Weekly Market & Currency Developments – From Our Bankers

Consumer confidence lifts the most in 71⁄2 months Biggest decline in Queensland building in a decade

Consumer sentiment; Building approvals

  • Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.6 per cent – the biggest increase in 71⁄2 months – to 114.7 points. Consumer sentiment is above both the average of 114.3 points held since 2014 and the longer term average of 113.1 points since 1990.
  • Inflation expectations: Consumer inflation expectations over the next two years fell from 4.2 per cent to 3.6 per cent last week – the lowest level since records began in October 2014.
  • Building approvals: Council approvals to build new homes rose by 19.1 per cent (consensus: -1.8 per cent) in February to be down by 12.5 per cent over the year. In trend terms, Queensland building approvals fell by 35.3 per cent over the year to February – the weakest growth rate in a decade.

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The approvals data has implications for banks, retailers, developers, building and building material companies.

What does it all mean?

  • Aussies were buoyed last week by the prospect of much-needed tax cuts in tonight’s Federal Budget. Job vacancies also rose to record highs. While developments in the job market remain key to the interest rate outlook, consumer spending is also critical to economic growth.
  • Household wealth fell by the most in seven years during the December quarter due to the property downturn and falling share prices. Aussies have been de-leveraging, preferring to pay down debt, rather than spend and save.
  • So further government spending support is required via a fiscal stimulus, including tax cuts and job-creating infrastructure programs, potentially encouraging consumers to part with their hard-earned coin. After all, goods prices – especially for clothing and household furnishings – remains low with consumers’ acutely aware that inflation is contained.
  • The disposable income of households has been squeezed by a combination of limited wage gains, high mortgage debt, rising taxes (from bracket creep), falling welfare payments, declining rental income and a reduction in investment income. According to Reserve Bank Assistant Governor (Economic)Luci Ellis: “In the past year, taxes paid by households increased by around 8 per cent, more than double the rate of growth in gross household income of 31⁄2 per cent.”
  • Population growth in Queensland may be at 5-year highs, but residential building construction is losing momentum. According to surveyor, Rider Levett Bucknall, Brisbane recorded the biggest decline (down 13 to 59) in the national crane count in the March quarter. The Sunshine Coast also lost six cranes. The annual growth rate of building approvals in the Sunshine State is the weakest (down 35.3 per cent) in a decade.

What do the figures show?

Consumer Sentiment

  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.6 per cent – the biggest increase in 71⁄2 months – to 114.7 points. Consumer sentiment is above both the average of 114.3 points held since 2014 and the longer term average of 113.1 points since 1990.
  • Four out of the five major components of the index rose last week:
    • The estimate of family finances compared with a year ago was down from +6.6 points to +5.0 points;
    • The estimate of family finances over the next year was up from +20.2 points to +20.7 points;
    • Economic conditions over the next 12 months was up from -1.0 points to +7.0 points;
    • Economic conditions over the next 5 years was up from +9.3 points to +10.7 points;
    • The measure of whether it was a good time to buy a major household item was up from +24.0 points to +30.2 points.
  • The measure of inflation expectations fell from 4.2 per cent to 3.6 per cent – a record low.

Building Approvals

  • Council approvals to build new homes rose by 19.1 per cent in February to be down by 12.5 per cent over the year.
  • House approvals fell by 3.7 per cent and apartment approvals rose by 62.4 per cent – the biggest monthly gain in 61⁄2 years.
  • In trend terms, overall approvals rose by 0.4 per cent. House approvals fell by 0.8 per cent, but apartment approvals were up by 2.6 per cent.
  • Over the past year 204,626 new homes were approved – a 4-year low and down from the record high of 242,862 in the year to August 2016.
  • Dwelling approvals across states/territories in February: NSW (up 25.2 per cent); Victoria (up 37.3 per cent); Queensland (up 3.4 per cent); South Australia (up 6.8 per cent); Western Australia (down 10.9 per cent); Tasmania (down 13.6 per cent). Trend terms: Northern Territory (down 6.5 per cent); ACT (down 6.3 per cent).
  • The value of all commercial and residential building approvals rose by 15.4 per cent in February to be down 9.7 per cent on the year. Residential approvals rose by 24.7 per cent; new building rose by 27.8 per cent; alterations & additions increased by 4.4 per cent. Commercial building rose by 2.1 per cent in February.
  • Over the year, building approvals fell further from a record high of $129.2 billion in March 2018 to $116.5 billion in February. Annual commercial building approvals stood at $42.9 billion in February, down from a record high $50.0 billion in March 2018.

What is the importance of the economic data?

  • The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
  • The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of thefirst stages of the construction ‘pipeline’ and is thus a keyleading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

What are the implications for interest rates and investors?

  • Building approvals are volatile. Local council consents for Victorian apartments surged in February (up by 134.1 per cent). Melbourne’s crane count lifted by 30 to a record- high 222 in the March quarter. In fact, 24 cranes were added for residential construction with 148 currently operating. That said, overall building approvals have peaked with the annual growth rate of total house approvals at 61⁄2-year lows, pointing to further falls in dwelling construction and investment.
  • The weekly consumer sentiment rating averaged 114.5 points during the March quarter. The current reading of 114.7 points is also broadly in-line with the longer-term average of 114.3 points.
  • Clearly, low unemployment, lifting sharemarkets, expected tax relief and potential interest rate cuts are boosting consumer morale. That said, the property downturn, weak wages growth and higher petrol prices are restraining spending at a time when households are keen to get ahead on their mortgage repayments.
  • The Federal election is likely to be called this weekend with a month-long campaign expected. Political uncertainty impacts both business and consumer confidence.
  • The Reserve Bank meets today and while the Board will probably sit tight, much interest will be on its communication and forward guidance. Will policymakers follow the lead of their counterparts in New Zealand and adopt an interest rate easing bias, or will they await the announcement of the Morrison government’s fiscal initiatives tonight?
  • Either way, there is no guarantee that policies announced in tonight’s Budget will be enacted in the near-term. There is the usual difficulty of passing legislation through the multi-party Senate. Also, the opposition Labor Party are ahead in the opinion polls and Shadow treasurer Chris Bowen has confirmed that he will call on Treasury to reset Australia’s policy settings in a mini-Budget by September if his party wins government.
  • Experts expect interest rates to be unchanged for the foreseeable future. But the loss of momentum across global economies means central banks are skewed to more accommodative monetary policies.

Retail spending soars; Record trade surplus

Retail trade; International trade; Services sector

  • Retail trade: Retail trade rose by 0.8 per cent in February. And the more consistent grouping of ‘larger retailers and chain stores’ shows that sales rose by 1.4 per cent in the month.
  • Foreign trade: The trade surplus rose from $4.35 billion to a record $4.80 billion in February. The annual trade surplus with China hit record highs as did annual exports and imports with the country.
  • Services sector: The Australian Industry Group (AiG) Performance of Services Index (PSI) rose by 0.3 points to 44.8 points in March, remaining near 4-year lows. Still, a reading below 50 indicates contraction of services activity. The ‘final’ Markit Services Purchasing Managers’ Index (PMI) rose by 0.6 points to 49.3 points in March.
  • New vehicle sales: In March, 99,442 new vehicles were sold, down by 7.1 per cent over the year. In the twelve months to March, sales totalled 1,130,111 units, down 5.9 per cent on a year ago and the biggest annual decline in nine years.

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. The services sector gauge highlights conditions in the sector as well as providing guidance on the economy more generally. The vehicle sales data provides guidance on consumer spending as well as conditions for the Autos and Components sector of the sharemarket.

What does it all mean?

  • In the space of an hour the perception of the Australian economy and its outlook changed. Data showed retail spending soared by 0.8 per cent in February. Apparently rumours of the death of the Aussie consumer were over- stated. And data showed the largest ever trade surplus being recorded in the month. Exports to China and imports from China were both at record highs over the past year. And the final piece of positive news: the Financial Times reports that the US and China have resolved most of their trade issues.
  • The Aussie dollar rose from US70.55 cents to US71.00 cents in response to the confluence of positive news. Seemingly, a Reserve Bank rate cut isn’t warranted at all. And the Federal Budget is on stronger ground, less than 24 hours after being presented to Parliament.
  • It’s not all super-positive though. Gauges of services sector activity are still weak and rolling annual motor vehicle sales posted the biggest yearly decline in nine years.

What do the figures show?Retail trade

  • Retail trade rose by 0.8 per cent in February after rising 0.1 per cent in January. Annual growth rose from 2.8 per cent to 2.9 per cent (3-year average 3.0 per cent).
  • Non-food retailing rose by 0.9 per cent in February after a flat result in January. Annual growth rose from 1.7 per cent to 2.0 per cent.
  • Sales by chain-store retailers and other large retailers rose by 1.4 per cent in January with annual growth lifting from 3.3 per cent to a 4-month high of 4.3 per cent (3- year average 4.4 per cent).
  • Ten of the 15 retail subgroups rose in February.
  • Spending rose most in February: Department Stores (up 3.5 per cent); Footwear and other personal accessory retailing (up 2.5 per cent); and Butchers, fruit & veg stores etc. (up 1.8 per cent).
  • Spending fell the most: Newspaper and book retailing (down 4.4 per cent) and “Other recreational good retailing” (sporting goods, toys, games) (down 2.5 per cent).
  • Spending rose in seven Australian states and territories in February: NSW (up 0.6 per cent); Victoria (up 0.8 per cent); Queensland (up 1.4 per cent); South Australia (up 0.7 per cent); Western Australia (up 0.6 per cent); Tasmania (down 0.7 per cent); Northern Territory (up 1.4 per cent); ACT (up 1.7 per cent)

International trade – February

  • The trade surplus rose from $4,351 million to a record high of $4,801 million in February.
  • The rolling annual surplus was a record $29.08 billion in the year to February.
  • Exports of goods and services fell by 0.2 per cent (goods exports fell by 0.2 per cent).
  • Imports of goods and services fell by 1.1 per cent (goods imports fell by 2.3 per cent).
  • Exports were up by 13.2 per cent on a year ago, while imports were up by 4.4 per cent.
  • Rural exports fell by 1.1 per cent. “Cereal grains” and wool both fell 6 per cent.
  • Non-rural goods rose by 0.5 per cent. Metal ores rose 11 per cent but coal fell 13 per cent with transport equipment down 27 per cent.
  • Within imports, consumer imports rose by 0.1 per cent; capital goods imports fell by 2.3 per cent and intermediate goods imports fell by 4.0 per cent.
  • Consumption goods imports were up by 0.2 per cent on a year ago, capital goods imports rose by 4.7 per cent, but intermediate goods imports were up by 5.4 per cent.
  • The net services deficit widened from $418 million to $517 million in February.
  • Australia’s annual exports to China rose from $119.33 billion to $121.21 billion in February – a new record high. Exports to China are up 21.1 per cent on a year ago. Exports to China account for 34.4 per cent of Australia’s total exports – a new record high.
  • Australia’s annual imports from China rose from $76.10 billion to a record $76.51 billion in February. Annual imports were up by 17.1 per cent on a year ago. Imports from China accounted for 24.95 per cent of Australia’s total imports – a record high.
  • Australia’s rolling annual trade surplus with China rose from $43.24 billion to a record $44.70 billion in February.

New vehicle sales

  • The Federal Chamber of Automotive Industries reported: “The March 2019 market of 99,442 new vehicle sales is a decrease of 7,546 vehicle sales or -7.1 per cent on March 2018 (106,988) vehicle sales. March 2019 (25.5) had the same number of selling days as March 2018 and this resulted in a decrease of 295.9 vehicle sales per day.”
  • “The Passenger Vehicle Market is down by 7,121 vehicle sales (-19.7 per cent) over the same month last year; the Sports Utility Market is up by 135 vehicle sales (0.3 per cent); the Light Commercial Market is down by 409 vehicle sales (-1.9 per cent); and the Heavy Commercial Vehicle Market is down by 151 vehicle sales (-4.4 percent) versus March 2018.”
  • Annual sales across states and territories: NSW (down 8.4 per cent); Victoria (down 11.5 per cent); Queensland (down 5.5 per cent; South Australia (up 9.4 per cent); Western Australia (down 3.5 per cent); Tasmania (up 6.2 per cent); Northern Territory (down 9.7 per cent); ACT (down 7.9 per cent).

Services Purchasing managers’ indexes

  • The Australian Industry Group (AiG) Performance of Services Index (PSI) rose by 0.3 points to 44.8 points in March – below a reading of 50 (contracting) for a third successive month and remaining near 4-year lows. It was the first month that every sector contracted since August 2010.
  • AiGroup notes: “Services businesses reported weak customer demand in March, with several businesses noting slower sales and enquiries as well as weakening retail conditions. Some businesses that are directly or indirectly affected by the construction sector (mainly in the business-oriented services sectors) mentioned a negative impact on their activity arising from lower residential building commencements, a downturn in the housing market and credit tightening. In regional locations, excessive heat and drought conditions are affecting some services businesses while floods are impacting others.”
  • The ‘final’ Markit Services Purchasing Managers’ Index (PMI) rose by 0.6 points to 49.3 points in March – the second consecutive contraction in activity since the survey started in May 2016. Any reading below 50 indicates contraction.
  • Notes: “Business conditions across the Australian service sector deteriorated further at the end of the first quarter. March showed a decline in new business despite growth in export sales. Consequently, business activity shrank and employment was broadly stagnant. However, backlogs rose and business sentiment remained positive, supporting longer-term prospects. Meanwhile, cost pressures persisted, prompting firms to raise prices.”

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.
  • Australian Industry Group (AiG) release surveys on the services sector each month. The Australian surveys are the local equivalents of similar surveys released for other countries. The services sector surveys are useful not just in showing how the sector is performing but in providing some sense about where it is headed. The key ‘forward looking’ components are orders and employment.
  • The Federal Chamber of Automotive Industries releases estimates of new vehicle sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.What are the implications for interest rates and investors?
    •   Net exports (exports less imports) looks like adding to economic growth in the March quarter. Certainly the trade accounts have never looked better. Australian exports are growing at double-digit annual rates with 57 nations.
    •   Consumers are still spending – and that makes sense because wage growth is still out-pacing prices. Retailers need to constantly remain relevant to shoppers.
    •   CommSec expects interest rates to be unchanged for the foreseeable future. The leaning is still to lower rates, but there is clearly no urgency to provide stimulus, especially after the Budget stimulus.

What are the implications for interest rates and investors?

  • Net exports (exports less imports) looks like adding to economic growth in the March quarter. Certainly the trade accounts have never looked better. Australian exports are growing at double-digit annual rates with 57 nations.
  • Consumers are still spending – and that makes sense because wage growth is still out-pacing prices. Retailers need to constantly remain relevant to shoppers.
  • Experts expect interest rates to be unchanged for the foreseeable future. The leaning is still to lower rates, but there is clearly no urgency to provide stimulus, especially after the Budget stimulus.

Investor Signposts: Week Beginning April 7 2019

Australia: Reserve Bank and consumer confidence in focus

  • In Australia over the coming week, ‘top shelf’ data is conspicuous in its absence. Consumer confidence readings will attract most interest.
  • The week kicks off on Tuesday when the weekly consumer sentiment index is issued from ANZ and Roy Morgan. This survey will provide the first indication on how the Federal Budget went down with Aussie consumers.
  • Also on Tuesday, the Australian Bureau of Statistics releases the February data from its publication: “Lending to households and businesses”.
  • In January, the value of lending to households fell by 2.4 per cent after a 3.6 per cent decline in December. Lending for housing fell by 2.1 per cent, investor lending was down 4.1 percent and lending for owner-occupier dwellings fell by 1.3 per cent.
  • The value of loans for home alterations and additions fell by 0.7 per cent to a record-low of $281 million.
  • On Wednesday there is another check on consumer confidence, this time from the monthly survey by Westpac and Melbourne Institute. In March, consumer sentiment index fell by 4.8 per cent to 98.8 after rising by 4.3 per cent to 103.8 points in February. The sentiment index is below its long-term average of 101.3.
  • Also on Wednesday, the ABS releases two building publications – “Building Activity and “Construction Activity” –both for the December quarter. Most interest will be in the component data on dwelling starts.
  • The number of dwelling units commenced fell 5.7 per cent to 54,803 dwellings in the September quarter following a fall of 4.7 per cent in the June quarter.
  • There are a number of speeches from Reserve Bank officials on Wednesday. Deputy Governor, Guy Debelle, speaks at the American Chamber of Commerce event in Adelaide. Melissa Hope, Head of Note Issue Department, and Lindsay Boulton, Assistant Governor (Business Services), speak at a currency conference in Dubai.
  • On Thursday, the ABS releases “Overseas Arrivals and Departures” containing data on tourism and migration flows.
  • Also on Thursday, Deputy Governor, Guy Debelle, delivers a speech via video conference to an audience in Hong Kong.
  • On Friday, the Reserve Bank releases the February data on credit and debit cards.
  • Also on Friday the Reserve Bank releases the semi-annual Financial Stability Review.

Overseas: US inflation data and Federal Reserve in focus

  • A raft of reports on inflation are released in the US over the coming week. In addition the minutes of the last Federal Reserve meeting are released. In China inflation and trade data are of most interest.
  • The week begins on Monday in the US when data on factory orders and consumer inflation expectations are expected. Orders may have fallen 0.3 per cent in February after two gains of 0.1 per cent.
  • On Tuesday in the US, the National Federation of Independent Business (NFIB) releases its business optimism index for March together with the IBD/TIPP economic optimism gauge, JOLTS job openings and the regular weekly data on chain store sales.
  • The NFIB business optimism index bounced from 2-year lows in February. And job openings on January lifted to levels just short of record highs.
  • On Wednesday in the US, the consumer price index is due for release alongside the monthly Budget Statement, weekly mortgage finance data and the minutes of the last Federal Reserve policymaking meeting – the Open Market Committee.
  • The core rate of inflation – excludes food and energy – is tipped to remain at a 2.1 per cent annual rate in March.
  • On Thursday in the US, another gauge of inflation – the producer price index (PPI) – or measure of business inflation, is released. The annual core PPI is expected to ease from 2.5 per cent to 2.4 per cent. Also on Thursday the usual weekly data on claims for unemployment insurance is issued.
  • On Friday in the US, there yet two more inflation measures are to be released – data on export and import prices. The University of Michigan releases its preliminary estimate of consumer sentiment for April.
  • In China, the key data is released over Thursday and Friday.On Thursday data on consumer and producer prices is released together with vehicle sales.
  • On Friday in China, export and import figures for March are issued. At present forecasts suggested a widening of the trade surplus from US$4.1 billion to US$26.4 billion.

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