Investor Signposts: Week Beginning July 21 2013

Upcoming economic and financial market events

Australia

July 22: State of the States – CommSec’s quarterly assessment of state/territory economies

July 24: Consumer Price Index (June Qtr) – We expect that prices rose 0.4% to be up 2.4% over the year

Overseas

July 22: US Existing home sales (June) – A modest lift in sales is tipped

July 23: US Home prices (May) – Data from the Federal Housing Finance Agency

July 23: US Richmond Fed index (July) – A key regional survey

July 24: “Flash” manufacturing gauges – Released in US, China and Europe

July 24: US New home sales (June) – Sales are tipped to have lifted by 1.9%

July 25: US Durable goods orders (June) – A modest 0.5% increase is expected

The big picture

• We know that the Aussie dollar has lost altitude in the past couple of months, but how far has it fallen, and how does the decline compare with corrections in the past?
• According to data from Thomson Reuters, the Aussie dollar peaked in April at US105.82c – the highest rate in three months. But in the following three months the Aussie has fallen by 15 per cent, touching US89.98c on July 12 according to the financial newswire.
• That three-month drop was the biggest in almost two years, just short of the 15.3 per cent decline recorded in October 2011 when the currency fell from US110.8c to US93.86c over a same three-month period. To find a larger drop, you actually have to go back to the midst of the Global Financial Crisis in January 2009 when the Aussie slumped almost US17 cents over a three-month period.
• The Reserve Bank believes the latest fall in the Aussie dollar is well over-due. As the chart shows, for the better part of a year the Aussie dollar had broadly trended sideways, holding between US101-106c. But over the same period commodity prices gradually trended lower.
• The break in the traditional link between the Aussie dollar and commodity prices was unusual. The Aussie dollar has always been regarded as a “commodity currency” given Australia’s high reliance on commodities or raw materials for export income.
• In part the Aussie dollar’s relative strength up to April 2013 was due to Australia’s economic out-performance. But in mid April that out-performance was re-assessed as stronger US economic data called into question the need for super-stimulatory US monetary policy settings.
• Interestingly it now appears that the Aussie dollar has fallen too far. If the Reserve Bank agrees and next week’s inflation data is on the high side of expectations, then interest rates will be kept steady at the August Board meeting.
  • In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.
  • In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
  • On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
  • On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
  • Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
  • The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
  • Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
  • On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
  • In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
  • On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
  • On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
  • Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
  • And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.
  • The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
  • The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
  • There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.

The week ahead

In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.

• In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
• On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
• On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
• Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
• The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
• Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
• On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
• In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
• On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
• On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
• Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
• And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.

Sharemarket, interest rates, currencies & commodities

• The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
• The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
• There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.