8 December 2021
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Investor Signposts - week beginning July 13 2009

Craig James
13 July 2009

In the US, retailers aren’t complaining just about high unemployment, recession and falling house prices – the weather has also proved problematic. Until recently, the summer in the north-east has proved unseasonably cool and wet, reducing demand for seasonal items like air conditioners and clothing.

Investors and analysts tend to focus on economic factors when considering consumer spending, but it is clear that the vagaries of the weather are important – especially for the peak seasons of summer and winter.

Here in Australia, the autumn/winter period has actually proved relatively “normal”, with both day and evening temperatures close to average. Add in the healthy number of “rain days” and it has all added up to firmer demand for seasonal items like heaters, jackets, rugs and coats. In Perth, there were 19 rain days in June, 15 in Adelaide, 14 in Sydney, 13 in Brisbane and 11 in Melbourne.

It is not just the retailers that are happy with current conditions. It may not be colder than normal, but the average temperatures support demand from utilities like gas and electricity operators. However the increased number of rain days could prove a negative for insurance companies with the potential for increased car accident claims.

And while our economy may not have received fresh challenges lately from the weather – either current winter conditions or floods and droughts – the question is how long that is likely to continue.

On 8 July, the Bureau of Meteorology warned that all of its indicators were pointing to the formation of an El Niño event. For the agricultural sector, in particular, this warning is significant as El Niño events have been generally associated with droughts in the past or at least warmer and drier-than-normal conditions.

The last El Niño event that occurred in late 2006/early 2007 was relatively mild. But in the previous event in 2002/03, dam levels plunged to record lows across the country. And the last La Niña event (the conventional meteorological label for the opposite of El Niño, associated with wetter conditions) occurred in 2007/08.

Rural and regional Australia has sailed through the Global Financial Crisis relatively unscathed, largely because weather conditions and agricultural prices have remained broadly favourable. So a new drought would pose fresh challenges for an Australian economy that is in the early stages of a recovery.

Still for retailers, warmer and drier conditions over late spring and early summer would provide just the right tonic ahead of the key Christmas/New Year period.

The week ahead

While there is a bevy of domestic indicators to be released in the coming week, investors are likely to spend more time focussed overseas. The monthly batch of Chinese economic indicators will be issued over Thursday and Friday while key US data is also scheduled.

Here at home, the main interest will be in the latest survey of business confidence and conditions on Tuesday. While overall conditions may have modestly improved in June, the key question is whether business owners are as confident as their customers. Over the past two months, consumer confidence recorded the biggest improvement in the 36-year history of the series (the first survey was first conducted by the Melbourne Institute in 1973). Clearly, if consumers start spending, business owners will become decidedly more chipper.

The other domestic indicators to watch over the week are lending finance (Monday), Treasury’s TRYM database including wealth estimates (Wednesday), the Reserve Bank Bulletin and imports (Thursday) and export and import prices (Friday).

Wealth levels are slowly repairing, courtesy of higher house prices and a modest lift in share prices. But fundamental improvement is still some way off. So for now consumers are trying to keep their financial houses in order. This should be reflected in subdued personal lending figures on Monday as well as the credit card figures contained in Thursday’s Reserve Bank Bulletin.

In April, the average credit card balance was down just over one per cent on a year earlier – the first decline in over 14 years of records. And the number of cash advances fell at the fastest annual rate on record. But consumers are more confident and starting to spend again so they may soon start leaving more outstanding debt on their credit cards.

In China, the usual batch of key monthly indicators will be released in the coming week. On Thursday, GDP (economic growth) figures will be issued while production, retail sales and inflation figures are slated for Friday. The Reserve Bank consistently refers to the “strong recovery” underway in China and that should be highlighted in the latest economic growth figures. We expect the annual growth pace to lift from 6.1 per cent to 7.3 per cent.

In the US a number of key reports on economic activity are released. Retail sales data is released on Tuesday followed by production on Wednesday and housing starts on Friday. And overall the results should be encouraging. Retail sales probably lifted by 0.5 per cent in June, boosted by lower tax rates and government payments. Production may have fallen again, but the decline of 0.5 per cent would be the best result in eight months. It’s worth noting that the production component of the ISM manufacturing index is now above 50, signifying growth. And housing starts probably also edged slightly higher in June.

Share market

The US profit-reporting, or earnings season, cranks up a notch in the coming week with banks in the spotlight. Goldman Sachs is scheduled to report earnings on Tuesday with JP Morgan Chase on Thursday and Citigroup and Bank of America on Friday. Investors will want to hear that these banks are now making money and, more importantly, note continued signs of stabilisation and improvement in their underlying businesses. Apart from the banks, Google and IBM report earnings on Thursday with General Electric on Friday.

The ASX 200 Resources Index has slid 15 per cent from the mid-June highs but base metal prices have retreated just 7.5 per cent. While the leads and lags can be debated, resources have scope to rally if metal prices hold up.

Interest rates

One of the best signs that global financial markets are stabilising can be judged from interbank borrowing rates, or libor. Around the time of the collapse of Lehman Brothers last year, banks were reluctant to lend to one another, leading to higher borrowing costs. Three-month US dollar libor rates soared from 2.81 per cent in mid-September to 4.82 per cent in mid-October. Rates have fallen since, but the decline really gathered momentum from 10 March – around the time that equity and commodities started their march higher. Currently three-month US dollar libor stands at a record low of 0.525 per cent.

It’s not just US dollar libor rates that have eased, other currency libor rates also are hovering near record lows. The three-month Aussie dollar libor rate stands at 3.42 per cent, down from 7.92 per cent in early October.

Currencies and commodities

The Aussie dollar has gravitated to both ends of its US77-82 cent range over the past month, but there are still few signs of it breaking out of its straitjacket. But Chinese economic data may prove important in the coming week. Stronger than expected readings will confirm a solid recovery underway in China with resources suppliers like Australia key beneficiaries of an upturn that is increasingly looking ‘V-shaped’.

While investors have trimmed positions from energy and base metal markets over the past week, other commodity prices have held onto the gains made since early March. The CRB raw industrials index, an index that includes scrap metal, wool, cotton and rubber, is up 23 per cent from the March lows And the livestock index has gained 30 per cent since March despite retreating almost nine per cent over the past month.


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