RBA comfortable on forecasts; Healthy Retail spending

RBA Statement on Monetary Policy; Retail trade; New car sales

• Forecasts: The Reserve Bank may not have materially changed inflation forecasts but it has trimmed economic forecasts over the longer-term. Economic growth is now seen at 2.5-3.5 per cent in June 2018 around half a per cent lower than previous forecasts.
• Inflation is expected to hold between 1.5-2.5 per cent over the forecast period – well below or at the low end of the target band.
• Retail trade rose by 0.6 per cent in September to be up 3.3 per cent over the year – a 4-month high. Non-food retailing rose by a healthy 0.9 per cent in September. Non-food retailing has risen by 1.5 per cent in the past two month – the strongest two-month result in 20 months.
• New motor vehicle sales totalled 93,357 in October, down 1 per cent over the year. The CommSec Car Affordability measure was little changed in the September quarter. CommSec estimates that a worker on the average wage needs to work for 23.9 weeks to purchase a new Ford Falcon. While the affordability measure is down from 24.01 weeks in the June quarter, it is up slightly on the record low of 23.82 weeks in the March quarter. In broad terms though cars are the most affordable that they have ever been.

What does it all mean?

• The latest Monetary Policy statement has given the Reserve Bank the opportunity to flesh out how the economy is tracking. And it seems like the Central Bank is in the glass half full camp. Policymakers have updated economic growth and inflation forecasts and it is clear that growth remains relatively sound.
• Interestingly inflation is expected to remain at the below or at the low end of the Reserve Bank 2-3 per cent target band over the next two years. In that context if rates are going to move anywhere it will be down and not up. In fact the Reserve Bank inflation forecasts essentially suggest that there would be no pressure to raise rates well into 2018 at the absolute earliest.
• Importantly given that near-term growth forecasts are unchanged and expected to hold between 2.5-3.5 per cent, it is clear the central bank is by no means signalling that future rate cuts are either imminent or likely to be significant. Rather the Reserve Bank has highlighted that if inflation continues to track below 2 per cent it will keep the door open to provide further stimulus. However it should be made clear that the central bank is essentially holding to a neutral bias.
• The economy essentially went through a purple patch in the later part of 2015. Household consumption was strong, supporting the broader growth story, while unemployment has drifted to a 2½-year low. However policymakers have noted that activity have somewhat slowed over the first half of 2016 and labour market figures are were decidedly more mixed. However the anecdotal evidence across the economy suggest that activity levels are now lifting.
• In that context the latest retail data is certainly encouraging. Not only did overall spending lift, but non-food spending has recorded the biggest back-to-back monthly gains in 20 months (+1.5 per cent). In addition spending at department stores and large chain stores recorded a solid lift. The results resonate with the Commonwealth Bank Business Sales Indicator, which tracks broader economy-wide spending, and has been lifting for the last couple of months.
• The latest car sales data suggest activity remains sound. Not only are Aussie continuing their love with 4wd’s but cars are the most affordable they have ever been – largely due to lower pricing than significant wage growth. CommSec estimates that a worker on the average wage needs to work for just 15.1 weeks to buy the top-selling Toyota Corolla Ascent 1.8l auto sedan.

What do the figures show?

Retail trade

• Retail trade rose by 0.6 per cent in September after rising by 0.5 per cent in August. Trend spending rose by 0.2 per cent in September. Retail trade is up 3.3 per cent over the year – a 4-month high.
• Non-food retailing rose by a healthy 0.9 per cent in September after rising by 0.6 per cent in August. Non-food retailing has risen by 1.5 per cent in the past two month – the strongest two-month result in 20 months. Non-food retail spending is up 3.6 per cent on a year ago.
• Spending at department stores rose by 0.5 per cent in September with spending at hardware, building & garden suppliers up by 3 per cent. Takeaway food was up 0.6 per cent in September, after lifting by 4.5 per cent in the prior two months. But spending at electrical goods stores was up by 2.7 per cent after falling by 2.1 per cent in August.
• Sales by chain-store retailers and other large retailers rose by 0.8 per cent in September after rising by 1 per cent in August. Sales are up 4.1 per cent over the year.
• Sales rose in all of the eight states and territories: NSW (+0.8 per cent), Victoria (+0.6 per cent), Queensland (+0.5 per cent), South Australia (+0.3 per cent), Western Australia (+0.5 per cent), Tasmania (+0.4 per cent), Northern Territory (+1.2 per cent), ACT (+0.3 per cent).

New vehicle sales

• According to the Federal Chamber of Automotive Industries (FCAI), new motor vehicle sales totalled 93,357 in October, down 1 per cent over the year. In the year to August, a record 1,178,688 new vehicles were sold.
• Passenger vehicles in October were down 7.4 per cent on a year earlier while sales of sports utility vehicles (SUVs) were up by 4.9 per cent and light commercial vehicles were up by 0.4 per cent.

Key take-aways from the Reserve Bank report

• Below are our key “take-aways” from the Reserve Bank’s latest quarterly reviews. The full Statement on Monetary Policy can be found here.
  • “Headline inflation is expected to pick up to around 1½–2½ per cent by early 2017 and to remain in that range over the rest of the forecast period.”
  • “Liaison suggests that private sector wage growth is likely to remain broadly stable in the year ahead and that the risks of further declines in growth have diminished somewhat”
  • “The decline in spare capacity in various product markets is also expected to lead to a gradual pick up in inflationary pressures. For example, the effects of heightened retail competition on food and consumer durable prices are expected to diminish, although only gradually.”
  • “…housing prices are rising at a brisk rate in some locations, although overall housing credit growth and housing turnover remain lower than they were last year.”
  • “There has been no material change to the forecast for underlying inflation, which is expected to remain around current rates in the near term, before gradually picking up to around 2 per cent by the end of the forecast period.”
  • “The growth in labour costs is expected to rise over the forecast period as labour market conditions improve and the effects of the large decline in the terms of trade and mining investment on demand wane.”
  • “…the large amount of (housing) work in the pipeline raises concerns that some locations could become oversupplied, particularly in inner-city areas where a lot of high density housing is planned. This could lead to settlement failures by off-the-plan purchasers and a general reduction in rents and prices.”
  • “While there are reports of some settlement delays and settlement failures, liaison suggests that so far the incidence of these is not higher than usual (although there looks to have been a slight rise in settlement delays for some foreign buyers).”
  • “Revised data in the annual national accounts suggest that non-mining business investment has been on an upward trend for the past few years, after declining in 2012/13, although growth was modest in 2015/16.”
  • “ASX 200 companies reported their results for the first half of 2016 in August. Aggregate headline profits rose by 5 per cent from the same period in 2015.”

What is the importance of the economic data?

• The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
• The Federal Chamber of Automotive Industries releases estimates of car sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.
• The Reserve Bank releases its Statement on Monetary Policy each quarter. The Statement is the Reserve Bank’s assessment of economic and financial conditions and also contains the latest inflation views. The Statement is crucial is assessing the short-term outlook for interest rates.

What are the implications for interest rates and investors?

• The data over the past week, has painted a picture of an economy that is improving albeit after a sluggish period. Inflation will remain the trigger for interest rates. Not only is inflation subdued but it is expected to remain at the low end of the 2-3 per cent target band. However a number of indicators make rate cuts look less likely than even six months ago – improved Chinese activity levels, a stronger terms of trade, a modest lift in domestic activity
• Looking forward policymakers will keep a close eye on how the rebalancing of the domestic economy (away from mining investment) is keeping pace.