 per cent of respondents thought the ‘wisest’ place to put new savings was in ‘real estate’ – a record 46-year low. The ‘wisest’ place for savings remains bank deposits (28.8 per cent of respondents) from ‘pay debt’ (26.3 per cent).
  • Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index fell by 4.8 per cent to 98.8 in March after rising by 4.3 per cent to 103.8 points in February. The sentiment index is back below its long-term average of 101.3.T

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.

What does it all mean?

  • Aussie consumers remain super-conservative. When asked what was the wisest place to put new savings, ‘bank deposits’ and ‘paying-off debt’ were ranked number one and two. Understandably with home prices falling, real estate didn’t feature in the top places for new savings. In fact the result for ‘real estate’ was the lowest since the survey began in 1973.
  • Aussie consumers aren’t confronted with a lot of financial news in the mainstream media nowadays. But when it is published it tends to be bad news. Last week consumers would have heard that the Australian economy slowed in the December quarter, that the Australian dollar had fallen to US70 cents, and that retail sales rose modestly in January. There was speculation about rate cuts. Understandably this was picked up in the ANZ-Roy Morgan confidence index yesterday and today’s Westpac-Melbourne Institute survey. Confidence does bounce from week-to-week and month-to-month. Before the latest drop, Aussie confidence levels were actually above longer- term averages.
  • Westpac noted: “Responses over the survey week show a marked drop-off after the national accounts update. Those collected before the March 6 release had a combined index read of 100.7. Those collected after the release had a combined read of 92.7, an 8 per cent fall.”
  • If consumers are pessimistic, they may reduce spending. But much depends on the strength of the job market (at present, it is quite strong) and consumer prices (inflation rate is low). So it is a case of being alert and not
  • alarmed.
  • The good news is that more homebuyers believe that now is a good time to buy a home. The index is at 5-year highs, up 30 per cent from the mid 2017 low.

What do the figures show?

Consumer confidence

  • The Westpac/Melbourne Institute survey of consumer sentiment index fell by 4.8 per cent to 98.8 in March after rising by 4.3 per cent to 103.8 points in February. The sentiment index is back below its long-term average of 101.3. A reading above 100 denotes optimism. The survey of 1,200 people was conducted from March 4-8.
  • The current conditions index fell by 2.8 per cent and the expectations index fell by 6.2 per cent.
  • All five of the components of the index fell in March after all rose in February:
    • The estimate of family finances compared with a year ago fell by 5.6 per cent to 84.4;
    • The estimate of family finances over the next year fell by 5.9 per cent to 107.8;
    • Economic conditions over the next 12 months fell by 7.0 per cent to 101.4;
    • Economic conditions over the next 5 years fell by 5.5 per cent to 94.6;
    • The measure on whether it was a good time to buy a major household item fell by 0.6 per cent to 117.9.
  • Housing outlook: A good time to buy a dwelling? The index rose 3.5 per cent to 112.7, and was up 11.5 per cent on the year. House price expectations fell by 2.7 per cent to 85.4 and were down by 34.1 per cent on a year ago.
  • Unemployment expectations: Unemployment expectations rose by 8.9 per cent to 130.6 in March to be up by 7.2 per cent over the year.
  • Wisest place for savings: On the question of the ‘wisest place for savings’, banks (28.8 per cent) led the way from paying down debt (26.3 per cent). Only 8.8 per cent of respondents selected real estate while 7.5 per cent nominated shares. Overall a record 51.7 per cent suggested choices for putting savings other than traditional real estate, bank deposits, building society deposits, bonds or shares.

What is the importance of the economic data?

  • Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

  • Consumer confidence ebbs and flows over time, but the job market remains in strong shape. Provided unemployment remains low, job opportunities abound and wages tilt higher then consumers will continue to embrace ‘retail therapy’.
  • Consumers may currently prefer to put savings in other places than real estate but that could be about to change. The reading on whether it was a good time to buy a home has lifted to 4-year highs. Low interest rates, softer home prices and a strong job market are a heady mix of positive influences, balanced against a raft of new housing supply in the process of hitting markets.
  • Experts don’t expect a change in official interest rates for the foreseeable future.

Investor Signposts: Week Beginning March 17 2019

Australia: Jobs and population data in focus

  • In the coming week the all-important jobs report is released. The Reserve Bank’s March monetary policy meeting minutes are issued. Population data is also scheduled.
  • The week kicks off on Tuesday with a speech on “Bonds and Benchmarks” by Reserve Bank Assistant Governor (Financial Markets) Christopher Kent at the KangaNews DCM Summit in Sydney. And the Reserve Bank’s March 5 monetary policy meeting minutes will be released at 11:30am Sydney time.
  • Also on Tuesday, the regular weekly reading on consumer confidence is published by ANZ and Roy Morgan. And the Bureau of Statistics’ releases its quarterly publication “Residential Property Price Indexes”. Apart from home prices there is other data covering the average value of homes and changes in the number of homes in each state.
  • On Wednesday the Business Sales Indicator for February is issued. And the Department of Jobs and Small Business releases the Internet Vacancy Index for February. In January, the index rose by 1.3 per cent to a 61⁄2-year high of 88.2 points. It was the fourth straight gain in the trend index. The index is 3.3 per cent higher than a year ago.
  • Also on Wednesday, Michele Bullock, Reserve Bank Assistant Governor (Financial System) gives a speech at the Urban Development Institute of Australia in Perth.
  • On Thursday, the February employment report is
    released. Leading indicators of jobs growth have been mixed and there has been a loss of momentum in private-sector activity. That said, 65,400 full-time jobs were added in January with the NSW unemployment rate falling to 3.9 per cent – the lowest level since the 1970s. Economists’ forecast 15,000 jobs to be added with the unemployment rate steady at 5 per cent.
  • Also on Thursday the Bureau of Statistics’ releases the September quarter population estimates. Annual population growth probably held near 1.5-1.6 per cent – still one of the fastest rates across advanced nations.
  • The Reserve Bank releases the quarterly Bulletin publication also on Thursday.
  • On Friday, the ‘flash’ Purchasing Manager indexes for March are released.

Overseas: The US Federal Reserve takes centre stage

  • In the absence of any ‘top shelf’ data releases in China, the US Federal Reserve’s interest rate decision is the highlight for investors in the week ahead.
  • The week begins on Monday in the US when the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index for February is released. According to NAHB Chair Randy Noel, the “Ongoing reduction in mortgage rates in recent weeks coupled with continued strength in the job market are helping to fuel builder sentiment. In the aftermath of the fall (autumn) slowdown, many builders are reporting positive expectations for the spring selling season.” The home builder sentiment index is currently at 4-month highs at 62 points.
  • On Tuesday, the January data on US factory orders is released along with the weekly chain store sales figures. Economists estimate that factory orders fell by 0.1 per cent. New orders for US-made goods rose by just 0.1 per cent in December and business spending on equipment was much weaker than expected, pointing to a softening in manufacturing activity.
  • Also on Wednesday the US Federal Reserve’s Open Market Committee (FOMC) hands down its interest rate decision at the conclusion of its two-day meeting. Chair, Jerome Powell, is expected to reiterate in his press conference the FOMC’s recently stated position that it can be patient when it comes to the future path of monetary policy. With inflation pressures “muted”, the US facing “crosscurrents” from slowing global growth and likely winter-impacted March quarter economic activity, we expect the Federal Reserve to remain sidelined this year.
  • In an interview on CBS News’ “60 Minutes” on Sunday, Chair Powell called the current rate setting “roughly neutral” – meaning it’s neither stoking nor slowing growth – and “patient means that we don’t feel any hurry to change our interest rate policy.” Several policymakers have expressed support for ending the run-off of assets from the central bank’s US$4 trillion balance sheet later this year with a timetable expected to be announced.
  • On Thursday, manufacturing sector data from the Federal Reserve Bank of Philadelphia is released together with the Conference Board’s Leading Index and the weekly figures on new claims for unemployment insurance. The “Philly Fed” survey on general business conditions contracted by 4.1points in February – the first negative reading since May 2016. But a modest rebound to 3 points is expected in March.
  • On Friday, IHS Markit issues ‘flash’ manufacturing indexes for major advanced economies. Factory activity is contracting in Germany and Japan and at its lowest level in two years in the US due to slowing global trade flows.
  • Also on Friday in the US, the monthly budget statement and existing home sales data are both issued.


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