Our stock market put in a shocker on the third last day of trading before the Christmas break. As the smarties who trade stocks have a history of collectively getting it right about the economy and company profits at least six months ahead of time, the question has to be asked: are we heading down the economic gurgler?
Our S&P/ASX 200 index is down a big 13.3% since August 29 and this coincides with remarks from the Fed chairman, Jerome Powell. This is how The National website reported it: “Remarks by Fed officials late last week at the symposium in Jackson Hole, Wyoming, confirmed the consensus market expectation that the US central bank will hike interest rates two more times this year, delivering the biggest annual tightening in more than a decade.”
For a stock market, rapidly rising interest rates are like a crucifix to Count Dracula!
On top of this, the Trump China trade war got more heated and the likes of Goldman Sachs, followed by others, started to downgrade US economic growth for next year. I think all three events explain why stocks might be selling off but what’s explaining our sell off?
Well, all the above and our stock market plays follow the leader with Wall Street, so it’s hard to ignore both good and bad vibes from the New York Stock Exchange.
On top of these external challenges for our stock market, we also have had APRA clamp down on bank lending to real estate investors and Chinese property buyers, the Royal Commission has KO’d bank stock prices and we now have an election looming, with a minority Government in power and set to be replaced by a Labor party that looks less business-friendly. And you wonder why our market is down?
But the interesting question is: how is our economy doing and will it make matters worse or better going into 2019?
Let’s do a quick, updated eco-check. So here goes:
• Unemployment rose in November from 5% to 5.1% but it was caused by more workers looking for work, which is a positive economic sign.
• Jobs were up by a bigger-than-expected 37,100 but full-time jobs fell by a small 6,400, while part-time work surged by 43,400.
• The NSW jobless rate is at a 40-year low of 4.4%, which isn’t bad, with so many scary house price collapse headlines around nowadays.
• Australia’s annual population growth rate rose from 1.56 to 1.59% and a record 314,800 babies were born over the past year. More Aussie born people on top of immigration is great for economic growth and Baby Bunting’s share price!
• The weekly ANZ-Roy Morgan consumer confidence rating rose 0.1% to 117.8. The index is comfortably above the longer-term average of 113, held since 1990. (The so-called wealth effect from the house price falls has not kicked in yet.)
• The Housing Industry Association reports that detached house sales rose 3.6% in November – the biggest lift in 13 months and to 5-month highs!
• The Federal Government is projecting a $5.2 billion underlying cash deficit (0.3% of GDP) for the current financial year (2018/19). The May 2018 budget had forecast a deficit this year of $14.5 billion. A budget surplus of $4.1 billion is now expected in 2019/20.
• Retail trade rose by 0.3% in October, after a 0.1% lift in September. Annual spending growth was steady at 3.6% in October. Over the year to October, trend growth of spending in Victoria lifted to four-year highs of 6.1%. And Tasmanian retail sales rose by 5.8% over the year to October, up from 5.6% in September.
• The trade surplus fell by $624 million to $2,316 million in October. The rolling annual surplus rose from $13.69 billion to $15.29 billion – the highest level in 11 months. Both Australia's exports to China and Australia’s imports from China were at record highs in the year to October.
• The Australian Industry Group (AiG) Performance of Services Index (PSI) rose for a 21st consecutive month, rising by 4 points to 55.1 points in November – the longest expansion since March 2008. PSI results above 50 points indicate expansion, with higher numbers indicating stronger rates of growth.
• Company operating profits rose by 1.9% in the September quarter to stand 13.5% up on the year. Profits in the year to September were up 13.2% on a year earlier and these are in record high territory!
(Just in case you haven’t noticed, there’s no really bad news yet.)
• Australia’s record economic expansion is now well into its 28th year. The Australian economy grew by 0.3% in the September quarter, after growing 0.9% in the June quarter. Annual economic growth eased from 3.1% to 2.8% but this is still a good number and December looks already to be a stronger result.
• Tourist arrivals rose by 1.1% in October and tourists from China hit record highs over the year but annual growth of Chinese inflows is the slowest in eight years. This could be a consequence of the trade war and a slowing growing China.
• Recent Chinese economic data shows our best export customers are growing more slowly and are being affected by the trade war.
• Total new lending commitments (housing, personal, commercial and lease finance) fell by 1.2% in October to $70.7 billion. The value of loans to buy new cars fell to 30-month lows of $8.14 billion in rolling annual terms in October.
• The number of loans (commitments) by home owners (owner-occupiers) rose by 2.2% in October – the largest gain in 15 months, while loans are down by 4.8% on the year, though that’s not a dramatic collapse. Also, the proportion of first-time buyers in the home loan market rose from 18% in September to 6-year highs of 18.1%. in October (decade-average 17.7%).
• Approvals to build new homes fell 1.5% in October but private house approvals rose by 2.7%. This is a number that will upset the house price collapse mob.
• The NAB business conditions index eased from +13 points to +11 points in November. This is a good number, as the long-term average is only 6!
• Business confidence fell from +5 points to +3 points and the long-term average is 5.8, so this isn’t a great result, but the NAB business conditions employment sub-index lifted from +7 to +9 points in November. And the 12-month moving average rose from +9.93 points to +10.04 points in November – a record high. This a great number!
• And for home price collapse worriers, this is the score up to September — the Bureau of Statistics reports that Australian home prices fell by 1.5% in the September quarter to stand 1.9% lower over the year.
• The CoreLogic Home Value Index of national home prices fell by 0.7% in the month to be down 4.1% over the year. Sydney prices fell 8.1% over the year, with Melbourne down 5.8%, while Hobart was up 9.3%, Canberra up 4%, Adelaide up 1.4% and Brisbane up 0.3%. Perth was down 4.2% and Darwin was off 0.8% but experts think the worst is behind these cities.
• The Australian Industry Group (AiGroup) Performance of Manufacturing Index fell from 58.3 to 51.3 in November. The sector has been expanding for 26 successive months – an index above 50 points – for the longest period since 2005. But the latest reading is the lowest since October 2017.
• ANZ job advertisements fell by 0.3% in November but ads are still only 1.7% away from the 7-year high set in May.
Recently, CommSec’s Craig James summed up the RBA’s message from its latest meeting minutes and this is what he came up with: “The Reserve Bank hasn’t changed the central message. There is no case for a near-term change in monetary policy. But the next move was likely to be an increase in the cash rate. The tone of the Reserve Bank Board minutes suggests ‘business as usual’, with no new issues of concern.”
And looking at my list of latest economic readings, you’d have to want a doomsday scenario to be out there warning bad economic times are on the horizon. If I’m wrong, the cause for economic Armageddon will come from without and not within.