• Petrol prices drop: According to the Australian Institute of Petroleum, the national average Australian price of petrol fell by 4.0 cents per litre to 151.3 cents a litre in the week to July 6. The national average petrol price has traded between 149-158 cents over 2014.
• Discounting cycle: Petrol prices in Sydney, Melbourne, Brisbane, and Adelaide peaked well over two weeks ago and are at present at the low point in the cycle. Prices should lift over the coming days and peak towards the end of this week.
• Business conditions and confidence: The NAB business confidence index rose from +7.3 points to +7.9 points in June. The business conditions index rose from -0.8 points to +2.3 points. The survey was conducted from June 24 to June 30.
• Consumer confidence stabilises: The weekly ANZ/Roy Morgan consumer confidence rating fell by 0.3 per cent in the week to July 6 but was still up by 1.8 per cent over the month and up 5.8 per cent on the lows recorded in late May.

The NAB business survey has components that track broader economic variables such as employment, exports and consumer spending. Businesses can benchmark their experiences against industry and state results. The petrol figures and consumer sentiment data have implications for retailers, especially petrol marketing groups.

What does it all mean?

• Over the past couple of months the business sector has been a lot more upbeat than consumers on the outlook and now conditions are also showing signs of improving. This is in stark contrast to the slide that was noted in consumer confidence in the past couple of months. Business confidence has actually edged up slightly over the past month. And now with the Budget retreating from media headlines, greater focus can be placed on Australia’s good economic circumstances.
• Even consumer confidence is showing signs of having bottomed out. And as the lift in house prices and share markets come to the fore, more Aussies are likely to realise that the economy is in solid shape and interest rates are going nowhere. And more confident consumers should lead to better operating conditions for businesses.
• Encouragingly inflationary pressures are benign with businesses actually noting that labour costs and purchase costs eased in June.
• Overall, the Australian Reserve Bank is in a similar position to the US Federal Reserve. There is no pressing need at present to be tightening monetary policy. But the Australian economy is forming a solid base for future growth and therefore a base for more “normal” interest rates.
• The national petrol price has lost relevance as an indicator of petrol price trends due to the vagaries of the discounting cycle. One week the price is up 4-5 cents, the next week it’s down 4-5 cents. In just the past three weeks petrol price has swung through a 15-17 cent range across Sydney, Brisbane and Melbourne.
• The good news for motorists is that the national average fuel price fell to the low $1.50s a litre last week. The slide in the national price was largely due to the discounting cycle. In Sydney, Melbourne, Brisbane and Adelaide, petrol prices are currently at the low point in the cycle. In fact petrol is trading near wholesale prices at Sydney, Melbourne and Adelaide pumps. Prices are likely to drift higher with the peak in the cycle likely to be later this week.
• Global oil prices are edging lower, reflecting the recent improvement in the geo-political situation in the Middle East. Last week, Libyan export capacity lifted by around 500,000 barrels per day as rebels blockading eastern oil ports agreed to reopen the remaining two terminals. No doubt the Middle East political situation and the volatility of the Australian dollar will be driving factors that determine pump prices in coming months.

What do the figures show?

National Australia Bank Business Survey:

• The NAB business confidence index rose from +7.3 points to +7.9 points in June. The business conditions index improved from -0.8 points to +2.3 points.
• The index of trading conditions strengthened from +1.5 points to +6.6 points; employment weakened from -0.1 points to -2.6 points; profitability strengthened from -2.6 points to +3.1 points; forward orders improved from 0.0 points to +0.4 points.
• Inflationary pressures were largely flat in June. The monthly reading of labour costs rose at a 0.6 per cent quarterly rate in June after a 0.7 per cent rise in May. Purchase costs rose at a 0.3 per cent quarterly rate in June, after a 0.4 per cent rise in May. Final product prices rose by 0.1 per cent after a 0.1 per cent rise in May. Retail prices lifted 0.2 per cent in June, after a flat result in May.
• Capacity utilisation eased from 80.2 to 79.3 in June, below the long-term average of 81.2 per cent.
• The proportion of firms reporting that they did not require credit rose from around 45 per cent in May to around 65 per cent in June.

Petrol prices

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 4.0 cents a litre to 151.3 c/l in the week to July 6. The metropolitan price fell by 5.5 c/l to 149.1 c/l, while the regional average price fell by 0.6 cents per litre to 156.0 c/l.
• Average unleaded petrol prices across states and territories over the past week were: Sydney (down by 8.2 cents to 147.5 c/l), Melbourne (down by 5.7 cents to 147.0 c/l), Brisbane (down by 7.4 cents to 149.4 c/l), Adelaide (down by 5.8 cents to 145.9 c/l), Perth (up by 1.2 cents to 154.0 c/l), Darwin (unchanged at 173.0 c/l), Canberra (unchanged at 157.2 c/l) and Hobart (up by 0.2 cents to 160.9 c/l).
• Today, the national average wholesale (terminal gate) unleaded petrol price stands 143.0 c/l, down around 1.6 cents over the week. Petrol is trading near wholesale prices at Sydney, Melbourne and Adelaide pumps.
• Last week the key Singapore gasoline price fell by US$1.60 or 1.2 per cent to US$127 a barrel. Yesterday the Singapore gasoline price fell further to a 3-week low of US$125.10 a barrel. In Australian dollar terms the Singapore gasoline price fell by 66c a barrel or 0.5 per cent last week to $123.19 a barrel or 85.29 cents a litre.
• Figures from MotorMouth show that petrol prices in Sydney, Melbourne, Brisbane, and Adelaide peaked well over two weeks ago and are at present at the low point in the cycle. Prices should lift over the coming days and peak towards the end of this week.

Consumer sentiment:

• The ANZ/Roy Morgan consumer confidence rating fell by 0.3 per cent in the week to July 6 after falling 0.3 per cent in the previous week and lifting by 2.4 per cent in the week to June 22. Over the month, confidence rose by 1.8 per cent. The confidence rating is up 5.8 per cent on the lows recorded for the week to May 25.
• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes.
• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.
• Business confidence and conditions are good without being great. Smart companies are looking for opportunities in the current environment but there are still plenty of risk-averse businesses on the sidelines. Exports and housing construction are the key drivers of the Australian economy.
• The Reserve Bank doesn’t need to be in a rush to lift interest rates. Inflation remains well contained, while the higher Aussie dollar continues to hamper rebalancing efforts across the economy.

What is the importance of the economic data?

• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.

What are the implications for interest rates and investors?

• Business confidence and conditions are good without being great. Smart companies are looking for opportunities in the current environment but there are still plenty of risk-averse businesses on the sidelines. Exports and housing construction are the key drivers of the Australian economy.
• The Reserve Bank doesn’t need to be in a rush to lift interest rates. Inflation remains well contained, while the higher Aussie dollar continues to hamper rebalancing efforts across the economy.

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• Global share markets pushed higher over the last week helped by mostly good economic news, notably this time from China, and the possibility of a diplomatic solution with respect to Syria.
• In Australia, the boost to confidence from the change in Government was evident in higher readings for consumer and business confidence, a rally in the share market and a slight gain in the $A. While other factors also played a role in the share market gain, eg global share markets also rose, confidence has been a missing ingredient in the Australian economy in recent times so if the new Government can maintain higher confidence levels by implementing a program of lower taxes, smaller government and less regulation resulting in a more business friendly environment then it will help drive Australia’s path back to stronger growth. The likelihood that a mix of independents and minor parties to the right of the Coalition will control the balance of power in the Senate increases the chance that the new Government will get its legislative program through Parliament.
• The further surge in the Australian share market pushed the ASX 200 to its highest since June 2008 and the accumulation index (which takes account of capital growth plus dividends) rose above its November 2007 all-time record. While shares are vulnerable to a short term correction, the combination of reasonable valuations, low interest rates and easy money and the anticipation of an upswing in economic growth and profits next year is likely to push the share market up to around 5350-5400 by year end with further gains likely next year.
• In the US, the focus is now turning to Congressional negotiations regarding a new Budget (required by October 1) and an increase in the debt ceiling (required by mid-October). Expect the usual cantankerous argy bargy between both sides of politics to cause bouts of financial market nervousness ahead of the usual last minute deal. With the US budget deficit having fallen to 4% of GDP (from a 2010 peak of above 10%) it will be harder for the Republicans to push too hard without risking alienating the public, which they probably don’t want to do ahead of mid-term elections next year.

Major global economic events and implications

• Chinese data for August was unambiguously positive with stronger exports, industrial production, power generation, retail sales and fixed asset investment, solid growth in money supply and lending and all at the same time that inflation is low. Momentum in China appears to have bottomed and is on track for 7.5% growth this year. This is good for global growth but also provides support for commodity producers like Australia.
• A pickup in exports is also starting to appear in other emerging countries including Korea and India and is consistent with an improvement in broad global growth momentum.
• Meanwhile the problems in parts of the emerging world are a long way from over with Indonesia hiking interest rates yet again to defend the Rupiah and fight inflation, but which will only make the growth outlook worse,
• It was a quiet week on the data front in the US. Weekly jobless claims fell but this was distorted by two states failing to file. Consumer credit was weaker than expected, small business optimism fell very slightly, and weekly mortgage applications fell highlighting the ongoing impact of the rebound mortgage rates that has resulted from the back up in bond yields. US mortgage rates are now running around 4.6% compared to a low in May of 3.4%.
• While Eurozone industrial production fell in July, the rising trend in manufacturing PMIs suggests this is an aberration with the recovery likely to resume.
• Japanese economic data was somewhat messy with June quarter GDP growth revised up to 3.8% annualised and bankruptcies down but mixed readings on business conditions and sentiment.

Australian economic events and implications

• Apart from the poor jobs report, Australian data releases over the last week were positive. The deterioration in the labour market in response to the sub-par growth of the last year was clearly evident in August with jobs falling for the second month in a row and unemployment rising to 5.8% which is just below its post GFC peak. Labour force underutilisation is now at its highest since 2002. Unfortunately, falling job ads and business hiring plans point to a further deterioration ahead. The soft labour market with higher unemployment still to come highlights that the risks for interest rates remain on the downside. However, the labour market is always a lagging indicator and leading indicators released over the past week were more upbeat with a continuing rising trend in housing finance and solid gains in both business and consumer confidence. While the bounce in confidence owes much to the change in Government they are nevertheless welcome news given the important role confidence plays in driving the economy.
• More broadly, four factors have played a role in holding the economy back over the last few years: relatively high interest rates, the high $A, China worries and the political mess. We have now seen relief on all these fronts.

Major market moves

• Share markets had a good week helped by good economic data from China and signs that a diplomatic solution will be found for Syria.
• Commodity prices mostly fell on nervousness ahead of the Fed’s taper decision despite stronger Chinese data.
• The Australian dollar rose helped by a combination of strong data from China and a post-election boost to confidence. The gains were partly reversed though as poor jobs data kept alive the prospect of another rate cut.

What to watch over the next week?

• In the US, we expect the Fed to announce that it will be scaling back its monthly asset purchases from $US85bn to $US75bn. Such a move will hardly come as a surprise as the Fed has been warning of its since May and a September taper has become the market consensus expectation. The softer than expected August jobs report means that such a move is not a done deal, but on balance the run of data released recently suggest that the US economy has picked up pace enough to withstand a lessening in the pace of stimulus. However, because growth is still far from robust the Fed is likely to indicate the pace of quantitative easing will not be reduced in a straight line and that interest rates are unlikely to be hiked until some time in 2015 at the earliest. Its dovish forward guidance is likely to be focussed on pushing back against the recent back up in bond yields. To avoid pressure on mortgage rates it’s also more likely to cut back purchases of bonds as opposed to mortgage backed securities. Finally, it’s worth stressing that tapering its QE program is not the same as a monetary tightening – it will just be equivalent to cutting interest rates at a slower rate.
• On the data front in the US, expect a modest rise in industrial production (Monday), benign inflation (Tuesday), a slight fall back in the NAHB homebuilder conditions index (Tuesday), a further rise in housing starts (Wednesday) but a slight fall in existing home sales (Thursday). Manufacturing surveys for the NY and Philadelphia regions are expected to show continuing strength.
• In Europe, the German Federal election (Sunday 22 September) is most likely to see the return of Angela Merkel as Chancellor with the main uncertainty relating to whether she will lead a coalition with the Free Democrats (as at present) or the Social Democrats (as over 2005-09). Either outcome is unlikely to pose a threat to Germany’s relationship with the rest of the Eurozone and so is unlikely to have significant investment market implications, beyond any initial kneejerk response.
• In Australia, the minutes from the RBA’s last Board meeting (Tuesday) will be watched closely to see whether the explicit easing bias that was removed from the post meeting statement in August, but returned with the August minutes only to be left off from the post meeting statement two weeks ago will be returned again. It would make sense for the RBA to make it clear that it retains an easing bias because it helps maintain downwards pressure on the $A without necessarily having to do anything. A speech by Assistant Governor Malcolm Edey will also be watched for clues regarding interest rates.

Outlook for markets

• After a strong run up, shares are at risk of a short term correction as we go through the seasonally weak period of September/October and given various worries including the Fed’s taper decision, the German election, coming budget and debt ceiling negotiations in the US, the nomination of the next Federal Reserve chairperson and various imbalances in the emerging world and remaining risks involving Syria.
• However, any pullback is likely to be modest and just another bull market correction which should be seen as a buying opportunity as the broad trend in shares is likely to remain up. Valuations remain reasonable, monetary conditions are set to remain easy well into next year, and profits are likely to improve next year as global and Australian growth picks up. So by year end we see further upside in global and Australian shares with gains continuing next year.
• Government bond yields have increased too far too fast and could stabilise or even decline a bit, particularly if the Fed presents dovish forward guidance when it decides to start tapering. However, still low yields and an unwinding of years of massive inflows into bond funds point to poor returns ahead.
• The $A looks to be undergoing a short covering rally which could take it to around $US0.95/96. But once this has run its course and extreme short positions have been unwound the downtrend is likely to resume.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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Home loans soar but business confidence still gloomy

The number of new owner-occupier housing loans rose by 5.2 per cent in March, the strongest rise in four years. But the share of loans taken up by first home buyers fell to a near 9-year low.

What does it all mean?

• Reserve Bank Board members are probably wincing after the latest home loan data. Last week figures showed that employment soared by over 50,000 in April. Today, data shows that home loans jumped by the biggest amount in four years. Add in the weaker Aussie dollar – an event welcomed by businesses – and Board members may be regretting their decision to trim cash rates.
• Still, it is clear from the latest survey that businesses were clearly hoping for a rate cut to be delivery at the May Board meeting with business conditions near four-year lows. And the home loan data certainly wasn’t unambiguously strong with the share of loans taken up by first home buyers easing again to fresh four year lows.
• But policymakers need to come to grips with the fact that Generation Y has a far different attitude to home ownership and debt than their parents. A growing proportion want to rent, not buy, preferring lifestyle of socialising and travel over decades of paying off home loans.
• It is clear from the latest cards data that Aussie consumers have a frosty relationship with their credit cards. Aussies are no longer adding to debt, in fact the pace of debt reduction is the fastest in history. Of credit cards attracting interest charges the average balance is falling at a near 6 per cent annual rate.
• Overall a lot has happened in the space of the week. And there are good reasons for the Reserve Bank to stay on the interest rate sidelines for at least a month or so before thinking about cutting rates again.

What do the figures show?
Housing Finance:

• The number of new owner-occupier housing loans rose by 5.2 per cent in March – the strongest gain in four years. Excluding the refinancing of dwellings, loans were up 7.2 per cent. The value of loans rose by 5.8 per cent (excluding refinancing, up 6.8 per cent).
• The number of loans for the construction of homes rose by 4.6 per cent and the value of loans rose by 6.2 per cent.
• The number of loans to buy newly-erected dwellings rose by 21.1 per cent and the value of loans rose by 16.6 per cent.
• The number of loans for the purchase of established dwellings rose by 4.2 per cent and the value of loans was up by 5.0 per cent.
• The number of refinancing transactions rose by 1.1 per cent and the value rose by 3.2 per cent.
• The value of new housing commitments (owner occupier and investment) rose by 4.5 per cent in March. Owner-occupier loans rose by 5.8 per cent with investment loans up by 2.1 per cent.
• The proportion of first home buyers in the market fell to a near 9-year low of 14.2 per cent in March (lowest since June 2004), down from 14.4 per cent in February. Fixed rate loans rose from 13.5 per cent of all loans to 18.4 per cent in March – the highest level in five years. And the average home loan across Australia stood at $301,100 in March, up 4.0 per cent on a year ago.

Credit card

• Figures released from the Reserve Bank show that the average credit card balance fell by $24.90 in March to $3,256.70. The average credit card balance is down by 2.4 per cent on a year ago.
• Of credit cards attracting interest charges, the average outstanding balance fell by $60.10 in March to $2,294.30. The average balance accruing interest is down by a record 5.7 per cent on a year ago.
• The average credit card limit fell by $6.50 to $9,133.80 in March. The average credit card limit rose by just 1.4 per cent in the year to March – equalling the slowest growth rate in 18 years.
• The number of credit card cash advances rose by 3.4 per cent in March after slumping by 7.7 per cent in February (value rose by 5.5 per cent). In smoothed terms, credit card advances are down 4.1 per cent on a year ago and have consistently fallen in the past five years.
• The number of purchases made with credit cards rose by 1.9 per cent over the year to March. Purchases made with debit cards were up 10.6 per cent on a year ago.

National Australia Bank Business Survey:

• The NAB business confidence index fell from +1.6 points to minus 2.0 points in April while the business conditions index improved modestly from minus 7.0 points to minus 5.9 points.
• The index of trading conditions improved from minus 5.0 points to minus 2.6 points; employment worsened from minus 5.7 points to minus 9 points; profitability improved from minus 9.3 points to minus 6.3 points; and forward orders weakened from minus 5.2 points to minus 6 points – the 25th straight month that forward orders have contracted.
• In terms of business conditions, NAB noted: “conditions improved markedly in mining (up 17 to +4 points), retail (up 15 to -8 points) and manufacturing (up 14 to -21 points). While the improvement in mining activity is a little surprising given the extent of falls in commodity prices over April, it is possible that the impact of earlier floods and cyclones has now subsided, providing some relief to miners. Transport & utilities and finance/ business/ property were the only industries to report a (moderate) deterioration in activity in the month – both down 4 points – with activity in the latter falling to its lowest level since June 2009.”
• Inflationary pressures are still restrained. The monthly reading of labour costs rose at a 0.7 per cent quarterly rate in April after a 0.8 per cent rise in March. Prices rose by 0.1 per cent after a 0.2 per cent fall in March. Retail prices rose by 0.1 per cent in April after falling at a 0.4 per cent quarterly rate in March. And purchase costs rose at a 0.4 per cent quarterly rate in April, after a 0.5 per cent rise in March.
• Capacity utilisation eased from a five-month high of 79.9 per cent in March to 79.6 per cent in April, and below the long-term average of 81.2 per cent.
• The proportion of firms reporting that they did not require credit stood at 68 per cent in April.

Why is the data important?

• 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.
• The Reserve Bank releases data on credit and debit card transactions each month. The credit card figures are useful in highlighting consumer borrowing and spending trends.
• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications?

• The housing market is in recovery mode. The good news is that more loans are being written to build homes and to buy newly-erected homes. But more may need to be done to entice first home buyers into the market.
• The latest rate cut, stable job market and state government grants will continue to lift home building, representing good news for developers, building material suppliers and retailers of housing-related goods like carpets and whitegoods.
• Business conditions should lift in coming months in response to the rate cut and housing pick-up.
  There is no need for a follow-up rate cut from the RBA. Financial market pricing suggests a 22 per cent chance of another rate cut in June.

The post Home loans soar but business confidence still gloomy appeared first on AdviserVoice.

The survey of 500 businesses took place from 9-15 January and pre-dates the low inflation result and ongoing improvement in share markets.

What does it all mean?
There were encouraging signs in the latest business survey but really it is still early days and the improvements are yet to bloom into a fully-fledged recovery for the sector. Business confidence did bounce back into positive territory and recorded the most optimistic reading in five months but that’s as far as the good news goes.

Not only were business conditions still decidedly weak, but trading conditions actually deteriorated despite the substantial rate cuts late last year. Interestingly across the sub-indices, forward orders remained decisively weak, while more worryingly for businesses, profitability continues to be squeezed. Given the ongoing discounting and rising input prices it is understandable that margin pressures are resulting in businesses claiming that trading conditions are yet to improve.

The caution being shown by businesses can be clearly seen in the lack of interest in credit. Despite the attractive lower interest rates on offer businesses are still not interested in increasing borrowings. The substantial cuts in borrowing rates over the past few months have not altered perceptions on borrowing.

The proportion of firms reporting that they did not require credit rose from 50 per cent to 72 per cent in December. In other words, almost three quarters of all businesses are not interested in seeking loans. Structurally the domestic economy remains sound, however the patchy nature of the recovery is ensuring that businesses remain conservative and use existing cash facilities to fund development and investment.

Overall it is clear that businesses remain decidedly cautious about current economic conditions. However over coming months the Reserve Bank would be hoping that the deep rate cuts would boost confidence and support activity. And given that the latest survey was conducted in early January – before the release of the low inflation reading, the improvement in global economic conditions (extension of the US debt ceiling and stronger flash manufacturing readings across the globe) and rising sharemarkets, are likely to support further improvement in confidence levels in coming months.

What do the figures show?
The NAB business confidence index improved from minus 8.8 points to +2.9 points in December – the best result since July 2012. And the business conditions index improved from minus 6.0 points to minus 4.3 points.

The index of trading conditions deteriorated from minus 2.7 to minus 3.7 points; employment improved from minus 5.1 to minus 2.8 points; profitability improved from minus 11.1 to minus 6.3 points; and forward orders improved from minus 10.8 to minus 5.5 points but marked the 21st straight month that forward orders have contracted.

In terms of business conditions, NAB noted: “Business conditions in the non-farm business sector improved a touch in December – up 2 points to -4 index points – though remained relatively subdued overall. Despite the tick up in the month, trend business conditions were unchanged at -5 index points and remained consistent with an economy clearly growing below trend.

The tick up in activity in the month reflected modest improvements in profitability and employment conditions, which were partly offset by a slight deterioration in trading conditions. The December monthly survey highlighted the embedded weakness in the wholesale sector, which appears to be bearing the brunt of poor conditions faced by industries dependent on its services (including retail and manufacturing).

Elsewhere, conditions remained poor in manufacturing, retail and construction, while they were strongest in transport & utilities and recreation & personal services.”

Inflationary pressures remain well contained. The monthly reading of labour costs rose at a 0.9 per cent quarterly rate in December after a 0.7 per cent rise in November. Prices were flat in the December quarter after a 0.1 per cent rise in November. Retail prices rose at a 0.4 per cent quarterly rate in December after a 0.2 per cent decline in November.

Purchase costs rose at a 0.4 per cent quarterly rate in December after a 0.6 per cent rise in November. Capacity utilisation rose from 79.5 per cent in November to 79.7 per cent in December, still below the long-term average of 81.2 per cent.

The proportion of firms reporting that they did not require credit rose from 50 per cent to a record high of 72 per cent in December.

What is the importance of the economic data?
The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications for interest rates and investors?
The Reserve Bank would be more relaxed about interest rate settings at present. The rate cuts last year continue to work through the economy and while policymakers may consider cutting rates further, a move is unlikely to take place at the next Board meeting in February, given the improving economic outlook.

The post Businesses cautiously optimistic appeared first on AdviserVoice.

• Business conditions improved from a 3-year low, up from -3.9 to -1.
• The survey of over 300 businesses took place from June 19 – June 29.
• Across the sub-indices, profitability improved from a three-year low, the index of trading conditions recorded a modest improvement, however forward orders contracted for the 15th straight month and held at a three-year low.
• Despite lower attractive interest rates, demand for credit weakened sharply. The proportion of firms reporting that they did not require credit rose from 47 per cent to 63 per cent in June.
• Inflationary pressures remain well contained. The monthly reading of labour costs eased from a 0.9 per cent to a 0.7 per cent quarterly rate in June – “consistent with the weakness in employment conditions”.

What does it all mean?

• Any hope of a revival in business sentiment has been eroded after the latest business survey. The latest business survey is certainly disappointing, particularly given that it took place in late June well after the back to back rate cuts. Business confidence deteriorated to the weakest levels in 10-month, while conditions bounced of three year lows. It is clear that business remain decidedly worried about current economic conditions. The tough domestic trading conditions coupled with the downside risks to global growth and the concerns surrounding the Europe Union are dampening confidence and increasing caution.
• Interestingly across the sub-indices, profitability continued to go backwards while more worryingly forward orders slumped to three-year lows. And the latest result comes despite the Federal Budget handouts which began in earnest in late May. Over coming months the Reserve Bank would be hoping that the deep rate cuts would provide a positive shock to confidence and support activity but in the short-term it is yet to have the desired effect.
• It was particularly disappointing to see that despite the attractive lower interest rates on offer businesses were not interested in increasing borrowings. The substantial cut in borrowing rates over the past few months have not significantly altered perceptions on borrowing. The proportion of firms reporting that they did not require credit rose from 47 per cent to 63 per cent in June. In other words almost two thirds of all businesses are not interested in seeking loans. Structurally the domestic economy remains sound, however the patchy nature of the recovery is ensuring that businesses remain conservative and use existing cash facilities to further development and investment.
  Looking forward, the rate cuts and slide in fuel prices should provide consumers with more breathing space in the household budget. A most pick up in spending is likely to take place over the medium term. And after a lack of borrowing over the past year, Australian consumers and businesses are likely to be tempted by the lower rates on offer as confidence improves.

What do the figures show?

• The National Australia Bank business confidence index fell from -2.2 to – 2.7 in June – a ten-month low. The business conditions index improved from -3.9 to -1. Both readings are well below long-term averages.
• The index of trading conditions rose from -0.6 to 2.7; profitability improved from a three-year low of -6.2 to -1.1; employment eased from -3.7 to -4.3; and forward orders fell from -4.3 to -7.9 – a three-year low and marked the 15th straight month that forward orders have contracted.
• Inflationary pressures remain well contained. The monthly reading of labour costs eased from a 0.9 per cent to a 0.7 per cent quarterly rate in June – “consistent with the weakness in employment conditions”. Prices rose at a 0.2 per cent quarterly pace. Retail prices were going backwards, down by a -0.1 per cent quarterly rate in June. Purchase costs rose at a 0.4 per cent quarterly rate in June, down from the 0.5 per cent growth in May.
• Capacity utilisation lifted marginally from 79.9 per cent to 80.6 per cent in June. The long-term average stands at 81.2 per cent.
  The proportion of firms reporting that they did not require credit rose from 47 per cent to 63 per cent in June.

What is the importance of the economic data?

• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications for interest rates and investors?

Consumers are cautious about spending, so businesses are keeping a tight rein on costs. The tame reading for labour costs, retail prices and purchase costs keeps the door open to another rate cut. Companies are discounting heavily, financial conditions remain tight, the non-mining economy is largely only chugging along at present and there are still downside risks to the global economy. The negative momentum is clearly why the Reserve Bank slashed rates over the last couple of months.

CommSec expect the Reserve Bank to cut rates once more in August to support confidence and insulate the domestic economy from the ongoing European debt crisis.

11 July 2012

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• In the March quarter, retail prices fell by 0.9 per cent – the biggest price fall in almost 30 years of records. Prices are unchanged on a year ago, the lowest result in seven years.
• The NAB business confidence index rose from +2.6 in March to +3.7 in April, but this was still below the long-run average of +6.3. However, business conditions fell from +3.4 in March to a six-month low of -0.1 in April. The survey of 400 businesses took place from April 23-30 – before the May 1 super-sized rate cut.
• Bad news for job seekers: The number of job advertisements fell for the first time in four months, dropping 3.1 per cent in April.

What does it all mean?

• Australia’s retailers have finally something to celebrate. Not only did spending lift in March by the biggest margin in almost a year, once you adjust for inflation, the gain over the March quarter was the best in almost three years. No one will be getting carried away with one month’s sales result. But it shows there is life out there in consumer land.
• Why did we start to spend again? It seems like lower prices had a lot to do with it. There has never been a bigger fall in retail prices in 30 years. A stronger Australian dollar, cheaper food, on-going innovation in technology goods, strong global competition and good old fashioned discounting have prompted Aussies to part with their cash again.
• The big winners have been specialised food stores, cafes and restaurants with consumers seemingly giving up on renovating and decking out their homes and focussing on food instead. The lift in sales at butchers, bakers, fruit & veg shops and seafood stores over the March quarter was the best in five years. And the increase in cafes & restaurant trade was the best in 18 months. Cheaper prices had a lot to do with it – even prices at cafes & restaurants fell 1.0 per cent in the March quarter – a record fall.
• The biggest casualty was in household goods like carpets, furniture, hardware and garden supplies where spending slumped 3.3 per cent in inflation-adjusted terms over the March quarter
• The clear conclusion from the raft of economic data out today is that the Reserve Bank can cut rates again. However the RBA is likely to take a few more months to weigh up all the influences. CommSec is pencilling in a rate cut in August after the next inflation data.

What do the figures show?
Retail trade

• Retail trade rose by 0.9 per cent in March – the biggest increase in 11 months. Sales had previously risen by 0.3 per cent in February and 0.4 per cent in January. Annual spending growth lifted from 2.1 per cent to 3.7 per cent.
• Non-food retailing rose 1.0 per cent in March after a scant 0.1 per cent rise in February. Sales by chain-store retailers and other large retailers rose by 1.6 per cent in March – the best gain for over two years (November 2009).
• Sales rose across all states and territories, led by ACT, up 1.5 per cent, with Victoria up 1.3 per cent and NSW and Western Australia up 1.2 per cent.
• In real (inflation-adjusted) terms, retail spending rose 1.8 per cent in the March quarter – the biggest rise in almost three years (since June quarter 2009). Annual growth lifted from 1.4 per cent to 2.9 per cent – still below the decade average of 3.7 per cent.
• The biggest gain in the quarter was by “specialised food retailing” (butchers, bakers, fruit, seafood stores), up 8.0 per cent. Next best was cafes & restaurants, up 5.9 per cent.
• Department stores posted the best real growth in five years (up 2.6 per cent) in the March quarter in response to 0.8 per cent fall in prices (biggest drop in over a decade).
• Biggest drop in real spending was by Furniture, Floorcovering and Textile Goods Retailing, down 3.3 per cent, and Hardware, Building & Garden Supplies Retailing, also down 3.3 per cent.
• Only four of the 15 detailed retail classifications recorded price increases in the March quarter. Six of the 15 retail sectors are recording annual price deflation (falling prices).

Job advertisements

• The combined number of internet and newspaper job advertisements, as tracked by ANZ, fell for the first time in four months, dropping by 3.1 per cent in April after gains of 0.7 per cent in March, 3.3 per cent in February and 7.4 per cent in January. Job ads are down 1.7 per cent on a year ago.
• Newspaper job ads rose for the second straight month, up by 0.1 per cent in April, while the far larger component of internet job ads fell by 3.2 per cent.
• ANZ provides data on newspaper job ads by state but given their minor importance in relation to internet ads and poor record in tracking total advertisements, the data is not useful for analytical purposes.

National Australia Bank Business Survey

• The National Australia Bank business confidence index rose from +2.6 in March to +3.7 in April. But the business conditions index fell from +3.6 to a six-month low of -0.1. Both readings are below long-term averages.
• The index of trading conditions slumped from +7.5 to +2.0; profitability fell from +2.7 to -4.1; employment rose from +0.5 to +2.2; and forward orders fell from -1.0 to -1.5. It was the 13th straight month that forward orders have contracted.
• Inflationary pressures remain well contained. The monthly reading of labour costs “picked up to a modest 1.1 per cent (quarterly rate) in April. The survey suggests that wage costs pressures are reasonably well contained and are unlikely to be too concerning for policy makers.” Prices rose at a 0.1 per cent quarterly pace, a similar result to March. Retail prices fell at a 0.7 per cent quarterly rate in April. But bucking the trend, purchase costs rose at a 0.7 per cent quarterly rate in April, up from the 0.4 per cent growth in March.
• Capacity utilisation slumped from 81.0 per cent to a 34-month low of 79.4 in April. The long-term average stands at 81.2 per cent. In April, 69 per cent of firms report that they did not require credit – a record high.

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 monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.
• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications for interest rates and investors?

• Inflation has been replaced by deflation, setting up the prospect of another cut in interest rates. Prices won’t continue to fall, and in their absence the Reserve Bank can step in and maintain spending momentum by cutting prices.
• Department stores had a good quarter, but it appears that the biggest drop in prices in a decade had a lot to do with the lift in sales. All businesses will be fixated on reducing costs in the current environment because lifting prices is out of the question.
• The business survey was undertaken before the Reserve Bank delivered the super-sized rate cut in early May. But it is clear from the survey that inflationary pressures are well contained, entrenching the view that interest rates can be cut again.
• The drop in job ads isn’t a great concern as yet as it’s just the first fall in four months. But it’s clear that businesses remain cautious about hiring, investing and spending in the current environment.

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• Total apparent consumption of alcohol fell for the fourth straight year, down from 10.27 litres of pure alcohol per person to a 9-year low of 9.99 litres per person. The equivalent of 2.2 standard drinks per day per person aged 15 years and over.
• Services sector slumps: The Performance of Services index slumped by 7.4 points to 39.6 in April – a 3-year low. A reading below 50 suggests contracting activity.
• All the key components of the index fell in April. Of note, the new orders sub-index and sale both fell to 3-year lows while the employment sub-index contracted at a faster pace.

What does it all mean?

• Australia used to be a beer drinking nation. Well that has changed, just like a whole host of other things. Wine and beer consumption were neck and neck at the end of June last year and it could very well be the case that today more Australians are consuming alcohol in the form of wine, not beer.
• Interestingly Aussies aren’t just cutting back on beer, alcohol consumption as a whole fell for the fourth straight year and is now down at 9-year lows. Perhaps it’s all about quality not quantity or perhaps Aussies are taking health matters seriously. Not only are we cutting back on alcohol, spending on cigarettes and take-away food is falling. Australia is making a serious attempt at climbing the ranks of world healthiest nations.
• Aussies aren’t cutting back on the drink completely as consumption of spirits has lifted. Perhaps in the current climate, more people are looking for a good, stiff drink!
• The latest figures on the services sector were clearly disappointing. However the result does further validate the recent super-sized rate cut by the Reserve Bank. The services sector has contracted for nine months out of the past year. And the latest result suggests that that there is no real catalyst for a turnaround. In fact in April the pace of contraction was the fastest in three years.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Business margins are constrained, thus depressing profitability. In addition the forward looking index of new orders and sales are also holding at the weakest levels in three years.
• The main factors driving the weakness in the services sector include high interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses Clearly the latest rate cut could not have come at a better time and will help to alleviate some of these detrimental factors in coming months. However it is unlikely that the service sector will see a full-blown turnaround anytime soon – rather it is likely to be a slow grinding recovery

What do the figures show?
Alcohol consumption

• The apparent consumption of alcohol consumed in the form of beer fell from 4.45 litres of pure alcohol per person (aged 15 years or more) to 4.23 litres in 2010/11. It was the lowest result in 65 years. Consumption of full-strength beer fell from 3.67 litres to 3.49 litres; mid strength fell from 0.57 litres to 0.56 litres; and low strength fell from 0.22 litres to 0.18 litres.
• The consumption of alcohol in the form of wine fell from a record high of 3.82 litres to 3.74 litres in 2009/10 with declines in white, red and other wines. But consumption of alcohol in the form of spirits rose from 2.00 litres to 2.03 litres with spirits up from 1.28 litres to a record high of 1.32 litres while “ready to drink” eased from 0.71 litres to a record low of 0.70 litres.
• Total apparent consumption of alcohol fell for the fourth straight year, down from 10.27 litres of pure alcohol per person to a 9-year low of 9.99 litres per person. As a standard drink consists of 12.5 mls of pure alcohol, this is equivalent to an average of 2.2 standard drinks per day per person aged 15 years and over.

Services sector gauge

• The Australian Industry Group/Commonwealth Bank Australian Performance of Services index fell by 7.4 points to 39.6 in April – marking the sharpest contraction in three years.
• All the key components of the index fell in April. Of note, the new orders sub-index slumped from 47.7 to a 3-year low of 35.8; the employment sub-index fell from 48.9 to 46.6; and sales fell from 44.6 to 33.8 – another 3-year low.
• According to the survey: “ Respondents across all sub-sectors continued to note that economic uncertainty, low levels of activity in large parts of the manufacturing and construction sectors, and the high level of the currency is weighing on activity.” “While the activity indices for each sub-sector are seasonally adjusted, the timing of Easter this year suggests that the Easter holiday period may have had a larger impact on the results of the April survey than in other years.”

What is the importance of the economic data?

• The Australian Bureau of Statistics releases alcohol consumption data each year. The data is important for the hospitality sector.
  The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.

What are the implications for interest rates and investors?

• To some degree the service data is now backward looking highlighting the dearth in activity across the economy. Looking forward the recent rate cut is likely to provide a modest degree of stimulus and more importantly a boost to confidence. The Reserve Bank is likely to assess the impact over the next few months before deciding if further rate cuts are necessary.
• A more multicultural Australia and higher income and wealth levels goes a long way to explaining increased wine consumption since the 1970s as well as perceived health benefits in recent years.

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In addition:

• Tourist arrivals fell but departures rose in September
• Tourist arrivals fell for the sixth time in nine months, dropping 4.1 per cent in seasonally adjusted terms in September
• Trade surplus narrows, with Australia’s trade surplus easing by $389 million to $2,564 million in September.
• Over the past 18 months trade surpluses have totalled $34.2 billion.
• Exports fell by 2.5 per cent while imports fell by 1.3 per cent in the month.

What does it all mean?
The latest business confidence figures are hardly encouraging. Yes confidence improved but it was from a sustained level of pessimism and remain well short of long-term averages. In addition the key forward looking indicators were decidedly weaker, trading conditions eased, profitability worsened, while forward orders contracted for the 15th time in 16 months. It is clear that at present Aussie businesses are remaining on the sidelines, uncertain about the outlook and remaining non-committal to investment plans.

Importantly the latest survey occurred in late October, before the interest rate cut by the Reserve Bank on Melbourne Cup day. And as such it is likely that business confidence levels should receive a boost in ensuing months. Although it is unlikely that one rate cut alone can have the profound effect of turning around the lacklustre business survey readings.

More likely if the Reserve Bank wanted to provide a strong degree of support to the economy a further rate cut would do just that. And it certainly has the scope to do so, especially given that the latest business survey has confirmed that overall inflationary pressures are mild and even non-existent in the retail space. CommSec expects a further rate cut to take place in February however if a solution to the European debt crisis is not forthcoming it may result in policy makers cutting rates earlier to support the domestic economy.

Aussies continue to flock overseas in record numbers. Over the past year a record 7.64 million short-term departures were recorded. And while this doesn’t strictly translate to the number of people trekking offshore, it can’t be far off, suggesting that one in three Aussies went abroad for business or pleasure over the year. If retailers are wondering where all their customers have gone, they only need to visit the international terminal.

Australian consumers are devoting more of their budget to holidays and travel and this trend should continue while ever the Aussie dollar remains perched above parity against the greenback. Tourism-reliant businesses will no doubt continue to experience challenging operating conditions but they will need to focus on tapping the opportunities presented by rising income levels through Asia. Almost 700,000 Chinese tourists (including Hong Kong) visited Australia over the past year, up almost 17 per cent over the year.

What is the importance of the economic data?
The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

The Australian Bureau of Statistics releases data on overseas arrivals and departures is produced monthly and is an indicator of the health of the tourism sector. The figures are also useful in understanding spending trends and tracking migrant numbers – an indicator with widespread implications for employment, housing and spending.

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 latest NAB business survey certainly doesn’t look overly encouraging. However the recent interest rate cut should provide some degree of stimulus. Importantly it will take a lift in consumer confidence and resulting pickup in consumer spending to support the business sector.
Inflationary pressures are well and truly contained and if it was required the Reserve Bank certainly has the scope to cut interest rates and support activity levels over coming months. The global environment particularly Europe will be a key factor in deciding the timing of the next rate cut.

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• The NAB business confidence index rose from -2.7 to +4.0 in January. The business conditions index slumped from +5.8 in December to -5.8 in January. Excluding Queensland the confidence reading rose by 2 points to +3.0, while conditions fell by 10 points to -1.0.
• Forward looking sub-indices remained decidedly weak despite modest improvements. Profits fell sharply, employment recorded a modest fall and the pace of contraction in new orders increased.
• Migration slumps to 34-year low. Net migation (permanent and long-term arrivals less departures) slumped to just 1,650 people in December – the lowest monthly result since June 1976.

What does it all mean?

• The latest NAB business survey reinforces the view that corporate Australia is remaining on the sidelines. The weakness in consumer spending, a slowdown in housing construction, and the multiple interest rate hikes of last year have all taken their toll on business confidence and conditions. Added to this, the devastating floods have robbed businesses of much needed optimism at a time of sluggish activity. In fact business conditions have now fallen to the weakest levels in just shy of two years.
• It’s important to highlight that the survey was conducted from 22 January – 2 February, effectively just under a fortnight after the December survey. And the resulting slide between the two results clearly highlights just how much of a devastating impact the floods have had on business conditions.
• More concerning is the added weakness in forward looking indicators. Business owners continue to trim future orders, while profitability has slumped to the weakest levels in 22 months. Given that retailers are aggressively discounting, borrowing costs are rising, and the higher Aussie dollar is curbing manufacturing exports, it is likely that activity will remain subdued in the near term. The negative momentum is clearly worrying, meaning that the Reserve Bank could face an extended stay on the interest rate sidelines.
• It is not all bad news, especially given that rates are likely to remain on hold over the next couple of months. And once businesses and consumers focus on the rebuilding phase following the floods and cyclone, growth and activity should rebound quite dramatically – as the Reserve Bank pointed out in the Monetary Policy Statement released last week.
• Simply, it doesn’t make sense. The job market is super-tight and employers are crying out for skilled workers. But net migration in December was the lowest in over 34 years. Clearly migration intake targets will needed to be lifted markedly over 2011 if we want to complete all necessary projects – both the rebuilding and repair work in Queensland and Victoria as well as the raft of mining and energy projects. To meet the demand for workers, the government will clearly need to look overseas or risk forcing wages and prices up.

What do the figures show?

National Australia Bank Business Survey:

• The National Australia Bank business confidence index rose from -2.7 to +4.0 in January.
• The business conditions index fell from +5.8 to -5.8 in January.
• Excluding Queensland the confidence reading rose by 2 points to +3.0, while conditions fell by 10 points to -1.0.
• The index of trading conditions deteriorated, down from +8.7 to –7.0; profitability recorded a sharp fall from +2.6 to -10.0; employment fell from +5.1 to +0; and forward orders remained weak sliding from -2.6 to -4.8.
• The monthly reading of labour costs rose modestly from 0.8 per cent to 0.9 per cent in January. NAB noted that annual growth of labour costs stands at 3.8 per cent.
• Inflationary pressures are well contained. Retail prices were flat in January after rising at a 0.2 per cent quarterly rate in December. Purchase costs jumped by a 0.8 per cent quarterly rate, however the annual rate of increase edged lower from 2.0 per cent to 1.9 per cent.
• Capacity utilisation eased from 82.3 per cent to 80.5 per cent in January – below the decade average of 81.6 per cent and the weakest reading since September 2009.

Overseas arrivals/departures

• Net permanent and long-term arrivals to Australia fell to 205,900 people in calendar 2010, down 32.2 per cent or 97,730 people on a year ago. Departures from Australia rose by 38,520 while arrivals plunged by 59,210.
• The net number of permanent settlers entering Australia (arrivals less departures) stood at just 1,650 in December – the lowest monthly result in over 34 years.
• Tourist departures rose by 0.2 per cent in December to 603,800 after rising by 0.8 per cent in November. It was the third rise in departures in four months. Departures are up 10.4 per cent on a year ago.
• Tourist arrivals rose by 0.3 per cent in seasonally adjusted terms in December to 505,800 after lifting by 1.1 per cent in November. It was the fourth rise in arrivals in five months. Arrivals are up 4.2 per cent on a year ago.
• In seasonally adjusted the tourism deficit – the gap between departures and arrivals – stood at 98,000 in December, unchanged on November and below the record (34-year history) deficit of 125,900 in June.
• In trend terms, tourism arrivals have risen for the past eight months. Tourism departures fell 0.2 per cent in trend terms in December.

What is the importance of the economic data?

• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• The Australian Bureau of Statistics releases data on overseas arrivals and departures is produced monthly and is an indicator of the health of the tourism sector.

What are the implications for interest rates and investors?

• Looking forward, business confidence and conditions should improve to a modest degree as long as the Reserve Bank remains on the interest rate sidelines.
• The continued easing in migrant numbers must be addressed by Government or it will risk a lift in inflationary pressures. But the increase in short-term tourism arrivals is certainly encouraging when you
  consider the heady levels of the Aussie dollar

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• The NAB business confidence index fell from +6.2 to -2.7 in December – the weakest reading in 20 months. The business conditions index rose from +3.7 in November to +5.8 in December. Excluding Queensland the confidence reading fell to +1.0, while conditions rose to +9.0.
• Forward looking sub-indices remained decidedly weak despite modest improvements. Profits ticked marginally higher as did employment, however the pace of contraction in new orders increased.
• The Performance of Manufacturing index improved from 46.3 to 46.7 in January. Any reading above 50 means the manufacturing sector is expanding. Key sub-indexes were mostly weak with new orders, exports and employment still contracting.

What does it all mean?

• The latest NAB business survey highlights the inherent level of caution that is being shown by corporate Australia. Rapid fire rate hikes and the devastating floods have robbed businesses of much needed optimism. In fact business confidence has now fallen to the weakest levels in just shy of two years. It’s important to highlight that the survey was conducted from January 10-14, and as such the effect of the floods on the latest reading is likely to be more profound.
• Interestingly a record 58 per cent of businesses surveyed confirmed that they are not looking for additional finance at this time. The November rate hike is having a lasting impact given the additional increase in borrowing costs. Clearly until activity levels improve and growth picks up pace, businesses are likely to sit on the sidelines.
• More concerning is the added weakness in forward looking indicators. Business owners continue to trim future orders, while profitability is still relatively weak. Given that retailers are aggressively discounting, borrowing costs are rising, and the higher Aussie dollar is curbing manufacturing exports, it is likely that activity will remain subdued in the near term. The negative momentum is clearly worrying, meaning that the Reserve Bank could face an extended stay on the interest rate sidelines.

• It is not all bad news, business conditions have shown signs of improving, rising for the last couple of months – albeit it from a very low base. No doubt the fact that interest rates have been on hold for a couple of months has been helping sentiment. The rebuilding phase following the floods should also provide a degree of  stimulus and improve business conditions.
• The latest reading on the manufacturing sector highlights the lacklustre activity levels in the domestic economy. The manufacturing sector has now contracted for five consecutive months and is holding just shy of the one year low reached last month. In fact the key sub indices of new orders and exports put into perspective just how tough times are for the sector. New orders continue to contract while the higher Australian dollar is making exports less competitive on the global stage and keeping selling prices depressed – a concerning sign given the forward looking aspect of these indicators.
• Interestingly inventory levels have been run down to the lowest levels in 20 months. It may be that the reduction in production has been caused by the floods, resulting in businesses running down inventories. And it just might be what the manufacturing sector needs. An inventory rebuilding phase would need to take place, replenishing stockpiles and supporting activity in coming months.

What do the figures show?

National Australia Bank Business Survey:

• The National Australia Bank business confidence index fell from +6.2.to -2.7 in December – marking the weakest reading in 20 months.

• The business conditions index rose for only the second time in ten months, rising from +3.7 to +5.8 in December.
• Excluding Queensland the confidence reading fell to +1.0, while conditions rose to +9.0.
• The index of trading conditions improved, up from +4.1 to +8.7; profitability recorded a marginal improvement from +1.6 to +2.6; employment rose from +4.4 to +5.1; and forward orders remained weak sliding from -2.0 to -2.6.
• The monthly reading of labour costs fell from 1.1 per cent to 0.8 per cent in December. NAB noted that annual growth of labour costs stands at 4.2 per cent.
• Inflationary pressures are well contained. Retail prices rose at a 0.4 per cent annual rate in December. Purchase costs jumped by a 0.5 per cent quarterly rate, however the annual rate of increase edged lower to 2.0 per cent.
• Capacity utilisation rose from 80.9 per cent to 82.3 per cent in December – above the decade average of 81.6 per cent.

Performance of Manufacturing Index

• The Performance of Manufacturing index rose modestly from 46.3 to 46.7 in January, marking the fifth straight month that the PMI has been below 50, indicating that the manufacturing sector is contracting.
• Key activity components of the PMI were mostly weaker in December. New Orders recorded a modest improvement (despite still contracting), while production moved back into expansion territory. Employment still contracted however at a more modest pace.
• The production sub index rose 3.7 points to 50.3; new orders rose by 0.8 points to 45.1; the employment index rose 4.9 points to 44.1; exports rose by 0.3 points to 48.9; the index of selling prices rose modestly from 48.2 to 50.7, while input prices rose by 7.5 points to 71.2 and wages eased marginally.
• In seasonally adjusted terms just three of the 12 sectors recorded a decline in activity in January.

What is the importance of the economic data?

• The monthly Performance of Manufacturing Index is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• Looking forward, business confidence and conditions should improve to a modest degree as long as the Reserve Bank remains on the interest rate sidelines.
• Given the sustained contraction in the manufacturing sector and weakness in other indicators such as housing activity and business confidence, the Reserve Bank would be hard pressed to justify a near term rate hike, especially considering the tame inflation environment.

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