Weekly economic and market update

America sees the release of key December 2012 data on retail sales and housing starts. 

• American consumer spending has been reasonably solid considering the recent political turmoil over budget tightening (“fiscal cliff”) as well as Hurricane Sandy. Further spending gains are expected. The strong positive for the US economy has been the housing recovery in 2012, so strength in housing construction would also be welcome.
• China’s see the release of critical economic activity results for the end of 2012. China’s Real GDP result for the December quarter should show that economic growth stabilised at a 7.5% pace. This comes after a slowdown in the preceding quarters from the +9% growth pace set in 2011. Industrial production & Retail Sales should show solid results for December consistent with China’s economy becoming more focused on domestic demand rather than exports.
• Australia’s labour force data for December is the key focus. Given subdued sentiment in the “Non – Mining” economy as well as significant job loss announcement in both the private & public sectors in 2012, a soft result is expected for employment for the end of 2012.  Job losses of circa -10,000 are anticipated for December while the unemployment rate is expected to rise sharply from 5.2 % to 5.4 %.  

Outlook for markets

• Global shares appear to be now entering a consolidation phase after a sharp rally with the “fiscal cliff” vote in the opening week of 2013.  America’s fiscal problems are yet to be fully resolved with further political turmoil likely over government spending and the debt ceiling. Caution will also likely prevail as   the US corporate earning reporting season for the December quarter has just started.  Europe faces significant political challenges with an Italian general election in February while Spain’s is struggling with a weak banking system and an alarming +26% unemployment rate. Hence Global Shares seem set to drift sideways over coming weeks.
• Yet 2013 should ultimately be another good year for Global Shares. Global growth should slowly improve in 2013 as America employment and housing recovery gathers speed while Europe’s economy gradually stabilises. This will create a solid corporate profit environment favourable for Global Shares. Given Global Shares are undervalued on historic measures and with investors likely to be tempted to switch from overvalued and low yielding Government Bonds, this year should be another rewarding one for share investors.
• Global Sovereign bonds are vulnerable to a rising trend in yields as global economic growth improves. American, German, Japanese and Australian Government bonds provide extraordinarily low yields currently. This would suggest low returns for the medium term. Corporate bonds are thus a better proposition for those seeking income but who are cautious about investing in shares presently.

Headline developments of the past week

• Australia’s nominal retail sales disappointed in November with a marginal -0.1% fall. Considering that the RBA had cut interest rates by 0.25% in the previous month, this is a very soft result. Over the past year, Australian nominal retail sales have recorded only modest growth of +2.9%.  For the RBA, this soft November retail sales result would suggest further interest rate cuts may be required in 2013 to revive retail spending.
• Europe’s labour markets continue to weaken given the recession conditions prevailing. November saw Europe’s unemployment rate climb to 11.8%. Within Europe, there is a dramatic divergence in jobless rates. Greece’s unemployment rate of 26.8% and Spain at 26.6% contrast sharply with Germany’s 5.4% unemployment rate. Even Italy (11.1%) and France (10.5%) are also struggling with elevated unemployment rates in November.
• In more encouraging news, China’s trade performance improved with a sharp pickup in exports. China’s export growth rose at a +14% annual pace in December which is a dramatic revival compared to November’s muted +3% pace. A pick-up in China’s export volumes would typically signal a revival in global growth. For Australia the news is considered beneficial as China’s import growth revived to a +6% annual pace signalling that demand for Australia’s commodities is gaining speed. This is particularly apparent in the sharp revival in the spot Iron Ore price from US$ 87 in August 2012 to now US$ 158 per ton.
• Japan’s new Government announced a fiscal stimulus package of Yen 10 billion (A$ 109 billion) to revive Japan’s weak economy. This stimulus should enable Japan slowly emerge from its current recession in 2013 although the government debt burden is set to surge beyond the recent estimates of 237 % of Nominal GDP.

Major global economic releases and implications

• Europe’s economic activity data released this week was also disappointing. The European Commission’s surveys of business & consumer sentiment were weak and suggest that a mild recession continues in Europe.
• However the European Central Bank (ECB) kept their key policy interest rate on hold at 0.75%. The ECB President Dr Draghi conceded that the risks “remain on the downside” for Europe given “balance sheet adjustments” and “persistent uncertainty”. Dr Draghi expected that “later in 2013, economic activity should gradually recover”.
• America’s economic releases were mixed last week. The NFIB small business survey shows soft confidence readings in December. Yet consumer credit demand is slowly reviving judging by November’s annual +6% rise. Housing mortgage applications and refinancing were strong in the opening week of this year.  
• China’s annual inflation showed a mild pickup to 2.5% in December given the recent cold weather adversely impacting vegetable prices. However price pressures seem generally well contained and below the central bank’s 4 % inflation target. So there is still scope for China to gradually relax monetary policy in 2013.                     

Australian economic releases and implications

• Job vacancies fell sharply in November 2012 by 7%. This signals that labour demand is clearly softening with the “non mining economy” struggling (sectors such as manufacturing, retail, transport and tourism are very subdued). 
• Australia’s trade performance deteriorated in November with an increased deficit of A$ 2.6 billion. This is the fourth largest monthly deficit on record. Strong capital import demand given the Mining investment boom and solid consumer good imports taking advantage of a high Australian Dollar were the key factors for the larger deficit.
• Building approvals did improve by +2.9% in November indicating that housing construction is slowly responding to lower interest rates.  

Major market moves

• Global shares were generally flat for the past week. American shares (S&P 500) rose marginally by +0.4 % given caution with the start of the corporate earnings season for the December quarter. There were also minimal changes in Europe. Australia’s ASX 200 marginally fell by -0.3% for the week. 
• US earnings reporting season commenced with Alcoa the first major company to report. Alcoa provided signs of optimism, expecting growth in aluminium demand to reach 8% in 2013. A mild US earnings season is expected with annual profit growth of circa +2% anticipated.

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