• Lending slumped in January. Total lending finance fell for the first time in the five months – down by 6.0 per cent in January. Lending totalled $52.6 billion in January, up 5.8 per cent over the year. Over the prior four months cumulative monthly gains in lending finance stood at 12.8 per cent.
• RBA Board on interest rate sidelines. The decision to leave interest rates on hold in March was due to an array of factors, however the key driver was the negative impact on the economy from the floods. The subdued level of consumer spending also provided Board members with further reason to hold off on near-term rate hikes.
• Australian new car sales recorded a modest 0.2 per cent rise in February.
• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 3.5 cents per litre to 142.7 cents a litre in the week to March 13 – a near 29 month high. Over the past month the national average price has lifted by 7.9 cents per litre.
• Brisbane has the highest petrol price across the capital cities, while Canberra is the lowest.
• The futures market has now priced in a 55 per cent chance of a rate cut at the April meeting in light of the Japanese nuclear crisis.

What does it all mean?

• Lending finance is a forward-looking indicator of economic activity – as any rise in borrowings will eventually translate to a pickup in spending and production. The floods are clearly complicating analysis of the lending data, but the continued softness of consumer borrowing remains a concern.
• In late 2010 there were tentative signs of thawing in the conservative attitudes of consumers and businesses. Lending finance had risen for four straight months prior to the sharp 6 per cent fall in January. The key issue going forward is: how long will the weakness last? Notwithstanding the floods, the Reserve Bank would clearly want to see some improvement in lending over February and March.
• The weakness in consumer borrowings is a major concern, especially given that personal finance has fallen for five out of the last seven months. CommSec expects the Reserve Bank is likely to stay on the interest rate sidelines – especially given that inflation looks to be well contained at present.

• The latest Reserve Bank Board minutes identified the Queensland floods as a key reason for interest rates remaining on hold in March. And as the Reserve Bank has noted on recent occasions, the lack of consumer activity is not all bad news – ensuring that inflationary pressures are contained in the near term. Even the recent slide in lending is unlikely to surprise the Reserve Bank, especially given that it was expecting growth to be sluggish in the first half of 2011.
• The minutes revealed that Board members were generally optimistic about the outlook, noting strength in business investment plans as well as the sustained improvement in labour market conditions. However given that interest rate were “mildly restrictive” – in other words acting to slow the Australian economy – a rate pause seemed the most logical outcome.
• After a modest pickup in activity in the mid part of 2010, car sales are now effectively going nowhere with more signs of buyer caution once again emerging. In annual terms vehicle sales are down almost 2 per cent on a year ago. The rate hikes of late last year are no doubt resulting in potential car buyers being more circumspect about future purchases. In fact in trend terms car sales have been broadly flat for the last ten months.
• What is required in the near term is for interest rates to remain on hold, allowing consumers and businesses to adjust to the higher interest rates now in place and, in turn, start spending again.
• Brisbane was hit hard by the floods and now it has the highest petrol price of any capital city. The lofty petrol price is clearly an impediment to economic recovery.

What do the figures show?

Lending Finance:

• Total new lending commitments (housing, personal, commercial and lease finance) fell by 6.0 per cent in January after rising 4.3 per cent in December. However over the prior four months lending was up a much healthier 12.8 per cent in cumulative terms. Lending totalled $52.6 billion in January, up 5.8 per cent over the year.
• All housing finance (owner occupier & commercial) fell by 4.8 per cent in January – the first fall in seven months.
• Commercial finance fell by 5.8 per cent in January. Within commercial commitments, fixed lending fell by 4.0 per cent while revolving credit slumped by 9.7 per cent. Commercial loans are up 13.9 per cent on a year ago.
• Personal finance fell by 9.5 per cent in January – marking the fifth fall in the past seven months. Within personal commitments, fixed lending fell by 4.5 per cent while revolving credit fell by 14.5 per cent. Personal loans are down 6.2 cent on a year ago.
• Lease finance fell by 1.3 per cent in January and loans are down 6.2 per cent over the year.

New car sales

• New car sales rose by 0.2 per cent in February after sliding by 2.4 per cent in January. Total car sales are down 1.5 per cent on a year ago.
• Passenger car sales fell by 2.7 per cent in the month, sports utility vehicles rose by 4.1 per cent while “other” vehicles (trucks, utes etc) were 4.2 per cent higher. In annual terms “other” vehicle sales were up 1.4 per cent on a year ago.
• In rolling annual terms, 236,260 SUV’s have been sold in the 12 months to February – the second highest reading on record. Overall SUV sales are up 4.6 per cent on a year ago.

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 3.5 cents a litre to 142.7 cents a litre in the week to March 13. The metropolitan price rose by 3.7 c/l to 142.8 c/l, while the regional average price rose by 3.3 c/l to 142.6 c/l.
• Average petrol prices across states over the past week were: Sydney (up 4.5 cents to 143.2 c/l), Melbourne (up 3.5 cents to 142.2 c/l), Brisbane (up 4.9 cents to 145.6 c/l), Adelaide (up 1.6 cents to 141.1 c/l), Perth (up 2.7 cents to 141.5 c/l), Darwin (up 1.3 cents to 144.4 c/l), Canberra (up 3.3 cents to 137.3 c/l) and Hobart (up 1.4 cents to 145.5 c/l).

Minutes from the March 2011 Reserve Bank Board meeting

Consumer spending

• Retail sales data had shown subdued spending in late 2010, including a small fall in real spending for the December quarter. Liaison with retailers had suggested some improvement in conditions in early 2011, with sales data for January released during the Board meeting showing moderate growth in the month. Consumer confidence had softened in early 2011 to be only modestly above average levels, although it was difficult to determine how much of this decline was due to the floods and the cyclone.

Business conditions

• Most business surveys showed a deterioration in current conditions in January, and there was a substantial reduction in hours worked in Queensland. However, business confidence in late January had bounced back after falling in the previous survey taken in early January.

Employment

• There had been another solid rise in employment in January, with the unemployment rate remaining at 5 per cent. Forward-looking indicators of employment from surveys and liaison pointed to solid employment growth over the coming year. Wage growth had picked up over the second half of 2010, with the quarterly outcomes for the wage price index back at around their average rate for the 2005–2007 period. Wage outcomes had been stronger in the mining sector.

The decision

• Interest rates on loans were slightly above average, a level reached after the monetary policy decision taken in November 2010. Members judged that this mildly restrictive stance of policy continued to be appropriate. The Board therefore decided to leave the cash rate unchanged.

What is the importance of the economic data?

• Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
• The Australian Bureau of Statistics (ABS) provides monthly estimates of car sales in seasonally adjusted and trend terms after receiving the actual sales data from the car industry. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

What are the implications for interest rates and investors?

• Overall the latest Board minutes suggest that the Reserve Bank has a degree of flexibility on the interest rate front. And while the near term domestic data looks patchy the Reserve Bank remains confident about the outlook.
• CommSec doesn’t expect a rate hike until at least May, however the risks are that the Reserve Bank will maintain stable rates for longer.
• Interestingly current futures market pricing indicates a 55 per cent chance of a rate cut at the April meeting in light of the Japanese nuclear crisis.

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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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• Australian new car sales recorded a modest fall in January. Car sales fell by 1.9 per cent in January – marking the biggest monthly fall in six months.
• Passenger car sales slumped by 3.9 per cent in the month, while sales of SUVs rose by 2.9 per cent. In annual terms total vehicle sales are down 3 per cent on a year ago.

What does it all mean?

• New vehicle sales are effectively tracking sideways. After going through a period of consolidation followed by a modest pickup in activity in the mid part of 2010, signs of buyer caution are once again emerging. In annual terms vehicle sales are down almost 3 per cent on a year ago. The rate hikes of late last year is no doubt resulting in potential car buyers being more circumspect about future purchases.
• Despite this month’s weakness, in a longer run sense passenger vehicle sales are generally going nowhere. In trend terms monthly growth has been hovering close to zero for the last nine months. Encouragingly the weakness in other vehicles sales seems to be moderating after considerable lack of activity last year.
• In annual terms vehicle sales are down almost 3 per cent on a year ago, and while activity levels are likely to be subdued in the near term it is important to highlight that the midterm outlook is much more favourable. The strength in labour market conditions will be a clear underlying driver of a pickup in new car sales. And more importantly the strength of the Australian dollar should ensure that car dealers are able to pass on more savings to consumers thus driving up sales.
• What is required in the near term is interest rates to remain on hold, allowing consumers and businesses to adjust to the rate hikes that have taken place and in turn start spending again. CommSec anticipates that rates will remain on hold until at least May.

What do the figures show?

New car sales

• New car sales fell by 1.9 per cent in January after rising by 1.0 per cent in December.
• Passenger car sales fell by 3.9 per cent in the month, sports utility vehicles rose by 2.9 per cent while “other” vehicles (trucks, utes etc) were 1.3 per cent lower. In annual terms “other” vehicle sales were down 9.7 per cent on a year ago.
• In rolling annual terms, 235,417 SUV’s have been sold in the 12 months to January – the second highest reading on record. Overall SUV sales are down just 0.1 per cent on a year ago.

What is the importance of the economic data?

• The Australian Bureau of Statistics (ABS) provides monthly estimates of car sales in seasonally adjusted and trend terms after receiving the actual sales data from the car industry. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

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The big picture

• China is now the second largest economy in the world. Australia ranks as 13th biggest. But Australia is regarded as an advanced economy whereas China is defined by the IMF as an “Emerging and Developing” economy. So what defines the level of advancement?
• Certainly there are many ways that can economies can be distinguished. The traditional way is to look at GDP per capita – that is, the size of the economy divided by the number of people in it. And on this measure the gap between Australia and China is huge. GDP per capita in Australia is estimated at US$54,869, compared with China at US$4,283. And that gap isn’t going to close any time soon.
• Other ways of distinguishing economies include social measures like education advancement. And comparisons can be made on consumer measures like the number of vehicles per head of population.
• In Australia, the latest motor vehicle census was published just a few days ago. The figures showed that Australia had 16.06 million motor vehicles as at March 2010, up 2.5 per cent over the previous year and a gain of just over 15 per cent over the past five years. The actual number of cars or passenger vehicles stood at 12.27 million while the remainder of vehicles included trucks, buses, motor cycles and vans.
• Interestingly, while population growth in Australia has been solid in recent years, the car population has actually increased at a faster rate. The Bureau of Statistics estimated that there were 721.1 motor vehicles per 1,000 people in Australia as at March 31 2010, up from 686.3 vehicles per 1,000 residents five years ago.
• The data on cars per head of population doesn’t get updated regularly across the globe. But the latest data showed the US out in front with 842 motor vehicles per 1,000 people. Based on the latest data, Australia would now be in second spot, up from fourth in the last survey.
• So where does China stand? Figures published for the 2008 year indicated that there were just 128 motor vehicles per 1,000 in China, which puts it level with countries such as Fiji and the Seychelles. But China is no doubt quickly moving up the league table.
• In 2010, a record 13.8 million cars were sold in China. When combined with trucks, buses etc, total vehicle purchases totalled 18.1 million units, up 32.4 per cent on a year ago. By comparison, there were 11.6 million vehicles sold in the US over 2010. While Chinese vehicle sales are tipped to slow in 2011, it will still retain its position as the biggest car buying nation.
• While China has passed the US as the largest car buying nation, it would need to purchase 50 million vehicles a year to be on level terms on a per capita basis. Clearly another reason to be positive on resource stocks.

The week ahead

• The job market and Aussie consumers will both feature in Australian economic data in the coming week. But in the US the economic cupboard is almost bare with the only data of note being released late in the coming week.
• The week kicks off with job advertisements, retail trade and the Performance of Construction index all to be released on Monday. In terms of job ads, the interesting result in December was the fact that the ANZ series rose but the Advantage internet index actually recorded the biggest drop since July 2009. The difference may prove more of a timing issue, but certainly business conditions have softened in recent months.
• Also on Monday we will finally see how retailers performed during the all-important Christmas trading period. We expect that retail trade rose by 0.5 per cent in December after a weak 0.3 per cent increase in November. But key complications to the forecast are the flooding across NSW and wet weather in Queensland which could lead to a softer result than currently expected. Over the December quarter retail sales may have fallen 0.5 per cent in inflation-adjusted terms, thus setting up a weak reading for economic growth (GDP).
• On Wednesday the Melbourne Institute and Westpac release the February consumer sentiment report. In January, confidence levels plunged almost six per cent as people dissected the latest news on the Queensland floods. Given that Cyclone Yasi is now in focus, there may not be too much short-term improvement in sentiment.
• On Thursday, the monthly employment data is released. The December figures were soft with only 2,300 new jobs created. But after solid gains in the previous six months, it may have just been a pause for breath. Certainly we believe that employment lifted again in January, rising by 25,000. And that should be enough to keep the unemployment rate around 5.0 per cent.
• And on Friday the Reserve Bank Governor will face his quarterly grilling by members of the Parliamentary Economics Committee. No doubt Glenn Stevens will get plenty of questions on the floods and how the Reserve Bank works out the impact on economic activity and inflation. There aren’t too many other ‘hot button’ issues that members will be looking to explore, but perhaps some will challenge the Reserve Bank’s constant focus on the terms of trade and its influence on the economy.
• In the US, a quiet week is in prospect. Figures on consumer credit are released on Monday together with the employment index. The usual weekly indicators will be issued – department store sales on Tuesday, mortgage refinancing on Wednesday and claims for unemployment insurance (jobless claims) on Thursday. Data on wholesale inventories and the Federal Budget are also released on Thursday with trade and consumer sentiment on Friday. Economists tip a modest widening of the trade deficit in December, up from US$38.3 billion to US$40.4 billion.
• A number of Federal Reserve presidents will also deliver speeches over the week. Richmond President, Jeffrey Lacker, fronts the podium on Tuesday together with Atlanta President Dennis Lockhart and Dallas President, Richard Fisher. On Wednesday and Thursday, Dennis Lockhart will also deliver speeches.

Sharemarket

• The Australian profit-reporting season gets into full swing in the coming week. Amongst those to report on Tuesday are Reckon, Cochlear, and JB Hi-Fi. Commonwealth Bank reports its half-year earnings on Wednesday together with Bradken, Stockland, OZ Minerals, Boral and Ansell. On Thursday Rio Tinto, Telstra, Transurban. Fosters, Cochlear and Alumina are scheduled to report, with Newcrest slated for Friday.
• It’s not hard to see why the Australian sharemarket has been treading water over the past few weeks – investors are nervous ahead of earnings season. A raft of companies have been lining up to downgrade profit expectations from consumer-focussed businesses, affected by weak consumer spending, to mining companies, affected by floods. Guidance is likely to be super-cautious and many investors are content to sit on the sidelines for now.

Interest rates, currencies & commodities

• The Aussie dollar has clawed its way back up to parity with the greenback. Interestingly the Aussie is also near parity with the Canadian dollar, suggesting that there is a “Super Dollar’ relationship now between Australian, US and Canadian dollars. Our currency strategists continue to believe that the Aussie will climb its way back to around US$1.02 by the end of the March quarter before easing through to the end of the year. The US economy is expected to gather momentum throughout 2011 with talk of higher interest rates in the second half providing support to the greenback. By the end of 2011, our strategists believe that the Aussie will be around US92c.
• The Reserve Bank Board meeting has come and gone and interest rate expectations have not shifted. Financial markets still believe there is an outside chance of a rate cut in the next three months with a rate hike gradually being priced in to the second half of the year. And remarkably, while economists tip two or three 25 basis point rate hikes by end year, financial markets still don’t have one move fully priced in.
• The CRB futures commodities index hit 28-month highs on Tuesday, fully reversing all the weakness that accompanied the global financial crisis. In July 2008 the CRB futures index hit a record high of 473.52. From there, it was basically all down-hill, retreating to 200.34 in early March 2009. Since those lows, the CRB has rebounded by 70 per cent.

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• Motorists need to prepare for higher petrol prices. The terminal gate or wholesale price of petrol leapt by over 2 cents a litre last week to 26-month highs. CommSec expects petrol prices to rise 3 cents a litre over the coming fortnight.
• Inflation is under control. The TD Securities-Melbourne Institute monthly inflation gauge rose by just 0.2 per cent in December. Excluding volatile items, prices were flat – the fifth straight month of negligible growth.
• Lending rose in November. Total lending finance rose for the third consecutive month up by 1.7 per cent in November. Lending totalled $53.2 billion in November, up 4.4 per cent over the year but up a much healthier 7.7 per cent in the past three months.
• Australian new car sales recorded a healthy rise in December. Car sales rose by 0.8 per cent in December after a 0.5 per cent rise in November. Passenger car sales rose by 4.8 per cent in the month.

What does it all mean?

• Motorists need to prepare for higher petrol prices over the next fortnight. The wholesale price of petrol leapt by almost two cents a litre last week and more than likely the higher cost will be passed through to motorists over the next 7-10 days.
• Not only has the wholesale price continued to rise but increased competition has resulted in petrol retailers selling fuel in some states at or near cost – which is clearly a unsustainable scenario in the longer term. Even on the world stage the Singapore unleaded price is holding just shy of the 27-month highs reached last week. And looking forward the fortunes of the Australian dollar will determine by just what magnitude petrol prices will rise.
• The latest TD inflation gauge suggests that inflation remains well and truly under control at present. In December price rose by just a 0.2 per cent rise. And while the annualised rate of inflation is holding at a seemingly unhealthy 3.8 per cent it is largely a reflection of higher readings in the latter part of 2009 and early 2010 than what is taking place now. In fact over the past six months inflation has been negligible and the annualised result is holding at a more sedate level of 2.6 per cent.

• Strip out volatile elements like fruit and vegetable prices, and petrol and inflation is largely non-existent in Australia. But that is no surprise – retailers of all descriptions have been telling us that is the case for some time. In the current environment businesses are trimming prices to get people to part with their cash, while the strength of the Australian dollar is working at keeping imported inflation low. Once volatile items are excluded, inflation has hardly budged over the past five months, and even the three month annualised rate of inflation is amazingly just 0.1 per cent.
• Looking forward the increase in global oil prices is likely to have a feed through effect on the inflation front. However there is not a lot that the Reserve Bank can do about changes at the petrol bowser or the floods in Queensland – a key driver of changes in fruit and vegetable prices. If underlying inflationary pressures remain contained, then the Reserve Bank can stay on the sidelines until well into 2011.
• Lending finance is effectively a forward looking indicator of economic activity – given that any rise in borrowings will eventually translate to a pickup in spending and activity. And while the conservative attitudes of consumers and businesses have kept borrowings weak, there are signs that things are thawing. Lending finance has risen for the third straight month and in annual terms the growth rate is a much healthier 4.4 per cent – marking the best result in 14-months.
• The overall improvement in lending is only in its infancy, and given the November rate hike is yet to have a full impact on the economy, the argument for a period of interest rate stability remains the best outcome. The Reserve Bank would be best served by staying on the interest sidelines – especially given that inflation looks to be well contained at present.
• The latest result on car sales is certainly encouraging, even more so given the surge in sales of passenger cars over the month of December. In seasonally adjusted terms passenger car sales recorded the best monthly increase in eight months. No doubt the strength in the labour market is the clear underlying driver in the pickup in activity. With a sustained increase in employment and resulting improvement in job security, households are once again tentatively spending on big ticket items.

What do the figures show?

Inflation gauge:

• The monthly inflation gauge rose by 0.2 per cent in December after lifting by 0.4 per cent in November. The annual rate of inflation eased from 3.9 per cent to 3.8 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the inflation gauge remained unchanged after rising by 0.1 per cent in November. The annual rate of core inflation fell from 3.2 per cent to 3.0 per cent. The three-month annualised rate of inflation eased from 0.7 per cent to just 0.1 per cent.
• The trimmed mean inflation measure rose by 0.3 per cent in December. The trimmed mean measure is up 3.2 per cent on a year ago while the three-month annualised rate rose from 1.9 per cent to 2.8 per cent.
• TD Securities noted that “Contributing most to the overall change in December were price rises for automotive fuel, fruit and vegetables, and holiday travel and accommodation. These were offset by falls in prices for audio, visual and computing, sport and other recreation, and books, newspapers and magazines. The automotive fuel price increased by 4.7 per cent in December, and while the price of rent was unchanged in the month, annual rent inflation rose to 2.3 per cent, the highest reading since May 2009.”

Petrol prices:

• The national average wholesale (terminal gate) price hit a near 26-month low high of 125.5 cents a litre today. Over the past week the terminal gate price has risen by 2 cents a litre. Just over two months ago (October 1) the terminal gate price stood at an 11-month low of 111.6c/l.
• Last week, the key Singapore unleaded petrol price fell by US33 cents (0.3 per cent) to US$105.02 a barrel. And in Australian dollar terms the Singapore gasoline price fell by 66 cents (0.6 per cent) over the week to $105.40 a barrel.

Lending Finance:

• Total new lending commitments (housing, personal, commercial and lease finance) rose by 1.7 per cent in November after rising 3.3 per cent in October. Lending totalled $53.2 billion in November, up 4.4 per cent over the year but up a much healthier 7.7 per cent in the past three months.
• All housing finance (owner occupier & commercial) rose by 1.1 per cent in November, the third straight monthly gain.
• Commercial finance rose by 1.0 per cent in November. Within commercial commitments, fixed lending rose by just 3.8 per cent but revolving credit slumped by 4.9 per cent. Commercial loans are up 11.1 per cent on a year ago.
• Personal finance rose by 2.2 per cent in November, only the second rise in five months. Within personal commitments, fixed lending rose by 2.0 per cent while revolving credit rose by 2.5 per cent. Personal loans are up 9.2 per cent on a year ago.
• Within fixed lending, all categories are higher than a year ago except residential blocks of land (down 19.5 per cent).
• Lease finance rose by 0.5 per cent in November and loans are up 13.7 per cent over the year.

New car sales

• New car sales rose by 0.8 per cent in December after rising by 0.5 per cent in November.
• Passenger car sales rose by 4.8 per cent in the month, sports utility vehicles fell by 10.7 per cent while “other” vehicles (trucks, utes etc) were up 3.1 per cent. In annual terms “other” vehicle sales were down 24.8 per cent on a year ago.
• In rolling annual terms, 235,285 SUV’s have been sold in the 12 months to December. However SUV sales are down 7.6 per cent on a year ago.

What is the importance of the economic data?

• The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.
• Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. 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.
• The Australian Bureau of Statistics (ABS) provides monthly estimates of car sales in seasonally adjusted and trend terms after receiving the actual sales data from the car industry. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

What are the implications for interest rates and investors?

• Inflation is under control at present but some of the volatile elements like petrol and fruit and vegetable prices are starting to move higher. This complicates the situation for the Reserve Bank. While the Reserve Bank can’t lift rates to respond to factors outside its control, the risk is that higher inflation may become entrenched, with businesses using the higher inflation base to justify price increases.
• The lift in the price of petrol is further bad news for motorists, taking precious spending dollars out of consumer pockets. Retailers already have to contend with the effects of La Nina on seasonal spending, consumer conservatism and higher utility prices.

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• In December, 86,587 vehicles were sold, down by 2.4 per cent compared with a year ago. In seasonally adjusted terms CommSec estimates that sales rose by 1.5 per cent in the month
• Over the year to December 235,285 four-wheel drive vehicles were sold – up 25 per cent on a year ago.

What does it all mean?

• The latest data on car sales is certainly encouraging. Over 86,000 vehicles were sold in December, however the substantial improvement in passenger vehicle sales is what really stands out. In original terms over 51,000 passenger vehicles were sold – marking the best result in six months.
• The strength in the labour market is the clear underlying driver in the pickup in activity. With a sustained increase in employment and resulting improvement in job security, households are once again tentatively spending on big ticket items.
• Interestingly Australia’s love-affair with the four-wheel drive vehicle is far from over. Not only are annual sales just shy of record highs but 4WDs also represent more than one in four cars/4WDs sold each month.

What do the figures show?

Car sales:

• The Federal Chamber of Automotive Industries reported that 86,587 new cars were sold in December, down 2.4 per cent on a year ago. Passenger car sales were up 9.5 per cent on a year ago, 4WDs were down 5.4 per cent and “other vehicles” (trucks, utes etc) were down 24.4 per cent.
• Over the past twelve months, 1,035,574 new cars were sold, up 10.5 per cent on a year ago and marking the second best year on record. Over the year to December, 235,285 four-wheel drive vehicles were sold, easing from the record high of 236,346 vehicles sold in the year to November.
• CommSec estimates that in seasonally adjusted terms car sales rose 1.5 per cent in December.

What is the importance of the economic data?

• 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 tentative pickup in consumer spending patterns is still in its infancy and can easily evaporate if interest rates are raised too quickly.
• Until a sustained increase in activity takes place, profitmargins at retailers will remain under downward pressure.
• A period of interest rate stability together with the continued improvement in labour market are the key planks of support for retailers.

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• The services sector is going backwards. The Performance of Services index fell from 50.7 to 46.2 in November. Any reading below 50 suggests that the services sector is contracting. The services sector has contacted in nine of the past 11 months in 2010.
• New vehicles sales rose in November. There were 87,342 new motor vehicles sold in November, up 1.8 per cent on a year ago. Sales of four-wheel drive vehicles hit record highs over the past year.
• Car affordability is close to the best levels in 34 years. CommSec estimates that it takes the average worker just over 31 weeks of wages to buy a new Ford Falcon.
• CommSec has estimated that vehicle sales rose 1 per cent in seasonally adjusted terms in November after falling by 0.6 per cent in October.

What does it all mean?

• Had it not been for a modest lift in car sales, economic data over the past few days would have been uniformly dreadful. And while we estimate that car sales rose in seasonally adjusted terms in November, the gain was modest with an estimated lift in sales of around one per cent.
• Certainly the services sector is depressed, impacted by higher interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses. The Reserve Bank has a habit of applying one too many rate hikes, and that appears the case with the decision to lift rates in November.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Input costs jumped sharply in November but the reading of selling prices actually fell. 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 until mid 2011, consumers may be tempted to open their wallets again.
• The car market is in reasonable shape. While sales are rising, the gains remain quite modest as savvy consumers and businesses weigh up their options.
• Clearly Australia’s love affair with the four-wheel drive shows no signs of ending. One in every four vehicles sold is a 4WD vehicle and that ratio could lift to one in three over 2011. The usual deterrent of 4WD purchases is the rising cost of fuel but petrol prices have actually been reasonably flat over 2010. And Aussies just love the versatility of the four-wheel drive or sports utility vehicle.

What do the figures show?

Performance of Services index

The Performance of Services index fell from 50.7 to 46.2 in November. It was the ninth time in the past 11 months that the PSI has been below 50. Any reading below 50 indicates a contraction of activity.

The property and business sector was the only one of the nine sectors to record growth (reading above 50) in the latest month.

Sales, orders and employment all fell in the month with each now below 50, suggesting weakening activity. In fact only input prices and wages have index readings above 50.

Profitability is clearly under pressure with the index of selling prices falling 1.6 points to 49.0 and input prices up 4.3 points to 64.4.

New vehicle sales

The Federal Chamber of Automotive Industries reported that 87,342 new motor vehicles were sold in November, up 1.8 per cent on a year ago. Passenger car sales were up 5.0 per cent on a year ago, 4WDs were up 13.3 per cent, heavy commercial vehicles were up 6.2 per cent but light commercial vehicle sales were down 18.9 per cent. ·  Over the past twelve months, 1,037,695 new vehicles were sold – the highest annual total in 25 months – but still below the record high of 1,068,301 vehicle sales in the year to June 2008.

CommSec estimates that vehicle sales rose 1 per cent in November in seasonally adjusted terms – the third modest gain in four months.

Over the year to November a record 236,346 four-wheel drive vehicles were sold, accounting for a record 28.7 per cent of all combined passenger and 4WD vehicle sales.

CommSec estimates that car affordability is close to the best levels since the 1970s. It takes someone earning the average wage just over 31 weeks of wages to buy a new Ford Falcon. Five years ago, the average worker would have needed to work an extra month to afford the same car.

What is the importance of the economic data?

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.

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?

Overly optimistic analysts have some soul searching to do. Retail spending is slumping, the services, manufacturing and construction sectors are going backwards and the non-farm economy actually contracted in the September quarter. The mining sector is not coming to the rescue of retailers or builders – for that we have to rely on a period of stable interest rates to allow some positive momentum to take hold.

The car market is in reasonable shape, but we can’t say the same for many other businesses that are reliant on consumer spending. Holding in the car market’s favour are lower prices, serving as an attractive inducement to car buyers.

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Consumer sentiment; New car sales; Dwelling starts

• The Westpac/Melbourne Institute index of consumer confidence eased in the latest month. The index fell by 5.0 per cent to a three-month low of 113.2 in September. Aussie consumers believe that bank deposits are the wisest place for savings (30.7 per cent of respondents), followed by paying debt (21.0 per cent).
• Australian new car sales rose for the first time in four months, up by 0.3 per cent in August after a 2.6 per cent fall in July. Passenger car sales fell for the fourth straight month, down by 0.2 per cent in August.
• Sales of SUV’s eased by 2.1 per cent in August. However over the past year more than 225,000 SUV have been sold – the best result in records going back 16 years.
• Australian dwelling starts have risen for the fourth straight quarter, lifting by 0.8 per cent in the June quarter. The lift in dwelling starts was dominated by the public sector, rising by 3.9 per cent, while private sector starts rose by only 0.4 per cent. In the June quarter, starts rose in only three of the eight states and territories.
• In seasonally adjusted terms work started on 44,899 dwellings in the quarter – the biggest quarterly result in six years

Click here to download the document (pdf)

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