Weekly Market & Currency Developments – From Our Bankers

Election fever boosts Canberra property?

Manufacturing activity hits 8-month high

Home prices; Manufacturing

  • Home prices: The CoreLogic Home Value Index of national home prices fell by 0.49 per cent in April – the smallest decline since September – to be down 7.2 per cent over the year. Prices fell in all capital cities except Canberra (up by 0.4 per cent). Regional prices fell by 0.3 per cent.
  • Shares outperform residential property: Total returns on national dwellings fell by 3.6 per cent in the year to April with houses down by 4.2 per cent on a year earlier and units were down by 1.9 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index lifted by 10.2 per cent over the year to April.
  • Manufacturing sector: The Australian Industry Group Australian Performance of Manufacturing Index rose by 3.8 points to 8-month highs of 54.8 points in April. The ‘final’ Manufacturing Purchasing Managers’ Index (PMI) declined by 1.1 points to 50.9 points. Any reading over 50 indicates expansion.

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?

  • National home prices continued to decline in April, albeit at the slowest rate since September last year. The property downturn in Sydney and Melbourne appears to be easing. That said, housing activity may have been distorted by the extended school, Easter and Anzac Day holiday period.
  • With federal election fever gripping the country perhaps shrewd property buyers see the nation’s capital as a potential beneficiary of change in government, or in fact a bigger government? Canberra saw a decent 0.4 per cent gain in home prices in April and previous monthly price movements have been relatively stable when compared to other larger capital cities. The 2018 OECD Regional Well-being Study ranked the ACT as the world’s most liveable region. Public sector job creation has been solid.
  • The ACT economy is in good shape at the moment. Economic growth, as measured by State Final Demand, grew by 5 per cent over the year to December, supported by solid population growth near 2 per cent per annum. The annual growth rate in retail spending was up by a healthy 4.3 per cent in March. And the jobless rate is the lowest in the nation at 3.6 per cent.
  • And home building and the purchase of homes is nation- leading when compared to the decade average. The ACT government is investing almost $3 billion in infrastructure projects over the next four years.
  • With the Aussie sharemarket hitting 11-year highs in April, total returns for shares continue to exceed returns on residential property, which are near decade lows. If you include dividends, the S&P/ASX All Ordinaries Accumulation Index increased by 10.2 per cent over the year to April, outperforming total returns for national dwellings, which were down by 3.6 per cent.
  • While there will be some anxiety around the possible
    impact of slowing home prices on household spending and the ‘wealth effect’, the rebound in sharemarkets so farin 2019 could potentially support consumer sentiment together with tax cuts.
  • The rebound in global manufacturing activity is welcome after a ‘soft patch’ in late 2018. The AiGroup’s measure of Aussie factory activity was the strongest since September. Pleasingly, six of the seven underlying activity indexes, including production, new orders, deliveries, exports, sales and employment, all expanded in April. Importantly, the survey said that “business confidence remained positive in April”, potentially signalling a further improvement in conditions.

What do the figures show?

Home prices

  • The CoreLogic Home Value Index of national home prices fell by 0.49 per cent in April – the smallest decline since September – to be down 7.2 per cent over the year. Prices fell in all capital cities except Canberra (up by 0.4 per cent). Regional prices fell by 0.3 per cent (down 2.6 per cent on the year).
  • In capital cities, prices fell by 0.5 per cent to be down 8.4 per cent over the year to April. House prices fell by 0.6 per cent and apartment prices fell by 0.5 per cent. House prices were down 9.1 per cent on a year ago and apartments were down by 6.6 per cent.
  • In regional areas, house prices fell by 0.3 per cent and apartment prices fell 0.5 per cent in April to be down 2.8 per cent and 2.2 per cent respectively on the year.
  • The average Australian capital city house price (median price) was $628,587 and the average unit price was $526,813 in April.
  • Dwelling prices fell in seven of the eight capital cities in April. Home prices fell in Darwin (down 1.2 per cent), Hobart (down 0.9 per cent), Sydney (down 0.7 per cent), Melbourne (down 0.6 per cent), Brisbane and Perth (both down 0.4 per cent), and Adelaide (down 0.1 per cent). But prices rose in Canberra by 0.4 per cent.
  • Home prices were lower than a year ago in five of the eight capital cities in April. Prices fell by the most in Sydney (down 10.9 per cent); Melbourne (down 10.0 per cent); Perth (down 8.3 per cent); Darwin (down by 7.1 per cent) and Brisbane (down 1.9 per cent). But prices are still positive in Hobart (up 3.8 per cent), Canberra (up 2.5 per cent) and Adelaide (up 0.3 per cent).
  • Total returns on national dwellings fell by 3.6 per cent in the year to April with houses down by 4.2 per cent on a year earlier and units were down by 1.9 per cent. In contrast, the S&P/ASX All Ordinaries Accumulation Index lifted by 10.2 per cent over the year to April.

Manufacturing Purchasing Managers’ Indexes

  • The Australian Industry Group (AiGroup) Australian Performance of Manufacturing Index rose by 3.8 points to 8-month highs of 54.8 points in April. The ‘final’ Manufacturing Purchasing Managers’Index (PMI) declined by 1.1 points to 50.9 points. Any reading over 50 indicates expansion.
  • According to AiGroup, “Manufacturers in the food and beverages sector reported higher than usual demand for this time of year (June quarter is typically slower for this sector), although their input prices did rise in April. The current range for the Australian dollar is supporting export orders. Infrastructure projects, particularly in NSW and Victoria, are supporting demand for machinery and equipment and metals products, but overall activity levels in these sectors remains relatively weak.”
  • According to other experts, “The slowdown in Australia’s manufacturing sector gained momentum at the start of the second quarter. The headline index sank to its lowest level in the three-year survey history, dragged down by lower output and markedly slower order book growth. Employment was stagnant, while firms cut back on purchasing activity for the first time since the series inception. Cost pressures intensified and business confidence was the second-lowest on record.”

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 AiGroup and 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?

  • The housing market continues to gradually rebalance. Home prices declined in April, but the rate of deceleration in prices was the slowest in eight months. In fact, the three-month rolling average Sydney median house price lifted by $35,000 to $870,000 in April. That said, the decline in prices has spilled over into more regional cities, towns and suburbs. Further modest falls in home prices are expected.
  • Tighter lending standards – specifically the availability of credit – are weighing on demand for home loans. Investor demand is also waning due to falling property prices and increased stamp duty for foreign buyers. Listings of homes for sale have increased.
  • Prospective buyers may also be dissuaded from purchasing properties due to political uncertainty around theLabor Party’s proposed negative gearing policy and the upcoming Federal election. On the flip side, Canberra’s desirable quality of life and solid jobs market, supported by public infrastructure spending and broader government activity, are attracting more people to the nation’s capital, supporting the property market.
  • First home buyers and renters are the ‘winners’ from the property downturn. Capital city rents are up by just 0.4 per cent over the year to April, led by falls in Sydney (down 3.1 per cent).
  • With household disposable incomes under pressure and mortgage debt still elevated, Reserve Bank policy makers will hope that the upturn in sharemarkets continues, ‘cushioning the blow’ from the negative wealth effect of falling home prices.
  • Consumer spending, proposed Federal Budget tax cuts and the strength of the labour market will determine the future direction of interest rates.
  • All eyes will be on the Reserve Bank’s monetary policy statement on Tuesday to see whether an explicit easing bias is inserted into the commentary.
  • Experts don’t expect a change in the official cash rate in the foreseeable future, but the risks are still tilted to rate cuts.

US interest rates: Patient posture

US Federal Reserve meeting

  • US Federal Reserve decision: As widely expected, the US Federal Reserve’s Open Market Committee (“FOMC”) unanimously kept the target range for the federal funds rate between 2.25-2.50 per cent.
  • US interest rate outlook: The FOMC is forecasting no rate changes in 2019, despite acknowledging that inflation has declined “below 2 per cent” (it’s target). That said, Chair Jerome Powell said that low inflation was “transitory”, the neutral policy stance is “appropriate right now” and “we don’t see a strong case for moving in either direction.”
  • Interest rate targeting: The FOMC adjusted its interest rate on excess reserves (IOER) target to 2.35 per cent from 2.40 per cent to keep the federal funds rate within its target rate after drifting higher recently.

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?

  • The US Federal Reserve is likely to stay on the interest rate sidelines over 2019, reiterating that it will be “patient”.In a nod to the better-than-expected March quarter economic growth (GDP) report, the FOMC statement characterised economic activity as “solid”, but acknowledged that the “growth of household spending and business fixed investment slowed.” That said, jobs growth was “solid” and unemployment “remained low.”
  • But it was the FOMC’s commentary on inflation that fired up market participants, who had expected policymakers to perhaps lay the groundwork for eventual policy easing later this year due to persistently low inflation. In fact, theFed’s preferred measure of inflation – the core Personal Consumption Expenditure (PCE) Deflator – grew by just 1.6 per cent over the year to March – the weakest annual pace since January 2018.
  • In his press conference, Fed Chair Jerome Powell said that tepid inflation was “transitory”, despite recently acknowledging that it was “one of the major challenges of our time.” Lower airline prices, changes to methods of collecting apparel prices, falling drug prices and lower energy (gasoline and natural gas) prices have all been identified as items likely to eventually increase in price and wages growth is just below decade highs.

What are the implications of today’s decision?

  • US policymakers are under no immediate pressure to adjust interest rates, despite US President Trump’s insistence. FOMC members have retained a neutral policy stance and will continue to assess economic conditions as they evolve. The US economy (GDP) grew by 3.2 per cent in the year to March – the strongest first quarter growth rate in four years. But a closer look ‘underneath the bonnet’ reveals that consumer spending,business investment and housing activity all moderated.
  • With inflation entrenched below the Fed’s 2 per cent target, the federal funds futures market is increasingly pricing in an increased probability of an interest cut by early next year as the Trump Administration’s fiscal stimulusfades. But the Fed – sidelined for now – can afford to take its time evaluating economic data releases. The jobs market is still solid with the unemployment rate near 50-year lows, annual wages growth is just below decade highs at 3.2 per cent and retail sales rebounded in March (up 1.6 per cent). A potential trade deal with China and a bipartisan US$2 trillion infrastructure spending plan with the Democrats present upside risks.
  • US sharemarkets were volatile during Wednesday’s trading session with the Dow Jones index closing down by 163 points or 0.6 per cent as investor expectations for additional monetary accommodation was scaled back. The S&P 500 index fell by 0.8 per cent. And the Nasdaq index lost 46 points or 0.6 per cent. US 10-year government bond yields were flat near 2.50 per cent, but US 2-year government yields rose by 4 points to 2.31 per cent.
  • The US dollar strengthened following the FOMC’s announcement, given the US’ relative economic strength and higher interest rates compared to other economies. The Aussie dollar fell from US70.60 cents to US70.07 cents and was around US70.15 cents in late US trade.

Investor Signposts: Week Beginning May 5 2019

Australia: Reserve Bank in focus

  • In the coming week, the Reserve Bank dominates the economic calendar. Top-tier data releases include retail and international trade. Consumer sentiment, job vacancies, inflation and construction data are also issued.
  • The week kicks off on Monday when ANZ releases job advertisements data for April. Ads have declined for five consecutive months. Vacancies fell by 1.7 per cent in March to be down 6.0 per cent over the year.
  • Also on Monday the Melbourne Institute issues the monthly inflation gauge. The gauge has lifted by 2.1 per cent over the year to March, above the Consumer Price Index of 1.3 per cent.
  • The Reserve Bank Board meets on Tuesday in what is shaping up as the most finely balanced policy get together in years. The annual rate of ‘underlying’ inflation – the Bank’s preferred measure of prices – was the lowest on record at 1.4 per cent in the March quarter, leaving the door ajar for a possible rate cut. But we think that the Board will want to see a “sustained increase in the unemployment rate” before it pulls the trigger.
  • Also on Tuesday, the Bureau of Statistics (ABS) releases both the retail and international trade data for the month of March. Quarterly retail sales data is also issued. Retail spending rose by 0.8 per cent in February. The annual growth rate stood at 2.9 per cent, just below the three-year average of 3.0 per cent.
  • Australia’s 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 China.
  • Roy Morgan-ANZ’s weekly measure of consumer sentiment and AiGroup’s construction gauge round out the data deluge on Tuesday. The construction gauge has contracted for seven successive months with residential home building and dwelling investment both decelerating from their most recent peaks.
  • On Friday, the Reserve Bank releases its Statement of
    Monetary Policy. All eyes with be on the Board’s economic (GDP) growth and inflation forecasts. Downgrades to the February projections are widely expected. Forecasts for annual GDP growth in 2019 of 3 per cent look optimistic with the IMF recently downgrading its growth forecast to 2.1 per cent – which would be the weakest annual growth rate in a decade, should it materialise. The average of the Reserve Bank’s underlying inflation measures has now been below the Bank’s 2-3 per cent target for 31⁄2 years, pointing to downward consumer price revisions. And projections on the unemployment rate and wages growth will also be keenly observed.

Overseas: Trade and inflation data dominate

  • In both the US and China, international trade and inflation data are issued. Further US-China trade talks are scheduled in Washington, DC. And a monthly US Federal Budget update is forthcoming from the US Treasury.
  • The week begins on Monday in China when the Caixin services business activity index is released. The gauge rose to its highest level in 14 months in March at 54.4 points. A further expansion of 0.2 points is forecast in April.
  • On Tuesday in the US, the regular weekly data on chain store sales is scheduled along with the monthly survey on job openings and labour turnover (JOLTS), IBD/TIPP economic optimism index and consumer credit data.
  • On Wednesday in the US, Chinese Vice Premier Liu He is scheduled to lead a delegation to the White House for additional trade discussions. The regular weekly reading on new US mortgage applications is issued.
  • Also on Wednesday in China, international trade figures for April are due. China’s annual export growth rebounded to 14.2 per cent in March, albeit boosted by seasonal distortions. Exports to the US increased by 3.7 per cent. But imports fell by 7.6 per cent in the year to March, led lower by falling oil, copper and steel imports.
  • On Thursday data on consumer and producer prices is scheduled in China. Consumer prices accelerated to an annual growth rate of 2.3 per cent in March from 1.5 per cent in February, led higher by rising vegetable and pork prices amid an African swine flu epidemic. But factory deflation still poses a risk, despite rising commodity prices.
  • On Thursday in the US, the usual weekly data on claims for unemployment insurance and the monthly producer prices figures are both issued. Most attention, however, will be on the US international trade balance. The trade gap unexpectedly narrowed to an 8-month low in February of US$49.4 billion due to a lift in commercial aircraft export orders. And the all-important US trade deficit with China narrowed to US$30.1 billion for the month.
  • Federal Reserve Chair Jerome Powell gives opening remarks before the “Renewing the Promise of the Middle Class” Federal Reserve System Community Development Research Conference in Washington DC.
  • On Friday, US data on consumer prices, wholesale inventories and the monthly Federal Budget statement are all scheduled for release. Both headline and core consumer prices are projected to grow by 2.1 per cent over the year to April. The US Federal Budget deficit fell from US$233.98 billion in February to US$146.95 billion in March. But a surplus of US$165 billion is tipped by economists in April. The 2018 deficit was the worst in six years.

Financial markets

  • The US earnings (profit-reporting) season continues in the coming week. Companies expected to report include:
    • On Monday: Berkshire Hathaway and Tyson Foods.
    • On Tuesday: Allergan, Lyft and Marriott.
    • On Wednesday: AECOM, Bunge, Chesapeake Energy, Eastman Kodak, Marathon Petroleum and Walt Disney.
    • On Thursday: Century Casinos, Cheniere Energy, Dropbox, Duke Energy, News Corp, Revlon and Symnatec.


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