Weekly Market & Currency Developments – From Our Bankers

Balanced Budget: Opposition must support tax plan

Monthly Financial Statements

  • Budget: The Federal Budget is effectively balanced. In the twelve months to April 2019, the Budget deficit stood at $33 million (less than 0.1 per cent of GDP).
  • Other surplus measures: Over the same 12-month period to April, the fiscal balance was in surplus by $4,846 million (0.2 per cent of GDP). The net operating balance was in surplus by $8,932 million (0.4 per cent of GDP).

The monthly Budget figures can provide insights on the broader economy and policy settings. If fiscal settings are tight, the Reserve Bank may allow easier monetary settings.

What does it all mean?

  • The underlying Budget is broadly balanced. The deficit for the full 12 month period to April (rolling annual total) was $33 million, less than 0.1 per cent of GDP. The Budget had been in surplus in the 12 months to March by $1,544 million but the figures do bounce around from month-to-month.
  • The Government continues to show restraint on spending with payments in the 10 months to April around $2.3 billion less than assumed by the finance boffins. Revenues were $363 million lower than where the Department of Finance thought they would be, reflecting a slowing economy.
  • To further highlight the slowdown of the economy (and need for government stimulus), annual growth of GST receipts fell to a 43-month low of 0.9 per cent, slower than inflation. Businesses and consumers are still spending, but at a far slower rate than late last year.
  • The Federal Opposition must respect the election result. The electorate supported the Government’s tax proposals over that of the Opposition’s rival proposals. The community must be allowed to plan with certainty.

What do the figures show?

  • In the twelve months to April 2019, the Budget deficit stood at $33 million. Over the same 12-month period to April, the fiscal balance was in surplus by $4,846 million with the net operating balance in surplus by $8,932 million.
  • Smoothed revenues (twelve months to April) were up 9.6 per cent on a year ago – down from 9.9 per cent in March (which was the fastest growth in 61⁄2 years). Expenses rose by 3.87 per cent over the same period, the fastest rate in 17 months.
  • Annual company tax collections are up 13.1 per cent over the year with net individual tax up 9.2 per cent. In expenses, Health spending is up just 2.2 per cent while public debt interest is up 1.8 per cent, the slowest growth in three years.
  • The Department of Finance noted: “The net operating balance for the year to 30 April 2019 was a surplus of $4,368 million, which is $2,099 million higher than the 2018-19 Revised Budget profile surplus of $2,270 million. The difference results from higher than expected revenue and lower expenses.”
  • In terms of the underlying cash balance, “The underlying cash balance for the financial year to 30 April 2019 was a deficit of $4,914 million, which is $1,866 million lower than the 2018-19 Revised Budget profile deficit of $6,780 million.” Receipts: “Total receipts were $363 million lower than the 2018/19 Revised Budget profile.” Payments: “Total payments were $2,258 lower than the 2018/19 Revised Budget profile.”
  • In terms of the fiscal balance the Department of Finance noted: “The fiscal balance for the year to 30 April 2019 was a surplus of $1,816 million, which is $3,498 million better than the 2018-19 Revised Budget profile deficit of $1,682 million. The difference results from higher than expected revenue, lower expenses and lower net capital investments.”
  • Federal Treasury and the Department of Finance currently expect an underlying deficit of $4,162 million for 2018/19, well above the current result for the 12 months to April.
  • Receipts from the Goods and Services Tax stood at $66,463 million in the twelve months to April, up 0.9 per cent on a year ago and down from the record $67.57 billion in receipts for the year to December.
  • Actual GST receipts for the 10 months to April stood at $56,836 million, just below the Revised Budget ‘profile’ of $57,466 million.

What is the importance of the economic data?

  • The Department of Finance releases the Government Financial Statements (Niemeyer Statement) almost every month. The statement allows investors to track the current Budget position and provides insights into the effectiveness of fiscal policy.

What are the implications for interest rates and investors?

  • The turnaround in the Budget position has been nothing short of remarkable. Just a year ago the rolling annual deficit was over $12 billion. At its peak, the budget was in deficit by almost $60 billion. Today the budget accounts are balanced.
  • But it should be noted that the economy has slowed in line with most major economies. Fiscal policy must adapt to the times, and at present, modest fiscal stimulus is required. That means a small deficit is more appropriate than a blinkered approach of keeping the budget in balance or pushing it further into surplus.
  • To complement tax offsets flowing through to taxpayers, we expect the Reserve Bank to cut rates on Tuesday week.

Regional jobless rates: Winners & Losers

Consumer views on family finances hit 2-year high

Detailed labour force; Consumer confidence

  • Regional unemployment: Last week we highlighted where we could be doing better in reducing unemployment across different age groups. This week we focus on the regions. The regions with the highest unemployment rates are dominated by Queensland and Western Australia. The regions with the lowest jobless rates can be predominately found in NSW, ACT and Victoria.
  • Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.2 per cent to 118.6 points. Consumer sentiment is 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 four-week moving average for family finances over the next year rose to 28.2 points – the highest level since February 26 2017.

The detailed job data can influence interest rate policy and government spending decisions. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.

What does it all mean?

  • The Reserve Bank Governor said that we can do better on unemployment and shouldn’t be satisfied with a jobless rate near 5 per cent. When he made that statement he wasn’t really thinking about Sydney and Melbourne – unemployment remains low in many of the regions in our largest capital cities. But looking at the highest jobless rates in the land, Queensland and Western Australia regions dominate. Six of the 15 regions with the highest jobless rates can be found in Queensland with four of the regions domiciled in Western Australia.
  • Of the 15 regions with the lowest jobless rates, 10 regions can be found in NSW with four in Victoria and the remainder in the ACT.
  • Of Australia’s 87 SA4 regions, 40 of the regions have jobless rates below 5 per cent. At the other end of the scale, 26 regions have jobless rates of 6 per cent or above.
  • Job security is a key driver of consumer confidence. But sentiment towards current family finances is arguably a more important determinant of consumer spending. In fact, growing expectations for interest rate cuts, continued low inflation and better sentiment towards the housing market boosted consumer views on their current finances last week. The four-week moving average of the future family finances sub-index rose to more than two-year highs.

What do the figures show?

Regional unemployment

  • Unemployment rates were assessed across the 87 SA4 regions where data is available from the Australian Bureau of Statistics (ABS). Data is available up to April and rolling annual averages were used for assessment to adjust for seasonality. In the year to April the highest unemployment rate could be found in the Queensland Outback (14.0 per cent), followed by Moreton Bay North (Qld 9.4 per cent) and Coffs Harbour-Grafton (NSW 8.2 per cent).
  • Lowest unemployment rates could be found in Sydney-Sutherland (1.9 per cent), Sydney-Northern Beaches (2.5 per cent) and Sydney-Inner West (2.8 per cent).
  • If the latest unemployment rates are compared with ‘normal’ levels (decade averages), 58 regions have jobless rates that are below ‘normal – or better than the ‘average’ experience. Again, NSW and Victorian regions dominate the list but the average jobless rate in Cairns for the year to April was 4.8 per cent – over 36 per cent lower than the decade average of 7.6 per cent.
  • At the other end of the scale, the 6.2 per cent jobless rate in Darling Downs-Maranoa was almost 68 per cent above the decade average of 3.7 per cent.

Consumer Sentiment

  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.2 per cent to 118.6 points. Consumer sentiment is above both the short-term average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.
  • Four of the five major components of the index rose last week:
    • The estimate of family finances compared with a year ago was up from +9.1 points to +10.4 points;
    • The estimate of family finances over the next year was up from +29.1 points to +30.1 points;
    • Economic conditions over the next 12 months was up from +7.3 points to +10.5 points;
    • Economic conditions over the next 5 years was up from +11.7 points to +16.7 points;
    • The measure of whether it was a good time to buy a major household item was down from +29.0 points to +25.3 points.
  • The measure of inflation expectations fell from 4.0 per cent to 3.8 per cent.

What is the importance of the economic data?

  • The Australian Bureau of Statistics (ABS) provides detailed labour market figures one week after releasing ‘top level’ statistics of employment & unemployment levels across states and territories. The detailed data is useful in identifying broader underlying trends and instructive about the health of the economy.
  • 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?

  • Rate cuts can only do so much in stimulating the economy and getting the jobless rate down. Arguably one or two rate cuts may only have a modest effect in lifting economic growth given that rates are already historically low.
  • State and Federal Governments must continue to focus on infrastructure spending and population policies to lift economic momentum more broadly across the country. Fortunately with state and federal budgets generally in good shape, fiscal policy can be directed to job creation rather than fiscal consolidation.
  • Increased spending on infrastructure is positive for a raft of industry sectors such as developers, retailers and building material suppliers.
  • Aussie consumers are content for now. Unemployment, interest rates and inflation all remain low. Political uncertainty has been removed following the Federal election. Tax cuts are coming. A new train line has opened in the Hills District of Sydney. The housing market is showing tentative signs of stabilisation. The Aussie sharemarket (S&P/ASX200 index) is a global outperformer, lifting by almost 2.6 per cent so far in May. But next week’s March quarter economic growth data may underwhelm.
  • Experts expect a rate cut to be delivered in June while another could occur in August. Low inflation, modest wage growth and an uncertain consumer backdrop means an extended period of record low interest rates.

Credit card debt at 8-year low

Slowest home loan growth for over 40 years

Private sector credit; Credit cards; China data

  • Credit cards: According to APRA, bank lending to households by credit card fell by 3.9 per cent in the year to April. Lending totalled $39.6 billion in April – an 8-year low.
  • Lending: Private sector credit (effectively outstanding loans) rose by 0.2 per cent in April (consensus: +0.3 per cent. Lending growth for housing is the slowest since records began in 1976.
  • China purchasing managers’ indexes: China’s official manufacturing purchasing managers’ index fell from 50.1 points to 49.4 points in May (forecast 49.9). And the services gauge was unchanged at 54.3 points in May (survey: 54.3 points). A level above 50 denotes in expansion in activity.

Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending. Credit card data is important for the retail and financial sectors. The Chinese data have implications for the currency markets and therefore exporters and importers.

What does it all mean?

  • Ahead of the election, Aussies were reluctant to borrow. It remains to be seen whether the proposed rate cut(s) will change the behaviour of Aussie consumers and businesses. But lower interest rates, tax cuts, APRA changes on mortgage serviceability, the increase in minimum wages and government assistance for first home buyers may lead to a lift in borrowing by home owners and investors.
  • The world has changed markedly since the election. So today’s data is effectively ‘ancient history’. But it is interesting that more and more Australians are trimming outstanding credit card debt, thus strengthening balance sheets and lifting the capacity to spend.
  • Ahead of the election, investors were on strike. And that is understandable. If Labor won government, there was the likelihood of changes to investment markets, both property and shares. Now we will have to wait and see how investors respond to the status quo. Anecdotes suggest that investors are again actively looking at the opportunities.
  • The softness in Chinese economic data keeps the door open for more stimulus. In turn, stimulus through rate cuts and/or infrastructure spending would be positive for Australian resource providers.

What do the figures show?

Private sector credit & APRA data

  • Private sector credit (effectively outstanding loans) rose by 0.2 per cent in April (consensus: +0.3 per cent) after a 0.3 per cent lift in March. Annual credit growth fell from 3.9 per cent in March to a 51⁄2- year low of 3.7 per cent in April.
  • Housing credit grew by 0.3 per cent in April. And the annual growth fell from 4.0 per cent to 3.9 per cent – the slowest growth rate on record.
  • Owner occupier housing credit rose by 0.4 per cent in April to stand 5.5 per cent higher over the year – the weakest annual growth rate for almost four years.
  • Investor housing finance was flat for a fourth successive month in April with annual growth the slowest on record at 0.6 per cent.
  • Personal credit fell by 0.3 per cent in April to be down 2.8 per cent over the year – the equal slowest annual growth rate in over nine years.
  • Business credit was flat in April – the smallest outcome in 11 months. The annual growth rate fell from 5.0 per cent to 4.5 per cent.
  • The M3 money aggregate and Broad Money both lifted by 0.1 per cent in April after rising 1.2 per cent in March. Annual growth of the M3 measure rose from 3.9 per cent to 4.3 per cent. And the Broad Money measure rose from 3.9 per cent to 4.2 per cent.
  • Term deposits with banks fell by $3.7 billion to $624.2 billion in April. And the annual growth rate eased from a 23-month high of 8 per cent in March to 7.3 per cent in April.
  • Loans and advances by banks grew by 4.0 per cent in the year to April, near the slowest growth rate in almost 27 years.
  • Loans and advances by non-bank financial intermediaries rose by 9.4 per cent in the year to April, down from 11.0 per cent over the year to February and 10.5 per cent in the year to March.
  • Deposits at banks rose by 0.2 per cent in April after lifting 1.0 per cent in March. Annual growth rose from 4.0 per cent in March to 4.3 per cent in April – a 15-month high.
  • According to APRA, loans by banks to households via credit cards fell from $39.85 billion in March to an 8- year low of $39.62 billion in April. Credit card lending is down 3.9 per cent over the year.

What is the importance of the economic data?

  • Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
  • The National Bureau of Statistics releases the Chinese purchasing manager indexes at the beginning of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for interest rates and investors?

  • It is remarkable that loans extended to buy homes are growing at the slowest pace for over 40 years. Low inflation, lower home prices, an investor strike and competition from other asset classes all are playing roles. The situation doesn’t seem sustainable, reflecting an alignment of deflationary influences.
  • Experts expect the Reserve Bank to cut rates next Tuesday. Another rate cut is possible in August.

Investor Signposts: Week Beginning June 2 2019

Australia: Interest rates & economic growth

  • A strange quirk of the statistical calendar is that each new season is ushered in by a barrage of new economic data. So, the ‘Winter Whirlwind’ is upon us – around a dozen surveys or data releases are scheduled over the coming week.
  • The week kicks off on Monday when the Bureau of Statistics (ABS) issues the Business Indicators publication that includes data on profits, sales, wages and stocks.
  • Also on Monday are surveys of manufacturing. CoreLogic issues the May data on home prices. ANZ job ads and the Melbourne Institute inflation gauge are issued.
  • In May, home prices may have fallen by around 0.5 per cent. But the data pre-dates the Federal Election result, APRA announcement of mortgage serviceability and the Reserve Bank Governor’s guidance on rate cuts.
  • On Tuesday the Reserve Bank meets and economists are in agreement that a quarter of a per cent rate cut will be delivered – the first move in almost three years. The Reserve Bank Governor speaks at the RBA Board dinner held with the business community.
  • In terms of data, the quarterly balance of payments figures are issued with government finance, retail trade and the weekly reading of consumer sentiment.
  • Retail spending has risen for the last three months, averaging 0.4 per cent gains a month. But some of this growth in spending can be attributed to higher grocery prices.
  • On Wednesday the focus will be on the March quarter economic growth (GDP) estimates. The data is now almost ancient history. Not only are readings on the economy available for April and May, the federal election is also in the rear window. Activity has seemingly lifted markedly post-election.
  • Overall we expect that the economy grew by around 0.5 per cent in the quarter with annual growth near 2.3 per cent.
  • Also on Wednesday, the Federal Chamber of Automotive Industries issues the May data on new vehicle sales.
  • On Thursday the April figures on exports and imports (international trade) are released. There have been 15 consecutive monthly trade surpluses and the annual surplus to March was at a record high of $34.1 billion.
  • And on Friday, the comprehensive April data is released on new lending by financial intermediaries to the household and business sectors with the Performance of Construction index. Encouragingly, Bankers Association data suggests that the number of housing loans lifted 1.7 per cent in the month with the value of commitments up 6.5 per cent.

Overseas: US jobs data & the Beige Book awaited

  • A busy week is in prospect. In the US the Beige Book is issued on Wednesday and non-farm payrolls (jobs) on Friday.
  • The week begins on Monday with readings on the manufacturing sector in the US and China. In the US there are rival surveys from Markit and the Institute of Supply Management. In China, there is the survey from the private sector Caixin group. Manufacturing activity has softened across the globe.
  • Also on Monday in the US is data on new vehicle sales and construction spending.
  • On Tuesday in the US, data on factory orders and the ISM New York index are released with weekly chain store sales. The Federal Reserve chair, Jerome Powell, gives opening remarks at a conference.
  • On Wednesday, the focus shifts to surveys on the services sector. Again, in the US there are the Markit and ISM services surveys. In China, the services survey is conducted by Caixin.
  • Also on Wednesday in the US is the ADP survey of private sector payrolls as well as the Beige Book survey of economic conditions across Federal Reserve districts. Traders are now closely looking for any signs of slippage in the economy that could provoke the Federal Reserve to cut rates.
  • On Thursday in the US is the April international trade data (exports and imports). The deficit is seemingly stuck near US$50 billion.
  • Also on Thursday are final estimates of unit labour costs and productivity for the March quarter, the Challenger survey of job cuts and the weekly data on initial claims for unemployment insurance.
  • On Friday in the US, the all-important non-farm payrolls (jobs) data is released. The job market is strong. Unemployment stands at a 49-year low of 3.6 per cent. Jobs lifted by 263,000 in April. And hourly earnings are up 3.2 per cent over the year.
  • Economists tip a 195,000 lift in payrolls with little change tipped for hourly earnings and the jobless rate.

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