by Craig James
A busy week
The start of a new month ushers in a barrage of economic data with a Reserve Bank Board meeting thrown in for good measure. This week parts of the economic growth jigsaw puzzle were released and on Wednesday the official economic growth figures for the March quarter are issued and will take centre stage. In the US the spotlight shines strongly on Friday’s employment data (non-farm payrolls). Meanwhile in China, key manufacturing data is released on Sunday, with services sector data on Thursday.
In Australia, the week kicks off on Monday when the Bureau of Statistics (ABS) releases a publication entitled Business Indicators, containing figures on sales, profits, inventories and wages. While the profits data attracts most attention, the other data is useful in gauging the health of the broader economy.
Also on Monday TD Securities and the Melbourne Institute release the monthly inflation gauge for May. There are no signs of inflationary pressures at present. And the ABS releases data on building approvals. We tip a 0.5% fall in April approvals. The Performance of Manufacturing survey is also issued.
On Tuesday the Reserve Bank Board hands down its latest monetary policy decision. Since the last rate decision there is unlikely be any significant angst about how the economic recovery is panning out. Activity levels have been healthy and the Aussie dollar has barely budged, holding around US92-93c. It will be interestingly to see if there is any discussion by Board members on the ongoing negativity surrounding the Federal Budget and the resulting sharp pullback in consumer confidence. We expect the Reserve Bank to stay on the interest rate sidelines and attempt to gauge how the economy tracks over coming months.
Also on Tuesday the current account data for the March quarter is issued with plenty of interest in the extent to which net exports (exports less imports) boosted economic growth in the quarter. In addition the ABS releases retail trade figures for the April. Activity levels have been healthy and we expect retail trade to have lifted for the 12th consecutive month, up by 0.4 per cent in April.
On Wednesday the ABS issues March quarter gross domestic product (GDP) or economic growth data. On current indications the economy recorded strong growth of around 0.9 per cent in the quarter, with annual economic growth lifting to around 3.1 per cent, in line with longer-term averages.
Also on Wednesday the Performance of Services gauge and new car sales data are released.
And on Thursday the monthly trade figures are issued. In recent months, healthy, consistent trade surpluses have re-appeared, suggesting Australia is again paying for itself in the world. A trade surplus of $900 million is tipped for April.
Overseas: US employment data & global manufacturing figures in the spotlight
In the US, the week kicks off on Monday with the ISM manufacturing gauge, alongside new figures on construction spending. Economists tip a lift in the ISM gauge to 55.5, firmly in expansion territory – above the 50 line that separates expansion from contraction. The April data on construction spending is released the same day with a 0.7 per cent lift expected.
On Tuesday automobile sales are released together with factory orders.
On Wednesday the usual weekly data on housing finance activity is released alongside the ADP employment index, productivity figures and the ISM services index. The Federal Reserve also issues its Beige Book – or summary of conditions across the 12 Fed districts.
On Thursday the weekly data on jobless claims is issued together with the Challenger job layoff series.
And on Friday in the US, the pivotal non-farm payrolls or employment data is released. If the Federal Reserve is committed to winding back monetary stimulus, one key metric that has given them confidence in recent months has been the ongoing improvement in the labour market. Economists expect that 215,000 jobs created in May, although the unemployment rate is expected to lift marginally from 6.3 to 6.4 per cent.
In China, the official manufacturing gauge is released on June 1 followed by the HSBC measure on Tuesday and the services gauge on Thursday.
Sharemarkets, interest rates & the Aussie dollar
Can the Aussie sharemarket still be regarded as “fair value”? Well despite rising price-to-earnings levels over the past year, it is hard to say for certain that the market has moved from either “fairly valued” to “expensive”.
Certainly valuations have lifted. According to FactSet, the forward price-earnings ratio (share prices compared with next year’s expected earnings) has lifted from 14.8 in May 2013 to 15.0 currently. The current forward PE estimate is only mildly above the decade average of 14.4.
Now investors are unlikely to rush to embrace riskier assets, but certainly investors are getting less risk averse, putting more funds to work outside cash. So some “PE expansion” is to be expected as investors re-balance portfolios. But investors shouldn’t become complacent either. Earnings must rise to justify current PE ratios. Interestingly from a PE perspective Australia is relatively cheap compared with other markets. In fact the US forward PE is 7 per cent above decade averages.
Upcoming economic and financial market events
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