8 December 2021
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Investor Signposts - week beginning 5 July 2009

Craig James
3 July 2009

The Government’s two cash handouts to Aussie households have done their job. Retail spending has risen in seven of the past eight months, with the 7.1 per cent annual growth (in seasonally adjusted terms) well above the long-term average of around six per cent. Larger retailers have done best by far with sales up over nine per cent, well ahead of the near one per cent growth for ‘small’ retailers.

But while the Government deserves credit in keeping spending growing, it is only part of a much bigger story. The Reserve Bank slashed interest rates from September last year, boosting purchasing power for the third of Australians paying off homes. But more importantly, the rate cuts have served to lift consumer confidence.

Then there was the first homeowners boost that has reinvigorated the housing market and, in turn, the fortunes of housing-dependent retailers. Over the past three months, spending at furniture and floor-covering retailers has grown at a 12 per cent annual rate.

Petrol prices fell sharply late last year, again boosting purchasing power and consumer sentiment. While petrol prices have since lifted from the lows, the average price of $1.19 a litre since February compares with the $1.55 a litre average that held from June to October last year.

Businesses have also done their bit in supporting spending. Unlike the 1990/91 recession, companies have been reluctant to lay off staff, preferring instead to cut work hours or trim salaries. There’s a big difference between losing all your spending power to only having a few less dollars in your pocket. And lower petrol prices, cheaper mortgages and government handouts have certainly filled any hole.

And it’s important to remember the longer-run influences that have put household budgets in good shape. Australian wage earners have benefited over the past seven years from regular tax cuts and real wage gains. These developments have occurred over a long period of time, so we tend to miss the significance. Back in 2002, the average annual wage was $42,920, translating to $825 a week gross or $647 a week after tax. Now the after-tax wage is around $953 a week – a 47 per cent improvement in seven years.

Inflation over those seven years has been just 22 per cent, meaning that the average wage earner is better off in real terms by around 25 per cent. Tax now slices just 20 per cent off the average gross wage, compared with 22 per cent back in 2002.

At face value, that suggests the cost of labour has gone up. But courtesy of higher productivity, real unit labour costs have actually fallen by five per cent since 2002. Is it any wonder that unemployment has actually fallen over that time, down from 6.4 per cent to 5.7 per cent? Sometimes we may feel we are going backwards, but I bet few Australians would want to swap their lot in life for the average punter in either the US, UK or Europe.

The week ahead

A packed economic diary awaits investors in the coming week. No fewer than five key indicators will be released over the week with a Reserve Bank Board meeting thrown in for good measure.

On Monday, job advertisements and the monthly inflation gauge are issued. The Reserve Bank Board meeting is the sole event on Tuesday while housing finance and consumer sentiment are slated for release on Wednesday. And on Thursday the monthly employment report is issued.

In May, there were signs that Corporate Australia’s “hiring freeze” was coming to an end. Job advertisements fell by just 0.2 per cent – the best reading in 13 months. If job ads start rising again, economists will need to revise down their forecasts for the peak level of unemployment. And another weak reading is expected in TD Securities’ monthly inflation gauge.

The Reserve Bank Board meets on Tuesday but cash rates are all but certain to be left on hold for the third straight month. Conditions in the Australian economy have improved with confidence, spending and housing lending markedly stronger while ‘V-shaped’ recoveries are emerging in Asia.

The Federal Budget probably kept homebuyers on the sidelines in May. We expect that the value of housing lending eased 0.5 per cent in the month – only the first decline in eight months. Consumer confidence may have also retreated modestly in July after shooting the lights out in June. Petrol prices have been creeping up while the sharemarket has been trending sideways, rather than higher in recent weeks.

And another “interesting” employment report is expected on Thursday. Over the last few months, economists have consistently got it wrong – tipping large falls in employment when the actual results have indicated little change. Employers haven’t been hiring, but they certainly aren’t firing. We tip a 20,000 fall in employment in June, but largely because new entrants to the job market have found it difficult to get work. The jobless rate may have crept up from 5.7 per cent to 5.9 per cent.

In the US, a quiet week is in prospect for new readings on the economy. The ISM services index is released on Monday with the trade balance and consumer sentiment reading for July set down for Friday.

The services sector is still contracting – that is, the ISM index is below 50. Still, we expect that the services gauge edged up from 44 to 46 in June. The trade deficit was probably around US$30 billion in May. And consumer sentiment may have eased modestly from 16-month highs. Federal Reserve Board Governor Elizabeth Duke is also expected to deliver a speech in Thursday.

Share market

As is clear from the sideways trend in US and Australian share market indexes, investors are now bracing for earnings results. While economic data has been encouraging, now there needs to be validation from those at the coal face that a recovery is emerging. The interesting development in Australia is that companies appear to have been caught out by the revival of confidence and spending. The key point that many investors and analysts appear to have missed is that Australia’s slowdown has been very much a confidence thing given the fact that the economy was in fundamentally good shape going into the crisis. Alcoa kicks off the US earnings season on Wednesday after the close of trade.

Interest rates

Financial markets believe it’s a 50:50 call whether the Reserve Bank cuts rates again in the second half of the year. The overnight index swap rate in five-months time stands at 2.8975 per cent, effectively pricing in just under half of a 25 basis point rate cut. Interestingly, by contrast, the implied yield on the September 90 bank bill futures contract is 3.14 per cent with December bills at 3.27 per cent. Physical 90-day bank bills are currently yielding 3.12 per cent, above the three per cent cash rates. The bottom line is that investors believe that if cash rates aren’t already at the low point for the current cycle, they aren’t far away.

Currencies and commodities

The Group of Eight (G8) nations hold their next summit in Italy beginning on Wednesday. The G8 includes the US, UK, Germany, Italy, France, Japan, Canada and Russia. While the G8 will hold their normal meeting in L’Aquila (Naples) on Wednesday, they will be joined by the G5 (Brazil, China, India, Mexico and South Africa) on Thursday together with Egypt. While a range of issues will be covered, there is speculation that there will be debate on proposals for a new reserve currency.

The US dollar index has fallen 11 per cent from the early March highs as investor risk appetite improved and more questions were raised about the greenback’s status as global reserve currency. If the US dollar loses further favour with investors, not only would the Aussie dollar be on track to the mid 80s, but commodity prices would receive a boost. Many commodities are priced in US dollars, so a weaker greenback tends to improve the purchasing power for buyers in Europe and Asia.

Base metal prices are certainly extending their ‘V-shaped’ recoveries from the lows set in February. The London Base Metal index is up 51 per cent from the lows with nickel one of the stand-outs, lifting to nine-month highs.

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