• 

  Housing approvals rose for the second month in a row.

  Dwelling approvals: Dwelling approvals rose by 3.0 per cent in August and are up 14.5 per cent over the year. Over past 12 months a record 197,571 dwellings were approved – marking the highest result on record.

• Trade deficit narrows: Australia’s trade deficit narrowed by $288 million to a deficit of $787 million in August – largely in line with forecasts.
• Exports to China eased for the fourth straight month with receipts of $98.5 billion for the year to August. Exports to the US hit a near 5-year high of $10.42 billion in the year to August.
• Reserve Bank Assistant Governor, Malcolm Edey, and Head of Financial Stability Department, Luci Ellis, appeared before the Senate Committee. The RBA officials stressed that no specific macro-prudential controls have been ruled in or out although restrictions on loan to valuation ratios (LVRs) were considered unlikely.

What does it all mean?

• The latest economic data was clearly encouraging – particularly the lift in dwelling approvals. Dwelling approvals rose for the second straight month in August and hit record highs when viewed over the past 12 months. At the same time the trade deficit narrowed.
• Over the past 12 months there were 197,571 approvals to build new homes, marking the highest result on record. And despite the fact that approvals have consolidated over the past few months it is pretty clear that housing activity is going to be the backbone of Australia’s growth story over the coming year.
• Keep in mind that dwelling approvals (16,810) are holding over 24 per cent above decade averages, underpinned by pivotal private sector house approvals, suggesting that home building is set to lift further over the second half of 2014.
• Lower interest rates, strong population growth, improving affordability, and pent up housing demand will see the housing sector gather pace over the medium term. In addition the recent cuts to fixed interest rates by the major banks will spur a further round of home building.
• The lift in approvals will appease policymakers to some degree. Fundamentally, the growth in house prices has been driven by a lack of stock, and a substantial lift in new housing stock should ensure more sedate price growth over the longer term.
• The latest trade figures were more positive than in recent times. Australia recorded its fifth consecutive trade deficit, but the August deficit of $787 million was the smallest deficit over that period. In addition the recent slide in the Australian dollar is yet to filter to through to the trade accounts and should support a lift in exports in the next result.
• From a broader sense Australia is certainly less vulnerable to external shocks than compared with the past and the demand for Australian resources will continue to underpin the trade accounts. That is not just an ongoing lift in iron ore volumes, but also the anticipated lift in LNG exports. And to some degree the slide in commodity prices will be offset by the fall in the Australian dollar.
• Interestingly Australia’s exports to China and the US are looking more encouraging. Australia’s exports to China held just shy of $100 billion the year to August, and account for over 36 per cent of Australia’s total exports. And exports to the US hit a near 5-year high of $10.42 billion in the year to August. No doubt the lift in growth across the super economies bodes well for Australia’s external growth prospects.
• While rate hikes are off the near term agenda, it is unlikely that the Reserve Bank will shift away from its “interest rate stability” rhetoric any time soon. A few solid months of robust employment would be required to change the “on hold” message. The data suggests that the Reserve Bank will continue to keep a neutral view on rates with a slightly dovish skew.

What do the figures show?

Building Approvals:

• Dwelling approvals rose by 3.0 per cent in August after rising by 2.1 per cent July. Approvals are up 14.5 per cent over the year. Over past 12 months a record 197,571 dwellings were approved – marking the highest reading on record.
• The current number of dwelling approvals (16,810) is well above the decade average (13,555) and five-year average (14,291).
• House approvals fell by 1.4 per cent in August (private sector down 1.8 per cent). Meanwhile ‘lumpy’ apartment approvals rose by 9.2 per cent in August after rising by 3.0 per cent in July.
• House approvals are up 12.6 per cent over the past year while apartments are up 17.1 per cent.
• Across states in August: NSW approvals rose by 2.9 per cent; Victoria rose by 15.5 per cent; Queensland rose by 1.4 per cent; South Australia rose by 11.3 per cent; Western Australia fell by 16.2 per cent; Tasmania fell by 0.6 per cent.
• The value of all commercial and residential building approvals rose by 0.5 per cent in August after falling by 10.9 per cent in July. Residential approvals rose by 3.0 per cent with new building up by 3.4 per cent and alterations & additions up by 0.4 per cent. Commercial building fell by 4.5 per cent in August after falling by 27 per cent in July.

International trade:

• Australia’s trade deficit narrowed by $288 million to a deficit of $787 million in August. The July trade balance was revised from a deficit of $1,359 million to a deficit of a $1,075 million.
• In August, exports of goods and services fell by 1.5 per cent (goods down by 1.9 per cent) while imports of goods and services fell by 2.5 per cent (goods down 3.1 per cent). Exports are down 4.7 per cent on a year ago, while imports are down by 5.1 per cent.
• Rural exports fell by 4.2 per cent in August while non-rural exports fell by 0.1 per cent.
• Within imports, consumer imports fell by 0.9 per cent in August with capital goods imports up by 5.9 while intermediate goods imports fell by 8.7 per cent.
• Consumer goods imports are down 2.6 per cent on a year ago while capital goods imports are down by 8.2 per cent and intermediate goods imports are down by 3.3 per cent.
• The net services deficit narrowed marginally by $26 million to $878 million in August.
• Australia’s exports to China eased further from record highs, posting earnings of $98.5 billion in the year to August. And down from a record $100.6 billion in the year to April. Annual exports were up 19.1 per cent on a year ago and accounted for 36.13 per cent of Australia’s total exports, just down from a record high of 36.73 per cent in the year to April.
• Australia exports to the US hit a near 5-year high of $10.42 billion in the year to August. The share of exports going to the US hit a 3½-year high of 3.82 per cent.
• Australia’s imports from China eased from a record $50.3 billion in the year to July to $50.0 billion in the year to August, up 10.2 per cent on a year ago and accounting for a record 19.99 per cent of Australia’s total imports.
• Australia’s rolling annual trade surplus with China stood at $48.5 billion in August, easing further from the record high of $51.1 billion in April.

Senate Economics Committee – Inquiry into Affordable Housing

• Reserve Bank Assistant Governor, Malcolm Edey, and Head of Financial Stability Department, Luci Ellis, appeared before the Senate Committee today. Their opening statement can be found here.
• To date, the transcript of the Senate hearing is not available.
• Key points:
• One key measure of affordability – the repayment on a typical new housing loan expressed as a ratio to disposable income – “has fluctuated around a broadly stable average over the past three decades, with average repayments varying between around 20 and 30 per cent of disposable incomes.”
• “the ratio of housing prices to incomes is at the top of its historical range; but…
  over time, this has been more than offset by falls in financing costs, so that the typical repayment burden as a share of income is not particularly high. This of course does not rule out affordability problems in particular market segments or for particular types of households.”
• The composition of housing finance has become unbalanced with investor demand dominating, especially in Sydney & Melbourne.
• The RBA officials stressed that no specific macro-prudential controls have been ruled in or out although restrictions on loan to valuation ratios (LVRs) were considered unlikely.
• The RBA officials were at pains to point out that the strength of investor housing demand was largely limited to Sydney and Melbourne. The key would be to devise controls that didn’t discourage new housing supply that was required to meet strong demand and lead to more sustainable growth of home prices.
• The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
• The Reserve Bank would be heartened by the second wind in dwelling approvals. Housing activity is no doubt supporting the overall lift in spending and will continue to absorb the weakness in mining investment.
• Overall the economy is on a solid footing and remains fundamentally sound. Given the low interest rate environment, falling Australian dollar and the lift in home prices, the Reserve Bank is likely to be watching for an improvement in labour market conditions before thinking about a lift in interest rates. We expect the Reserve Bank to maintain a neutral monetary policy stance, while keeping a close eye on the transition of growth from mining investment to other parts of the economy. Rates are expected to remain on hold over the rest of 2014.

What is the importance of the economic data?

• The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.

What are the implications for interest rates and investors?

• The Reserve Bank would be heartened by the second wind in dwelling approvals. Housing activity is no doubt supporting the overall lift in spending and will continue to absorb the weakness in mining investment.
•  Overall the economy is on a solid footing and remains fundamentally sound. Given the low interest rate environment, falling Australian dollar and the lift in home prices, the Reserve Bank is likely to be watching for an improvement in labour market conditions before thinking about a lift in interest rates. We expect the Reserve Bank to maintain a neutral monetary policy stance, while keeping a close eye on the transition of growth from mining investment to other parts of the economy. Rates are expected to remain on hold over the rest of 2014.

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Dwelling approvals; TD Inflation Gauge; New Car Sales; Weekly petrol prices

• Dwelling approvals consolidate: Dwelling approvals fell by 3.5 per cent in March. Approvals are still up 20 per cent over the year. The current number of dwelling approvals (15,958) is well above the decade average (13,489).
• House approvals are up 19.1 per cent over the past year while apartment approvals are up 21.3 per cent.
• Inflation contained: The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.4 per cent in April to stand 2.8 per cent higher than a year ago.
• Petrol prices ease: According to the Australian Institute of Petroleum, the national average Australian price of petrol fell by 1.4 cents per litre to 150.2 cents a litre in the week to May 4.
• Regional price slide: In Australian dollar terms the Singapore gasoline price fell by US$4.82 last week to $128.06 a barrel. Petrol prices are at the peak (high point) in the discounting cycle and should ease over the next fortnight.
• Car sales dip but record SUVs. New car sales fell by 5.2 per cent over the year to April. Over the year a record 334,385 new sports utility vehicles (SUVs or 4WDs) were sold.

What does it all mean?

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• 

  Interest rates on the move?

  The Reserve Bank Governor has delivered a speech at the Anika Foundation in Sydney. The Reserve Bank Governor has provided the clearest message yet that while super low interest rates are providing a boost to the economy, there is “no impediment to further easing if needed”. The inflation data last week has not changed the central bank’s views on the scope for further rate cuts.

• The tone and comments from the speech is consistent with CommSec’s view that the cash rate will be cut by 25 basis points next Tuesday. The Aussie dollar fell from US91.60c to US90.80c during the speech.
• Dwelling approvals consolidate: Dwelling approvals fell by 6.9 per cent in June after falling by a revised by 4.3 per cent in May (previously a 1.1 per cent fall). Approvals are down 13.0 per cent over the year.
• House approvals are down 1.3 per cent in June (private sector down 1.2 per cent). ‘Lumpy’ apartment approvals fell by 15.2 per cent in June.

What does it all mean?

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Loans for the purchase of newly erected dwelling slumped by 12 per cent in February. Over the past three months loans are down almost 36 per cent – marking the biggest three monthly fall in records going back 32 years.

Overall, the value of housing loans fell by 4.0 per cent in February. The value of loans to owner occupiers was down by 4.8 per cent (number of loans down 5.6 per cent), while the value of investment loans fell by 2.3 per cent.

The proportion of first home buyers in the market fell from 15.2 per cent to 14.9 per cent of all lending in February – the lowest reading in 6½ years. The size of the average home loan was $281,500 – the lowest level in a year.

Even excluding Queensland the number of housing finance commitments have only been lower on one other occasion in the past ten years.

What does it all mean?

• There is no doubt that conditions are tough in the housing sector. Home prices have been easing, albeit modestly, while new construction in the sector has slumped to multi-year lows. Buyers seem to be holding off on purchases in all areas. Loans for the construction of new dwellings – a key forward looking indicator for housing activity – recorded a modest rise, but remained just above the lowest levels in two years. Even more concerning is that loans to purchase newly established dwellings have now slumped by almost 36 per cent in the past three months – marking the biggest three monthly slide in records going back 32 years.
• The natural disasters earlier in the year have no doubt had a negative effect on the housing sector, but rather than being the primary reason for the sharp downturn in housing activity it is more a peripheral issue that has compounded an already weak housing sector. In fact if Queensland is excluded housing finance fell by a much more profound 6.7 per cent in February. Keep in mind the data is for February and the double whammy November rate hike is the clear underlying driver behind the weakness across Australia.
• It is not only owner occupied loans that are falling, with even investor finance on the slide. The slump in investment loans is yet another sign that potential property investors believe that property prices are in for a period of consolidation, and as such can afford to take their time on investment decisions – especially given the Economic Insights Home loans fall to near decade lows likelihood of further rate hikes over the coming year.
• Interestingly the size of the average home loan is at a one year. The higher home loan interest rates have resulted in potential home buyers reworking their sums and being able to afford less. Higher interest rates have also resulted in the proportion of loans taken up by first home buyers falling to the lowest levels in 6½ years. The weakness in dwelling activity will no doubt result in more subdued economic growth in the near term.

What do the figures show?

Housing Finance

• The number of new owner-occupier housing loans fell by 5.6 per cent to 45,393 new commitments. The number of loans is 7.2 per cent lower than a year ago.
• Loans for the construction of homes rose by 1.1 per cent in January to 4,571 – holding just shy of the lowest reading in two years. Loans for the purchase of established dwellings (ex refinancing) fell by 4.0 per cent, while loans for the purchase of newly erected dwelling slumped by 12.0 per cent. The slide follows a 13.6 per cent fall in January and a further 10.2 per cent fall in December. Refinancing commitments were lower by 9.3 per cent.
• The value of new housing commitments (owner occupier and investment) fell by 4.0 per cent in February. Owner occupier loans slumped by 4.8 per cent while investment loans fell by 2.3 per cent.
• Banks accounted for 90.1 per cent of all loans taken out in February up from 89.4 per cent in Janaury.
• The proportion of first home buyers in the market fell from 15.2 per cent to 14.9 per cent of all lending in February – the lowest reading in 6½ years and well below the record high of 28.5 per cent set in May 2009. Fixed rate loans accounted for 7.3 per cent of all loans, down from 8.2 per cent of loans in January. And the average home loan across Australia stood at $281,500, up 1.8 per cent on a year ago.

What is the importance of the economic data?

• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

What are the implications for interest rates and investors?

• The rate hikes over the past year are having a profound impact on consumer spending patterns. The housing sector is cooling while businesses continue to highlight weak trading conditions. Given the subdued near term economic conditions it is unlikely that the Reserve Bank will be raising interest rates anytime soon.
• The long term fundamentals for the economy remain sound. The job market remains tight, wage growth is healthy and affordability is tracking sideways. The rebuilding phase after the floods will support housing activity and in turn drive up economic growth in the second half of the year. CommSec doesn’t expect the next rate hike to take place until at least August.
• Our equity analysts retain a BUY recommendation on Adelaide Brighton (ABC) highlighting that “ ABC is one of our preferred stocks within our Australian building materials coverage. Our positive view is underpinned by the recent share market overreaction around contractual lime and cement supply concerns; its significant pipeline of growth opportunities; excess franking credits expected to support a higher payout ratio and potential capital management; strong balance sheet position, suggest considerable valuation upside”.

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• The outlook for home builders is gloomy. Council approvals to build news homes slumped by 15.9 per cent in January. In annual terms approvals are down 24.8 per cent on a year ago.
• The floods certainly played a part in the weak result but excluding Queensland new dwelling approvals still fell by 13.3 per cent in January.
• The all-important private sector new house segment fell by 2.4 per cent in January, holding at 22 month lows.
• Australia’s trade surplus narrowed by $143 million to $1,875 million in January – modestly above expectations. Australia has chalked up trade surpluses of $21.1 billion over just the past ten months.
• In February, 80,896 vehicles were sold, down by 1.6 per cent compared with a year ago. In seasonally adjusted terms CommSec estimates that sales eased 0.5 per cent in the month.

What does it all mean?

• The recent improvement in building approvals has certainly been short lived. After encouraging signs in December dwelling approvals have slumped by almost 16 per cent in January and in annualised terms approval are now down over 24 per cent on a year ago.
• It could be argued that the wet weather and in particular the floods in Queensland has been the key driver behind the weak result. Especially given that Queensland approvals fell by almost 30 per cent in January to the lowest level in records going back 28 years. But even if you exclude Queensland, approvals slumped by over 13 per cent. In fact approvals fell across all states in seasonally adjusted terms – highlighting the current weakness in housing activity.
• There is no doubt that the building approvals series tends to be volatile especially given that apartment approvals, tend to be lumpy. And it is important to note that the January figures are likely to be revised in coming months, given the flooding. However the ABS has highlighted “that flooding in the eastern states, particularly Queensland, and other recent natural disasters have not adversely affected participation by providers in the Building Approvals collection or the quality of estimates in this release”.

• And while revisions are likely to take place, it is clear that there is an underlying level of weakness in housing activity. Not only is overall building approvals plummeting but the all important private sector new house segment fell once again in January and is holding at the lowest levels in 22 months. No doubt the November rate hike is only starting to filter through the data and our concern is that the weakness could remain in play for the next few months.
• It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent.
• The economy may be going through a soft patch but the dollars keep rolling in. Australia has now notched up its tenth consecutive trade surplus, totalling in excess of $21 billion. Despite the boost to Australian coffers the impact has yet to have a resounding effect on the economy. The weakness in business and consumer spending suggests the additional income is being saved rather than spent.
• However as the Reserve Bank has highlighted, increased savings will eventually mean a pickup in spending down the track. It is the multiplier effect that essentially the Reserve Bank is banking on to spur domestic growth over the coming year. At present the additional income is not being spent, but as the recovery gains traction it is likely that Australian businesses and consumers will follow through on spending and investment plans.
• More importantly, while the floods in Queensland have had a detrimental impact on coal exports it seems this has been partially offset by higher prices. And given the ABS did not encounter any significant issues in collating the data, any sizeable downgrade in the size of the surplus is unlikely to take place in coming months. Even more so, healthy surpluses are likely to be part of the landscape over coming months provided the weather doesn’t take an extreme turn for the worse.

What do the figures show?

Building Approvals:

• New dwelling approvals fell by 15.9 per cent in January, after rising by 10.0 per cent in December. Dwelling approvals are down 24.8 per cent on levels of a year ago.
• Excluding Queensland new dwelling approvals fell by 13.3 per cent in January.
• House approvals fell by 3.3 per cent in January (private sector down 2.4 per cent), after sliding by 0.4 per cent in December. Apartment approvals fell by 32.4 per cent in January (private sector was down 30.8 per cent) after rising by 27.4 per cent in December. In annual terms apartment approvals are down 24.8 per cent on a year ago.
• Dwelling approvals fell in all states with Tasmania (down 34.9 per cent) faring worst followed by Queensland (down 29.9 per cent) and South Australia (down 20.9 per cent) in January.
• In annual terms approvals across the state: NSW (down 37.5 per cent), Victoria (up 8.0 per cent), Queensland (down 46.2 per cent), South Australia (down 46.0 per cent), Western Australia (down 33.0 per cent), and Tasmania (down 36.2 per cent).
• The value of building approvals fell by 26.5 per cent in January and was lower by 28.0 per cent on a year ago.

International trade

• Australia’s trade surplus narrowed by $143 million in January to $1,875 million – marginally above expectations.
• Exports fell by 4.1 per cent while imports fell by 3.8 per cent. It was the tenth consecutive trade surplus.
• Rural exports fell by 1.5 per cent in January while non-rural exports fell by 8.4 per cent.
• Within non-rural exports, coal, coke and briquettes fell by 29 per cent. “On a revised recorded trade basis, between December 2010 and January 2011, large value decreases were recorded for the following selected commodities hard coking coal fell $713m (40 per cent) with exports to India down $230m (49%) and China down $149m (53%), driven by decreases in volumes of 47% and 49%, respectively. Semi–soft coal fell $230m (33 per cent). Bituminous (thermal) coal fell $75m (6 per cent.”
• Within rural exports meat and meat preparations fell by $82 million or 13 per cent.
• Within imports, consumer imports fell by 1.5 per cent in January, capital goods imports rose by 3.2 per cent while intermediate goods imports fell 11.0 per cent.
• While the physical trade of goods is in surplus, the services account remains mired in deficit – the deficit widened from $289 million to $377 million in January. The high Australian dollar is a key culprit, depressing tourism receipts.

Car sales:

• The Federal Chamber of Automotive Industries reported that 80,896 new cars were sold in February, down 1.7 per cent on a year ago. Passenger car sales were 5.0 per cent lower than a year ago, 4WDs were up 4.7 per cent and “other vehicles” (trucks, utes etc) were up 1.3 per cent. 0.5.0 per cent in February.

What is the importance of the economic data?

• The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business
  spending while exports reflect global demand as well as domestic influences such as drought.
• The Federal Chamber of Automotive Industries release figures on new car sales at the start of each month. The data is useful in gauging consumer spending behaviour.

What are the implications for interest rates and investors?

• The strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s has notched up its 16th consecutive services deficit. The Aussie dollar strength is making Australia a less attractive destination for overseas tourists and potential international students. Interestingly when the Aussie fell below US70c in 2009 the services sector notched up a series of surpluses.
• While the housing sector is cooling it is not about to collapse in a heap. The fundamental for property remain attractive. Population growth remains healthy, vacancy rates continue to slide and the employment growth will support activity in the mid to longer term.
• The rate hikes have certainly taken their toll on the housing sector over the past year and unfortunately for the sector it is unlikely that a turnaround is going to take place anytime soon. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5 per cent.

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• Approvals to build news homes rose by 8.7 per cent in December. However all the gains were centred on apartment approvals – which tend to be volatile. Apartment approvals surged by 23.4 per cent in December after sliding by 8.5 per cent in the prior month.
• The all-important private sector new house segement was unchanged, holding at 18 month lows.
• Australia’s trade surplus narrowed by $97 million to $1,981 million in December – in line with economist expectations. Australia has chalked up trade surpluses of $19.2 billion over just the past nine months.
• The services sector is still going backwards. The Performance of Services index eased modestly from 46.4 to 45.5 in January. Any reading below 50 suggests that the services sector is contracting. The services sector has only expanded for just two months in the past year.
• In January, 73,584 vehicles were sold, down by 1.7 per cent compared with a year ago. In seasonally adjusted terms CommSec estimates that sales eased 2.0 per cent in the month. Sales of “other” vehicles like utes, trucks and buses totaled just 13,013 in January – marking the lowest reading in two years.

Click here to download this document (pdf)

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The big picture

• With the first Reserve Bank Board meeting for 2011 scheduled for next Tuesday, it’s opportune to do a stock take of our current economic fortunes.
• First there is inflation. The December quarter figures confirm that inflationary pressures are well contained with prices up just 0.4 per cent. In fact the number of goods that are lower in price than a year ago is the highest for at least 20 years and probably the highest on record. And underlying inflation is at decade lows. Sure, the floods will lift food prices, but at the same time, retailers are engaged in massive discounting, keeping inflation in check.
• Second, there are the gauges of activity across the economy. The Performance of Services index has been below a reading of 50 for the past 10 months – indicating that the sector is going backwards. The equivalent indexes for manufacturing and construction are showing similar trends – that is, the sectors are contracting.
• Then there is the housing sector. New building approvals fell 4.2 per cent in November, the seventh decline in eight months. Over this time period building approvals have fallen by 23 per cent, so it is clear that home building has started 2011 in poor shape.
• And retailers also aren’t cheering at present. Retail spending rose 0.3 per cent in November after a 0.8 per cent slide in October. Annual growth of retail spending is close to the lowest levels seen in the past five years while chain store sales are growing at the slowest pace in 16 years. Retailers are actively discounting because consumers won’t spend and the news doesn’t look like getting better any time soon.
• Then there is the job market. Up until recently, the job market had been the stand-out with employment rising strongly since June. But in December employment rose by just 2,300 positions while the Advantage job ad index fell by 2.3 per cent in the month – the biggest fall since July 2009.
• And then there are the floods, disrupting coal production and general business activity. Certainly the repair and refurbishment activity will lift economic growth in the future. But that is still down the track.
• Overall it is clear that the economy has lost momentum, perhaps even contracting slightly in the December quarter. And at the same time, inflation is under control. So the Reserve Bank can sit tight on interest rates – there is no need to be lifting or cutting rates at present. We still believe that the economy will get over this flat patch, especially with our resources in big demand by Asian economies. But rates are going nowhere for now.

The week ahead

• With schools returning after the long summer break, no doubt more investors will be back at their posts. And there will be a barrage of Australian and US economic data to welcome people back in the coming week.
• In Australia, private sector credit or lending figures are released on Monday together with the RP Data-Rismark home price index. Credit probably rose modestly in December, up 0.2 per cent, while another soft result on home prices is expected after the November rate hike.
• On Tuesday the Reserve Bank Board meets while the Performance of Manufacturing index and the Bureau of Statistics house price series are released. The Reserve Bank won’t be touching rates, but investors will closely dissect the accompanying statement to gauge any subtle shifts in emphasis.
• On Wednesday the Bureau of Statistics will release price data on a raft of food items. The Bureau plans to cease production of this series – a huge disappointment as this is the only publication that details the actual prices of items regularly purchased by Aussie consumers.
• On Thursday, building approvals, international trade and the Performance of Services index will be released. We expect that building approvals improved modestly in December, lifting by 2 per cent. And a trade surplus of $1.8 billion is tipped for the month.
• And on Friday the Reserve Bank releases the Statement of Monetary Policy which should include estimates of the impact of the floods on the broader economy.
• In the US, the week kicks off with data on personal income and spending on Monday. Economists expect firm readings with income up 0.4 per cent and spending up 0.5 per cent. Purchasing manager surveys for New York and Chicago are also released.
• On Tuesday the ISM manufacturing gauge is released together with construction spending and car sales figures. Any reading for the ISM gauge above 50 means manufacturing is expanding and the current result stands at 57.0.
• On Wednesday the Challenger job layoff series and ADP employment survey are released – two useful readings on the state of the job market. The ADP survey reported that 297,000 jobs were created in December, but that strength wasn’t picked up in the official non-farm payrolls report.
• On Thursday, the ISM services index is released together with factory orders, productivity and the weekly jobless claims data (new claims for unemployment insurance).
• And on Friday, the January non-farm payroll report is released – the official gauge on job market conditions in the US. While unemployment fell in the latest month, the concern was that this reflected people giving up the search for jobs, not more people finding work.

Sharemarket

• The quarterly US profit-reporting or earnings season continues in the coming week although the majority of bellwether companies have already issued earnings. Amongst companies reporting on Monday are Exxon Mobil and Anadarko Petroleum. On Tuesday earnings are expected from Lexmark and BP. Profit results on Wednesday include those from AOL, Time Warner, YUM! Brands and News Corp. On Thursday Kellogg, Mastercard and Merck release earnings. And on Friday Fortune Brands will be amongst a small group of companies to report their results.
• So far in the US earnings season, around three-quarters of S&P 500 companies have beaten market expectations with their results– consistent with profit-reporting seasons over the past year or so.
• Also in the coming week the Australian earnings season will have its customary slow start with a number of small and mid-sized companies to release half-yearly profit results.

Interest rates, currencies & commodities

• In 2010 the Australian dollar was the second strongest currency in the globe, lifting by 12 per cent against the greenback. So how is it faring in 2011? The first month of the year is almost over and the Aussie dollar is actually in the cellar, rather than on the top shelf. Of 120 currencies monitored, the Aussie dollar has eased by 2 per cent against the US dollar, giving it a ranking of 113. Interestingly other high performers from last year are also underperforming with the Japanese yen, South African rand, Thai baht and Mongolian tugrik all lower against the greenback since the start of the year.
• Financial markets continue to believe there is more chance of a rate cut in the next three months, than a rate hike. The one-month overnight indexed swap rate stands at 4.72 per cent with the three-month rate at just under 4.75 per cent.
• For most of the period from the mid 1980s to 2002, freight costs went sideways. In fact the Baltic Dry index broadly held between 1,000-1,500 points. Then came the ascent of China and the index soared to almost 11,800. More ships were needed, and more ships were supplied. The end result? Freight costs have slumped with the Baltic Dry index now at a 2-year low of 1,234. This is good news, especially with steel production at record highs.

The post Investor Signposts: Week Beginning January 30 2011 appeared first on AdviserVoice.

• The outlook for home builders is gloomy. Approvals to build news homes slumped by 4.2 per cent in November. The slide in approvals marked the seventh decline in eight months. Over the past eight months approvals have fallen by 23 per cent
• The all-important new house segement was down by 2.0 per cent and apartment approvals fell by 2.0 per cent.
• The value of building approvals fell by 3.5 per cent in November to be down 32.5 per cent in annual terms, largely driven by a weakness in commercial building.
• The value of alterations and additions rose to record highs in trend terms as a growing number of people elect to renovate rather than move.
• The services sector is still going backwards. The Performance of Services index rose modestly from 46.2 to 46.4 in December. Any reading below 50 suggests that the services sector is contracting. The services sector contacted for ten months in 2010.

What does it all mean?

• The latest slide in building approvals rings true with the anecdotal evidence that we have been hearing for some time. Not only are approvals below longer-term averages but they have fallen for seven out of the past eight months. And the downturn is not just limited to home building with the value of commercial construction loans sliding by just shy of 60 per cent on a year ago. All areas of the construction sector would be rightly worried about the outlook.
• The rate hikes have certainly taken their toll on the housing sector over the past year and unfortunately for the sector it is unlikely that a turnaround is going to take place anytime soon – especially given the double whammy rate hike in November is yet to make its mark on the data.
• While approvals to build new homes may be sliding one area that has picked up pace is the renovation market. In smoothed terms the value of alterations and additions rose to a record high of almost $560 million in November. Whether it is higher home prices or the cost of building or development that is driving the increase, people seem to be electing to renovate rather than move.

• Interestingly when you look across the states Victoria continues to outshine the rest. In annual terms approvals in Victoria are still up 4 per cent on a year ago, compared with the likes of NSW, Queensland, South Australia and Tasmania which have recorded double digit losses. The strength in construction activity in Victoria has provided a healthy degree of support for the state economy over the past year.
• While interest rate rises have been the driver for the weaker activity levels, state, federal and local governments need to share part of the blame. In states like NSW, costs for developers need to be reassessed,
  as a degree of under building continues to take place. The sustained slide in rental vacancy rates is a clear indicator of the level of under building.
• The data yesterday highlighted the contraction in the manufacturing sector and the story is no different for the service sector. There are a couple of factors driving the weakness in the services sector including higher interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Input costs and wages remain elevated but selling prices are flat. Business margins are constrained, thus depressing profitability.
• A period of interest rate stability would clearly help the situation. If the Reserve Bank stayed on the interest rate sidelines over the next couple of months, activity levels should improve.

What do the figures show?

Building Approvals:

• New dwelling approvals slumped by 4.2 per cent in November, after rising by 8.3 per cent in October. Dwelling approvals have fallen for seven out of the last eight months and are down 9.9 per cent on levels of a year ago.
• House approvals fell by 2.0 per cent in November (private sector down 1.7 per cent), after rising by 1.2 per cent in October. Apartment approvals fell by 7.7 per cent in November (private sector was down 5.5 per cent) after rising by 22.3 per cent in October. In annual terms apartment approvals are up 3.8 per cent on a year ago.
• Dwelling approvals fell most in Tasmania (down 15.4 per cent) and NSW (down 13.4 per cent) in November. Approvals improved the most in Western Australia (up 7.1 per cent).
• In annual terms approvals across the state: NSW (down 19.4 per cent), Victoria (up 4.9 per cent), Queensland (down 24.6 per cent), South Australia (down 11.6 per cent), Western Australia (down 4.9 per cent),
• The value of building approvals fell by 3.5 per cent in November and was lower by 32.5 per cent on a year ago.

Performance of Services index

• The Performance of Services index rose modestly from 46.2 to 46.4 in December. It was the tenth time in the past 12 months that the PSI has been below 50. Any reading below 50 indicates a contraction of activity.
• The poor performance in services sector activity was largely concentrated in the professional services subsectors. In particular, the activity indices of the property & business services, finance & insurance, and communication services sub-sectors all fell sharply in December.
• On the other hand, the activity indices of the services sub-sectors exposed to household spending generally picked up in the month, after falling back in November. The strongest growth was recorded in the wholesale trade, hospitality and personal & recreational services.
• Sales, orders and employment all recorded modest improvement but still remained below 50, suggesting weak activity levels in coming months. In fact only input prices and wages have index readings above 50
• Profitability is clearly under pressure with the index of selling prices largely unchanged while input prices and wages continue to trend higher.

What is the importance of the economic data?

• The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
• The Australian Industry Group and Commonwealth Bank release the Performance of Services index each month. The PSI is a key indicator of conditions in the services sector – includes retailing, finance, hotels and cafes.

What are the implications for interest rates and investors?

• It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. The fundamental for property remain attractive. Population growth remains healthy, vacancy rates continue to slide and the employment growth will support activity in the mid to longer term.
• Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5-8 per cent.

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• New dwelling approvals rose for the first time in seven months – up 9.3 per cent in October.
• The RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia – reported that home prices rose by 0.3 per cent seasonally adjusted terms in October. House prices outside capital cities eased by 0.1 per cent in the month.
• Capital city home prices are up 6.5 per cent on a year ago while prices in the ‘Rest of State’ markets are up just 2.4 per cent.
• Private sector credit rose by only 0.1 per cent in October, largely driven by weakness in business credit which fell by 0.8 per cent in the month. Credit growth stands 2.8 per cent higher over the year.
• The broad measure of Australia’s external position – the current account – worsened markedly in the September quarter. The current account deficit widened by $2.4 billion to $7.8 billion in the September quarter.
• Overall CommSec expects that the economy grew by around 0.5 per cent in the September quarter.

What does it all mean?

• The release of five economic indicators has certainly given economists and analysts a lot to ponder. And at first glance the data certainly paints a mixed picture of the Australian economy. House prices and building approvals recorded a healthy rebound, while private sector credit remains sluggish, and the current account deficit widened.
• The improvement in building approvals is certainly encouraging but needs to be put in context. Dwelling approvals have slumped by over 30 per cent in the past six months and the latest rebound is mostly all apartment approvals, which tend to be lumpy. A few more months of rising approvals will be needed to claim a turnaround.
• Even the rise in property prices is the first in five months. Clearly the interest rate hikes have taken some of the steam out of the housing sector and a consolidation period will remain part of the landscape in the near term. It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5-8 per cent.

• Given that all the backward looking data that plugs into the economic growth calculations has now been released, focus will turn to the tomorrows growth result. Overall CommSec expects that growth is likely to be around 0.5 per cent for the quarter – good but not great. The data on Government finances suggest that the public sector added to economic growth in the September quarter but was offset by the slide in net exports which is expected to detract 0.4 percentage points to GDP.
• There is no doubt that the domestic economy is limping along at present. Activity has been subdued with consumers keeping a tight rein on spending, while domestic businesses are also feeling the pinch of higher interest rates. In fact the latest data on private sector credit confirms that the business sector remains cautious and unwilling to borrow. Business credit has slumped for four straight months and is down over three per cent on a year ago. Until the conservative mood of Australians changes, the economy will continual to struggle and the Reserve Bank will stay on the interest rate sidelines.

What do the figures show?

Building Approvals:

• New dwelling approvals have risen for the first time in seven months, up 9.3 per cent in October. Dwelling approvals are up just 1.2 per cent on levels of a year ago.
• House approvals rose by 1.9 per cent in October (private sector up 1.5 per cent), after sliding by 1.2 per cent in September. Apartment approvals rose by 24.5 per cent in October (private sector was up 23.6 per cent) after sliding by 12.7 per cent in September. In annual terms apartment approvals are up 61.6 per cent on a year ago.
• The value of building approvals rose by 4.1 per cent in October and was lower by 18.4 per cent on a year ago.

House Prices

• The RP Data-Rismark Hedonic Australian Home Value Index rose by 0.3 per cent in seasonally adjusted terms in October, following the 0.1 per cent drop in the previous month. The monthly growth rate peaked in January at 1.7 per cent and has consistently softened since.
• House prices rose by 0.7 in the month while apartments rose 0.5 per cent.
• Home (dwelling) prices are up 6.5 per cent on a year ago with house prices up 6.4 per cent and apartment prices up 6.8 per cent.
• The biggest fall in home prices occurred in Perth (down 1.8 per cent), followed by Brisbane (down 0.2 per cent). Prices rose the most in Canberra (up 1.8 per cent), followed Darwin (up 1.7 per cent), Adelaide (up 0.9 per cent), and Sydney and Melbourne (down 0.6 per cent).
• Home prices are higher than a year ago across all capital cities but Perth (down 1.8 per cent) and Brisbane (down 0.7 per cent). Leading the way is Darwin (up 10.8 per cent), followed by Melbourne (10.7 per cent), Canberra (up 9.6 per cent), Sydney (up 8.4 per cent), and Adelaide (up 5.5 per cent).

Private sector credit

• Private sector credit (lending) rose by just 0.1 per cent in October after a flat result in September. Credit growth is up 3.3 per cent on a year ago.
• Housing credit grew by 0.5 per cent with lending to owner-occupiers up 0.6 per cent and investor housing up 0.5 per cent. Housing credit is up 7.7 per cent on a year ago. Owner occupier housing credit is up 7.5 per cent on a year ago – slowest pace in records going back 20 years. Investor housing lending remained up 8.1 per cent on a year ago – a two year high.
• Personal credit rose by 0.2 per cent in October after rising by 0.4 per cent in September. Other personal credit was up 2.4 per cent over the year. Business credit fell again in October, down 0.8 per cent after a similar fall in September. Business credit is down 3.2 per cent on a year ago.

Government Finances
Government consumption spending rose by 0.5 per cent in the September quarter after a 1.8 per cent lift in the June quarter. But public investment was up 1.9 per cent in the September quarter after remaining flat in the June quarter. General government investment rose 1.6 per cent in the quarter while spending by public corporations rose by 2.7 per cent.
Balance of Payments

• The broad measure of Australia’s external position – the current account – worsened markedly in the September quarter. The current account deficit widened by $2.4 billion to$7.8 billion in the September quarter. The balance of goods and services moderated from a surplus of $6.6 billion to a surplus of $5.8 billion. And the net income deficit widened by $1.7 billion to a deficit of $13.2 billion.
• In the September quarter exports of goods and services fell by 1.2 per cent, outpacing a 0.2 per cent fall in imports.
• The trade sector (exports less imports) will detract 0.4 percentage points to economic growth in the September quarter.
• The terms of trade (ratio of export prices to import prices) rose by 0.8 per cent to a record high of 108.6 in the September quarter.
• Net foreign debt fell by $8.3 billion to $666 billion in the September quarter.

What is the importance of the economic data?

• The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.
• The RP Data-Rismark Hedonic Australian Home Value Index is based on Australia’s biggest property database including over 280,000 sales during 2009. Unlike the ABS Index, which excludes terraces, semidetached homes and apartments, the RP Data-Rismark Hedonic Index includes all properties.
• The monthly RP Data-Rismark Hedonic Index compares month-to-month index results. Quarterly results are measured comparing end months rather than averaging each month in the quarter. For example, the first quarter of 2009 index results compare the end of March index with the end of December index.
• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
• The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance of the data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less imports) to the latest estimates of economic growth. Trade has been a drag on economic growth over the past four years with a lack of productive capacity holding back exports while rising incomes have boosted imports.

What are the implications for interest rates and investors?

• The Reserve Bank would be well aware that the forward looking data suggests that growth is likely to be subdued in the near term. Interest rates are likely to remain on hold for the next few months, to support investment and activity.
• The ongoing boost to the terms of trade will have longer term implications for the domestic economy. Driving up incomes, employment and spending.

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• There’s no doubt that researchers have it easy nowadays compared with their predecessors even just a decade ago. There is just so much information freely available. And it’s important to note that the definition of researchers can cover a broad cross-section of people. It may be economists, small-business people, local governments and
  even large corporations.
• Just this week the Bureau of Statistics has released the latest National Regional Profile, providing a vast array of data covering the period from 2004 to 2009. The data included items such as home prices, wealth levels, demographic information and industry composition. And the good news is that researchers can drill down to relatively fine geographical areas.
• No doubt it would be good to get even timelier data. But it is a simple case of cost/benefit. There is a vast amount of data that can be collected but would the outlay of our taxpayer dollars be worth the benefit?
• Amongst the more interesting results were the estimates of home prices (or more specifically, the average value of private sector houses. The data is only provided up to June 2009 but it is nevertheless useful to see how values, and therefore wealth, has changed over time. Usually the information is only available at a national level or for capital cities, so the regional figures provide an extra layer of information.
• Looking at the data at a statistical sub-division level, the stand-out areas over the past five years have been De Grey in the Pilbara and Carnegie in central Western Australia. From 2004 to 2009, home prices in the De Grey region rose 236 per cent while Carnegie values lifted 220 per cent. Admittedly the values were very volatile over the period – it certainly wasn’t a steady increase.
• Still it’s important to note that Western Australia grabbed the first six spots on the list of strongest home price gains over the five-year period.
• On average across the 201 regions assessed, home prices grew by 46 per cent over the five-year period, or around 9 per cent a year. That is, only slightly above the very long-term average, so it hardly is descriptive of a housing “bubble”. And there were actually six regions where prices retreated over the period according to the data. Interestingly the figures suggest that Albury home prices fell by 20 per cent, while in the ACT, Belconnen prices eased by 1.7 per cent and Gunghalin-Hall fell by almost 19 per cent. In contrast South Canberra home
  values were assessed to have lifted by 70 per cent over the period.
• Sometimes there can be gremlins in the data, but importantly it is actually having the data that causes researchers to look more closely to see whether there are underlying issues or problems to be investigated.

The week ahead

• Regular readers would know that every change in season is ushered in with a barrage of economic data, and certainly it is no different with the onset of summer in Australia. Around a dozen key indicators will be released over the coming week – fortunately we have another week to wait for the next Reserve Bank Board meeting.
• On Monday, the Bureau of Statistics (ABS) releases the latest Business Indicators publication, covering data such as inventories, sales and profits. On Tuesday, RP Data issues the latest update on Australian home prices while the Reserve Bank releases private sector credit (lending). And on the same data the ABS issues the balance of payments, government finance and building approvals.
• Some analysts may say that Wednesday is the highlight of the week with the latest economic growth estimates (GDP) to be released. But the data is quite old now and certainly the Reserve Bank has already got a good handle on what the figures will show. The Performance of Manufacturing survey is also issued.
• On Thursday international trade and retail trade figures will be released. And on Friday the Performance of Services survey is issued.
• In terms of the forecasts, home prices were probably close to flat with credit (lending) up 0.1 per cent. Simply, people just don’t want to take on more debt, and higher interest rates aren’t helping the situation.
• Building approvals probably rebounded by 5 per cent in October – they certainly need to, having fallen 31 per cent over the past six months, or the biggest drop in a decade. The trade surplus should have been maintained close to $2.5 billion in October. And retail trade may have again edged 0.5 per cent higher, keeping annual growth at a sub-standard rate near 4 per cent.
• And the economy probably grew by 0.7 per cent in the September quarter – a result that is good, but not great. Consumption and investment are growing at modest rates, but Aussies are still not prepared to fully commit to the future, worried about what else may fall from the cupboard.
• In the US, there is also a fair slab of data to be released, but most will only have eyes for the employment (nonfarm payrolls) figures to be released on Friday.
• Earlier in the week the Case-Shiller home price data is issued on Monday alongside the Chicago purchasing managers index and consumer confidence. On Wednesday there is an avalanche of data including the Federal Reserve Beige Book, car sales, the ISM manufacturing index, ADP employment report and construction spending. Pending home sales and weekly jobless claims data are issued on Thursday. On Friday the ISM services index and factory orders figures will no doubt play second fiddle to the jobs data.
• Economists are tipping another solid month of job gains with payrolls expected to have lifted by 150,000 in November, close to the October result. Perhaps US businesses are again embracing the future, with the help of a weaker greenback to drive exports. But the jobless rate probably remained near 9.6 per cent.
• Of the other data, the ISM manufacturing index may have eased from 56.9 to 56.0 but it remains at a healthy level. Again, the ISM services index may have been little changed near 54.3. Consumer confidence is tipped to lift from 50.2 to 52.0; construction spending probably eased 0.1 per cent and factory orders lifted by 0.3 per cent.

Sharemarket

• Will there be a ‘Santa Claus’ rally this year? Some analysts think there will, in fact tipping very solid gains, but certainly the month of November hasn’t been a good lead in. Still, the optimistic forecasters have history on their side with the All Ordinaries only sliding on four occasions over the past 20 years and seven times in the past 30 years.
• So why the good track record? Some will put it down to ‘window dressing’ by fund managers. Whether it is the US or Australia, fund managers rule off the books for the month, the quarter and the calendar year. And it is in the interest of fund managers to show the best possible returns in order to attract new investment inflows.
• And then there is the forward-looking approach by investors to take into account. Investors are likely to end this year, much the same as the last – expecting better times ahead. The Australian sharemarket fell in both December 2007 and December 2008, but that was understandable given the GFC. In December last year stocks lifted by 3.5 per cent, extending the rally that began in early March. This year there is again the sense that the healing process in underway, although tinged with a little more frustration than last year.

Interest rates, currencies & commodities

• Many commodities have very developed futures markets. For instance futures quotes exist for US crude oil for the next eight years. Clearly this is extremely positive for oil users, allowing them to hedge risks well into the future. And for speculators it provides a range of opportunities to take positions. But what is the shape of the oil futures curve telling investors about future oil demand. The December 2010 oil price is around US$81.75 a barrel, and from there the curve climbs to US$85.17 by December 2011 before flattening to US$86 by December 2012. When you consider that oil prices were hovering around US$87 a barrel in early November, it is clear that traders still express doubts about the path of the global economy in 2011.

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