Weekly Market & Currency Developments – From Our Bankers

Year in Review; Year in Preview

Economic & financial perspectives

  • Record expansion: Australia’s record economic expansion has almost completed its 28th year. Interest rates have fallen to fresh record lows; wages are growing near 2.5 per cent; underlying inflation is around 1.5 per cent; the jobless rate is 5.2 per cent.
  • Good year for shares: Total returns on Australian shares (All Ordinaries Accumulation index) have lifted by 11.4 per cent over 2018/19 (20-year average +9.5 per cent) to a smidgen below record highs.
The report is useful to assist investors to start planning for 2019/20.

 

What does it all mean?

  • The 2018/19 financial year is almost complete and it is an opportune time to see how investments, financial markets and economies have performed over the past year.
  • Overall, the global economy has slowed over the past year, largely restrained by the US-China trade conflict. Central banks are now favouring rate cuts over rate hikes largely because inflation remains low. The US economy generally remains in good shape. But Chinese authorities have been stimulating their economy in response to the slowdown caused by the trade dispute with the US.
  • The Australian economy is currently growing at a 1.8 per cent annual pace – the slowest pace in 91⁄2 years. Just like other major economies, growth slowed over the year. Uncertainty over the Federal Election result also slowed activity ahead of the May 18 poll. Activity is expected to lift with election uncertainty resolved.
  • The Reserve Bank has re-assessed policy settings in response to stubbornly low inflation. The Reserve Bank now believes that unemployment can fall to 4.5 per cent before igniting inflationary pressures. As a result, the Reserve Bank cut the cash rate by 25 basis points in June to 1.25 per cent and has flagged another rate cut in coming months. Inflation is expected to edge higher to around 2 per cent in 2018/19 with unemployment 4.50-5.00 per cent. But much will depend on the global trade environment.
  • Returns on shares have lifted by just over 11 per cent in 2018/19 and growth of 7-11 per cent is expected in 2018/19. The Australian dollar should support the record economic expansion, largely holding in the late 60s/early 70-cent range against the greenback.

 

What does the data show?

 

Interest rates

  • The cash rate was reduced from 1.50 per cent to 1.25 per cent in June. It was the first rate change since August 2016.
  • The market-determined 90-day bank bill rate has held between 1.21 per cent and 2.10 per cent over 2018/19 and is ending the year near record lows. Yields on the long bond – 10-year government bonds – have held in a range of between 1.29 per cent and 2.79 per cent and yields are ending the year near record lows.

 

Currencies

  • The Aussie dollar has fallen around 6 per cent over2018/19. The Aussie started the year around US74 cents and is ending the year near US69 cents. We have calculated that the Aussie is ranked 103rd strongest against the US dollar of 120 currencies tracked. The currencies of Thailand, Egypt, Uganda, Mexico, Philippines and Japan all have lifted around 3-7 per cent. The weakest currencies have been in the emerging economies of Venezuela, Argentina and Haiti. Only 24 currencies have lifted against the greenback over the year.
  • In the first six months of 2019, the Aussie dollar has fallen by around 2 per cent against the US dollar, making it the 97th strongest of 120 currencies tracked. The currencies of Russia, Egypt, Thailand, Central Africa and Canada have lifted around 3-10 per cent. The weakest currencies have been the emerging economies of Haiti, Argentina, Turkey, Pakistan and Ghana. Only 42 currencies lifted against the greenback over the year.
  • The Aussie has gradually trended lower for around two years. Over most of the period US policy interest rates were rising while the Aussie cash rate was left unchanged. The Aussie fell from around US80 cents to US68 cents (if the January 2019 ‘flash crash’ to US67.43 cents is ignored).

     

 

Commodities

  • Commodity prices eased over the second half of 2018 in line with slower global growth but recovered some lost ground in 2019. The Commodity Research Bureau futures index has fallen by 11 per cent over the year, but our daily index is up 3 per cent.
  • The difference between the two indexes is basically iron ore, with its price up 81 per cent over 2018/19 while gold and coking coal gained 12 per cent. Base metal prices fell 10-20 per cent; oil is down 23 per cent while spot natural gas has slid 58 per cent and thermal coal fell 37 per cent.

     

 

Sharemarket

  • The Australian sharemarket started 2018/19 with the All Ordinaries at 6,289.7 and the ASX200 at 6,194.6. The All Ords currently stands at 6,734.3 points (up 7.1 per cent) with the ASX200 is at 6,650.8 (up 7.4 per cent). We estimate that Australia is 19th of 72 global bourses. So far 35 bourses have recorded gains in 2018/19. The best performer has been hyperinflation-affected Zimbabwe but Argentina and Brazil have lifted more than 40 per cent. The US Dow Jones has lifted by around 10 per cent.
  • The worst performers have been West Africa, Nigeria, Kenya, Ghana, Lebanon and Pakistan and Egypt. The Irish sharemarket has fallen 12 per cent.
  • In the first six months of 2019, the All Ordinaries has risen by 18 per cent, ranking Australia 8th of 73 nations. Greece, Argentina, Russia and China have been amongst the top performers (up around 20-37 per cent) while Lebanon, Sri Lanka and Oman are amongst countries recording the biggest declines.

     

 

Investment returns

  • Total returns on Australian shares (All Ordinaries Accumulation index) have so far lifted by 11.4 per cent over 2018/19, hitting record highs in recent days. Returns on dwellings have declined by 3.6 per cent to date in 2018/19 while returns on government bonds have lifted by 10.4 per cent.

 

Sectors & size groupings

  • Of the 22 identified industry sub-sectors, only eight have recorded declines in 2018/19.
  • Leading the gains have been Consumer durables & apparel and Telecom (both up by near 41 per cent) followed by Commercial services (up 21 per cent) with Software & services and Transportation (up 20 per cent).
  • At the other end of the scale, Household & personal products has fallen by over 36 per cent, followed by Autos & components (down 21 per cent) and Energy and Capital goods (both down 8 per cent).
  • Of the size categories, the ASX50 has outperformed (up over 9 per cent) from the ASX100 (up 8 per cent) and the Small Ordinaries and MidCap50 (up 1 per cent).

 

What are the implications for investors?

  • Returns on shares are near record highs. In fact, sharemarket returns have only fallen once in the past 10 years. So an investor that has employed a diversified strategy across asset classes would be well pleased with the performance over recent years.
  • The outlook for the sharemarket remains positive. The Federal Election is in the background for another three years. And the Reserve Bank has adopted a stimulatory monetary policy. The Reserve Bank now believes that the economy can operate at a faster pace, thus generating greater job growth with the hope of driving the jobless rate to 4.5 per cent.
  • The cash rate was cut by a quarter per cent in June and a similar decline is expected in the next few months.
  • But the Reserve Bank doesn’t believe it can do it all alone – it is calling on greater fiscal stimulus.
  • Certainly, Federal and State governments are being active in advancing new infrastructure projects. And with budgets broadly balanced or in modest surplus, there is scope for even more fiscal stimulus to be applied.
  • Over the coming year, infrastructure building and net exports will add to economic growth. The Reserve Bank hopes that the stimulatory policy settings will lead to stronger household spending as well. Weaker home building will be the main factor weighing on growth.
  • Last year we noted: “Over the coming year experts expect the All Ordinaries index to be near 6,400-6,600 points in December 2018 and 6,600-6,800 points in June 2019”. The December forecast proved too ambitious but the June forecast looks to be safely achieved.
  • Over the coming year, experts expect the All Ordinaries index to be near 6,800-7,000 points in December 2019 and 7,100-7,300 points in June 2020.
  • Housing markets across the nation are continuing to rebalance to reflect the increase in supply (new home construction). Lower home prices and rate cuts will ensure that first home buyers remain active. Investors are also expected to return although sharemarkets are expected to remain more attractive in the short run.
  • Over 2019/20, national home prices may post small gains between 0-4 per cent. Since the Federal Election, there have been signs of stabilisation of Sydney and Melbourne home prices.
  • The low inflation/low-interest rate environment is entrenched, meaning that lower nominal investment returns are also here to stay. So investors will need to remain flexible and alert to the returns achieved across sharemarket sectors and across asset classes to ensure that their savings are keeping pace with the cost of living.
  • The ‘triple L’ theme (low unemployment, low inflation, low-interest rates) will also dominate global markets over the coming year. In fact, the US Federal Reserve is already contemplating rate cuts despite delivering the last rate hike just over six months ago.
  • The Aussie dollar is expected to largely trade in the late 60s/early 70s against the US dollar over most of the coming year. But interest rate differentials between the US and Australia and the US-China trade discussions are the two factors that could move the Aussie out of the tight range.
  • At the time of writing, financial markets were waiting on the next instalment of US-China trade talks. Successful completion of the talks should lead to a major upgrade in prospects for the global economy. If agreement remains elusive, expect stimulatory monetary policies to remain in place in China as well as advanced global economies.

 

Record infrastructure pipeline

Engineering construction

  • Engineering: Engineering construction work done fell for the third straight quarter, easing by 4.9 per cent in real (inflation-adjusted) terms in the March quarter. And work done is down 13.5 per cent on a year ago.
  • Infrastructure boom: Excluding the resource sector (coal, oil, pipelines etc.) work yet to be done stood at a record high of $47 billion in the March quarter. A record $36.6 billion of engineering work is yet to be done in NSW and Victoria.
The data on engineering construction work is important for builders, building material companies, professional services, developers, government businesses and other dependent sectors and industries.

 

What does it all mean?

  • The infrastructure boom continues on Australia’s eastern seaboard. There is a record amount of engineering work still be done in NSW and Victoria – around twice the level of the work outstanding three years ago. Over $20 billion of projects are in NSW and around $16 billion in Victoria.
  • And while there is plenty of work to be done in the east, in the south there has already been a lot of work done. Engineering work completed in Tasmania over the past year was at record highs while work done on South Australian projects was the highest in five years.
  • Over the next year you will see a lot of activity on the roads and railways – especially ‘metro’ rail systems, highway upgrades and city bypasses. There is more than $21 billion of work yet to be done on roads and highways and another $12 billion of outstanding work on railways. Both work totals are the highest on record, and by some margin.

     

 

What do the figures show?

Engineering construction

  • Engineering construction work done fell for the third straight quarter, easing by 4.9 per cent in real (inflation-adjusted) terms in the March quarter. And work done is down 13.5 per cent on a year ago.
  • Value of work completed for the public sector fell by 3.5 per cent in the quarter (just the third fall in 31⁄2 years). Private sector activity fell by 5.8 per cent.
  • Work done by the private sector for the private sector fell by 5.8 per cent. Work done by the private sector for the public sector fell by 5.6 per cent.
  • Construction work rose in three of the states and territories in the March quarter: NSW (up 2.6 per cent); Victoria (down 5.5 per cent); Queensland (down 0.4 per cent); South Australia (up 13.2 per cent); Western Australia (down 19.5 per cent); Tasmania (up 0.5 per cent); Northern Territory (down 30.7 per cent); ACT (down 11.6 per cent).
  • In the year to March, work done in Tasmania was at record highs with work done in South Australia at 5-year highs. But total Australian work is near 2-year lows.
  • Work yet to be done: There was $72.4 billion of engineering work yet to be done as at March 2019 – a 31⁄2-year high. Excluding the resource sector (coal, oil, pipelines etc.) work yet to be done stood at a record high of $47 billion in the March quarter.
  • Of work to be done, a record $20.7 billion of projects are to be completed in NSW – the most for any state. Victorian work to be done stands at $15.9 billion. And Queensland work to be done rose from a 12-year low of $7.1 billion to $8.6 billion over the March quarter.

 

What is the importance of the economic data?

  • The Bureau of Statistics releases quarterly estimates of engineering construction activity. The estimates include value of engineering construction work done, commenced and yet to be done, classified by state or territory, commodity (roads, bridges, pipelines etc.), sector (public/private) undertaking the work, and sector for whom the work is being done. The data is a comprehensive assessment of the infrastructure pipeline.

 

What are the implications for interest rates and investors?

  • There is a lot of infrastructure work that remains to be done. The issue is that there is so much work that there is a shortage of labour to do all the work. As the Reserve Bank Governor has flagged, there is still space capacity in the broad job market but there are also skill mismatches. That is, project leaders need to tap offshore job markets to secure the skilled staff that is required. Engineering inflation stands at 5.8 per cent whereas building prices are up just 2.4 per cent over the year.
  • In line with indications given by the Reserve Bank Governor, Experts expect another rate cut in the next few months. But the Reserve Bank is not expected to keep cutting rates – the Governor has questioned the value to be achieved from lower and lower interest rates.
  • The Reserve Bank is likely to keep pressure on the state and territory governments for further spending and investment. Fiscal and monetary stimulus will be positive for industrial and transport sectors.

 

Investor Signposts: Week Beginning June 30 2019

 

Australia: Reserve Bank in focus

  • The 2019/20 financial year commences with a ‘tier-1’ data deluge, including figures on home prices, building approvals, international trade, job vacancies, retail trade and purchasing manager indexes. But the Reserve Bank Board’s interest rate decision on Tuesday will dominate market attention.
  • The week kicks off on Monday with the release of manufacturing surveys from AiGroup and CBA. CoreLogic’s home prices data and the Melbourne Institute’s inflation gauge are both issued for June.
  • In June, national home prices may have fallen by around 0.3 per cent. Flat outcomes in Sydney and Melbourne are expected, but prices continue to fall in Perth, Brisbane and Adelaide.
  • That said, housing market sentiment has improved following theReserve Bank’s June 4 interest rate cut, the Federal Election result and APRA’s easing of mortgage serviceability requirements. And auction clearance rates have lifted to 60-65 per cent in Sydney, but the volume of homes listed remains subdued.
  • On Tuesday the Reserve Bank meets in Darwin and Governor Philip Lowe speaks at the Board dinner held with the business community at 7.30pm AEST. Economists believe it will be a close call whether the Board cuts the cash rate by a further 25 basis points to 1.00 per cent, despite the policymakers’ easing bias.
  • Also on Tuesday, the weekly Roy Morgan-ANZ measure of consumer sentiment is released.
  • On Wednesday, both AiGroup and the CBA release the June surveys on services activity. And the Federal Chamber of Automotive Industries issues the June data on new vehicle sales.
  • Also on Wednesday, one of the major leading indicators for home building – council approvals to build new homes – is released together with international trade data. Approvals fell by 4.7 per cent in April to be down by 24.2 per cent over the year. On the trade front, Australia recorded its 16th successive monthly surplus in April.
  • On Thursday, retail trade and job vacancies figures are both issued by the Bureau of Statistics. Job vacancies rose by 1.3 per cent to a record 241,600 in the three months to February. Vacancies were up by 13.9 per cent on a year ago, but some loss of momentum is expected if other leading indicators of jobs growth are any indication.
  • On Friday, AiGroup’s Performance of Construction Index is due for the month of June, rounding-out a busy week.

 

Overseas: US jobs data awaited after the Independence Day holiday

  • US financial markets are closed for Independence Day on Thursday. China’s official factory gauge will dominate headlines at the beginning of the week. But after a mixed report in May, investor attention will be firmly focused onFriday’s release of the June jobs report in the US. A further loss of job market momentum could encourage the US Federal Reserve to potentially cut interest rates in late July.
  • The week begins on Sunday in China when the official manufacturing and services gauges are both issued for June. Concerns over a ‘double dip’ in China’s economy could re-intensify should a weakening in domestic demand and new export orders result in a successive contraction in monthly factory activity in June.
  • On Monday and Wednesday in China, the private sector focused Caixin surveys on manufacturing and services activity are due. Despite recent steady readings, business activity from private sector exporters and firms could contract in June due to external sector weakness on the back of the intensification of China-US trade tensions.
  • On Monday in the US, the highly influential ISM manufacturing gauge is issued for June, along with figures on construction spending. In May, the ISM manufacturing index fell to its lowest level since October 2016, signalling a weakening of conditions in the US factory sector. Construction spending, however, was flat in April.
  • On Tuesday, the regular weekly reading on chain store sales is due. But most focus will be on the ISM New York and IBD/TIPP Economic Optimism Indexes. An update on vehicle sales is also provided by Ward’s Automotive.
  • On Wednesday in the US, the weekly mortgage applications figures from the Mortgage Bankers Association are due. In a busy day of data releases prior to the July 4 public holiday, an update on job losses from global outplacement firm Challenger, Grey and Christmas for June is provided.
  • Also on Wednesday, the weekly figures on new claims for unemployment insurance are issued, along with factory orders, the international trade data and the ISM non-manufacturing index. And ADP’s private sector payrolls figures are issued with job gains of 150,000 tipped in June following gains of just 27,000 in May.
  • On Friday, the all-important employment report is issued for June. Just 75,000 jobs were added in May – well below market expectations for gains of 175,000. In June, 163,000 jobs are tipped by economists to have been created with the unemployment rate steady at 491⁄2-year lows of 3.6 per cent.
  • After a stellar 103 consecutive months of job gains – an historic record – increasing labour cost pressures and skills shortages appear to hampering US job growth. And a weakening in annual wage growth to 3.1 per cent – the weakest rate since September – combined with job losses in New York, New Jersey and Connecticut in May, imply some loss of labour market momentum in recent months.

 

DISCLAIMER

 

This Freightplus article contains information obtained from sources believed to be reliable and has been prepared in good faith and with all reasonable care. Freightplus makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this website.

 

Neither Freightplus (Australia) Pty Ltd, its related entities, nor any of its providers of information, have any liability to the user, or any other third party, for the accuracy of the information or models contained in this article, or for any errors or omissions therein, nor will Freightplus (Australia) Pty Ltd or any of its providers of information have any liability for the use, interpretation or implementation of the information or models contained herein by any person.



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