Weekly Market & Currency Developments – From Our Bankers

Annual business profitability conditions hit 4-year low

NAB Business survey; Weekly consumer sentiment; Reserve Bank speech

  • Business survey: The NAB business confidence index rose from +2.3 points in June to +3.9 points in July. The long-term average is +5.9 points. But the business conditions index fell from +3.6 points in June to +2.4 points in July. The long-term average is +5.8 points.
  • Profit pressure: The 12-month moving average of the NAB profitability index fell to a 4-year low of +4.95 points in July, down from +5.76 points in June. The long-term average is +4.6 points.
  • Jobs market loses momentum: The 12-month moving average of the NAB employment index fell to a 2- year low of +5.36 points in July, down from +6.26 points in June. The long-term average is +2.0 points.
  • Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.3 per cent to 115.5 points. Consumer sentiment is still above the average of 114.5 points held since 2014 and the longer term average of 113.1 points since 1990.
  • Reserve Bank Assistant Governor speech: Assistant Governor (Financial Markets) Dr. Christopher Kent delivered a speech titled “The Usual Transmission – Monetary Policy and Financial Conditions.”

 

The business survey has broad implications for investors and the economy. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. Speeches from the Reserve Bank can provide guidance on interest rate settings.

 

What does it all mean?

  • The latest business survey reflects tepid operating conditions and cautious investment spending intentions across Australia. The NAB report supports recent Reserve Bank moves to cut interest rates, while potentially increasing the likelihood of further cuts in the coming months, especially if business investment weakens.
  • Aussie businesses are facing mounting profit margin pressures as rising operating, input and labour costs weigh on already constrained balance sheets. In fact, the NAB profitability conditions index hit the lowest level since April 2015 in 12-month moving average terms in July.
  • Cash-strapped Aussie firms are faced with increasing costs, including rising fuel, electricity, insurance, rent and regulatory fees. The minimum wage has also been lifted. And as of yesterday, 13 out of 21 ASX200 listed companies had reported a fall in statutory profit in the latest earnings season.
  • Consumer confidence was little changed last week, despite the value of the Aussie dollar hitting decade lows against the greenback and the Aussie sharemarket (S&P/ASX200 index) closing-out its worst week (down 184 points or 2.7 per cent) since November.
  • Most Aussies, however, are busily compiling and lodging their income tax returns in anticipation of receiving a chunky tax offset from the federal government. And household borrowers have seen around 44 basis points shaved-off their average standard variable mortgage rate in the past two months. Unsurprisingly, consumers’ views towards their ‘family finances over the next year’ has lifted to the highest level since late May, according to Roy Morgan and ANZ.

 

What do the figures show?

National Australia Bank Business Survey

  • The NAB business confidence index rose from +2.3 points in June to +3.9 points in July. The long-term average is +5.9 points. But the business conditions index fell from +3.6 points in June to +2.4 points in July. The long-term average is +5.8 points.
  • The survey was conducted in the period July 19-31 2019.
  • The rolling annual average business confidence index fell from +3.8 points in June to +3.6 points in July, below the long-run average of +5.8 points.
  • The rolling annual average business conditions index fell from +8.2 points in June to +7.2 points in July, above the long-run average of +6.0 points.
  • Key Components: The index of trading conditions fell from +6.8 points to +6.1 points; employment fell from +5.1 points to -0.2 points; profitability rose from -1.4 points to 0 points; forward orders rose from -3.7 points to -2.9 points; stocks were steady at -0.4 points; exports fell from +1.0 point to -0.1 points.
  • Inflationary indicators: The monthly reading of labour costs rose at a 1.1 per cent quarterly rate in July after a 1.5 per cent rise in June. Purchase costs rose at a 1.0 per cent quarterly rate (previously +0.7 per cent). Final product prices rose at a 0.5 per cent quarterly rate (previously +0.2 per cent). Retail prices rose at a 0.7 per cent quarterly rate (previously -0.7 per cent).
  • Capacity utilisation fell from 82.1 per cent to 80.9 per cent, above the long-term average of 81.1 per cent.
  • The proportion of firms reporting that they did not require credit fell from 45 per cent to 40 per cent.
  • NAB reported: “Business conditions declined slightly in the month. As we have noted in previous months, thedecline in business conditions since early 2018 has been broad-based and has continued to track at below average levels in recent months. This is concerning, because while conditions remain positive, it points to a significant loss in momentum in the business sector”.
  • “Business confidence ticked-up in the month, following an easing last month, but is also below average. While there were some positive signs with a post-election lift in confidence, this bounce now looks to have been short lived with confidence also tracking at below average levels in the two months since the election.”
  • “Business confidence in the retail sector saw a reasonable lift, likely related to the government’s tax cuts, but quite worryingly there appears to have been little boost to activity in the sector with conditions weakening further – the sector is currently facing recessionary levels of activity according to our measure.”
  • “Forward-looking indicators remain weak. Forward orders edged higher in the month but remain negative and well below average while capacity utilisation unwound its sharp spike last month and is now again just below average.”
  • “Looking at the components of the survey that provide an indication of conditions going forward, we see little improvement. With both forward orders weak, and capacity utilisation a bit below average – both capex and employment growth are at risk.”

 

Consumer Sentiment

  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.3 per cent to 115.5 points. Consumer sentiment is still above the average of 114.5 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 +7.3 points to +10.1 points;
    • The estimate of family finances over the next year was up from +24.7 points to +27.7 points;
    • Economic conditions over the next 12 months was down from +5.1 points to +0.6 points;
    • Economic conditions over the next 5 years was down from +13.2 points to +12.9 points;
    • The measure of whether it was a good time to buy a major household item was down from +28.9 points to +26.3 points.
  • The measure of inflation expectations rose from 3.7 per cent to 3.9 per cent.

 

Reserve Bank speech: “The Usual Transmission – Monetary Policy and Financial Conditions”

  • Reserve Bank Assistant Governor Dr. Christopher Kent (Financial Markets) said that recent interest rate cuts are flowing through the financial system and economy, contributing to the depreciation of the Aussie dollar, while supporting domestic demand.

 

Key quotes from the speech

  • Monetary policy: “..the transmission of monetary policy in Australia to financial conditions is working in the usual way.”
  • Interest rate cuts: “…the change in the stance of policy has underpinned the decline in risk-free rates along the yield curve.”
  • Easing of financial conditions: “It [rate cuts] has also contributed to a decline in the cost of funding in corporate bond markets, supported equity prices, and lowered the cost of funding for banks, including through lower rates on bank deposits. Much of the reduction in banks’ funding costs has been passed through to business and household borrowers.”
  • Aussie dollar and commodity prices: “…the Australian dollar had depreciated over that period when commodity prices had been rising. That implies that the effect of monetary policy on the exchange rate has been broadly working as usual…the decline in interest rates in Australia has contributed to the depreciation of theAustralian dollar.”
  • On housing conditions: “If housing conditions continue to improve in the coming months, we would expect to see a further rise in loan approvals.”
  • Support for the economy: “That broad-based easing in financial conditions in Australia will provide some additional support to demand in the period ahead.”

 

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.
  • Speeches by Reserve Bank officials provide a guide to the Board’s thinking on interest rate settings.

 

What are the implications for interest rates and investors?

  • Business investment is contracting globally due to uncertainty around the US-China trade war and softening economic growth backdrop. While spending intentions remain broadly positive in Australia, business owners continue to report a decline in profitability. And annual hiring conditions have hit two-year lows, signalling a slowdown in jobs growth in the coming months.
  • That said, Dr. Kent highlighted today that interest rates on loans to Aussie businesses have declined “to very low levels” – freeing up cashflow. While interest rates for smaller businesses are relatively higher than larger firms, it is hoped that lower borrowing costs will encourage firms to increase spending on capital and equipment. Private sector businesses, however, appear constrained when it comes to lifting workers’ pay.
  • Experts expect the Reserve Bank to assess the impact of previous rate cuts before deciding further moves on cash rates.

Australia’s strong job market

Labour force

  • Employment rose for the 33rd time in 34 months, up by 41,100 jobs in July after a revised 2,400 fall in jobs in June (previously reported as an increase of 500 jobs). Full-time jobs rose by 34,500 with part-time jobs up by 6,700. Economists had tipped an increase in total jobs of around 14,000.
  • Hours worked rose 0.5 per cent in July to be up 2.0 per cent over the year. In trend terms, hours worked were up 1.8 per cent on the year.
  • The unemployment rate was steady at 5.2 per cent in seasonally adjusted terms. In trend terms the jobless rate rose by less than 0.1 percent to 5.3 per cent.
  • Participation rate: The participation rate rose to a record-high 66.1 per cent in July. In trend terms, the participation rate rose from 66.0 per cent in June to a record high of 66.1 per cent in July.
  • Unemployment across states in July: NSW 4.4 per cent (June 4.6 per cent); Victoria 4.8 per cent (4.8 per cent); Queensland 6.4 per cent (6.5 per cent); South Australia 6.9 per cent (6.0 per cent); Western Australia 5.9 per cent (5.7 per cent); Tasmania 6.0 per cent (6.8 per cent). In trend terms, Northern Territory 4.9 per cent (4.8 per cent); ACT 3.5 per cent (3.5 per cent).
  • Average weekly earnings: Average weekly earnings rose by 3.1 per cent in the year to May 2019 – the fastest rate in six years. The average annual wage stands at $85,009.60.
  • Overseas arrivals: Tourist arrivals fell by 3.0 per cent in June while departures fell by 2.3 per cent.

 

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?

  • What is the definition of a strong job market? We would contend that it is one where employment is rising, more people are participating in the job market and where the jobless rate remains historically low. Australia has a strong job market. While the jobless rate in Australia is higher than the US, UK and New Zealand, in Australia job growth remains strong and more people are drawing down a wage. Retailers want to see more people with jobs because that converts to more opportunities to sell their goods and services.
  • It is always important to remember that indicators like employment and the unemployment rate reflect decisions made by businesses as much as six months ago. Simply, the hiring process takes time – from the decision to hire, the advertising and interview process, and then the time it takes for the successful candidate to start work. And the environment 5-6 months ago – before the Federal Election – was far different to today – a lot softer. In the past two months, job ads have lifted, pointing to even stronger employment ahead.
  • The Reserve Bank doesn’t expect much improvement in the jobless rate over the remainder of 2019. So it will take falls in the jobless rate to prompt the RBA to back off rate cuts. Reserve Bank forecasts assume a quarter per cent rate cut to be delivered late in 2019 and another cut of same size earlier in 2020.
  • Unfortunately for the Reserve Bank, the jobs data is a ‘lagging indicator’. So it will need to be confident that more timely data, like the monthly business survey, is pointing to firmer employment ahead.
  • Another key question is how far away is the peak in the workforce participation rate. If solid employment continues and the participation rate doesn’t rise in turn, the jobless rate has a chance of falling, meaning that spare capacity in the economy is being reduced.
  • The ‘problem’ – if we can call it that – is that more people are getting jobs and more people are coming into the workforce to take up the new positions. So spare capacity remains. But the employment pie continues to get bigger, and that is important for retailers and government tax coffers.
  • In NSW, Victoria, Northern Territory and the ACT, jobless rates are below 5 per cent. In other states, jobless rates are around 6.0-7.0 per cent. In-roads need to occur outside the main states if the Reserve Bank is to achieve the goal of a jobless rate near 4.5 per cent. And arguably this means greater use of fiscal policy, not monetary policy.

 

What do the figures show?

  • Employment rose for the 33rd time in 34 months, up by 41,100 jobs in July after a revised 2,400 fall in jobs in June (previously reported as an increase of 500 jobs). Full-time jobs rose by 34,500 with part-time jobs up by 6,700. Economists had tipped an increase in total jobs of around 14,000.
  • Annual job growth rose from 2.4 per cent to 2.6 per cent in July (decade average 1.7 per cent).
  • Hours worked rose 0.5 per cent in July to be up 2.0 per cent over the year. In trend terms, hours worked were up 1.8 per cent on the year.
  • The unemployment rate was steady at 5.2 per cent in seasonally adjusted terms. In trend terms the jobless rate rose by less than 0.1 percent to 5.3 per cent.
  • Participation rate: The participation rate rose to a record-high 66.1 per cent in July. In trend terms, the participation rate rose from 66.0 per cent in June to a record high of 66.1 per cent in July.
  • Unemployment across states in July: NSW 4.4 per cent (June 4.6 per cent); Victoria 4.8 per cent (4.8 per cent); Queensland 6.4 per cent (6.5 per cent); South Australia 6.9 per cent (6.0 per cent); Western Australia 5.9 per cent (5.7 per cent); Tasmania 6.0 per cent (6.8 per cent). In trend terms, Northern Territory 4.9 per cent (4.8 per cent); ACT 3.5 per cent (3.5 per cent).
  • State/Territory jobs: In seasonally adjusted terms, the largest increases in employment were in Queensland (up 19,900 persons), New South Wales (up 13,000 persons), and Victoria (up 3,600 persons). The largest decrease was in Western Australia (down 4,200 persons).
  • The working age population rose by 34,400 in July to 20.62 million. Over the year, the working age population rose by 360,900 – a near decade high – or 1.78 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 8.4 per cent. The monthly underutilisation rate remained steady at 13.6 per cent.
  • The monthly seasonally adjusted underemployment rate increased 0.2 pts to 8.4 per cent. The monthly underutilisation rate increased 0.2 pts to 13.6 per cent.

 

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.

 

What are the implications?

  • Employment growth again exceeded implications in July. ‘Normal’ annual job growth is around 1.7 per cent. In July, job growth was 2.6 per cent. That means more people with money to spend. And that benefits a raft of businesses.
  • In the past decade, 4.9 per cent was the lowest jobless rate recorded. So a jobless rate of 5.2 per cent is clearly a “good” outcome. The Reserve Bank believes that we can do even better. So rates can fall again to speed the economy up and create more jobs. Economists tip a quarter of a per cent rate cut in both November and February 2020.
  • The lift in job creation is important for business sales and profitability. So the latest outcome is positive for the sharemarket.
  • Not only are jobs being created, wages continue to outpace inflation. Average weekly earnings grew by 3.1 per cent over the past year – the fastest rate in six years. Female wages are up 3.6 per cent over the year with male wages up 3.0 per cent. Female wages have exceeded male wages over the past five years.

 

Investor Signposts: Week Beginning August 18 2019

Australia: Reserve Bank Board minutes in focus

  • A quieter week is in prospect in the coming week on the economic and financial calendar. Featured is the release of minutes of the Reserve Bank Board meeting, held on August 6.
  • The week kicks off on Tuesday. The weekly series of consumer confidence will be released by Roy Morgan and ANZ. The low value of the Aussie dollar and concern about how
    low interest rates may fall in Australia are issues for Aussie
    consumers.
  • Also on Tuesday, the Reserve Bank releases minutes of the Board meeting held on August 6 – the meeting that decided to leave interest rates unchanged at 1.00 per cent. The new economic forecasts likely dominated discussion at the meeting.
  • Looking out over the next 12-18 months, the Reserve Bank tips stronger economic growth, a modest lift in inflation and slightly lower jobless rate than applies currently.
  • On Wednesday, the Department of Employment, Skills, Small and Family Business releases the Internet Vacancy Index – a measure of available jobs in the economy. In June the IVI fell by 0.6 per cent – the sixth consecutive decline. And the IVI is 6.7 per cent down on a year ago.
  • On Thursday, the Australian Bureau of Statistics (ABS) releases detailed labour force estimates for July. Each month the ABS releases headline data like employment, unemployment and the participation rate. Then a week later the ABS releases for detailed estimates including demographics. For instance it is possible to get the number of 60-65 year old Aussie in the job market. The Reserve Bank Governor recently highlighted the increasing participation of senior workers in the job market.
  • Also on Thursday, August ‘flash’ (or early) estimates on activity in manufacturing and services sectors are released.
  • On Sunday August 25 Australian time at 2.25am (August 24 10.25am Wyoming, US), the Reserve Bank Governor is due to deliver a speech. 

 

Overseas: US housing activity in focus

  • Just like in Australia, the US economic and financial calendar is sparsely populated in the coming week.
  • The week begins on Tuesday, with the releases of the regular Redbook weekly reading on US chain store sales.
  • On Wednesday, the minutes of the last Federal Reserve Open Market Committee (FOMC) meeting are issued. The minutes will provide some guide about the likelihood of future interest rate cuts.
  • Also on Wednesday, weekly mortgage applications figures from the US Mortgage Bankers Association are due with the July figures on existing home sales.
  • In June, home sales fell 1.7 per cent to an annual rate of 5.27 million. According to Trading Economics the median house price went up to an all-time high of $285,700 in June from $278,200 in May and $277,700 a year earlier. Year-on-year, existing home sales dropped 2.2 percent, the 16th straight annual decline in home sales.
  • On Thursday in the US, the weekly figures on jobless claims are issued, along with the Conference Board leading index and the Kansas Federal Reserve manufacturing gauge. The leading index fell 0.3 per cent in June – the first decline since December 2018. The Conference Board says growth is likely to remain slow in the second half of the year. As such, the leading index supports the decision of the Federal Reserve to trim rates.
  • Also on Thursday, August ‘flash’ (or early) survey estimates of purchasing managers are issued in Japan, the US, France, Germany and the Eurozone. The results provide insights into manufacturing and services sector activity.
  • And beginning on Thursday (through to Saturday) is the annual gathering of central bankers in Jackon Hole Wyoming, US. This year the Economic Symposium is entitled “Challenges for Monetary Policy”. How apt.
  • On Friday, US new home sales data is issued. Sales of new single-family homes rose 7 per cent to a seasonally adjusted annual rate of 646,000 in June – the first rise in two months but still below forecasts. Economists tip another 6 per cent increase in sales in July. While interest rates are low and the job market is strong, analysts say that a shortage of affordable properties is constraining sales.

 

Financial markets

  • The reporting season – the time when listed companies report earnings results – moves into top gear in the coming week
  • While the data is subject to change, companies expected to report on Monday include Altium; BlueScope Steel; GWA; NIB Health; and Lendlease.
  • On Tuesday: BHP; SEEK; Estia Health; Oil Search; Senex Energy; Tassal; Sonic Healthcare; Charter Hall; Monadelphous; Kogan; Seven West Media.
  • On Wednesday: A2 Milk; Crown Resorts; Nearmap; Dominos; Aventus; Iluka; Emeco; Data#3; McMillan Shakespeare; St Barbara; WorleyParsons; Wisetech; Stockland and; Brambles.
  • On Thursday: Bingo; Origin Energy; Alumina; Perpetual; Zip; Medibank; Santos; Qube; Qantas; Flight Centre; ERM Power; Vocus Group; Southern Cross Media; Coca-Cola Amatil; Scentre Group; MyState; Downer EDI; Webjet; Coles Group; South32; Growthpoint Properties.
  • On Friday: Costa Group; Pilbara Minerals; WPP; Mayne Pharma; Coventry; IRESS, Ardent Leisure; Goodman; BMX.

 

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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