Investor Signposts: Week Beginning February 20 2011


The big picture

  • One of the biggest issues at present is the conservatism of Aussie consumers. Australians are saving again, rather than spending. And rather than buying goods on credit we are paying for goods with our own money – cash or EFTPOS.
  • The changes in the behaviour of Australian consumers actually started back in 2003 with people actively winding back the outstanding balance on credit cards. And the second phase began just before the global financial crisis in mid 2007.
  • The simple reason why consumers trimmed debt from 2003 was higher interest rates. In October 2003 the standard variable housing rate stood at 6.55 per cent but by mid 2008 home loan rates soared to 9.60 per cent. And while rates fell sharply as the global financial crisis took hold, it was the shock of GFC that consumers responded to rather than the attraction of lower rates.
  • By April 2009, the average credit card balance was actually lower than a year earlier. In May 2002, credit card balances were expanding at a 23 per cent annual rate but in April 2009 the average credit card balance was 0.6 per cent lower than a year ago.
  • Not only have consumers been cutting back on debt for some time, they have also been spending less and saving more. Over the past 25-years, retail spending has grown at a real annual rate of 4.0 per cent. Over the past five years this growth rate has slowed to just 3.0 per cent. And over the past three years, retail spending has grown at a real annual rate of just over 2.0 per cent.
  • Some economists believe that consumers will quickly come to their senses in coming months that conditions are not so bad – the job market is healthy, wealth is at record highs – and so they will start spending and borrowing with gusto. But changes in consumer behaviour don’t happen overnight. The shift from spending to saving evolved over time as did the change attitude towards credit card debt.
  • Reserve Bank officials don’t know how long this ‘new conservatism’ will last. In fact no one does. But the longer that consumers actively shop around for the best deals and focus more on saving, than spending, the longer the Reserve Bank can stay on the interest rate sidelines.
  • Asset prices will be an important part of the equation. If the sharemarket or home prices suddenly decided to take off then the risk is that the exuberance could spill over to consumer spending.

The week ahead

  • In the coming week, more pieces of the domestic ‘economic growth’ puzzle will fall into place. That is, more of the components of the December quarter GDP or economic growth figures will be released. The GDP result is not due until March 2. And in the US, the housing market will be in focus over the week.
  • The coming week gets off to a reasonably slow start with no major economic data or events scheduled for Monday or Tuesday. But on Wednesday the Reserve Bank Governor delivers his first speech of 2011 while data on wages and construction activity is released at the same time.
  • Governor Stevens will be speaking at a conference “Australia and the Resources Boom”. At present analysts think the Reserve Bank is unlikely to lift rates for some time, but if Stevens delivers a ‘hawkish’ address about the inflationary dangers of high income inflows then rate views may quickly change.
  • The wage price index should confirm that wage pressures remain contained outside the mining sector. Overall we expect that wages lifted by 0.9 per cent in the December quarter to stand 3.8 per cent over the year.
  • There is a lot riding on the data on construction work (Wednesday) and business investment (Thursday). Current indicators for the quarter have been weak with retail spending falling by 0.3 per cent. If business spending and construction work is similarly weak, then the prospect of a negative GDP reading comes into focus. Note that there is also a high risk of a negative GDP reading in the current March quarter due to the floods.
  • Overall we expect a solid reading for business investment (private capital spending) with spending up 5 per cent in the December quarter after a 6.2 per cent lift in the September quarter.
  • On Thursday, data on average weekly earnings is released. Now while this is another indicator of wages, the main interest is in the dollar figures provided for wages across sectors and states/territories.
  • In the US, the President’s Day holiday kicks off proceedings on Monday. On Tuesday, the consumer confidence survey results for February will be provided together with the Cash-Schiller home price series and Richmond Fed manufacturing index. Home prices are tipped to ease 0.8 per cent in December but consumer confidence may have edged up from 60.6 to 61.6.
  • On Wednesday, economists tip a flat reading for January existing home sales near a 5.28-5.30 million annual rate. The harsh snowstorms in the month may have distorted the results together with the new home sales data to be released on Thursday.
  • Also on Thursday, data on durable goods orders is released together with regional gauges of activity covering Chicago and Kansas City.
  • On Friday, the second estimate will be made for US economic growth in the December quarter. The statisticians take three attempts to get this one right and the first estimate showed the economy growing at a 3.2 per cent annualised pace in the December quarter.


  • The Australian earnings season clicks into top gear in the coming week. So far the results have proved very mixed. Resources companies have done well by consumer-facing businesses have struggled.  Companies have been reluctant to provide guidance, but the good news is that balance sheets are healthy with cash levels well up on a year ago.
  • Amongst those to report on Monday include Amcor, BlueScope Steel, Goodman Group, Woodside Petroleum and West Australian News. On Tuesday AWE Limited, Mirvac, OneSteel, REA Group, Sonic  Healthcare, and Spark Infrastructure are scheduled to release earnings. A rash of companies will report on Wednesday including Asciano, AGL Energy, and APA Group. It’s another big day for earnings reports on Thursday with Fairfax, Origin Energy, Ramsay Health Care, PaperlinX, Toll Holdings and Pacific Brands scheduled to report. And on Friday Harvey Norman, GPT Group, Primeag, Woolworths, Goodman Fielder, Austar, APN News & Media and Blackmores are amongst those to report.

Interest rates, currencies & commodities

  • For yet another week, all is quiet in currency land. The Aussie dollar is still holding near parity against the greenback despite comments from a senior IMF official that the Aussie may be over-valued by 5-15 per cent. Our CBA strategists still tip the Aussie peaking at US102c by March before easing to US92c by end year.
  • Market-determined prices for iron ore haven’t been around too long, in fact most spot prices extend back only as far as late 2008. But despite not being in existence for long, prices have certainly been on a tear. The Platts 62 per cent iron ore index stood at just US$57.50 a tonne in early November 2008. By August 2009 prices had doubled to US$105.50 a tonne and by April 2010 prices hit fresh record highs of US$186 a tonne. After weakening in response to last year’s European Debt crisis, prices resumed their upwards run in late July 2010 and now are back at record highs of US$192.50 a tonne. Demand by Chinese steelmakers is unwavering while Indian supplies remain tight.

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