Weekly Market & Currency Developments – From Our Bankers

Each week Freightplus updates our community on the latest market and currency developments. Here are the developments for the week of the 8th of September.

First Aussie current account surplus in 44 years

NSW retail spending growth hits 71⁄2-year low

Balance of Payments; Retail trade; Government finance; Consumer confidence

  • Current Account: The broadest measure of the trade accounts – the current account – was in surplus by $5.9 billion in the June quarter after a deficit of $1.1 billion was recorded in the March quarter. It was the first current account surplus recorded since June 1975. In original terms the Bureau of Statistics estimates the surplus was 1.2 per cent of GDP.
  • Trade surplus: In the year to June, the rolling annual trade surplus was a record $50.2 billion. As a share of GDP the trade surplus was 4.0 per cent of GDP – the largest since June 1973. Net exports (exports less imports) will add around 0.6 percentage points to economic growth in the June quarter.
  • Government sector: Government consumption spending will also add around 0.5 percentage points to economic growth in the June quarter.
  • Retail trade lifts: Retail trade fell by 0.1 per cent in July after a 0.4 per cent increase in June. The annual growth rate of retail spending in NSW fell to 0.4 per cent in July – the slowest pace since August 2011.
  • Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.3 per cent to 114.4 points, in-line with the average held since 2014 and above the longer term average of 113.1 points since 1990. Consumer views on economic conditions over the next year fell for a fifth consecutive week, down by 2.7 per cent to -7.2 or 92.8 points – the lowest level since April 30 2017.
Retail trade data is important for consumer-focussed companies. The balance of payments data has implications for trade-exposed businesses and companies vulnerable to changes in the Aussie dollar. The government spending data is an input to the calculation of economic growth. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.


What does it all mean?

  • Back in 1986 then-Aussie Federal Treasurer Paul Keating stared down a balance of payment crisis, warning thatAustralia’s record current account deficit of over 5 per cent of GDP could lead Australia to “end up being a third rate economy…a banana republic.” Fast forward 33 years and Australia recorded its first current account surplus in 44 years in the June quarter. Why?
  • Australia has posted 18 successive monthly trade surpluses and another record trade surplus was recorded in the June quarter. Rising commodity prices – especially iron ore (up 35 per cent to US$117.95 a tonne in the quarter) – boosted our export incomes and government coffers. While the external sector has been a key pillar for growth, the sluggish domestic economy and the wind down of LNG construction has weakened import growth.
  • Public demand remains solid in Australia. Government spending has been lifting due a surge in public transport-related infrastructure spending and increased outlays on the National Disability Insurance Scheme (NDIS). But with the Federal Budget broadly in balance or surplus, Reserve Bank policymakers have been cajoling the Federal government to ease fiscal policy further, through increased spending on infrastructure projects, productivity-enhancing reforms and measures to boost the confidence of businesses, who remain shy to invest given the tepid global and domestic economic backdrop.
  • More than half of the $7.5 billion in first stage tax offsets are estimated to have been paid-out to 10 million low and middle income earners in recent weeks. That said, consumer spending growth remains modest, but a pick- up in the coming months is expected, especially if the recovery in the property market gains traction. Of course, consumer concerns around the economic outlook and elevated mortgage debt will serve to restrain spending.


What do the figures show?

Retail trade – July

  • Retail trade fell by 0.1 per cent in July after a 0.4 per cent increase in June. Annual growth fell from 2.5 per cent to 2.4 per cent – the slowest pace of growth since January 2018.
  • Non-food retailing fell by 0.3 per cent in July and the annual growth rate eased from 2.2 per cent to 1.8 per cent.
  • Sales by chain-store retailers and other large retailers rose by 0.3 per cent in July after a 0.6 per cent increase in June to stand 4.5 per cent higher over the year.
  • By industry, retail sales fell in four of the six major industries in July, led by a decline in Cafes, restaurants and takeaway services (down 0.6 per cent). Sales also fell for Clothing, footwear and personal accessory retailing (down 1.0 per cent), “Other” retailing (down 0.4 per cent) and at Department stores (down 0.2 per cent). Food retailing (up 0.3 per cent) and Household goods retailing (up 0.1 per cent) both rose.
  • Across states/territories in July: Sales fell in Queensland (down 0.2 per cent), NSW (down 0.1 per cent), South Australia (down 0.5 per cent), Victoria (down 0.1 per cent), the ACT (down 0.5 per cent) and Tasmania (down 0.1 per cent). But sales rose in Western Australia (up 0.6 per cent) and the Northern Territory (up 0.3 per cent).

Balance of Payments

  • The broadest measure of the trade accounts – the current account – was in surplus by $5.9 billion in the June quarter after a deficit of $1.1 billion was recorded in the March quarter. It was the first current account surplus recorded since June 1975. In original terms the Bureau of Statistics estimates the surplus was 1.2 per cent of GDP .
  • The balance of goods and services was in surplus by a record $19.9 billion in the March quarter after a $14.8 billion surplus in the March quarter. In original terms the Bureau of Statistics estimates the trade surplus was 4.0 per cent of GDP. The rolling annual trade surplus was a record $50.2 billion in June.
  • In real terms exports of goods rose by 1.7 per cent with services up by 0.4 per cent. But imports of goods fell by 1.5 per cent and services fell by 0.9 per cent.
  • Exports of rural goods in current prices fell by $489 million (down 4 per cent) to $11,809 million, with volumes down by 4 per cent.
  • Exports of non-rural goods in current prices rose $5,655 million (up 7 per cent) to $83,091 million, with volumes up by 4 per cent and prices up by 3 per cent.
  • The trade sector (exports less imports) is expected to add 0.6 percentage points to economic growth in the June quarter.
  • Terms of trade (ratio of export to import prices) rose by 1.5
  • Net foreign debt rose from $1,124.1 billion as at the end of March to $1,143.5 billion at the end of June.
  • The debt serving ratio (net income on foreign debt, ratio to exports of goods and services) fell from 5.0 per cent to 4.3 per cent in the June quarter.


Government Finances

  • Government consumption spending rose by 2.7 per cent in the June quarter. Government consumption “is expected to positively contribute 0.5 percentage points to growth in the June quarter 2019 volume measure of GDP” (ABS).
  • Government investment fell by 2.3 per cent in the June quarter.
  • Overall, spending by the government sector rose by 1.5 per cent in the June quarter.


Consumer Sentiment

  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.3 per cent to 114.4 points. Consumer sentiment is in-line with the average of 114.4 points held since 2014 and above the longer term average of 113.1 points since 1990.
  • Three out of the five major components of the index rose last week:
    • The estimate of family finances compared with a year ago was down from +16.8 points to +13.0 points;
    • The estimate of family finances over the next year was up from +24.7 points to +26.3 points;
    • Economic conditions over the next 12 months was down from -4.6 points to -7.2 points;
    • Economic conditions over the next 5 years was up from +4.2 points to +8.2 points;
    • The measure of whether it was a good time to buy a major household item was up from +29.5 points to +31.7 points.
  • The measure of inflation expectations rose from 4.1 per cent to 4.2 per cent.


What is the importance of the economic data?

  • The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade coversspending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
  • The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance ofthe data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less imports) to the latest estimates of economic growth.
  • The Australian Bureau of Statistics releases the quarterly Government Finance Statistics near the start of March, June, September and December. The data details public sector consumption and investment spending and indicates the sector’s contribution to economic growth.
  • 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?

  • While all eyes will be on the Reserve Bank’s interest rate decision later today, Australia’s June quarter national accounts will be released tomorrow. The Bank recently forecast economic (GDP) growth for the June quarter to be 0.8 per cent or 1.75 per cent over the year.
  • Our economists, however, estimate June quarter GDP growth of around 0.5 per cent, reducing the annual growth rate from 1.8 per cent in March to near 1.4 per cent in June. If this materialises, it would be the weakest annual growth rate since September 2009.
  • Household consumption, net exports and public demand will make positive contributions to growth in the June quarter. But dwelling investment and inventories will detract from growth. Business investment should be broadly flat.
  • Our Experts expect two further rate cuts in November 2019 and February 2020.


Reserve Bank: Assessing the evidence

Reserve Bank Board meeting

  • The Reserve Bank has left the cash rate at a record low of 1.00 per cent. The Reserve Bank previously cut rates in both June and July, each time by 25 basis points or a quarter of a per cent.


What has changed since the last meeting?

  • The G7 Summit and Jackson Hole central bank symposium were overshadowed by US-China trade tensions.
  • The German and the UK economies contracted in the June quarter as business investment and exports fell.
  • The US Treasury yield curve inverted (2-year yields above 10-year yields) – in the past this has occurred before recessions.
  • The Australian jobless rate was steady at 5.2 per cent in July and the participation rate hit a record 66.1 per cent.
  • Skilled internet job vacancies increased by 0.4 per cent in July – the first increase in seven months.
  • The Wage Price Index rose by 0.6 per cent in the June quarter to be up 2.3 per cent on the year.
  • Capital city home prices rose by 1.0 per cent in August – the biggest rise since March 2017.
  • Private sector credit rose by just 0.2 per cent in July. Annual credit growth is 3.1 per cent – an 8-year low.
  • Retail trade fell by 0.1 per cent in July.
  • A record trade surplus of $8 billion occurred in June and the first current account surplus was recorded in 44 years in the June quarter.
  • The ASX200 index lost 3.1 per cent in August, breaking its longest monthly winning streak since September 2009.
  • The iron ore price fell by 27 per cent to US$85.85 a tonne in August.
  • The 10-year Australian Commonwealth Government bond yield hit a record low 0.85 per cent.
  • The Australian dollar has held around US66-69 cents.

The assessment

  • Reserve Bank policymakers have maintained their policy easing bias today, leaving the door open for further rate cuts, “if needed”. But in a subtle change to the all-important final paragraph, the word “including” was added to “in the labour market” comment, re-emphasising the importance of continued job growth to the interest rate outlook. While the Board remained patient in August and September, we expect the cash rate to be cut again in November. In fact, there seems little reason to delay pulling the interest rate lever, in our view, given the Bank has recently modelled its downgraded economic growth, jobless and inflation forecasts on two rate cuts.
  • That said, Governor Phillip Lowe appears sceptical about the effectiveness of taking interest rates towards the lower bound (near zero), arguing at the Jackson Hole symposium, “….given the challenges we face at the moment, it [monetary policy] isnot the best lever.”


Perspectives on interest rates

  • In July, the Reserve Bank Board cut the cash rate by 25 basis points (quarter of a per cent) to 1.00 per cent after a similar cut in June. There have now been 14 rate cuts since November 2011 with the cash rate cut from 4.75 per cent.
  • The Reserve Bank had 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?

  • The property market is recovering and consumers are feeling more upbeat about their current finances thanks to tax cuts and lower borrowing costs. But tepid wages growth and elevated mortgage debt remain headwinds to the consumer.


Investor Signposts: Week Beginning September 8 2019

Australia: Business and consumer confidence in focus

  • In the coming week there will be more insights into the economic environment in terms of business conditions and consumer sentiment. Home lending data will be scrutinised for a continued stabilisation in housing finance commitments. And the deceleration in Chinese tourist arrivals is expected to continue due to slowing Chinese economic growth and retail spending.
  • The week kicks-off on Monday when the Australian Bureau of Statistics (ABS) issues new lending data for July. Property market conditions and activity have improved, boosting hopes of a continued stabilisation in housing finance approvals. But the all- important spring selling season is crucial to the demand outlook.
  • On Tuesday weekly consumer confidence data is issued by ANZ and Roy Morgan. Sentiment is around long-run average levels with volatility in sharemarkets, Aussie dollar weakness and elevated petrol prices counterbalanced by lower mortgage rates, tax cuts and a bottoming in home prices.
  • Also on Tuesday NAB’s August business survey is released. Australia’s business sector lost momentum prior to the federal election> Forward looking indicators – particularly trading conditions and profitability – don’t point to an improvement in the near term. Global trade frictions are also weighing on sentiment, but lower interest rates and tax offsets are expected to eventually feed through to firms.
  • On Wednesday, monthly consumer confidence data is issued by Westpac and Melbourne Institute. Sentiment lifted by 3.6 per cent in August – the biggest lift in six months – propelled higher by a pick-up in consumer views on home purchases. Sentiment towards buying a dwelling is the most positive in 51⁄2 years.
  • Also on Wednesday, tourism data is released by the ABS. In June, a record 11.2 million annual trips were made by Aussies – 5.4 million more than 10 years ago. But the annual growth rate for Chinese tourists travelling to Australia was just above 9-year lows at 1.4 per cent.
  • On Thursday, the Reserve Bank issues updated credit and debit card lending data for the month of July.


Overseas: Inflation data issued in the US and China

  • In the US, the two stand-out economic data releases in the coming week are consumer prices (inflation) and retail spending. In China, the focus is on international trade and inflation data.
  • The week begins on Sunday in China when the National Bureau of Statistics issues international trade data for August. Exports unexpectedly rose by 3.3 per cent in the year to July, with goods shipped to the European Union and South-East Asian nations lifting, offsetting a decline in US exports due to rising tariffs.
  • On Monday in the US, July consumer credit (or lending) data is also issued. Consumer credit card debt rose by US$14.6 billion in June – the weakest amount in three months – perhaps due to greater economic uncertainty.
  • On Tuesday in China, consumer and producer prices data are scheduled. Consumer prices are lifting due to elevated fruit and meat prices. But the drop in producer prices signalled that China’s industrial sector had slipped back into deflation due to lower automobile and raw material prices.
  • On Tuesday in the US, the regular weekly reading on US chain store sales is due together with the JOLTS series of job openings report. The number of job vacancies (7.3 million) remains above the number of unemployed (6.1 million) in the US due to a skills shortage and tight labour market.
  • Also on Tuesday, investor attention will be on the reaction of the US small business sector (NFIB survey) to the latest escalation in China trade tensions. The details of the survey will be scrutinised, especially with respect to new business investment intentions and capital spending plans amid rising political uncertainty.
  • On Wednesday in the US, the weekly reading on mortgage applications is issued as well as producer prices and wholesale inventories data. Core producer prices unexpectedly declined by 0.1 per cent in July – the first fall in two years – as costs declined for guest room rentals, loan services, physician care and truck freight transportation.
  • On Wednesday, Chinese data on new vehicle sales is expected.
  • On Thursday, the weekly figures on jobless claims are issued in the US, along with consumer prices and the monthly budget statement. US core inflation rose by 0.3 per cent to 2.2 per cent from a year earlier in July, above economists’ expectations. Rising shelter, medical, clothing and used car prices are challenging US policymakers’ view that a return to its 2 per cent inflation target would take longer than previously anticipated. Rising tariffs on goods could limit the case for additional US Federal Reserve rate cuts, despite weakening business investment.
  • On Friday, the all-important US monthly retail sales report is issued. In July, consumer spending lifted by 0.7 per cent – the most in four months – as Amazon Prime Day sales boosted online sales. Job and wage gains have buoyed consumer sentiment, despite concerns about the levying of import duties on consumer goods prior to Thanksgiving and Christmas.
  • Also on Friday, the University of Michigan’s preliminary consumer confidence survey for August is issued. The survey was at 7-month lows in July, contrasting with near-cycle highs for the Conference Board measure.
  • US trade prices are also released. Import prices rose by 0.2 per cent in July after falling by the most in seven months in June with US dollar strength keeping a lid on import costs.
  • On Friday in China, money supply data may be released.


Stay updated with the latest market and currency developments here.



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