In the question and answer session after his recent speech, the Reserve Bank Governor was asked about the potential for a new asset “bubble” or an unsustainable lift in asset prices. Usually when asset prices are discussed, what is really meant is home prices. But the Governor wasn’t concerned, believing that there was little evidence to date that home prices were set to gallop away.â€¨â€¨
In part, the Reserve Bank Governor is no doubt highlighting the change in mood of the Australian economy. Aussies are less keen to borrow than in the past and more inclined to save. Further, the key home ownership group – Generation Y – have different attitudes on home ownership than their parents or grandparents. GenY has less desire to take out large loans to be paid off over 30 years. GenY is more focussed on “experiences” (as the Governor noted in his speech) such as travel and going to restaurants and concerts. As a result, GenY prefer to live close to city centres and rent rather than buy.â€¨â€¨
When you look at home price trends over the past 30 years it is clear that things have changed. Since 1980, on average, capital city home prices have grown by between 7.5-9.5 per cent a year.â€¨â€¨
But over the past five years, capital city home prices have only grown on average by 2.3 per cent a year. And over the past 10 years, prices have grown on average by 5 per cent a year.â€¨â€¨
The step-down in price growth is good news because that suggests the level of home prices is more sustainable, growing broadly in line with household incomes. The change also reflects the fact that the size of desired homes is reducing, not increasing as in the past.â€¨
The week ahead
In Australia over the coming week, the spotlight is squarely focussed on business and consumer confidence and wages. In the United States the customary ‘top shelf’ monthly indicators are released covering inflation, consumer spending and production.â€¨â€¨
In Australia, the week kicks off on Monday with lending finance data. This is the most comprehensive measure of new borrowing activity but strangely never gets the attention it deserves. The data covers personal, commercial, lease and housing loan commitments made by financial institutions.â€¨â€¨
On Tuesday, National Australia Bank releases its July business survey. Few would be expecting much change in either business confidence or business conditions until after the election is held. But of some interest will be the data on pricing – more specifically whether the lower Aussie dollar is leading to a lift in import prices.
On Wednesday, Westpac and the Melbourne Institute release monthly data on consumer sentiment. While financial markets tend to focus on this report, timelier, weekly readings on consumer sentiment are provided by Roy Morgan. On balance, people aren’t super-pessimistic, but they aren’t super-optimistic either.â€¨â€¨
Also on Wednesday the Australian Bureau of Statistics (ABS) issues the wage price index for the June quarter – the key indicator to assess wage pressures in the economy. At present, supply and demand for labour are reasonably balanced as evidenced by tame wage growth. We expect that wages grew by 0.8 per cent in the June quarter to stand 3.3 per cent higher than a year ago. At present, productivity growth is around 2 per cent and inflation is around 2.5 per cent and the sum of these measures represents the ‘pain threshold’ for businesses in delivering wage increases to staff. Clearly, wage pressures are contained.â€¨â€¨
On Thursday the detailed labour market measures are released by the ABS while it also issues the data on average weekly earnings – the dollar estimates of wages for particular industries.â€¨â€¨
And on Friday the Reserve Bank Assistant Governor for Financial Markets, Guy Debelle, will deliver a speech entitled: “The Impact of Payments System and Prudential Reforms on the RBA's Provision of Liquidity”.â€¨â€¨
In the US, the week kicks off on Monday with the monthly budget figures for July. The budget position is improving as the economy recovers.â€¨â€¨
On Tuesday the usual weekly reports on chain store sales are issued together with retail sales estimates for July, import and export prices data and business inventories figures. Economists believe that retail sales advanced by 0.4 per cent in July. And while that appears a healthy outcome, once car sales and gasoline sales are excluded, the expected lift in overall retail spending is far slimmer at 0.1 per cent.â€¨â€¨
On Wednesday the usual weekly report on mortgage activity – new purchases and refinancing – is released together with data on business inflation (producer prices). Economists expect that producer prices posted a solid rise of 0.5 per cent in July, but core prices (excludes food and energy) probably advanced just 0.2 per cent.â€¨â€¨
On Thursday the usual weekly data on claims for unemployment insurance is issued. But on the same day around five other reports are expected including consumer prices, industrial production and the Philadelphia Federal Reserve index. Economists think that core consumer prices (excludes food and energy) advanced by 0.2 per cent in July. If similar gains occur in the next few months, the annual rate will slowly lift towards 2.0-2.5 per cent. Production is also tipped to have lifted by 0.4 per cent in July.â€¨â€¨
And on Friday the July data on housing starts will be issued together with productivity estimates and the University of Michigan survey of consumer sentiment. Housing starts are expected to have lifted from an annual rate of 836,000 to 900,000 in the month.
Sharemarket, interest rates, currencies & commodities
The Australian profit-reporting season gets into full gear in the coming week. Amongst companies expected to report earnings results on Monday are GPT, James Hardie, Newcrest and UGL. On Tuesday, Challenger, Stockland and JB Hi-Fi are amongst those expected to release earnings data. On Wednesday, Commonwealth Bank, Computershare, Carsales, CSL, Goodman Fielder, Leighton, OZ Minerals, SAI Global, Southern Cross and Worley Parsons are expected to issue their latest financial results. On Thursday, AMP, Dexus, Goodman, Primary Health and Wesfarmers are scheduled to report. And on Friday Automotive Holdings, APN News, DUET, REA Group and Santos are slated to issue earnings data. As always, unfortunately the reporting dates can change from those listed above.
One of the positive aspects of the Reserve Bank’s communication strategy is that statements are always issued after each Board meeting. As a result, you can simply check any changes of wording or change in emphasis. And the only real change between July and August statements was the last sentence. It should be clear to all that the Reserve Bank is not planning any more imminent changes in interest rate settings. Understandably, the Reserve Bank – like everyone else – wants to see how the economy changes when the election uncertainty is finally removed. We expect to see a lift in economic activity with housing purchase and construction leading the way and confirming that this sector will be taking over the leadership role from the mining sector.
Upcoming economic and financial market events
August 12 - Lending finance (June) - Covers housing, personal, lease and business loans
August 13 - NAB business survey (July) - Little improvement is likely until after election
August 14 - Consumer sentiment (August) - Consumer sentiment is in a holding pattern
August 14 - Wage price index (June quarter) - We tip a 0.8 per cent lift in wages for the quarter; 3.3 per cent annual
August 15 - Average weekly earnings (May) - Provides dollar estimates of wages
August 16 - Speech by Reserve Bank official - Speech by Assistant Governor, Guy Debelleâ€¨
August 13 - US Retail sales (July) - A solid 0.4 per cent lift in sales is expected
August 14 - US Producer prices (July) - Core prices are tipped to lift by 0.2 per cent
August 15 - US Consumer prices (July) - Core inflation is expected to trend higher over 2013
August 15 - US Industrial production (July) - Economists tip a 0.4 per cent increase
August 15 - US Philadelphia Fed (August) - Influential regional survey
August 16 - US Housing starts (July) - Analysts tip a lift in annualised starts from 836,000 to 900,000
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