The big picture
- Confused about where the economy is heading? You’re in good company, with the boffins from the Reserve Bank also seemingly scratching their collective heads about where things are going. Earlier in the year the policymakers appeared confident that the economy would rebound strongly after the floods and cyclones and flagged the risk that this stronger growth would prompt the Bank to lift interest rates to keep inflation under control. But the economy hasn’t bounced as the Reserve Bank expected, reducing the inflation risk.
- So where did the Reserve Bank go wrong? Essentially it under-estimated the “new conservatism” mood that has taken hold among Australia’s consumers. The Bank thought – with jobs relatively plentiful and wages rising –that consumers would start spending again. But a raft of negative influences swamped the strong labour market outcomes, causing people to either save or just leave the dollars in their pockets.
- Not only are people still feeling the effects of the global financial crisis, but there have been the unprecedented floods across Australia, earthquakes in Japan and New Zealand, proposed carbon and mining taxes and the sharp increase in the cost of living such as higher food, electricity, gas and water prices.
- So where do we go from here? Well the positives are still out there. The global economy is still recording above trend growth, led by China and India. Incomes in Australia are being boosted by higher commodity prices. Mining companies are also pushing ahead with key projects. And the job market still generally remains in good shape. So it still seems more than likely that the domestic economy will pick up pace over time. And that means that interest rates are still more likely to rise rather than fall – but it may take a little longer than expected. And it depends whether any new factors come from left field to delay the process even further.
- The big mistake has been to assume that all the extra money coming into Australia was going to be spent. Miners are funnelling the extra dollars into new projects, many of which are capital, rather than labour intensive. Mining still accounts for a relatively small portion of our economy. Sure, the Aussie dollar has gone up, and that means more people are travelling offshore and buying foreign goods. But that doesn’t help our businesses. And while the rising share prices and higher dividends from our resource companies boost compulsory superannuation accounts, most can’t access the savings for decades.
The week ahead
- Investors are constantly trying to build a picture on the economy. Some pieces are big, others small, but each piece is useful. In Australia, some of the smaller pieces of the puzzle are provided in the coming week. Overseas,the focus is on the larger pieces of the puzzle including the latest economic growth figures from China.
- In Australia, the week kicks off with the May housing finance figures on Monday. The number of loans rose by 4.8per cent in April, but it was only the first gain in four months. And while the number of loans could have risen as much as 6 per cent in May, it probably has more to do with refinancing than loans to build new homes. As such it won’t suggest that stronger housing activity lays ahead.
- On Tuesday NAB issues its latest business survey. Both confidence and business conditions remain weak. And judging by recent surveys by Sensis and ACCI, little change in the soft readings is expected. Also on Tuesday the Reserve Bank releases the latest data on credit and debit card lending. Debit cards are favoured at present as consumers prefer to use their own money to buy goods. It would be good if the Reserve Bank started to provide the break-up between domestic and overseas purchases. If card purchases lift, but the dollars are going abroad,then this is hardly positive for Australian retailers.
- On Wednesday the latest consumer confidence figures are issued. With uncertainty about the carbon tax pervading, the latest sentiment figures are unlikely to be positive. On the same day lending finance data is released together with the “Modeller’s Database.” The lending data covers housing, business, personal and lease loans, so the figures provide a good guide to activity in the banking and finance markets. The “Modeller’s Database” includes the latest estimates on private sector wealth. You may not believe it, but Australians have never been wealthier.
- And on Thursday the Bureau of Statistics will provide some greater detail on the labour market such as state and demographic trends and figures on the number of hours worked.
- In the US, the first piece of market-moving economic data is issued on Tuesday in the shape of the latest trade data. The US has a major budget deficit and it also has a significant and persistent trade deficit. Investors aren’t too worried about the trade deficit just yet, but it’s important to note that the deficit remains large even with the weaker US dollar and soft US economy – factors serving to boost exports and constrain imports. A trade deficit near US$44 billion is expected in May. Also on Tuesday minutes of the June 21/22 Federal Reserve meeting are released, so more insights into policymaker thinking will be revealed.
- On Wednesday, Federal Reserve chairman, Ben Bernanke, delivers his semi-annual testimony on the economy.This statement takes on huge importance – Bernanke needs to be sufficiently upbeat on the economy without over-doing it to ensure that confidence and economic momentum is maintained. Also data on import and export prices is released on Wednesday together with the monthly budget figures.
- On Thursday in the US, data on retail spending, business inflation (producer prices) and new claims for unemployment insurance are released. Retail sales are stronger than in Australia and analysts tip a 0.2 per cent lift in non-auto sales. Business inflation is now “normal” with a 0.2 per cent lift in core prices (excludes food and energy) expected for June.
- And on Friday in the US, consumer sentiment, consumer prices and industrial production figures are releases with the Empire State survey thrown in for good measure. Economists tip a 0.2 per cent lift in core inflation and 0.4 percent rise in production. Overall these figures, together with those from earlier in the week, should confirm that the US economy is emerging from its “nap”.
- In China, the monthly download of key economic data occurs on Friday. As well as figures on production and spending, the June quarter economic growth figures are issued. Economists estimate that annual growth slowed a touch from 9.7 per cent to 9.4 per cent.
Sharemarket
- US earnings season kicks off on Monday. As is traditional, Alcoa gets the proceedings underway with analysts expecting earnings of US35 cents a share, up from US13 cents a share last year. Of the 27 other companies scheduled to report over the week, YUM! Brands issues its report on Wednesday with JP Morgan Chase and Google on Thursday and Citigroup on Friday.
- US earnings have been strong over the past year but the effects of the Japanese tsunami, the Greek debt crisis and the slowdown of the US economy will be influences on the results and outlook statements for companies during the earnings season. Overall Brown Brothers Harriman is tipping earnings of Standard & Poor’s 500 companies to be up 13.6 per cent on a year ago.
Interest rates, currencies & commodities
- The semi-annual testimony from the US Federal Reserve chairman, on-going debt woes in Europe, the start of US earnings season and Chinese economic data should be the key influences on financial markets in the coming week. Overall, we are tipping strength, not weakness, with the Aussie holding near US107 cents and commodity prices generally higher over the week.
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