Investor Signposts: Week Beginning July 3 2011


Upcoming economic and financial market events

The big picture

  • Our central view is that the US economy is undergoing a mid-cycle pause and that growth will start to lift again late in 2011. As such, we believe that the Federal Reserve won’t provide additional monetary stimulus and will in fact start to withdraw the stimulus in early 2012. The gradual withdrawal of stimulus is expected to translate to a firmer greenback over 2012.
  • We tip the Aussie dollar to ease from US104 cents at the end of 2011 to US102 cents by March 2012 and US97cents by June 2012. The Aussie is also expected to ease from 70.75 Euro cents in December 2011 to 70.30 Eurocents in June 2012.
  • The weaker Australian dollar should cause foreign investors to become more positive about the Australian sharemarket. Around 40 per cent of all our listed shares are owned by foreign investors, so the stronger Aussie dollar caused some investors to become overweight Australian shares, prompting some to lessen their exposure. In the March quarter foreign investors sold $1.9 billion of Aussie shares – the first fall in just over eight years.
  • But while a weaker currency should improve interest in Aussie shares, other factors such as proposed taxes on carbon emissions and mining profits, as well as a potential ban on the live animal trade, may also serve to restrain interest by foreign investors.
  • Valuations on the Australian sharemarket remain broadly favourable. Currently share prices stand at 13.6 times historic earnings – below the long-term P/E ratio of 15. At face value the sharemarket appears cheap, but given investor preference for liquid investments such as cash and bank deposits, it may actually just be regarded as fairly valued in these more conservative times. CommSec expects the ASX 200/All Ordinaries to end 2011 at 5,000 before lifting to 5,500 points by the end of 2012.
  • Shares are expected to out-perform other asset classes over 2011/12. Returns on residential property are expected to remain modest at 0-3 per cent given that supply and demand for property has become more balanced. Cash is expected to provide returns of around 5 per cent over the coming year with Government bonds also earning close to 5 per cent.
  • The $64 question is when will the “new conservatism” come to an end. Unfortunately no one has the answer. We expect cash to rise from 4.75 per cent to around 5.25 per cent over the coming year. However, just like 2010/11,the risk is that “new conservatism” results in rates remaining stable for longer

The week ahead

  • A busy week lies ahead in terms of domestic economic data with a Reserve Bank interest rate decision thrown in for good measure. In the US, the spotlight shines brightly on Friday’s jobs data.
  • In Australia, the first full week of the new financial year begins with a barrage of economic data. On Monday, data on job advertisements is released together with the TD Securities/Melbourne Institute inflation gauge, retail trade and building approvals data.
  • We expect that retail trade rose by 0.6 per cent in May with the colder weather providing a spur to seasonal purchases. Building approvals are expected to have risen by 3 per cent in May, but approvals are up one month and down the next, so little should be read into the gain. The other data is also worth watching. Job ads fell in May while underlying inflation fell to near 6½ year lows. If the June readings produce similar results, the Reserve Bank won’t be in any rush to lift rates.
  • The Reserve Bank Board meets to decide interest rate settings on Tuesday with the monthly trade figures and Performance of Services index released the same day. No change in rate settings is expected or justified. The next big test for most analysts is the June quarter inflation data to be released on July 27.• In terms of the economic data, the Performance of Services index was below 50 in May, pointing to a contraction of activity across the sector. Another weak reading would further water down the chances of a rate hike in coming months. And the trade surplus may have expanded to $1.7 billion in May.
  • Data on engineering construction is released on Wednesday while the June jobs report is issued on Thursday. We expect that employment grew by 15,000 people in the month – largely in line with the number of new entrants. As a result, the jobless rate probably remained unchanged at 4.9 per cent. Over the past two months, full-time positions have been cut by almost 80,000, and another fall in jobs in June would raise doubts about the fundamental health of the economy.
  • In the US, markets are closed for the Independence Day holiday on Monday. On Tuesday, data on factory orders is released, while the ISM services sector index is issued on Wednesday alongside the Challenger job lay-off series. Economists believe that the services sector is still growing – a reading above 50 is expected – but the index probably eased from 54.6 to 54.3 in June.
  • The ADP survey of private sector employment is released on Thursday while the non-farm payrolls (employment) report is issued on Friday alongside figures on consumer credit and wholesale inventories.
  • Economists tip a modest 60,000 lift in the ADP survey and then project a modest 90,000 lift in non-farm payrolls. But whichever way you cut it, job gains are modest. The unemployment rate is tipped to remain high near 9.0 percent, albeit down from 9.1 per cent in May.
  • The European Central Bank and Bank of England have rate-setting meetings on Thursday.


  • It may not seem like it, but the sharemarket had one of its least volatile years during 2010/11. Over the past financial year, there were just 56 trading days where the All Ordinaries either rose or fell by more than one percent. In fact it was the least volatile 12-month period in almost four years.
  • Looking back over the past 15 years, on average the sharemarket has risen or fallen by more than one percent on 63 days in a year, or around once every 4-5 days. No surprises for the most volatile period – it was the time of the global financial crisis. Over the year to January 2009, the All Ordinaries moved up or down by more than a percent on 163 days or around two in every three days. The least volatile period was the year to January 2005 when there were just nine days where the sharemarket rose or fell by more than one per cent.

Interest rates, currencies & commodities

  • The past year has been the most stable year for interest rate changes in six years – since 2004/05. Contrary to the forecasts of most private sector economists, the Reserve Bank hasn’t had to lift rates more than once over the financial year as a slowdown in non-mining sectors together with the effects of floods and cyclone have offset solid growth in the resources sector. The only rate change was a 25 basis point increase delivered on November 3. The last time there was just one rate change in a financial year was 2004/05 when rates rose 25 basis points on March 2 2005. That was the only official rate change between January 2004 and April 2006.
  • Interestingly, financial markets have again changed their view on the next move in rates. In five months time, the cash rate is tipped to be at 4.70 per cent – or below the current 4.75 per cent cash rate. In other words, financial markets have priced in a 20 per cent chance of a rate hike late this year.
  • Over the past year the Aussie dollar has held between US83.14 cents and US110.11 cents – a range of almost US27 cents or a 32 per cent movement between the highs and lows. It sounds a lot, but is this normal? Over the2 7½ years since the currency floated, the Aussie dollar has moved on average by US13.6 cents over a year, or a change of around 21 per cent. The 2010/11 financial year was actually the second most volatile year on record behind 2008/09 (range of US38.45 cents).
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