Each week Freightplus updates our community on the latest market and currency developments. Here are the developments for the week of the 22nd of September.
Federal Budget Balance
- Final Budget outcome: The budget deficit for 2018/19 was $690 million or less than 0.1 per cent of GDP. The budget deficit was a $13.8 billion improvement on the estimate made at the 2018/19 budget and a $3.5 billion improvement on the $4.16 billion deficit forecast just five months ago. The $690 million deficit for 2018/19 compares with a $10,141 million deficit in the 2017/18 year.
The budget data assists in forming a view of the economy and future monetary and fiscal policy decisions.
What does it all mean?
- The budget is effectively balanced. This is hardly a surprise – the deficit for the twelve months to May 2019 was just $148 million – well below the full-year estimate of $4.2 billion made at the time of the April 2019 budget. More Aussies have got jobs, boosting tax revenue. Big Aussie companies continue to make profits (although they have found it harder to lift earnings), further supporting tax revenues. On the other side of the ledger, spending (payments) lifted by 5.6 per cent (3.9 per cent in real terms), the biggest increase in five years. That is appropriate given the economic times but understandable in an election year.
- Looking out, the Government needs to be responsive to the economy’s needs. The important point is to ensure that economic momentum lifts from here. The interest rate cuts, low Aussie dollar, tax offset payments and lift in East Coast capital city home prices should achieve a faster pace of economic growth. If not, the Government may need to look at fresh stimulus measures. A balanced budget in the next year may be more appropriate than producing a big surplus in the current fluky economic times.
- In the next few weeks, monthly budget results will be produced for July and August and the figures should confirm the strong state of the Government’s finances.
What do the figures show?
- The Federal Budget was in deficit by $690 million in the 2018/19 year or less than 0.1 per cent of GDP. Just five months ago, when delivering the 2019/20 Budget, Treasury had estimated a $4.16 billion shortfall. A better-than- expected result was assumed, based on the monthly financial statements released up to May 2019.
- The net operating balance was in surplus by $8.7 billion (0.4 per cent of GDP). The headline deficit for 2018/19 was $7.199 billion (0.4 per cent of GDP), an improvement of $18.7 billion on a year earlier.
- The rolling annual underlying deficit was the smallest in a decade (since January 2009). It was the smallest financial-year deficit in 11 years.
- In terms of economic outcomes and assumption, the Government noted the following:
- “Real GDP grew by 1.9 per cent in 2018-19, softer than the 3 per cent growth forecast in the 2018-19 Budget following stronger-than-expected growth in 2017-18 of 2.9 per cent. Public final demand and net exports made more substantial contributions to growth than forecast, while growth in household consumption, dwelling investment and business investment was below forecast. Nominal GDP grew by 5.3 per cent in 2018-19, which was significantly stronger than the 2018-19 Budget forecast of 33⁄4 per cent. This was primarily the result of higher-than-assumed prices for key commodities, which more than offset the softer-than-expected real GDP growth.”
- In terms of movements in receipts and expenses, the Government noted:
- “The 2018-19 underlying cash deficit was $0.7 billion, an improvement of $13.8 billion compared with the estimate at the time of the 2018-19 Budget. This improvement was the result of higher total receipts of $11.5 billion and lower total payments of $6.6 billion. Net Future Fund earnings, which are excluded from the underlying cash balance, were $4.3 billion higher than expected at the time of the 2018-19 Budget.”
- “Receipts from total individuals and other withholding taxes were $5.7 billion (2.6 per cent) above the 2018-19 Budget estimate. This was driven by stronger-than-expected income tax withholding receipts ($3.0 billion above the 2018-19 Budget estimate), consistent with higher-than-expected employment growth. It was also driven by gross other individuals tax receipts ($1.7 billion above the 2018-19 Budget estimate), reflecting higher-than-expected capital gains and dividend income.”
- “Company tax receipts were $4.6 billion (5.1 per cent) above the 2018-19 Budget estimate, consistent with higher-than-expected growth in corporate profits, mainly mining profits.”
- “Receipts from superannuation fund taxes were $1.0 billion (9.3 per cent) above the 2018-19 Budget estimate, largely reflecting higher-than-expected outcomes from superannuation funds relating to the 2017-18 income year.”
- “Receipts from the GST were $2.3 billion (3.4 per cent) below the 2018-19 Budget estimate, owing to lower- than-expected growth in household consumption and dwelling investment.”
- “Total cash payments in 2018-19 were $478.1 billion, $6.6 billion lower than estimated at the time of the 2018-19 Budget. Total payments excluding Future Fund payments were $477.7 billion, $6.4 billion lower than estimated at the time of the 2018-19 Budget.”
- There was under-spending on NDIS ($4.6 billion); GST payments to the States ($1.4 billion); DisabilityCare Australia Fund ($1.3 billion); Family Tax Benefit payments ($0.7 billion).
- “The outcome also reflects increases in payments across a range of programs including increased payments under Local Government Financial Assistance Grants ($1.3 billion) to support local governments, particularly in areas affected by severe or unexpected weather events, and increased payments under the Pharmaceutical Benefits Scheme ($0.7 billion) largely reflecting new and amended listings on the scheme.”
- Government debt stood at $373.566 billion at the end of June 2019 or 19.2 per cent of GDP, almost exactly in line with the estimate made at the time of the 2019/20 budget.
- The Federal Government currently assumes a budget surplus in 2019/20 of $7.1 billion or 0.4 per cent of GDP and net debt of $361.0 billion or 18.0 per cent of GDP. The estimates will be revised in November/December at the time of the Mid-Year Economic and Fiscal Outlook review.
What is the importance of the economic data?
- The Final Budget Outcome is released by Federal Treasury and the Department of Finance late in September each year. The data provides a guide to how spending and taxing policies have performed. The data may have implications for the conduct of monetary policy.
What are the implications for interest rates and investors?
- The budget is in good shape. But the economy has lost momentum. The Government will need to closely watch whether the $7.5 billion tax offset payments – alongside rate cuts – are successful in boosting economic growth. Stronger economic growth is needed to create jobs, lift wages and, in turn, lift prices.
- Economists expect a rate cut to be delivered in November (or possibly earlier in October) and in February 2020.
US interest rates: Fed cut a “moderate” policy move
US Federal Reserve meeting
- US Federal Reserve decision: As expected, the US Federal Reserve’s Open Market Committee (“FOMC”)reduced the target range for the federal funds rate by 25 basis points (quarter of a per cent) to between 1.75-2.00 per cent – the second successive rate cut. The FOMC cited “the implications of global developments for the economic outlook as well as muted inflation pressures” as the primary reason for the cut. FOMC members voted 7-3 to cut interest rates, with one member voting for a 50 basis point cut.
- Split FOMC: The FOMC’s updated quarterly “dot plot” federal funds rate projections showed officials divided about the future direction of interest rates. Seven FOMC decision makers projected another 25 basis point cut before year-end, but no further cuts in 2020 to 2022. While five FOMC policymakers see rates going back to between 2.00 per cent and 2.25 per cent by year-end.
- US interest rate outlook: In his press conference, US Federal Reserve Chair Jerome Powell opened the door to “more extensive sequences of [rate] cuts” if needed, but emphasised that the situation should viewed as one “which can be addressed and should be addressed with moderate adjustments to the federal funds rate.” But the Fed will “act as appropriate to sustain the expansion.”
Changes in US monetary policy settings can affect rates in Australia as well as the sharemarket and currency.
What did the US Federal Reserve decide and what does it all mean?
- Global central bankers are lowering interest rates in response to slowing economic growth. The current US expansion – while the longest in post-war history – is losing momentum. The US-China trade war, including the imposition of ‘tit-for-tat’ tariffs on imports, has reduced trade volumes and contributed to a manufacturing recession in export-dependent economies, such as Germany, China and Japan.
- Trade policy uncertainty has weakened US business investment and lowered export growth. The concern of course is that the dispute will remain unresolved, with the slowdown in manufacturing activity spilling-over into the larger services sector, eventually impacting still-solid jobs growth and buoyant consumer spending.
- Household consumption remains the key driver of economic activity, growing at the fastest pace in the June quarter since 2014. Retail sales also increased by 0.8 per cent in July and 0.4 per cent in August, supported by solid job gains and wages growth.
- Despite the uncertain global geo-political backdrop, FOMC members raised their expectations for US economic growth, with GDP growth now expected to grow at a 2.2 per cent annual pace this year, up from a forecast of 2.1 per cent in June. That said, long-run growth forecasts are less optimistic at a more modest 1.9 per cent. Core inflation has lifted noticeably in recent months, driven primarily by increases in health care costs, but Federal Reserve officials left their inflation projections unchanged at 1.8 per cent for 2019 and 2.5 per cent over the longer run.
- Along with the rate cut, the Committee also cut the interest on excess reserves (“IOER”) by 30 basis points to 1.80 per cent in an attempt to lower the effective federal funds rate towards the lower-end of its 1.75-2.00 per cent target range. The New York Federal Reserve also announced additional intervention in the US money market in order to lower short-term interest rates.
What are the implications of today’s decision?
- The near-term economic outlook for the US remains solid, but US Federal Reserve Chair Powell said interest rates were cut as “we [FOMC] took this step to help keep the US economy strong in the face of some notable developments and to provide insurance against ongoing risks.” Furthermore, “weakness in global growth and trade policy have weighed on the [US] economy.” Therefore, “moderate” policy moves may be required to sustain the US economic expansion.”
- Investors seized on the monetary policy uncertainty as few clues were offered by policymakers around the timing of future interest rate moves. Therefore, US sharemarkets fell in the aftermath of the decision with the Dow Jones index down by 211 points at one stage. But shares reversed earlier losses with Dow eventually closing up by 36 points or 0.1 per cent, the S&P500 index was flat, but the Nasdaq fell by 8 points or 0.1 per cent.
- Shorter-dated US treasuries weakened (yields higher) and the yield curve flattened after the FOMC’s decision. US2-year yields rose by 3 points to near 1.76 per cent and US 10-year yields fell by 1 point to near 1.80 per cent.
- The Aussie dollar fell from highs near US68.53 cents to lows near US68.15 cents and was near US68.28 cents in late US trade. Economists still expect the FOMC to cut interest rates in December.
Investor Signposts: Week Beginning September 22 2019
Australia: Reserve Bank Governor speech in focus
- A relatively quiet week is in prospect. The Reserve Bank Governor’s speech will be a key focus for investors. No ‘top shelf’ economic data is scheduled, but job vacancies, infrastructure spending and wealth figures are all due.
- The week kicks-off on Monday when the CommBank releases its ‘flash’ manufacturing and services purchasing manager indexes for September. Services sector activity contracted, but factory activity continued to expand in August.
- On Tuesday weekly consumer confidence data is issued by ANZ and Roy Morgan. Sentiment is being influenced by a confluence of factors, but modest wages growth and elevated mortgage debt are primarily responsible for consumer caution.
- Also on Tuesday the Reserve Bank Governor Philip Lowe gives a speech – An Economic Update – at the ArmidaleBusiness Chamber dinner at 7.55pm AEST. Dr. Lowe’s commentary will be heavily scrutinised by economists and investors for clues on the direction of interest rates (‘forward guidance’) ahead of the next Reserve Bank Board meeting on October 1. Our Economists expect a rate cut on November 5.
- On Wednesday, the Department of Employment’s skilled internet job vacancies data is scheduled for August. Vacancies lifted by 0.4 per cent in July – the biggest monthly lift since November.
- Also on Wednesday, the Bureau of Statistics (‘ABS’) releases June quarter data on Engineering Construction. As well as providing data on recent activity, there are estimates of the amount of construction remaining to be done. Excluding the resource sector, 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.
- On Thursday, the ABS releases detailed estimates on the job market for August. The data will include industry estimates of employment. Job vacancies data for the three months to August is also due. Vacancies have eased from record highs.
- Also on Thursday, the ABS issues the ‘Finance and Wealth’ estimates for the June quarter. The report includes data on household wealth, which will be impacted by falling home prices but lifting sharemarkets in the quarter.
Overseas: Reserve Bank of New Zealand interest rate decision and US housing highlights
- US economic growth, inflation, trade and housing data will all feature in the final week of September. All eyes will be on the Reserve Bank of New Zealand’s interest rate decision on Wednesday.
- The week begins on Monday when IHS/Markit issues preliminary manufacturing purchasing manager indexes across the globe. Factory activity is contracting in export-focused economies, such as Germany, China and Japan due to the US-China trade war and slowing consumer demand for new motor vehicles and smartphones.
- Also on Monday in the US, the August activity index is produced by the Chicago Federal Reserve. The index draws on 85 economic indicators with 59 making negative contributions in July.
- On Tuesday, the regular weekly reading on US chain store sales is due together with the Richmond FederalReserve’s factory gauge and home prices data from S&P/Case-Shiller and the Federal Housing Finance Agency.
- Also on Tuesday, the Conference Board’s Consumer Confidence index is due. In August, the Board’s ‘jobs plentiful’ index (which measures the abundance of job offerings) rose by 5.6 points – the largest increase in series’history dating back to the mid-1970s. Consumer confidence is just below cyclical highs reached in October 2018.
- On Wednesday in New Zealand, the Reserve Bank Monetary Policy Committee is expected to keep the official cash rate at 1 per cent. But the Bank surprised economists with a 50 basis point rate cut in August motivated by a desire to support the jobs market and to nudge inflation up towards the midpoint of its 1-3 per cent target range. Economists expect a further 25 basis point cut in November.
- On Wednesday in the US, the weekly reading on mortgage applications is issued as well as new home sales data. Sales fell in July after an upward revision in June brought those sales to the highest level since 2007. According to the Mortgage Bankers Association, average 30-year mortgage rates have fallen to near three-year lows at 3.8 per cent after the US Federal Reserve cut rates in July.
- On Thursday, the weekly figures on jobless claims are issued in the US, along with data on economic growth, manufacturing (Kansas City Federal Reserve), international trade, wholesale inventories and pending home sales. The third estimate of US GDP growth for the June quarter is expected to show continued resilience with annual growth of around 2.0 per cent forecast by economists. Consumer spending was revised up in the second estimate and corporate profits lifted.
- On Friday, data on US personal income and spending are issued for August. The data is important as it contains the FederalReserve’s preferred measure of inflation – the core personal consumption deflator. And figures on durable goods orders – seen as a proxy measure of business investment – are due. Firms’spending remains weak due to uncertainty around trade policy.
- Also on Friday in China, August industrial profits data is scheduled. Profit growth is down 1.7 per cent in the seven months to July on a year earlier with the slowdown in industrial production continuing to weigh on profits and selling prices.
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