Market and Currency Developments from November 3rd

Each week Freightplus updates our community on the latest market and currency developments. Here are this week’s weekly market & currency developments.

Record Aussie life expectancy; Record Chinese wine exports; Bankruptcies hit 241⁄2-year low

Life expectancy; Personal insolvencies; Wine exports

• Life expectancy: Life expectancy at birth stands at 82.8 years for all Aussies in 2018 – amongst the highest in the world. Life expectancy for both females (84.9 years, up by 0.3 years from 2017) and males (80.7 years, up by 0.2 years from 2017) rose to record highs.
• Life expectancy by region: In 2018, the region with the highest life expectancy is Sydney – North Sydney and Hornsby at 86.7 years. The lowest life expectancy is in the Northern Territory – Outback at 74.5 years. Sydney – City and Inner South experienced the biggest increase in life expectancy of 1.9 years over the last five years.
• Falling bankruptcies: Over the year to September, bankruptcies fell by 6.4 per cent to a 241⁄2-year low of 3,692. New bankruptcies fell by 11.2 per cent to a 29-year low of 600 in Victoria. And bankruptcies were down by 9.6 per cent to a 15-year low of 1,065 in Queensland. Around 25 per cent of bankruptcies were business related.
• Wine exports: The value of Australian wine exports rose by 7 per cent to $2.89 billion over the year to September. But wine export volumes declined by 8 per cent to 774 million litres. The value of wine exports to China lifted by 18 per cent to a record high $1.25 billion.

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.

What does it all mean?

• Aussies are living longer. In fact, life expectancy from birth for all Australians is at all-time highs at 82.8 years in 2018. Over the past decade, female life expectancy has increased by 1.2 years to 84.9 years. And male life expectancy has lifted by 1.5 years to an all-time high of 80.7 years.
• In 2017/18, the biggest increase in life expectancy occurred for females in the Northern Territory (up by 0.8 years to 80.2 years) and males in Tasmania (up 0.6 years to 79.3 years).
• Across Aussie regions, the highest life expectancy is 86.7 years in Sydney’s leafy North Shore (North Sydney and Hornsby). Sydney, Melbourne and Brisbane’s affluent suburbs generally dominate the regions with the highest life expectancies. But Australia’s outback – especially the Northern Territory (74.5 years), Queensland (78.7 years) and Western Australia – North (78.9 years) – dominate the lowest life expectancies.
• Some Aussies are struggling at the moment with financial pressures, but new personal bankruptcies are at the lowest level since March 1995. Insolvencies have been falling over the past decade. In fact, bankruptcies in Victoria are at 29-year lows and insolvencies have hit 15-year lows in Queensland.

Inflation rate creeps towards RBA target zone

Consumer price index

• Inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.5 per cent in the September quarter, in line with expectations. In seasonally adjusted terms the CPI rose by 0.3 per cent. The annual rate of headline inflation lifted from 1.6 per cent to 1.7 per cent. The Aussie dollar was unchanged against the greenback in response.
• Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 per cent in the September quarter (1.6 per cent annual); the weighted median rose by 0.3 per cent (1.2 per cent annual) and the CPI less volatile items rose by 0.8 per cent (1.9 per cent annual). Overall, underlying inflation rose by around 0.5 per cent in the quarter and by around 1.5 per cent over the year. Market goods and services less volatile items rose by 0.8 per cent in the quarter (biggest rise in almost 4 years) to be up 1.8 per cent on the year.
• Main changes: International holiday travel (+6.1 per cent), tobacco (+3.4 per cent), property rates & charges (+2.5 per cent) and child care (+2.5 per cent) recorded the most significant price gains. The most significant offsetting price falls this quarter are automotive fuel (-2.0 per cent), fruit (-3.1 per cent), and vegetables (-2.5 per cent).
• Notable lows: Audio-visual equipment (39-year lows). Games, toys and hobby prices (record 21-year lows). Deposit and loan facilities (record 8-year lows). Record (20-year) annual fall in cost of new dwelling purchase (-0.1 per cent) with rents up just 0.4 per cent. Electricity prices fell 2.1 per cent on the year (biggest fall in 31⁄2 years).
• Notable price increases: Bread and cereal prices (+3.6 per cent) are growing at the fastest annual rate in a decade with cereal prices up 6.4 per cent. Drought effects are also apparent in beef & veal (+7.1 per cent), chicken (+5.2 per cent), lamb (+14.3 per cent). Milk prices are up 6.7 per cent over the year, the fastest rate in 11 years.

What does it all mean?

• Inflation remains contained. The headline annual inflation rate has bottomed, but it is creeping, rather than leaping, towards the Reserve Bank’s 2-3 per cent target band. That is more than we can say about ‘underlying inflation’ which solidly remains near 1.5 per cent.
• Headline inflation may be boosted by the drought effects on food prices in coming quarters. Higher home prices may serve to lift some price measures in the ‘Housing’ grouping. Wage growth may remain low but it is still outpacing prices. And with productivity growth near zero, the positive real wage growth may be applying some upward pressure on prices – especially in the services sector.
• The Reserve Bank has indicated that rate cuts are still possible. But the language from the policymakers suggest that they are very reluctant rate cutters from here. Rates are low enough and the rate cuts have actually been having the opposite to the desired affect – spooking Aussie consumers. And there is evidence to support the ‘gentle turning point’ view of the Reserve Bank. Unemployment fell last month and home prices are again barrelling higher in Sydney and Melbourne.
• The Reserve Bank is expected to wait until at least February 2020 to decide if more interest rate stimulus is required. 

What do the figures show?

• The Consumer Price Index – the main measure of inflation in Australia – rose by 0.5 per cent in the September quarter, in line with expectations. In seasonally adjusted terms the CPI rose by 0.3 per cent. The annual rate of headline inflation lifted from 1.6 per cent to 1.7 per cent.
• The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 per cent in the September quarter (1.6 per cent annual); the weighted median rose by 0.3 per cent (1.2 per cent annual) and the CPI less volatile items rose by 0.8 per cent (1.9 per cent annual). Overall, underlying inflation rose by around 0.5 per cent in the quarter and by around 1.5 per cent over the year. Market goods and services less volatile items rose by 0.8 per cent in the quarter (biggest rise in almost 4 years) to be up 1.8 per cent on the year.
• Capital cities: Sydney +0.5 per cent in the quarter (annual +1.6 per cent); Melbourne +0.5 per cent (+1.7 per cent); Brisbane +0.6 per cent (+1.9 per cent); Adelaide +0.7 per cent (+1.9 per cent); Perth +0.5 per cent (+1.6 per cent); Hobart +0.5 per cent (+2.2 per cent); Darwin +0.3 per cent (+0.5 per cent); Canberra +0.7 per cent (+1.8 per cent).
• Main Positive Contributors:
  • Recreation and culture (+1.5 per cent) due to the peak tourist season in Europe and America which drove international holiday, travel and accommodation (+6.1 per cent).
  • Alcohol and tobacco (+2.0 per cent) driven by tobacco (+3.4 per cent) due to the annual increase in the tobacco excise (12.5 per cent, applied on 1 September.). Wine rose 2.6 per cent in Sydney and 3.5 per cent in Adelaide.
  • Domestic holiday, travel and accommodation rose 3.2 per cent in Canberra and rose 4.4 per cent in Darwin
  • In Brisbane electricity rose 2.6 per cent, driven by the $50 asset ownership dividend that was applied to consumers’ electricity bills last quarter.
• Main Negative Contributors:
  • Communication (-1.1 per cent) driven by telecommunication equipment and services (-1.1 per cent) due to increased use of mobile services.
  • Transport (-0.3 per cent) due to a fall in automotive fuel (-2.0 per cent) as recent falls in world oil prices flow through to consumers.
  • In NSW: Sports participation (-3.5 per cent) due to the introduction of a second $100 Active Kids sports voucher for school aged children in New South Wales.
  • In Melbourne: Electricity (-4.1 per cent) due to the introduction of the Victorian Default Offer from 1 July 2019.
  • In Adelaide: Insurance (-3.5 per cent) due to the Compulsory Third Party insurance market being opened to competition on 1 July.
• Prices of tradables: The tradables component of the All groups CPI rose by 0.9 per cent in the September quarter to be up 1.2 per cent over the year. Tradable goods component rose 0.3 per cent due to wine (+1.8 per cent), gas and other household fuels (+3.0 per cent), furniture (+2.4 per cent) and garments for women (+1.4 per cent). Tradable services component rose 5.8 per cent due to international holiday, travel and accommodation (+6.1 per cent).
• Prices of non-tradables: The non-tradables component of the All groups CPI rose 0.4 per cent in the September quarter to be up 1.9 per cent over the year. Non-tradable goods component rose 0.6 per cent due to tobacco (+3.4 per cent). Non-tradable services component rose 0.3 per cent due to property rates and charges (+2.5 per cent).
• In seasonally adjusted terms, the tradables component of the All groups CPI rose 0.3 per cent and the non-tradables component rose 0.5 per cent.
• Tradable goods are those items whose prices are largely determined on the world market. Non-tradable prices are more affected by domestic economic conditions.

Why is the data important?

• The Consumer Price Index (CPI) is regarded as Australia’s premier measure of inflation. The CPI is published quarterly and measures price changes for a ‘basket’ of goods and services that dominate expenditure of metropolitan households. The “All Groups” index is the main focus, but other inflation measures are also published such as so-called ‘underlying’ measures. These include measures that abstract from price changes in volatile price items such as fresh food and petrol.
• The Reserve Bank aims to keep the headline inflation rate between 2-3 per cent over an economic cycle. If inflation is high and expected to rise, the Reserve Bank may elect to raise interest rates in order to constrain price pressures. Conversely, if inflation is low and expected to remain low, the Reserve Bank may elect to cut interest rates if it believes the growth pace of the economy is in need of strengthening.

What are the implications?

• There were no real surprises in the latest inflation data. Headline inflation remains stubbornly below the 2-3 per cent target band.
• The east coast drought is driving food prices higher, especially cereals and meat. But tech goods continue to get cheaper including games, toys and hobbies. Housing costs remain low as do financial services. The cost of pets continues to lift – up 6.9 per cent over the year, the fastest growth in eight years. The low Aussie dollar has driven up international travel by 5.8 per cent on the year – fastest gain in five years. Petrol is 3.9 per cent cheaper than a year ago. Even electricity prices are falling.
• The Reserve Bank Board meets on Tuesday and is expected to leave rates unchanged. The quarterly Statement on Monetary Policy is released on November 8.

US interest rates: Fed cuts, but signals pause

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 1.50-1.75 per cent – the third successive rate cut. The FOMC again 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 8-2 to cut interest rates.
• US interest rate outlook: In its statement, the FOMC dropped its vow to “act as appropriate to sustain the expansion”, but still remains data-dependent as it “assesses the appropriate path of the target range for the federal funds rate.” In his press conference, US Federal Reserve Chair Jerome Powell hinted at a pause as “we see the current stance of policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook.”

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?

• The US economy remains resilient, but the US central bank continues to take out insurance to shield consumers from the slowdown in business investment. In the continuing “tug-of-war” between solid consumer spending and weakening business investment, consumers again dominated the overnight release of economic growth (GDP) in the September quarter.
• In fact, US consumer spending rose by an annual growth rate of 2.9 per cent in the September quarter, in-line with its average pace over the first half of the year. Real GDP growth slipped to 1.9 per cent over the year, around its long-run average and ahead of market expectations for 1.6 per cent. Business investment, however, fell by 3.0 per cent over the year – recording the first back-to-back declines since March 2016.
• For now, the US Federal Reserve appears content to pause after three successive rate cuts. In his press conference, FOMC Chair Powell said “we believe monetary policy is in a good place” and noted that geo-political risks around trade and the Brexit were easing.

What are the implications of today’s decision?

• While the bar appears to have been lifted for a fourth consecutive US rate cut on December 11, developments in the job market and consumer-related data remain key to the interest rate outlook. A slowing in labour hiring (the unemployment rate is at 50-year lows of 3.5 per cent), the housing market, consumer sentiment indicators and/or further weakness in retail spending data could sway FOMC thinking. Policymakers would have already noted some consumer caution with reduced spending on motor vehicles, less appetite for large household durable goods, while delinquency rates on personal loans have been lifting.
• And of course the FOMC has been thrown a “curve ball” on the trade front with Chile cancelling next month’s APEC Summit in Santiago due to protests. That said, the Trump Administration appears keen to press ahead with the “phase one” partial trade deal with China in the coming weeks. Trade uncertainty has been a major contributor to decelerating global trade volumes, reduced business spending on capital and equipment and slowing global growth.
• US Treasuries weakened immediately after FOMC announcement with the US 10-year yield up slightly to 1.81 per cent. But Treasuries were firmer (yields lower) overall during the US trading session with US 2-year yields down by 4 points to near 1.61 per cent and US 10-year yields lower by 6 points to near 1.78 per cent.
• In US sharemarkets overnight, the Dow Jones index rose by 115 points or 0.4 per cent; the S&P500 index rose by 0.3 per cent to record highs; and the Nasdaq index rose by 27 points or 0.3 per cent.
• The Aussie dollar moved between US68.50 cents and US69.00 cents and was around highs in late US trade. Commonwealth Bank Group economists still expect the FOMC to cut interest rates in December.

Income lifts; Building rebounds; Credit stays weak

Export & import prices; Building approvals; Credit

• Export & import prices: Import prices rose by 0.4 per cent in the September quarter and were up 1.2 per cent on a year ago. Export prices rose by 1.3 per cent in the quarter to be up 14.7 per cent on the year.
• Lending: Private sector credit (effectively outstanding loans) rose by 0.2 per cent in September after lifting 0.2 per cent in August. Annual credit growth fell from 2.9 per cent to an 8-year low of 2.7 per cent. APRA data shows that loans via credit cards hit a 91⁄2-year low in September.
• Building approvals: Council approvals to build new homes lifted 7.6 per cent from 61⁄2-year lows in September. The value of home and commercial building totalled $114.5 billion in the year to September, 15 per cent above decade averages.
• China data: The manufacturing purchasing managers index (PMI) fell from 49.8 to 49.3 in October (forecast 49.8). The services PMI fell from 53.7 to 52.8 (forecast 53.9). Any reading above 50 signifies expansion.

The terms of trade data is useful in assessing the outlook for the Australian dollar and therefore trade-exposed businesses. Credit card data is important for the retail and financial sectors. The approvals data has implications for banks, retailers, developers, building and building material companies.

What does it all mean?

• Aussie continue to get richer. The prices we are getting for our exports are outpacing the prices we pay for our imported goods, putting the ‘terms of trade’ at 6-year highs. Both prices and volumes are rising, boosting the economy’s wealth.
• Home building has softened in a trend sense but commercial building is still lifting. The near $115 billion of building approvals is around 15 per cent above long-term averages.
• The Aussie housing market revival – centred on Sydney and Melbourne – may have seen a recent upswing in new home lending activity, but housing credit growth is still benign. Lending conditions have broadly eased, but slow adjustment to repayments appear to be capping credit growth. Annual investor credit growth has turned negative for the first time on record.
• Perhaps more troubling for Reserve Bank policymakers is the ongoing weakness in business credit growth. While there was a solid pick-up in September, the annual growth rate has decelerated to a 15-month low. Small businesses, in particular, are still contending with challenging business conditions (and greater compliance) amid the economic slowdown. And the Reserve Bank has already highlighted reports of difficulty in SMEs obtaining business loans. It is hoped that lower borrowing costs and signs of a stabilisation in the economy will encourage Corporate Australia to once again increase investment in capital and equipment.
• The pace of annual personal credit growth has hit decade lows, but it’s difficult to determine whether Aussies are being more disciplined with debt or it’s due to structural changes around increasing debit card use and millennials’ focus on ‘buy now, pay later’ payment methods.

Investor Signposts: Week Beginning November 3 2019