Weekly Market & Currency Developments – From Our Bankers

Aussie job hiring conditions hit 31⁄2-year low

Consumer confidence falls year after elections

NAB Business survey; Consumer sentiment

  • Business survey: The NAB business conditions index fell from +7.2 points in March to +3.1 points in April, below the long-term average of +5.8 points. But the business confidence index rose from 51⁄2-year lows of -0.6 points in March to -0.3 points in April – below the long-term average of +5.8 points.
  • Employment: The employment sub-index fell to a 31⁄2-year low of -1.2 points in April, down from +6.2 points in March and below the long-term average of +2 points.
  • Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.1 per cent to 114.8 points. Consumer sentiment is still above both the short-term average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.

The business survey has broad implications for investors and the economy. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.

What does it all mean?

  • The Reserve Bank is focussed on the health of the job market. Recent leading indicators of job hiring intentions have been mixed. According to the Bureau of Statistics, job vacancies were at record highs in February. But more recent readings from ANZ (jobs ads) and the Department of Jobs and Small Business (skilled internet job vacancies) point to a loss of job hiring momentum.
  • In a worrying development for policymakers, NAB’s April employment index has turned negative, falling to the lowest level since August 2015, implying monthly job gains of just 14,000 and a potential lift in the jobless rate.
  • Job creation has been solid so far this year with an average of 23,700 positions created on a monthly basis through to March. And 25,400 jobs per month were added over the year to March, keeping the trend unemployment rate at decade lows of 5 per cent. The Reserve Bank is steadfastly expecting the unemployment rate to remain at stuck at 5 per cent through to end-2020.
  • Some are attributing the easing in Aussie consumer confidence to disappointment that the Reserve Bank didn’tcut interest rates last week. But according to recent Westpac-Melbourne Institute monthly consumer confidence surveys, the “mortgager” sentiment sub-index has actually fallen from 108.2 points in February to 100.3 points in April (the most recent survey), despite growing market expectations for an official interest rate cut.
  • Instead, we think the weaker Aussie dollar and sharemarkets are behind the easing in consumer optimism. The value of the Aussie dollar weakened to three-year lows against the greenback overnight, trading near US69.40 cents. And the Aussie sharemarket continues to retrace from 11-year highs due to escalating trade tensions between the US and China. In fact, the S&P/ASX200 index fell by 0.4 per cent last week and is currently down around 1.7 per cent so far in May.
  • Like business confidence, consumer sentiment is typically choppy in the lead up to Federal elections. In the period leading up to and immediately after elections, confidence surveys are mixed as consumers digest policies and outcomes. Interestingly, our analysis of the long run ANZ-Roy Morgan consumer confidence index shows that sentiment is generally weaker 12 months after the election outcome in known as the ‘new’ government’s‘honeymoon’ period subsides.

What do the figures show?

National Australia Bank Business Survey

  • The NAB business conditions index fell from +7.2 points in March to +3.1 points in April, below the long-term average of +5.8 points. But the business confidence index rose from 51⁄2-year lows of -0.6 points in March to -0.3 points in April – below the long-term average of +5.8 points.
  • The survey was undertaken from April 18-30.
  • The rolling annual average business conditions index fell from +12.0 points to +10.4 points in April, below therecord high of +17.3 points in June 2018, but above the long-run average of +6.0 points.
  • And the rolling annual average business confidence index fell from +5.0 points to +4.1 points in April, below the long-run average of +5.9 points.
  • Key Components: The index of trading conditions fell from +10.9 points to +7.4 points; employment fell from +6.2 points to -1.2 points; profitability fell from +4.8 points to +1.0 point; forward orders fell from -1.1 points to -1.4 points.
  • Inflationary indicators: The monthly reading of labour costs rose at a 0.5 per cent quarterly rate in April after a 0.6 per cent rise in March. Purchase costs rose at a 0.5 per cent quarterly rate (also +0.5 per cent rise in March). Final product prices rose at a 0.2 per cent quarterly rate (previously +0.3 per cent). Retail prices rose at a 0.4 per cent quarterly rate (previous +0.3 per cent).
  • Capacity utilisation rose from 81.0 per cent in March to 81.1 in April, in-line with the long-term average.
  • The proportion of firms reporting that they did not require credit rose was broadly unchanged at 70 per cent.
  • NAB reported: “Overall, our read of the signal from the business survey is that the surprise jump in conditions last month was unwound this month – with business conditions, confidence and forward orders now all below average (a la
    February). A key development in the Survey this month wasthe sharp decline in the employment index to a below average read – the first since late 2016. Future readings of this index should be closely watched as, for the most part, leading indicators of the labour market have remained positive to date but could be expected to decline based on the prior slowing in economic activity.”
  • “Looking forward, business confidence and forward orders suggest ongoing weakness in private sector momentum with growth likely to remain weak in coming quarters. Capacity utilisation remains around average but no longer suggests a strong outlook for employment and capex. Overall, price pressures remain weak across the costs variables (including wage bill growth), suggesting that in addition to a slowing in the pace of activity in the business sector, there still remains spare capacity in the labour market.”

Consumer Sentiment

  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.1 per cent to 114.8 points. But consumer sentiment is still above both the short-term average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.
  • Three out of the five major components of the index fell last week:
    • The estimate of family finances compared with a year ago was up from +6.5 points to +8.6 points; The estimate of family finances over the next year was up from +25.9 points to +27.6 points;
    • Economic conditions over the next 12 months was down from +12.5 points to +3.4 points;
    • Economic conditions over the next 5 years was down from +14.5 points to +10.7 points;
    • The measure of whether it was a good time to buy a major household item was down from +27.1 points to +23.9 points.
  • The measure of inflation expectations rose from 4.1 per cent to 4.5 per cent.

What is the importance of the economic data?

  • The monthly National Australia Bank business survey is valuable in providing a timely reading about the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
  • 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.

What are the implications for interest rates and investors?

  • Aussie businesses and consumers are rightly cautious. A Federal election is imminent and a change of government looks likely, creating policy uncertainty. Rising US-China trade tensions could weigh on global growth.
  • At the same time, the Aussie economy has lost momentum over the past year, hampered by slowing global economic activity, weaker household spending, the property downturn and tighter credit conditions for borrowers. The AiGroup’s leading indicators of construction and services sector activity are both contracting. And international tourist and student arrivals are slowing. That said, the Chinese economy has stabilised in recent months.
  • Encouragingly, conditions in the mining and agricultural sectors have improved. And Australia has a huge pipeline of infrastructure projects that are currently being built across the country. But more needs to be done.
  • A more aggressive fiscal stimulus may be needed by the incoming government to support household consumption and economic growth. The Reserve Bank and Aussie dollar can’t do all the heavy lifting.
  • Of course, the potential for weaker jobs data in the months ahead will likely be the trigger for a rate cut. The last time the NAB employment sub-index was around current levels, the official cash rate was cut several months later.
  • We expect the Reserve Bank to wait until it sees the national unemployment rate edge closer to 5.5 per cent before it pulls the interest rate trigger. The Kiwi central bank cut rates immediately after one poor jobs report.
  • Tomorrow’s wages growth and Thursday’s jobs data take on extra importance for the interest rate outlook. But will the Reserve Bank look through the Easter seasonality if it’s aweaker-than-expected result?
  • Experts expect no change in the cash rate for a few months, but rate cuts remain more likely than rate hikes.

Jobs data: Something for everyone

Labour force; Domestic airfares

  • Employment rose for the ninth straight month, up by 28,400 in April after a revised 27,700 increase in jobs in March (previously reported as a 25,700 increase in jobs). Full-time jobs fell by 6,300, but part-time jobs rose by 34,700. Economists had tipped an increase in total jobs of around 15,000.
  • Hours worked rose by 0.1 per cent in the month to be up 1.9 per cent over the year. In trend terms, hours worked rose 0.3 per cent to be up 2.8 per cent on the year.
  • The unemployment rate rose from 5.1 per cent to 5.2 per cent in seasonally adjusted terms. In trend terms the jobless rate was steady at 5.1 per cent.
  • Participation rate: The participation rate rose from 65.7 per cent to a record high of 65.8 per cent. In trend terms the 65.7 per cent participation rate remained at record highs.
  • Unemployment across states in April: NSW 4.5 per cent (March 4.3 per cent); Victoria 4.9 per cent (4.6 per cent); Queensland 5.9 per cent (6.1 per cent); South Australia 6.1 per cent (5.9 per cent); Western Australia 6.1 per cent (6.0 per cent); Tasmania 6.8 per cent (6.7 per cent). In trend terms, Northern Territory 4.5 per cent (4.5 per cent); ACT 3.9 per cent (3.8 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 fastest annual rate in three years in May.

A raft of companies is affected by the employment data but especially those dependent on consumer spending. Amongst stocks affected are Nine Entertainment, West Australian Newspapers, Seek Limited and McMillan Shakespeare.

What does it all mean?

  • There is seemingly something for everyone in the latest labour force data. The pessimists will focus on a slight rise in the jobless rate. The optimists will focus on another month of job gains and a record labour force participation rate.
  • But what is the objective assessment of the data? It was a good, but not great set of numbers. Although, arguably it was a stronger outcome than most economists had expected. Job growth again exceeded expectations.
  • A softer result was to be expected given the extended holiday period in April and slowdown in business activity ahead of the election. Over four of the past five polls (including the current poll), trend job growth slowed. There is also the global economic slowdown caused by the US- China trade dispute. Full-time job growth was always going to correct after the out-sized job gain of near 50,000 in March. And then there is the small matter of hiring of election workers to further muddy the waters.
  • The proportion of Australians in work or looking for work is at record highs. In fact the record participation rate applies to female workers and to both male and female workers combined. That means it is getting harder for employers to find the right staff for unfilled positions – fewer ‘suitable’ candidates are available.
  • Does this make it more or less likely that the Reserve Bank will cut rates in the months ahead? While the jobless rate edged up a touch, that result can be attributed to the pre-election economic slowdown. When the election is out of the way, business will get back to business as we have seen after previous polls. More people are finding work and more people are looking for work. The NSW trend jobless rate is still at record lows. So the job market remains solid. The Reserve Bank will not make a knee-jerk response to the latest jobs figure. It will wait for clear air to make a judgement.
  • If interest rates were to be cut, August seems the earliest time period that this could occur – after two more months of job figures. It has to be remembered that stimulus from tax cuts is likely to flow through to workers from July/August. And that could push any need for monetary stimulus out to November.

What do the figures show?

  • Employment rose for the ninth straight month, up by 28,400 in April after a revised 27,700 increase in jobs in March (previously reported as a 25,700 increase in jobs). Full-time jobs fell by 6,300, but part-time jobs rose by 34,700. Economists had tipped an increase in total jobs of around 15,000.
  • Annual job growth rose from 2.4 per cent to a 10-month high of 2.6 per cent (decade average 1.6 per cent).
  • Hours worked rose by 0.1 per cent in the month to be up 1.9 per cent over the year. In trend terms, hoursworked rose 0.3 per cent to be up 2.8 per cent on the year.
  • The unemployment rate rose from 5.1 per cent to 5.2 per cent in seasonally adjusted terms. In trend terms the jobless rate was steady at 5.1 per cent.
  • Participation rate: The participation rate rose from 65.7 per cent to a record high of 65.8 per cent. In trend terms the 65.7 per cent participation rate remained at record highs.
  • Unemployment across states in April: NSW 4.5 per cent (March 4.3 per cent); Victoria 4.9 per cent (4.6 per cent); Queensland 5.9 per cent (6.1 per cent); South Australia 6.1 per cent (5.9 per cent); Western Australia 6.1 per cent (6.0 per cent); Tasmania 6.8 per cent (6.7 per cent). In trend terms, Northern Territory 4.5 per cent (4.5 per cent); ACT 3.9 per cent (3.8 per cent).
  • State/Territory jobs: In seasonally adjusted terms, the largest increase in employment was in NSW (up 25,100 persons), followed by Western Australia (up 6,400 persons) and Queensland (up 5,400 persons). The only decrease was in Victoria (down 7,600 persons).
  • The working age population rose by 25,900 in April to 20.54 million. Over the year the working age population rose by 362,400 or a 6-year high of 1.80 per cent, but this is still down from the record 2.36 per cent annual growth in December 2008.
  • The monthly trend underemployment rate remained steady at 8.3 per cent. The monthly underutilisation rate increased 0.1pts to 13.4 per cent.
  • The monthly seasonally adjusted underemployment rate increased 0.3pts to 8.5 per cent. The monthly underutilisation rate increased 0.4 pts to 13.7 per cent.

Domestic airfares

  • Business class airfares fell by 1 per cent in May after declining by 6.6 per cent in April – the biggest decrease in 41⁄2 years. Business class airfares are down 9.2 per cent on a year ago – falling at the fastest annual rate in six years. In smoothed terms, business class airfares fell by 1.4 per cent in May to be down 7.6 per cent on the year.
  • Discount airfares are volatile month-to-month. In May, fares fell by 25.6 per cent after lifting by 25.3 per cent in April. Discount airfares are down 7.1 per cent over the year to May. In smoothed terms, discount airfares fell by 2.3 per cent in May to be down 3.9 per cent on the year – the biggest fall in the annual growth rate in three years.
  • Restricted economy airfares fell by 0.5 per cent in May, but were up by 6 per cent on the year. In smoothed terms, restricted economy fares rose just 0.1 per cent in May to be up by 5.5 per cent on the year.

Why is the data important?

  • The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
  • If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.
  • 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 as well as broader economic activity.

What are the implications?

  • Experts don’t expect a change in interest rates for the next few months. If there were to be a change in rates, rate cuts are more likely than rate hikes. We’ll know more when the Reserve Bank Governor speaks on Tuesday.
  • More people in jobs, means more spending power in the economy. And this spending power is underpinned by rising wages. In fact today, SEEK indicated that annual wage growth of the available positions had lifted to 4.1 per cent – well above the official wage growth result for private sector employees of 2.4 per cent.

Investor Signposts: Week Beginning May 19 2019

Australia: Reserve Bank in focus following the Federal Election

  • In the coming week, Reserve Bank events dominate following the Federal election. Governor Philip Lowe’sspeech in Brisbane on Tuesday will hog the headlines immediately after the minutes of the May 7 Board meeting are issued. On the data front, the Bureau of Statistics (ABS) provides an update on construction work done.
  • The week kicks off on Tuesday when our Business Sales Index for April is released together with the weekly Roy Morgan-ANZ measure of consumer sentiment.
  • Also on Tuesday, the Reserve Bank will release minutes of the May 7 monetary policy meeting, where interest rates were left unchanged. The commentary will be closely observed by investors and economists for clues on the future path of interest rate settings. In particular, the potential insertion of an explicit cash rate easing bias will be of keen interest.
  • That said, the quarterly Statement of Monetary Policy was released on May 10, which largely supersedes the commentary from the May 7 Board meeting. In the Statement, the Reserve Bank acknowledged that “growth in the Australian economy has slowed and inflation remains low.” But the Reserve Bank reiterated that it will remain patient and see whether strong jobs growth continues as “the labour market is performing reasonably well, with the unemployment rate steady.”
  • In an interesting development, the Reserve Bank downgraded its economic growth and inflation forecasts last week noting that “the domestic forecasts are conditioned on the technical assumption that the cash rate moves in line with market pricing, which impliestwo 25 basis point cuts to the cash rate.” While the RBA always notes that forecasts are based on technical assumptions, this time it is quite explicit with the rate cut assumptions.
  • And Reserve Bank Governor Philip Lowe speaks at the Economic Society of Australia in Brisbane on Tuesday. The speech occurs after the release of the Board’s minutes. As usual, the commentary will be heavily scrutinised, especially as it will be Dr. Lowe’s first speech since March 6. While the Board’s focus remains on key developments in the labour market, the deteriorating global trade backdrop could also potentially trigger an eventual rate cut should growth slow.
  • On Wednesday the ABS provides an update on construction activity. Construction work done fell by 3.1 per cent in real (inflation-adjusted) terms in the December quarter. A decline of 1 per cent is forecast in the March quarter.
  • Also on Wednesday the Department of Jobs and Small Business releases the Internet Vacancy Index (IVI). The IVI fell by 1.5 per cent to 83.1 points in March – the biggest fall in six years.
  • On Thursday the preliminary May services and manufacturing purchasing manager indexes (PMI) are released. Both indexes are expanding, but activity remains subdued.

Overseas: US Federal Reserve and European elections in the spotlight

  • US-China trade tensions have ratcheted up a notch, overshadowing central bank commentary in recent sharemarket trading sessions. But US Federal Reserve Chair Jerome Powell’s speech and the release of the Federal Open Market Committee (‘FOMC’) April 30-May 1 meeting minutes will be of major interest to investors.
  • The week begins on Monday in the US when the Chicago Federal Reserve National Activity Index is released.
  • Also on Monday, US Federal Reserve Chair Jerome Powell gives the keynote speech at the Atlanta FederalReserve Financial Markets Conference in Florida.
  • On Tuesday, data on existing home sales are released with the regular weekly reading on chain store sales.
  • On Wednesday, the weekly mortgage applications data is released by the Mortgage Bankers Association.
  • Also on Wednesday, the US FOMC issues the minutes of the April 30-May 1 policy meeting. The FOMC retained its federal funds rate target at 2.25-2.50 per cent. And policymakers are forecasting no interest ratechanges in 2019, despite acknowledging that inflation has declined “below 2 per cent” (its target). 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.”
  • The minutes, however, pre-date the escalation in the US-China trade war. Should the tariff stand-off continue, potentially spilling over into weaker US economic data and financial market volatility, then traders may reinstate futures market pricing for US rate cuts.
  • On Thursday in the US data on new home sales is issued with the influential Kansas City Federal Reserve manufacturing index and weekly figures on new claims for unemployment insurance. Single family home sales rose by 4.5 per cent in March to a 16-month high of 692,000 annualised pace due to lower mortgage rates and rising wages. But economists tip a 3.8 per cent fall in sales in April.
  • Also on Thursday, Markit releases its ‘flash’ manufacturing purchasing manager indexes across developed economies.
  • And the European parliamentary elections kick-off on Thursday with the potential to undermine economic policymaking should anti-establishment parties gain a foothold across the continent.
  • On Friday in the US, durable goods orders (i.e. broadly long-lasting goods) are issued. Orders rose by the quickest rate in seven months in March, led higher by aircraft and motor vehicles. Orders are tipped to fall 1.5 per cent in April.

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