Weekly Market & Currency Developments – From Our Bankers

Record home building and NSW construction Engineering inflation at 7-year high

Construction work done; Skilled vacancies

Construction activity: Construction work done rose by 1.6 per cent in the June quarter – the sixth increase in seven quarters – but is down by 0.1 per cent on a year ago. And work done was revised-up to 2.4 per cent (from a previously reported +0.2 per cent) in the March quarter.

Construction inflation: Construction costs rose by 1.2 per cent in the June quarter with building costs up 0.6 per cent. On the year, construction costs were up 3.3 per cent (decade average +2.2 per cent) – just below 9-year highs.

Engineering inflation: Engineering costs rose by 1.8 per cent in the June quarter. Over the year, engineering costs rose by 4.2 per cent (decade average +2.6 per cent) – a seven year high.

Skilled vacancies: The Internet Vacancy Index rose by 0.2 per cent in July after decreasing for three consecutive months. The index is 4.7 per cent higher than a year ago.

The data on construction work is important for builders, building material companies and developers. The job internet vacancies data is a leading indicator of the job market and therefore important for consumer-focussed stocks and companies such as SEEK.

What does it all mean?

• The construction boom continues across Australia, especially in the growth engines of New South Wales and Victoria. Strong population growth and government spending are supporting a humungous pipeline of building activity. Construction work done in both states are at record highs. And the ‘cherry on top’ was the strong rebounding new home building. After residential work declined last year from peaks in 2016, a new summit has been reached.

• And it appears that the surge in construction activity and public transport-related infrastructure spending are generating price pressures. Construction inflation is just below the highest level in nine years and engineering costs are the highest in seven years.

• Certainly there is increasing demand for workers and skills shortages emerging in the engineering and construction sectors. Skilled vacancies for construction managers are at the highest level in seven years.

What do the figures show?

Construction Work

• Construction work done rose by 1.6 per cent in real (inflation-adjusted) terms in the June quarter – the sixth gain in seven quarters. But work done is down by 0.1 per cent on a year ago. And work done was revised-up to 2.4 per cent (from a previously reported +0.2 per cent) in the March quarter.

• Public sector construction work rose by 2.5 per cent in the quarter and private sector activity lifted by 1.3 per cent.

• Construction work rose in five of the states and territories in the June quarter. Leading the gains were South Australia (up by 10.4 per cent); Tasmania (up by 5.3 per cent); Victoria (up by 3.9 per cent); NSW (up by 2.9 per cent); ACT (up by 1.8 per cent).

• Construction fell in Northern Territory (down by 12.5 per cent); Queensland (down by 3.9 per cent); and Western Australia (down by 1.4 per cent).

• Engineering work rose by 0.4 per cent in the June quarter, but is down 7.2 per cent over the year.

• Commercial (non-residential) building rose by 1.3 per cent in the June quarter and was up by 8.2 per cent on the year.

• Residential building rose by 3.1 per cent in the June quarter and was up by 5.6 per cent over the year. But alterations & additions fell by 3.1 per cent in the quarter, while new residential work rose by 3.9 per cent.

• Construction costs rose by 1.2 per cent in the June quarter, with building costs up 0.6 per cent. On the year, construction costs were up 3.3 per cent (decade average +2.2 per cent), up from 2.8 per cent in the March quarter and 2.8 per cent in the December quarter. Building inflation was 2.5 per cent and engineering inflation was 1.8 per cent.

Skilled Vacancies

• The Department of Jobs and Small Business Internet Vacancy Index rose by 0.2 per cent in July 2018 after three consecutive months of declines. The index is up by 4.7 per cent over the year to July.

• Job vacancies rose in three of the eight occupational groups in July. Increases were recorded for Professionals (up by 0.3 per cent), Clerical and Administrative Workers (up by 0.1 per cent) and Labourers (up by 0.1 per cent). Vacancies were steady for Managers and Community & Personal Service Workers, but fell for Machinery Operators (down by 0.4 per cent), Sales Workers (down by 0.3 per cent) and Technicians & Trade Workers (down by 0.1 per cent).

• Job vacancies increased in three of the states and territories in July: Tasmania (up by 1.0 per cent), Victoria and Western Australia (up by 0.4 per cent) and ACT (up by 0.2 per cent). But fell in the Northern Territory (down by 1.1 per cent), South Australia (down by 0.2 per cent), Queensland (down by 0.1 per cent) and New South Wales (down by 0.1 per cent).

• Over the year to July 2018, job advertisements rose in six of the eight occupational groups, with the strongest gains recorded for Professionals (up by 9.6 per cent), Managers (up by 7.6 per cent) and Technicians and Trades Workers (up by 7.0 per cent). A decrease in job advertisements was recorded for Sales Workers (down by 6.6 per cent) and Labourers (down by 4.4 per cent).

• Over the year to July 2018, job advertisements increased in five states and the ACT, with Western Australia recording the strongest rise (up by 16.3 per cent), followed by Tasmania (up by 13.5 per cent) and Victoria (up by 8.7 per cent). Decreases in job advertisements were recorded in South Australia (down by 2.7 per cent) and the Northern Territory (down by 0.3 per cent).

What is the importance of the economic data?

• The Bureau of Statistics releases quarterly estimates of Construction work done. The estimates are based on a survey and cover around 85 per cent of the construction work done in the period. Revised estimates will be released in coming months. The data is useful largely for historical purposes but the work yet to be done estimates provide an early warning signal of future activity. The residential work figures give a good early guide to the strength of residential investment in the national accounts.

• The Department of Jobs & Small Business releases a monthly Internet Vacancy Index. The index is based on a count of online job advertisements newly lodged on three main job boards (SEEK, CareerOne and Australian JobSearch) during the month. The index is the only publicly available source of detailed data for online vacancies, including around 350 occupations (at all skill levels), as well as for all states/territories and 37 regions.

What are the implications for interest rates and investors?

• According to surveyor Rider, Levett and Bucknall, a total of 684 cranes were hoisted above our major cities in the June quarter, reflecting the continuing strength of the construction sector within the Australian economy. Around 346 cranes are located in Sydney, followed by 158 in Melbourne and 100 in South-East Queensland.

• Construction companies such as Lend Lease, Thiess, Brookfield Multiplex, BGC and Leighton have their signage plastered all over our major cities. They have plenty of work and are hoovering up highly skilled engineers, project managers and construction workers.

• In the past quarter engineering construction work done was almost $24 billion with residential building at $17 billion and commercial building around $11 billion. In the June quarter building approvals totalled $30 billion, potentially adding to new work. And according to Cordell, $30 billion of new projects were added to the construction pipeline in May and June alone.

• Examples of major new projects around Australia include: Dexus’ Lakes Business Park South near Sydney Airport; Boyuan Group’s Northern Gateway development at Badgerys Creek in Sydney; the $1 billion RepublicPrecinct in Belconnen, Canberra; the Wemen Solar Farm in Victoria; Aurrum Aged Care facility in Toowong, Brisbane; the 45-storey tower approved for Adelaide’s King William Street; the new Bridgewater Bridge in Hobart;Landcorp on the Park’s development in Western Australia and the HomeBuild tenders in the Northern Territory.


Politics and drought weigh on consumers

Consumer confidence; RBA Board minutes; Reserve Bank Governor speech

Consumer confidence weakens: The weekly ANZ-Roy Morgan consumer confidence rating fell by 3.5 per cent to 114.1 in-line with the average of 114.1 since 2014, but still above the average of 113.0 since 1990.

Reserve Bank Board minutes: The minutes from the August 7 meeting were issued, with the Board reiterating that there was “no strong case for a near term adjustment in monetary policy.” Therefore, theBoard’s neutral policy bias remains intact with a period of record low interest rate stability ahead for the foreseeable future since “progress on unemployment and inflation was likely to be gradual.”

Reserve Bank speech: Reserve Bank Governor Philip Lowe spoke at a breakfast event to launch ASIC’sNational Financial Capability Strategy 2018 in Canberra this morning. He said “Over recent times the Australian economy has been improving. This is good news. If we continue on this current improving track, as we expect we will, it is likely that the next move in official interest rates will be up, not down.”

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The Reserve Bank Board minutes provides guidance on interest rate settings. Speeches by the Reserve Bank Governor can have a major impact on interest rate expectations.

What does it all mean?

• Political uncertainty and worries about the severe drought gripping large swathes of eastern Australia weighed on Aussie consumers last week. Sentiment fell to the lowest level since early November last year.

• Prime Minister Malcolm Turnbull survived today’s leadership challenge, but its feared continuing political dysfunction has stymied any meaningful policy reform agenda, especially around energy, housing, the labour market and taxation.

• Still, there are reasons to be positive. The Aussie economy is improving with growth strengthening so far this year. Business conditions are just below record highs, non-mining business investment is lifting, the unemployment rate is near six-year lows, job vacancies have been at record highs and spending on infrastructure is lifting. ‘Green shoots’ are emerging in the mining sector. For example, BHP’s profits, announced today, hit four-year highs.

• And some improvement in cost of living pressures could be around the corner. While pay rises have been elusive for most workers, lower electricity prices, increased government childcare and TAFE subsidies, and lower car registration fees could “boost real household disposable income” according to the Reserve Bank.

• It is hoped that strengthening commodity prices and reasonable crops in recent years will cushion the blow for Aussie farmers struggling with drought. The Farm Management Deposit Scheme has around $6 billion to assist people on the land at this difficult time. But less income in rural communities amid diminishing export volumes will likely impact broader spending and household consumption.

• While all the political manoeuvring was occurring at Parliament House this morning, Reserve Bank Governor Philip Lowe spoke nearby in Canberra. Dr. Lowe is beginning to sound like a ‘broken record’, reiterating that “it is likely that the next move inofficial interest rates will be up, not down.” And the Board minutes released later also contained this quote, but re-emphasised that there was “no strong case” to pull the monetary policy levers yet “since progress towards a lower unemploymentrate and an inflation rate closer to the midpoint of the targetrange was likely to be gradual.”

What do the figures show?

Consumer Sentiment

• The weekly ANZ-Roy Morgan consumer confidence rating fell by 3.5 per cent to 114.1 in-line with the average of 114.1 since 2014, but still above the average of 113.0 since 1990.

•All components of the index decreased last week:
» The estimate of family finances compared with a year ago was down from 108.8 to 107.4;
» The estimate of family finances over the next year was down from 129.5 to 119.6;
» Economic conditions over the next 12 months was down from 107.2 to 106.3;
» Economic conditions over the next 5 years was down from 114.2 to 108.1;
» The measure of whether it was a good time to buy a major household item was down from 131.3 to 129.3.

• The measure of inflation expectations rose from 4.2 per cent to 4.4 per cent.

Reserve Bank August Board minutes

• Last paragraph: “Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy andachieving the inflation target over time.”

Interest rate outlook: “…members continued to agree that the next move in the cash rate would more likely bean increase than a decrease. However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy. Rather, members assessed that it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability andconfidence while this progress unfolds.”

On inflation: “Strong competitive pressures and low growth in wage costs had been placing downward pressure on retail prices for some time. In an environment of falling wholesale prices and heightened competition in the retail energy sector, energy providers had reduced some retail prices in the June quarter and there had also been an unusually small increase in private health insurance premiums. Rents, which are a large item in the CPI basket, had been flat in the June quarter and year-ended rent inflation had been at its lowest rate since the mid- 1990s. By contrast, inflation in new dwelling costs had risen.”

On the labour market and wages growth: “..Leading indicators suggested that employment could be expected to grow at an above-average pace in the second half of 2018…. It was possible that ongoing above-trend growth in output could see the unemployment rate fall faster than expected and wages growth pick up more strongly as a result. Alternatively, it was possible that the flow of new entrants to the labour force could be stronger than usual, such that unemployment would decline more slowly than expected and wage pressures would take longer toemerge.”

On household consumption: “Recent data on consumption showed that retail sales in the June quarter had been consistent with steady growth in consumption in year-endedterms…. Growth in household disposable income had pickedup over the year to the March quarter, reflecting an increase in growth in average earnings per hour and hours worked. Members noted that these increases, in combination with the more recent increase in minimum wages, the announcement of future tax cuts and expectations of a further tightening in labour market conditions, had reduced some of the uncertaintyaround the outlook for consumption.”

On the housing market: “In established housing markets,prices in Sydney and Melbourne had declined further in July and across a broader range of properties. Housing prices had also declined in Perth, but had increased in Hobart and been relatively stable in Adelaide and Canberra…. dwelling investment was expected to remain at a high level, but not to contribute to growth, over coming quarters.”

On trade: “The direction of international trade policy in the United States continued to be a source of uncertainty for the global outlook….the broader risk of adverse effects oninvestment decisions and confidence had increased.”

Aussie dollar: “Although the Australian dollar had depreciated a little against the US dollar, in trade-weighted terms it had remained within its trading range of the previous two years…. a depreciation of the Australian dollar, both of which wouldsupport the Australian economy.”

Reserve Bank Governor Speech

• Reserve Bank Governor Philip Lowe spoke at the breakfast event to launch ASIC’s National Financial Capability Strategy 2018 in Canberra on Tuesday.

• On the interest rate outlook: “Over recent times the Australian economy has been improving. This is good news. If we continue on this current improving track, as we expect we will, it is likely that the next move in official interest rates will be up, not down. This will not be welcomed by some, but it would be a sign that things are returning to normal. My advice here is to make sure your finances can withstand a lift in interest rates.”

• On the housing market: “….housing prices don’t always go up; like interest rates, they go up and down. We areseeing an example of this in Sydney and Melbourne at the moment. And most of our cities have seen falls in housing prices at some point over the past decade. While I would expect housing prices to trend higher over time as our incomes increase, there is no guarantee that your home will be worth more tomorrow than it is today. So plan accordingly.”

What is the importance of the economic data?

• 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.

• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

• The Reserve Bank remains optimistic about the Aussie economy, so much so that policymakers appear more constructive on the outlook for household consumption, “while recent data on wages growth and expectations of afurther tightening in labour market conditions had provided more comfort that household income growth wouldcontinue to increase gradually and support the outlook for consumption.”

• But the Board’s forward guidance on monetary policy remains unchanged with the August minutes containing little new information. And despite Governor Lowe’s best efforts to lay the groundwork for eventual rate hikes, the Board likely remains sidelined on interest rates until it meets its key policy objectives of full employment and inflation at the mid-point of its target range.

• As evidenced by today’s plunge in consumer confidence, there are new risks to the domestic outlook. While tariffshave been stealing all the headlines, political uncertainty appears likely all the way through to next year’s federal election. As evidenced by our Kiwi neighbours ‘across the ditch’ businesses loathe political uncertainty, withholding spending and reducing labour hiring, both of which are key planks in the current pick-up in Aussie economic activity.

• The drought also has the potential to impact economic growth, should farm output and incomes deteriorate significantly on the back of reduced crop and livestock production. That said, meat exports have lifted amid rising slaughter rates, but grain exports are expected to decline.

Investor Signposts: Week Beginning August 26 2018

Australia: Business investment, credit growth and housing data in focus

• A relatively quiet week beckons in terms of new economic data. Private sector credit, building approvals and business investment are the indicators of most interest.

• The week kicks off on Tuesday in Australia when the latest weekly reading on consumer confidence is issued by Roy Morgan and ANZ.

• On Wednesday the Housing Industry Association’s survey ofhomebuilders in the five largest states is scheduled for release. New home sales rose by 2.2 per cent in June 2018 – the first increase this year – reflecting changing conditions in the housing market.

• On Thursday the Australian Bureau of Statistics (ABS) releases the Private Capital Expenditure publication (essentially business investment figures) for the June quarter.

• New business investment (spending on buildings and equipment) rose by 0.4 per cent in the March quarter to be up 3.7 per cent over the year – just shy of the best growth in five years.

• Also the second estimate of investment in 2018/19 was reported at $87.74 billion, 1.4 per cent higher than the second estimate for 2017/18. Expected investment by non-mining and manufacturing firms has never been higher.

• Also on Thursday, local council building approvals data for July is issued. Council approvals to build new homes rose by 6.4 per cent in June – the largest increase since January. And approvals were up 1.6 per cent on the year. Greater Brisbane house approvals rose to a record rolling annual total of 14,715 over the year to June.

• On Friday the Reserve Bank releases the monthly Financial Aggregates publication, a report that includes the private sector credit measure (effectively ‘loans outstanding’) for July.

• Credit growth has slowed to four-year lows, led by the slowest ever growth in housing finance to investors. Tighter bank lending standards and falling home prices in Sydney and Melbourne are behind the weakness.

Overseas: US economic growth and inflation data in focus after Jackson Hole

• Following the Jackson Hole central bankers annual economic policy symposium over the weekend, US economic growth, trade, inflation, consumer confidence and business surveys will be in focus during the week.

• The week kicks off on Monday in China when industrial profits are scheduled to be released.

• Also on Monday in the US, business surveys from the Federal Reserve Banks of Chicago and Dallas are due.

• On Tuesday the ‘advance’ July data on trade in goods is released. A deficit of US$68.3 billion was posted in June. The Trump Administration is keen on reducing big trade deficits maintained with other countries.

• Also on Tuesday the S&P/Case-Shiller 20-city home price gauge is released with annual growth running at ahealthy 6.5 per cent. The Conference Board’s consumer confidence index, the Federal Reserve Bank of Richmond Manufacturing survey and the regular weekly data on chain store sales are also issued.

• On Wednesday the second estimate of economic growth for the June quarter is released. GDP growth is expected to be revised down slightly to 4.0 per cent, but remain at the best level in four years.

• Also on Wednesday in the US, the July index of contract signings to purchase previously-owned homes (pending sales) is issued with weekly data on new mortgage applications.

• On Thursday the personal income and spending report is scheduled. The Federal Reserve’s preferred measure of inflation – the core personal consumption expenditure deflator – will be keenly observed. The deflator is expected to increase by 0.1 per cent in July.

• Also on Thursday the weekly data on new claims for unemployment insurance is also issued.

• On Friday in the US, the Chicago purchasing managers index for August is released with the final August reading on consumer confidence from the University of Michigan. The preliminary reading fell to an 11-month low.

Financial markets

• The earnings season (profit-reporting season) comes to an end in the coming week. Results so far have been broadly positive and stable. Amongst the Aussie companies expected to report earnings:

On Monday are: AUB Group, Japara Healthcare, Reliance Worldwide and Spark Infrastructure.

On Tuesday: Sirtex Medical, Accent Group, Northern Star Resources, Austal and Caltex Australia.

On Wednesday: Boral, Autosports Group, Cabcharge Australia, Independence Group, Regis Resources, Oneview Healthcare, SpeedCast International, Virgin Australia and Westfield Unibail-Rodamco.

On Thursday: Atlas Arteria, Gateway Lifetsyle Group, Galaxy Resources, Perpetual, Perseus Mining, Ramsay Health Care and Sandfire Resources.

On Friday: GTN, Harvey Norman, Metals X, NEXTDC, Orocobre and Sino Gas & Energy.


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