Investor Signposts: Week Beginning November 14 2010


Upcoming economic and financial market events

The big picture

  • It never ceases to surprise how many people treat budget figures as facts rather than estimates. The Mid Year Economic and Fiscal Outlook (MYEFO) didn’t contain much that was new. The economic assumptions were tweaked and the bottom-line budget numbers barely budged, but still the Treasurer and many commentators claimed that Australia’s finances were solidly on track to returning to the black. In the year to September the budget deficit stood at just over $63 billion, and the rolling annual deficits are still increasing, not improving, so the path to surplus is hardly a smooth one.
  • The Government also claimed that the rising Australian dollar was to blame for wiping $10 billion off revenue estimates over the next four years. Perhaps. But while the Aussie dollar has been rising, making life difficult for exporters and the tourism sector, and crimping returns for mining producers, Federal Treasury also lifted economic growth estimates while cutting the forecast for the jobless rate. Apparently the economy will be growing at a faster pace but the Government will extract less in revenue. And if the Aussie dollar is indeed rising, the expectation is that commodity prices would also remain strong, and indeed the terms of trade are tipped to rise by 15.5 per cent this financial year, well up from the estimate at budget time.
  • And when it comes to estimating the impact of the Australian dollar on the economy, the latest tourism figures have thrown something of a curve ball into the calculations. In September a record number of foreign tourists visited our shores. In seasonally adjusted terms, tourist arrivals hit 511,400 in September, up 1.8 per cent on the previous month and the fourth increase in five months. Tourist arrivals are now 7.7 per cent higher than a year ago and slightly ahead of long-term average annual growth.
  • Certainly there are still more Aussies travelling abroad than people visiting our shores – almost 100,000 more in the latest month. And it will get even harder to attract visitors to Australia in coming months with the Aussie dollar at parity against the greenback and historically high against a raft of other countries. But the fact that more visitors came to our shores in September than ever before is clearly encouraging.
  • However what isn’t encouraging is that the number of migrants coming to Australia continues to fall. In the year to September, 218,400 migrants came to Australia, down by over 110,000 people on last year’s annual total. If we want to keep the Australian economy growing at a sustainable rate and move the budget into surplus, we need to keep attracting foreign workers from abroad. Federal Treasury estimates that full-employment is consistent with a jobless rate between 4.5-5.0 per cent.

The week ahead

  • The Australian economic calendar has been well populated over the past week, but by contrast the US calendar has been very quiet. Well in the coming week the tables are turned with most interest in the top-shelf indicators due for release across the other side of the Pacific.
  • In Australia, the week kicks off with car sales and lending finance figures on Monday. On Tuesday the Reserve Bank releases minutes of the November Board meeting. On Wednesday, the main gauge of wage pressures is issued – the Labour Price Index. On Thursday the average weekly earnings data will provide a different take on wages, showing how much we earn in actual dollars. Figures on imports are also released on Thursday while Reserve Bank Deputy Governor Ric Battellino delivers a talk in Perth to a CEDA function. And on Friday the state accounts are issued – showing how the state economies fared over 2009/10.
  • Car sales probably fell by 1.5 per cent in October – the first fall in three months. While car affordability is the best since the 1970s, buyer caution is emerging. Certainly lending has been soft in recent months – down 6.5 per cent in August alone. So analysts will be closely watching the latest data for signs of any improvement.
  • While there will be the usual interest in the Reserve Bank Board minutes, it is questionable how many new insights will be gleaned given that the quarterly monetary policy statement was released just three days after the rate decision.
  • The wage data should prove interesting. Certainly the job market has tightened and that suggests upward pressure on wages. But conditions vary significantly across industries and state and territory economies. We expect that wages lifted by 1.2 per cent in then quarter and by 3.4 per cent over the year.
  • In the US, a bevy of top-shelf indicators will be released over the week. On Monday, retail sales figures are due with producer prices and industrial production on Tuesday and housing starts and consumer prices on Wednesday. Also thrown in for good measure during the week is the Empire State index on Monday with the leading index and Philadelphia Fed survey slated for Thursday.
  • Overall the results should be encouraging with firmer activity readings expected as well as a dose of higher prices – serving to downplay some of the concerns about deflation. In terms of the activity indicators, economists tip a solid 0.7 per cent lift in retail sales for October, underpinned by higher car sales. Strip out autos and a 0.3 per cent lift is expected. Industrial production probably rose 0.3 per cent in the month given the guide provided by the ISM manufacturing gauge. And housing starts were probably little changed near a 608,000 annual pace.
  • And turning to the inflation gauges, rising agricultural prices probably pushed up producer prices by 0.7 per cent in October with consumer prices up 0.3 per cent. But excluding food and energy, core prices probably rose just 0.1 per cent for each measure.


  • Sharemarket investors had been hoping for some stability, but things don’t always turn out as planned. The US mid-term elections are out of the way and similarly the US earnings season, Federal Reserve quantitative easing and US non-farm payrolls report have all come and gone, leaving something of a vacuum. But beware idle hands at work.
  • Some media commentators and financial analysts have merely sought to revisit the European debt woes in the hope of conjuring up a fresh bad news story. There really isn’t anything new here – the issue has been bubbling beneath the surface over recent months but US issues have hogged the headlines. Simply, there isn’t much else to focus on at present and there are empty column inches to be filled.
  • Investors should ignore the hype. The big picture story of the global economy continues to improve and small economies such as Ireland and Greece serve as no threat to the recovery process.

Interest rates, currencies & commodities

  • In the US and Europe, policymakers and businesses are worried about disinflation – slowing rates of inflation – as well as deflation – falling prices. In fact many retailers in Australia are similarly concerned about these price trends. But in developing nations, it is inflation concerns that remain in focus – more specifically the issue of agflation or soaring prices for agricultural commodities.
  • However what is clear is that Commodity Boom MkII is well underway. The Commodity Research Bureau spot index has now recovered all the ground lost in the global financial crisis (GFC) and is back at record highs.
  • Amazingly the index has rebounded 63 per cent from the February 2009 lows, thus replicating the lift from October 2005 to June 2008. But the important point is that the rebound has occurred in a far shorter time frame.
  • While gold, oil and base metals generally grab the headlines; it has been the agricultural commodities that have recorded stellar gains in recent months. The CRB foodstuffs index is up 20 per cent from the recent July lows with both the textiles and raw industrials indexes showing similar gains over that period. In fact the raw industrials index – which includes cotton, wool, rubber and scrap metals – has soared 71 per cent since the December 2008 lows, thus exceeding the 63 per cent lift from November 2005 to April 2008 in Commodity Boom Mk1.

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