Weekly Market & Currency Developments – From Our Bankers

Home prices show signs of bottoming

Home prices; Manufacturing

  • Home prices: The CoreLogic Home Value Index of national home prices fell by 0.4 per cent in May, the smallest decline in a year. Prices fell in all capital cities except Adelaide (up by 0.2 per cent). Regional prices fell by 0.2 per cent.
  • Manufacturing sector: The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 54.8 points to 52.7 points in May. The Manufacturing Purchasing Managers’ Index rose from 50.9 to 51.0 in May. 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?

  • Over the past fortnight Sydney home prices have lifted by 0.3 per cent. Prices across the five mainland states are unchanged over that period. Clearly Australia is a different place since the surprise return of the Coalition government at the May 18 election.
  • But even before the election, home prices were showing signs of flattening, with national dwelling prices recording the smallest decline in a year.
  • Housing markets still have to contend with an increased supply of properties as new house and apartment projects get completed over the next 6-9 months. But demand has also lifted. Budding investors seem set to end their recent ‘strike’. And first home buyers are attracted by cheaper prices and government support, a proposed rate cut, a tax cut and an easing of loan serviceability hurdles.

What do the figures show?

Home prices

  • The CoreLogic Home Value Index of national home prices fell by 0.4 per cent in May, the smallest decline in a year. Prices fell in all capital cities except Adelaide (up by 0.2 per cent). Regional prices fell by 0.2 per cent.
  • In capital cities, prices fell by 0.4 per cent to be down 8.4 per cent over the year to May. House prices fell by 0.5 per cent andapartment prices fell by 0.3 per cent. House prices were down 9.1 per cent on a year ago and apartments were down by 6.4 per cent.
  • In regional areas, house prices fell by 0.2 per cent and apartment prices fell 0.7 per cent in May to be down 3.1 per cent and 2.9 per cent respectively on the year.
  • The average Australian capital city house price (median price) was $628,361 and the average unit price was $526,148 in May.
  • Dwelling prices fell in seven of the eight capital cities in May. Home prices fell in Darwin (down 1.6 per cent), Perth (down 1.0 per cent), Sydney and Brisbane (both down 0.5 per cent), Hobart (down 0.4 per cent), Melbourne (down 0.3 per cent), Canberra (down 0.2 per cent). But prices rose in Adelaide by 0.2 per cent.
  • Home prices were lower than a year ago in five of the eight capital cities in May. Prices fell by the most in Sydney (down 10.7 per cent); Melbourne (down 9.9 per cent); Perth (down 8.8 per cent); Darwin (down by 8.6 per cent) and Brisbane (down 2.3 per cent). But prices are still positive in Hobart (up 3.4 per cent), Canberra (up 2.4 per cent) and Adelaide (up 0.4 per cent).
  • Total returns on national dwellings fell by 3.6 per cent in the year to May with houses down by 4.3 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 10.5 per cent over the year to May.

Manufacturing Purchasing Managers’ Indexes

  • The Australian Industry Group (AiGroup) Australian Performance of Manufacturing Index fell from 54.8 points to 52.7 points in May. The Manufacturing Purchasing Managers’ Index (PMI) rose from 50.9 to 51.0 in May. Any reading over 50 indicates expansion.
  • According to AiGroup, “Manufacturers reported slower conditions in May 2019 compared to April, although demand is still relatively elevated in most sectors. Manufacturers in the ‘food and beverages’ sector continue to report buoyant conditions, with the index for this sector reaching a record high (trend). In contrast, respondents from the metals and machinery & equipment sectors are reporting a downturn in demand in their sectors as well as further rises in their electricity costs.”
  • According to Markit, “Output rose in May, following a dip in April, reflecting a strengthening in demand conditions. New order inflows increased at a slightly faster pace in the middle of the second quarter, though remain well below the historical average. Renewed growth in export sales partially contributed to the overall rise in new business. Firmer demand led firms to raise purchasing activity, after a reduction in April.”

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.
  • 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 world has changed since May 18 – at least the Australian economy has. Threatened changes to capital gains tax, negative gearing and franking credits are no longer on the drawing board. APRA has proposed changes to mortgage serviceability rules and the Reserve Bank is preparing to cut interest rates. Home prices are starting to stabilise.
  • It will take some time until we get a full suite of indicators covering the post-election environment.
  • Experts expect a rate cut to be delivered tomorrow. The aim is to run the economy faster to get the joblessrate down to a new ‘floor’ level of 4.0-4.5 per cent. Another rate cut could occur in August.

Rate cut to boost employment and economic growth

Reserve Bank Board meeting

  • The Reserve Bank has cut the cash rate by 25 basis points (quarter of a per cent) to a record low of 1.25 per cent. It is the first change in rates in 34 months (31 meetings).

What has changed since the last meeting?

  • The Coalition Government was returned to power at the Federal Election.
  • The Australian jobless rate rose from 5.1 per cent to 5.2 per cent in April. Private sector wages rose by 2.4 per cent over the year to March.
  • The CoreLogic national home price index fell by 0.4 per cent in May.
  • The Federal Budget was broadly in balance for the 12 months to April.
  • The annual total of dwelling approvals is close to the decade average.
  • Annual credit growth stands at 3.7 per cent – the slowest rate recorded in 51⁄2 years.
  • The Australian ASX200 share index hit 111⁄2-year highs after the Federal Election.
  • The Australian dollar has held around US68-69 cents.
  • There is uncertainty about whether a US-China trade agreement will be successfully concluded.
  • The US Federal Reserve expects to leave rates on hold over 2019.

The assessment

  • The Reserve Bank cut interest rates to a fresh record low 1.25 per cent today after an extended pause going back almost three years. Unemployment has edged higher, inflation remains anchored below the Reserve Bank’s 2-3 per cent target and a deteriorating global growth backdrop is likely behind the move.
  • In the final paragraph of the Reserve Bank’s Statement, the Board emphasised that “the decision to lower the cash rate….will assist with faster progress in reducing unemployment and achieve more progress towards the inflation target.” Clearly, Governor Philip Lowe is hoping that additional policy stimulus will reduce spare capacity in the economy, lower the jobless rate back towards 4-4.5 per cent and in-turn lift wages and stoke inflation.

Perspectives on interest rates

  • The Reserve Bank cut the cash rate by 25 basis points (quarter of a per cent) to 1.25 per cent. The previous move was a rate cut on August 2 2016 (25 basis points). There have been 12 rate cuts since November 2011, with the Reserve Bank cutting rates from 4.75 per cent to 1.50 per cent.
  • The Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 from 3.00 per cent to 4.75 per cent.

What are the implications of today’s decision?

  • It is good news for first home buyers. Less positive news for those relying on interest income like self-funded retirees. But the hope is that lower rates and other stimulus measures like tax cuts cause consumers to spend. And, in turn, that businesses lift hiring and investment. There are good chances that these hopes will be fulfilled given the positive post-election environment. But if not, the Reserve Bank will cut interest rates further in August (after the next inflation data).

Record trade surplus with China

International trade

  • Foreign trade: The trade surplus fell from a downwardly-revised $4.89 billion in March (previously $4.95 billion) to $4.87 billion in April. Australia has recorded 16 successive monthly trade surpluses. The rolling annual surplus was a record $37.7 billion in the year to April.
  • Record China trade: Australia’s rolling annual trade surplus with China rose from $46.7 billion in March to a record $48.7 billion in April. Annual exports and imports are also at record highs with the country.

The trade data has the potential to affect the Aussie dollar so it may be important for exporters and importers.

What does it all mean?

  • Australia’s external sector is in good shape. A record trade surplus of $5.02 billion was recorded in February. And April marked the 16th consecutive monthly trade surplus. Australia’s current account deficit has narrowed sharply.
  • Net exports were a positive contributor to March quarter economic growth and momentum has continued into April. LNG (natural gas) export volumes continue to surge due to strong global demand for cleaner energy sources. And the value of iron ore exports have lifted markedly.
  • Rising commodity prices – especially iron ore (futures in Singapore are currently hovering around US$100 a tonne) – are lifting our export earnings and boosting the Federal government’s coffers.
  • Certainly Chinese stimulus – focused on infrastructure spending – is one reason for current strength in demand for Aussie resources exports. The other is supply disruptions where the tailings dam tragedy in Brazil and Cyclones in the Pilbara region of Western Australia have both disrupted iron ore volumes, denuding stockpiles.
  • But will these dynamics last? Iron ore production will eventually be replenished. And the US and China’sprotectionist policies are already hindering global trade volumes. In fact, the World Bank has recently revised down its global economic growth forecast to 2.6 per cent this year, highlighting: “of particular concern is aslowdown in global trade growth to the lowest level since the financial crisis ten years ago.”

What do the figures show?

International trade – April

  • The trade surplus fell from a downwardly-revised $4.89 billion in March (previously $4.95 billion) to $4.87 billion in April. Australia has recorded 16 successive monthly trade surpluses.
  • The rolling annual surplus was a record $37.7 billion in the year to April.
  • Exports of goods and services rose by 2.5 per cent (goods exports rose by 2.9 per cent).
  • Imports of goods and services rose by 2.8 per cent (goods imports rose by 3.8 per cent).
  • Exports were up by 17.2 per cent on a year ago, while imports were up by 5.4 per cent.
  • Rural exports fell by 1.6 per cent. Other rural exports (includes sugar and honey) fell by 5 per cent. But meat exports rose by 2 per cent.
  • Exports of non-rural goods rose by 2.7 per cent. Exports of metal ores and minerals rose by 16 per cent.
  • Within imports, consumer imports rose by 3.5 per cent, capital goods imports rose by 4.9 per cent and intermediate goods imports rose by 3.9 per cent.
  • Consumption goods imports were up by 8.8 per cent on a year ago, capital goods imports rose by 5.3 per cent and intermediate goods imports were up by 5.8 per cent.
  • The net services deficit narrowed from $194 million to $124 million in April – the lowest deficit in over two years.
  • Australia’s annual exports to China rose from $123.7 billion to $126.6 billion in April – a new record high. Exports to China are up 25.6 per cent on a year ago. Exports to China account for 35.1 per cent of Australia’s total exports – a new record high.
  • Australia’s annual imports from China rose from $77.0 billion to a record $77.9 billion in April – a new record high. Annual imports were up by 18.9 per cent on a year ago. Imports from China accounted for 25.3 per cent of Australia’s total imports – a fresh record high.
  • Australia’s rolling annual trade surplus with China rose from $46.7 billion in March to a record $48.7 billion in April.

What is the importance of the economic data?

  • 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 externalposition 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.

What are the implications for interest rates and investors?

  • Australia’s external sector is a bright spot for the economy. We are enjoying an extended run of trade surpluses, boosting our trade income. Demand for Aussie bulk commodities and services remains solid.
  • But before we get too comfortable, recent leading indicators of the Chinese economy have lost momentum. The escalating trade war between the US and China is taking its toll on Chinese small and medium sized businesses.
  • The ramp-up in US tariffs on Chinese imports, in particular, has weighed on sentiment. China’s official factory gauge is contracting again and business surveys have moderated.
  • In a speech in Perth yesterday, the Reserve Bank’s AlexandraHeath said “resource exports are expected to contribute to GDP growth before plateauing at a new, higher level.”
  • And in a sign of soft Aussie domestic demand, the rolling annual growth rate of imported goods and services continues to decelerate to around 3 per cent.
  • Our experts believes the Reserve Bank could cut interest rates again in August. Additional monetary and fiscal stimulus are bothneeded to support the economy through the current ‘soft patch’.

Investor Signposts: Week Beginning June 9 2019

Australia: Jobs, consumer and business confidence surveys dominate

  • After the Queen’s Birthday public holiday on Monday, a raft of business and consumer surveys are released. A post-Federal election bounce is expected, but all eyes will be on the May employment report issued on Thursday.
  • The week kicks off on Tuesday when the NAB business survey is released. A rebound in business confidence is expected following the re-election of the Coalition government. The confidence index was just above 51⁄2-year lows at -0.3 points in April due to policy uncertainty. And the employment sub-index fell to a 31⁄2-year low of -1.2 points in April, signalling some weakness in hiring intentions. On Wednesday the Roy Morgan-ANZ weekly measure of consumer sentiment is released, followed by Westpac-Melbourne Institute’s monthly reading on consumer confidence. The Westpac-Melbourne Institute sentiment index rose by 0.6 per cent to 101.3 in May – near its long-run average.
  • Both surveys will be keenly observed for consumer reactions to the Federal election result and the Reserve Bank’s (RBA) cut in interest rates. Credit conditions in the property market are expected to improve after major banks reduced mortgage rates and the Australian Prudential Regulatory Authority (APRA) announced an easing in home loan serviceability requirements.
  • Also on Wednesday, the Australian Bureau of Statistics (ABS) releases April data on overseas arrivals and departures. Over the year to March, tourist arrivals were down by 0.8 per cent – the weakest annual rate in 71⁄2 years. Departures were up by 1.3 per cent, but grew at the slowest annual rate in 13 months.
  • RBA Assistant Governors Luci Ellis and Christopher Kent provide speeches in Melbourne on Wednesday. Dr.Ellis’ speech is titled “Watching the Invisibles” at The Freebairn Lecture in Public Policy. While Dr. Kent speaks at the Australian Renminbi Forum.
  • The Reserve Bank issues the credit and debit card statistics for April also on Wednesday.
  • On Thursday the employment report for May is issued. Jobs increased for a ninth straight month, up by 28,400 in April. The report, however, may have been distorted by seasonal effects from the extended Easter-Anzac Day holiday period and lead-up to the Federal election with part-time jobs up by 34,700.
  • But it appears that the primary catalyst for the RBA’s interest rate cut appears to be the tick up in the jobless rate and loss of momentum in leading indicators of hiring intentions. In April, the unemployment rate rose from 5.1 per cent to 5.2 per cent in seasonally adjusted terms. And measures of spare capacity – underutilisation and underemployment – both lifted. Policymakers now believe a lower jobless rate near 4.0-4.5 per cent will stoke inflation. We expect that 15,000 jobs were created with the jobless rate stable at 5.2 per cent in May.

Overseas: US retail spending and China monthly activity data in focus

  • Chinese economic data releases dominate the overseas calendar over the coming week. Trade, inflation and the May activity data are all scheduled. In the US, inflation, industrial production and retail spending figures will all be keenly observed by investors.
  • The week begins on Monday in China when trade data is released. Both exports and imports are expected to fall by 4 per cent over the year to May as US trade tensions re-escalate and global demand weakens.
  • Also on Monday in the US is data on job openings. The quits rate was steady at 2.3 per cent in March – the equal highest level during the current economic expansion. There were 7.49 million job vacancies in March.
  • On Tuesday in the US, data on small business sentiment and business inflation are scheduled. Renewed trade tensions with China could sap confidence from small firms in May. Producer prices are expected to remain muted.
  • On Wednesday, the focus switches back to China when inflation data is issued. Headline consumer prices lifted by 2.5 per cent over the year to April on the back of a 14.4 per cent acceleration in pork prices due to the African swine flu epidemic. But producer prices remain sluggish, limiting industrial profit growth.
  • Also on Wednesday, the latest update on US consumer prices and the monthly US budget statement are issued. While a sustained lift in inflation remains elusive, prices could rise in the coming months after tariffs on Chinese imports were increased in May. But US Federal Reserve Chair Powell believes that low inflation is “transitory”.
  • On Thursday, US trade prices (exports and imports) data is scheduled for May.
  • On Friday in the US, the all-important retail sales, consumer confidence and industrial production figures are released. Retail spending fell by 0.2 per cent in April. But a 0.7 per cent pick up is forecast by economists in May, supported by a robust job market with unemployment near 50-year lows.
  • Also on Friday in China, the May activity data is scheduled. Key indicators of the Chinese economy, such as credit growth, industrial profits, manufacturing activity and investment growth all weakened before the escalation in US trade tensions.
  • A rebound in consumer spending, however, is forecast by economists with production and investment growth remaining relatively stable in May, supported by continued policy stimulus.

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