CommSec Investor Signposts: Week Beginning May 22 2011

Upcoming economic and financial market events

The big picture

1. Is the petrol price high? It depends on your stand-point, especially given the fact that prices are quite volatile, making it harder to make comparisons over time. But it is worthwhile looking at the experience over the past three years as the pump price at that time was similar to now.
2. Over 2008, the pump price was climbing in Australia. In February the petrol price was near 135 cents a litre, lifting to a record high of 163.4 cents a litre in the week to July 13. But at this time three years ago, the pump price was around 146 cents a litre, much the same as now. The main difference is that the pump price was lifting solidly at that time, up 6 cents in the space of two months where as it has risen 3 cents since late March of this year.
3. However some will point out that the Aussie dollar is much higher now than three years ago, suggesting that motorists may be being short-changed. Certainly the Aussie dollar was lower three years ago – around US 93-95cents. In comparison the Aussie dollar has been trending higher over the last couple of months, averaging around US104 cents.
4. So what about the Singapore gasoline price? Well, it’s higher now in US dollar terms than three years ago, and that’s where the stronger currency comes in. Three years ago Singapore gasoline price was around US 73.7 cents a litre, where as now it has been averaging just over US 79c a litre.• Once you apply the higher value of the currency, the tables are turned. In Australian dollar terms Singapore gasoline has been averaging around 76 cents a litre in recent weeks, down from around US 79 cents three years ago.
5. So at face value, Aussie motorists appear to have lost out by around 3 cents a litre. Not a lot, mind you, but still higher than most would probably like. So what has been going on? Well the gap between the wholesale (terminal gate price) has widened over that period. Currently the gap between the pump price and the terminal gate stands at around 8 cents a litre. Back in April/May, that gross retail margin was closer to 5 cents a litre.
6. Why the wider margin? Well, that’s a question for the oil marketers like BP, Coles/Shell, Mobil/7-Eleven andWoolworths/Caltex. It may reflect higher costs such as wages or occupancy.
7. So at face value, the petrol price hasn’t changed much over the past three years. But then again, your wage probably has. Over the past three years the average for full-time employees has lifted by $174.70 a week. That means that you can buy an extra 120 litres of petrol, or an increase in purchasing power of around 16 per cent. And clearly that is an improvement you can’t claim for many items we purchase each week.

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The week ahead

• The domestic economic calendar is sparsely populated in the coming week. The spotlight will be on the release of new data on business investment, but there is also a speech by Reserve Bank Deputy Governor Battellino worth watching. Meanwhile in the US, each day there are key indicators to be released and deserving of investor attention.
• In Australia, as noted the clear highlight is the business investment data on Thursday, formally known as “private capital expenditure and expected expenditure”. While it may be a convoluted title, it accurately describes the content – the figures relate not just to spending over the last three months but also cover expected investment over the coming year.
• Overall CommSec is looking for a solid 4 per cent lift in business spending in the March quarter, reflecting cheaper prices for imported equipment as well as increased spending on buildings and equipment more broadly by the mining sector. And in respect of the latter point, it will be interesting whether other sectors are joining mining in lifting investment or staying on the sidelines.
• The other point of interest concerns future investment spending. Based on changes over the past decade, a reading of $131 billion for expected investment in 2010/11 would be considered “average” while estimated investment of $141 billion in 2011/12 would again be considered a reasonable outcome. Readings above these figures, especially for 2011/12 would suggest that strong business spending lies ahead.
• The other indicators to watch over the coming week are the figures on alcohol consumption (Tuesday),construction work done (Wednesday) and “Spotlight on the National Accounts (Thursday). The data on alcohol consumption will be important for investors in beer and wine companies while the residential building results in the construction work done release plug directly into the economic growth equation. That is, weak results on home building work completed would add to speculation that the Australian economy contracted in the March quarter.
• The other event to watch is the speech by Reserve Bank Deputy Governor, Ric Battellino. To date we haven’t received Reserve Bank views on the latest wage figures, Federal Budget or activity data like the weak home loan data. Some analysts have been speculating about a potential rate hike in June or July – the Deputy Governor may settle the argument once and for all.
• In the US, the Chicago Fed index is issued on Monday with data on new home sales and the influential Richmond Fed manufacturing index issued on Tuesday. On average, economists tip no change in home sales in April.
• On Wednesday, a measure of business investment – orders of “durable’ goods – is released together with the Federal Home Finance Authority price index for March. Economists expect that orders for durable goods like cars and aircraft eased by just 0.3 per cent in April
• On Thursday, the second estimate (preliminary reading) for economic growth in the March quarter is released. Economists tip a modest upward revision in the growth estimate to 2.1 per cent from the initial reading of 1.8 percent. And on Friday, data on personal income and spending is released. Analysts expect that both spending and income recorded healthy gains of 0.5 per cent in April. Figures on consumer sentiment and pending home sales are also released the same day.
• Overall the figures should confirm that the Federal Reserve is nearing the point where it will stop stimulating the economy, and indeed start removing some of the stimulus being applied – a development with implications for currency, equity and commodity markets.

Sharemarket

• Over time, the Australian sharemarket has consistently outperformed the US market, when expressed in US dollar terms. Over the past decade, the Aussie market lifted by almost 13 per cent, compared with 3 per cent inthe US. Even over the past year, Aussie shares have lifted by 24 per cent, ahead of a 16 per cent gain in the US. But are times changing? Since the start of 2011, the near 2 per cent lift in Aussie shares compares with 6 percent growth in the US. More analysts are recommending overseas shares, and perhaps with good reason.

Interest rates, currencies & commodities

• The Australian dollar has a reputation as being a volatile currency. That is, it gets embraced when times are good and there are favourable expectations for the global economy. Conversely the Aussie dollar is shunned in the bad times when the global economy looks shaky or there are wars or geopolitical jitters. So how has it fared this year?
• So far in 2011, the Aussie dollar has tracked in a range of just over US 13 cents – that is from US 97.04c to US 110.11 cents. In percentage terms, that is a movement of just under 12 per cent. That movement is close to the average of the experience over the past 29 years – but of course the year hasn’t yet reached the halfway mark. On average, the Aussie dollar has fluctuated by around US14 cents over a calendar year, or a movementof around 17 per cent.
• Interestingly however the Aussie has traded in a US 27 cent range on average over the past four years or around 28 per cent a year.