Chinese Economic data

• Chinese industrial production rose at an 8.8 per cent annual rate in May, in line with forecasts and up from 8.7 per cent in April. In the month, industrial production lifted by 0.71 per cent in May, up from 0.70 per cent growth in April.
• Chinese retail sales rose at a 12.5 per cent annual rate in May, above forecasts (12.1 per cent) and above the 11.9 per cent annual growth in April. It was the fastest annual growth in retail sales for four months. In the month retail sales grew by 1.16 per cent, up from the 0.82 per cent gain in April.
• Fixed asset investment rose at a 17.2 per cent annual rate in the five months to May, above the forecast average (17.1 per cent).

What does it all mean?

• The latest Chinese economic data is encouraging. Figures largely beat expectations, especially money and lending indicators. Growth rates are settling at lower levels than a few years ago but that was always going to happen in a bigger, more developed economy.
• The second largest economy in the world is producing annual growth rates near 12 per cent for retail sales, 9 per cent for production and 17 per cent for investment. Whichever way you cut it, these are solid growth rates, even though they have eased in recent years.
• Observers in other parts of the world should take the view that the Chinese economy continues to expand at a healthy pace and that the outlook remains positive.

 What does the data show?

Chinese economic data

• Retail sales rose at a 12.5 per cent annual rate in May, above forecasts (12.1 per cent) and up from the 11.9 per cent annual rate in April.
• It was the fastest annual growth in retail sales for four months. In the month retail sales grew by 1.16 per cent, up from the 0.82 per cent gain in April.
• Spending on jewellery was down 12.1 per cent over the year with household equipment & audio visual equipment up 6.6 per cent and car sales up 7.6 per cent. At the other end of the scale, communications equipment rose by 25.3 per cent in the year to May with construction and decorating materials up 16.8 per cent and furniture up 15.1 per cent.
• Industrial production rose at an 8.8 per cent annual rate in May, in line with forecasts and up from the 8.7 per cent annual rate in April. In the month, industrial production lifted by 0.71 per cent in May, up from 0.70 per cent growth in April.
• Pharmaceutical manufacturing rose 14.9 per cent over the year with non-ferrous metal smelting up 14.2 per cent and Railroad, marine, aerospace and other transportation equipment manufacturing was up 14.1 per cent. Crude steel rose by just 2.6 per cent with pig iron up 0.2 per cent, crude oil up 0.2 per cent and coke down 3.1 per cent.
• Urban investment rose at a 17.2 per cent annual rate in the five months to May, above the forecast average (17.1 per cent). Primary industry investment rose by 20.8 per cent over the period with secondary industry up 14 per cent and tertiary industry up 19.5 per cent.
• Civil (private) fixed asset investment was up by 19.9 per cent in the five months to May compared with a year ago, down from 20.4 per cent in the first four months.
• Real estate investment was up by 14.7 per cent in the five months to May compared with a year ago, down from 16.4 per cent in the first four months. Residential investment rose by 14.6 per cent; office rose 16.2 per cent; and commercial space rose by 23.6 per cent.
• The M2 money supply was up by 13.4 per cent in May on a year ago with outstanding loan growth up 13.9 per cent and new Yuan loans totalled 870.8 billion Yuan in May, up from 774.7 billion Yuan in April.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy
• The latest data have no implications for monetary policy in Australia.
• Credit and money supply measures indicate that there is healthy support for activity to continue at close to current growth rates.

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy

What are the implications for interest rates and investors?

•  The latest data have no implications for monetary policy in Australia.
• Credit and money supply measures indicate that there is healthy support for activity to continue at close to current growth rates.

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• Emerging market worries and no signs that the Fed is too concerned as it announced a further tapering of its monetary stimulus program saw share markets remain under pressure over the last week with bonds benefitting from safe haven demand.
• Our assessment remains that last year’s strong gains and high levels of investor confidence had left share markets vulnerable to a correction and that emerging world worries helped provide the trigger. There are several points to note. First, the emerging market (EM) problems are consistent with a longer term deterioration in their relative outlook that reflects a combination of slowing productivity growth and political problems. The Fed’s taper has merely helped expose these problems rather than cause them.
• Second, while emerging country growth is likely to be slower than we have become used to – with rising interest rates in several countries not helping – a plunge into a 1997-98 style emerging market recession seems unlikely: much of the emerging world is in better shape than back then with less reliance on debt, current account surpluses, lower inflation and floating exchange rates. What’s more while its still a time to be cautious on emerging markets generally, some do offer good value – particularly the surplus countries like Korea and China.
• Thirdly, a downturn in the emerging world is unlikely to have a major impact on advanced countries. Historically EM crisis have not had a big impact on advanced countries, eg the Mexican crisis of 1994-95 had little impact on the US and nor did the 1997-98 Asian-emerging market crisis.
• For Australia, the key remains China and its growth outlook hasn’t changed that much, but the broader problems in the emerging world provide a reminder that growth in commodity demand in the years won’t be what we have become used to. Which all points to the need for continued low interest rates and a lower $A.
• Once the share market correction has run its course and investor sentiment readings have fallen back to less exuberant levels the bull market in shares is likely to resume.
• With January seeing share market falls of around 3%, its worth having a look at the so called January barometer again. This basically says that “as goes January for shares, so goes the year”, but its track record is messy. For the US S&P 500 there have been 22 positive Januarys since 1980 of which 19 saw positive years, indicating an 86% hit rate. But the hit rate for negative Januarys (of which there were 12 going on to negative years was only 42%. It’s the same for Australia – since 1980 there have been 20 positive Januarys for the All Ords index of which 15 saw positive years, giving a hit rate of 75%. But of the 14 negative Januarys since 1980 only 5 saw negative years resulting in a hit rate of 36%. The bottom line is that while a positive January augurs well for the rest of the year, the fact that January has been negative doesn’t tell us much at all. In both Australia and the US, January’s in 2003 and 2009 saw shares fall but both years had solid returns.
• Finally, the news wasn’t all bad over the last week with confirmation that US growth has picked up, strong US earnings results, a further rise in European confidence measures, more solid Japanese data including a further rise in inflation and a good pick up in Australian business conditions in December. So despite the emerging market woes and a rough patch in shares, the world is in reasonable shape.

Major global economic events and implications

• The Fed provided no surprises with another $US10bn reduction in its QE program and ongoing assurances that further tapering is data dependent and that rates will remain near zero for a long time. The Fed’s failure to mention the issues in the emerging world probably suggests it does not see it as a big problem.
• US economic data remained good. Home sales and durable goods orders fell but the first was affected by bad weather and the latter was distorted by aircraft orders. Meanwhile consumer confidence and house prices rose solidly and December quarter GDP growth was a solid 3.2% annualised with the highlight being strong growth in consumer spending and business investment. The overall impression is that US growth has picked up pace.
• US December quarter earnings continue to improve with now 80% of results beating earnings expectations and 66% exceeding sales expectations. It now looks like quite a good reporting season.
• Eurozone money supply and lending growth remained weak highlighting the case for more ECB stimulus, but against this bank lending standards eased a bit and consumer and business confidence continue to improve.
• Japanese data for December saw more evidence that Abenomics is working with strong household spending, lower unemployment, the jobs to applicant ratio at a new 6 year high, industrial production growing at 7.3% and a further rise in headline inflation to 1.6% year on year and 0.7% in terms of the core.
• A possible crisis of confidence in China’s wealth management funds was averted when investors in a fund that invested in a failed coal venture were bailed out. While concern may linger regarding such funds, this one was complicated by fraud so may be a special case. The fund’s name “Credit Equals Gold #1”!
• Finally, strong and better than expected growth data from Korea, Taiwan and the Philippines highlighted that many Asian countries are in good shape and a long way from any sort of Asian-emerging market crisis.

Australian economic events and implications

• Australian data was reasonable. Skilled job vacancies slipped in December and the Westpac leading indicator showed only weak growth. But against this business conditions improved solidly in December, new home sales held on to held on to the bulk of a big November gain and remain in a strong uptrend and credit growth picked up a notch. Finally producer price inflation remained benign at 0.2% month on month or 1.9% year on year.

Major market moves

• Share markets had another difficult weak as emerging market concerns lingered.
• Bond yields were flat to down helped by safe haven demand. Yields particularly fell in Spain and Italy, highlighting that they are well and truly off the radar screen as investor concerns.
• Commodity prices were mostly softer, but the $A had a bit of a bounce after the previous week’s fall.

What to watch over the next week?

• In the US, the big focus will be on the January payrolls report due Friday which is expected to show a recovery from December’s weather affected gain of just 74,000 jobs. Expect payrolls to gain 190,000 with unemployment remaining at 6.7%. In other data expect a slight fall back in the ISM manufacturing conditions index (Monday) to a still strong reading of 56 and a slight bounce in the services conditions ISM (Wednesday).
• In Europe, both the Bank of England and the ECB are likely to leave monetary policy unchanged on Thursday, but the ECB is likely to signal it retains an easing bias.
• In Australia, the Reserve Bank is expected to leave interest rates on hold for the fifth meeting in a row on Tuesday. Interest rates have already been cut to record lows, evidence continues to build that rate cuts are getting traction – with housing construction indicators up strongly, retail sales improving and consumer and business confidence up from their lows, the $A has continued to fall and inflation is running slightly higher than expected. While problems in the emerging world pose a threat it’s way too early to respond to this. Our assessment remains that the RBA would prefer to wait for the full impact of past rate cuts to flow through and is now more focussed on achieving and maintaining a lower level for the $A.  On the data front expect the trend in building approvals, house prices (both Monday) and retail sales (Thursday) to remain up in December.
• Australian December half 2013 earnings results will also start to flow. Consensus expectations are for 14% earnings growth in 2013-14 led by 35% growth in resources profits on the back of the lower $A and reduced capex and 8% growth for industrials, so earnings results should show signs of this turnaround starting to come through. Key themes are likely to be the benefits of the lower $A for miners and offshore earnings, early and tentative signs of top line revenue improvement, ongoing focus on cost control and solid dividend growth.

Outlook for markets

• Despite a poor start to the year, global shares are likely to push higher this year helped by reasonable valuations, improving earnings on the back of the global economic recovery and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. However, with shares no longer dirt cheap returns are likely to be a bit more constrained and volatile, and the current correction could go a bit further until investor confidence readings fall back a bit more.
• Despite a likely more volatile ride, Australian shares are expected to perform well as profits pick up and interest rates remain low. The ASX 200 is expected to rise to around 5800 by year end.
• Government bond yields are likely to continue their gradual upward trend as global growth improves and investors switch to risky assets. Cash and bank deposits offer pretty poor returns given low interest rates.
• The $A looks messy with Fed tapering, China/emerging market uncertainties and RBA jawboning all working against it right now. The break below December’s low of $US0.8820 also points lower – down to around $US0.85. The $A is likely ultimately on its way to around $US0.80 over the next few years.

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.

The post Weekly market & economic update – week ending 31 January, 2014 appeared first on AdviserVoice.

AMP announces its themes for 2014 for the Australian market.

As the country prepares to mark Australia Day, AMP Capital has identified the key themes investors in Aussie equities should celebrate and those they should look out for this year.

AMP Capital Co-Head of Fundamental Equities Michael Price said: “Australian equities are a key component of many investors’ portfolios and there are reasons for investors to be positive about the asset class this year. There are signs M&A activity is increasing in response to a rising market while housing construction is also recovering.

“On the flip side, investors should be aware mining capital expenditure is continuing to be rolled over and this may have an impact on the economy more broadly and companies that service major miners in particular. Australian retailers’ supply chain management will also be an issue to watch.

“Aussie equities are a popular investment because they offer the potential for capital growth and income, tax advantages such as franking credits and liquidity in a market most local investors understand and feel comfortable with. They are often the first choice for investors ready to return to financial markets at a time when share valuations are still reasonable.”

The key themes are:

The return of M&A activity

After three to four lean years, mergers and acquisitions (M&A) activity in Australia looks set to increase along with the local equity capital market (ECM). There is a healthy initial public offering pipeline in place for 2014 with signs suggesting the return of contestable M&A. Periods of rising M&A and ECM activity are typically associated with rising margins for those companies linked to such activity. With both rising revenues and improving margins, Australian companies linked to capital markets are set for a strong year in 2014.

Housing construction recovery

Interest rate cuts have taken longer than normal to trigger residential activity due to concerns among consumers around job security and a desire by households to pay down debt. But the pick-up in demand the Reserve Bank of Australia (RBA) has been looking for is finally occurring in a coordinated manner across Australia. House prices are rising, finance approvals are picking up and housing start numbers are at levels consistent with previous peaks. A significant increase in demand for products such as concrete, bricks, plasterboard, glass, steel and concrete roofing, combined with the high fixed-cost nature of building product manufacture, should ensure a housing construction recovery translates into a large leap in profit for most operators. An improving housing market should also support hardware and electronics retailers.

Retailers to face increased sourcing costs and scrutiny on supply chains

Australian retailers’ supply chain management and supplier factory standards will continue to be scrutinised this year and laggards might face brand damage. In addition to margin impact from potential weakness in the Aussie dollar, retailers’ margins could also be impacted by continued wage inflation in Asia, most notably in Bangladesh where minimum wage inflation has lagged China. Emerging sourcing locations, such as Cambodia, also pose brand and operating risks.

Australian mining capital expenditure to continue to roll over

Investors should be mindful of the decline of mining capital expenditure, which is likely to impact companies providing services to the major miners. Factors such as uncertain demand from China and a lower commodity price environment are resulting in project deferrals and cancellations, and the rolling over of mining capital expenditure. Current market forecasts for many of the companies providing services to the major miners, notably those exposed to iron ore mining capital expenditure, continue to look too high and further downgrades are expected during the next 12 months.

All eyes to China

AMP Capital’s view is that Chinese growth will be around 7.5 per cent this year but it is the composition of this growth that is of particular importance. For example, if investment as a percentage of GDP dropped from 50 per cent to 30 per cent it would have a much bigger impact on resources demand than a change in GDP growth from 8.0 per cent to 7.5 per cent. Demand for copper and steel are still high by traditional standards, driven by a similar set of end-use sectors: infrastructure, construction and manufacturing. However, investors shouldn’t necessarily expect more of the same in China. Credit growth has slowed considerably during the past two months and the government appears determined to tighten liquidity conditions this year and in particular the growth of the shadow banking sector. We should expect demand growth to weaken from credit intensive sectors later in the year especially sectors that are highly carbon intensive as environmental controls tighten.

LNG will be a focus

The most interesting development in the Australian energy markets will be the commencement of the huge Gladstone liquefied natural gas (LNG) projects. While this could be a boon to the Australian economy, there are a few things to consider. LNG from the east coast of Australia is sourced from coal seam gas, which carries higher operational costs and potentially lower profits meaning tax revenues from these projects may not be substantial for many years. Also, if the new volumes of LNG being sold were to buoy the terms of trade considerably as some expect, the Australian dollar could be more supported than the RBA would like, providing a conundrum for interest policy.

Executive remuneration and governance in the spotlight

A number of companies have received their first strike since the introduction of the ‘two strike’ rule and a continued focus on executive remuneration is likely in 2014. As a result, companies that continue to have remuneration structures poorly aligned with shareholders’ interest and/or poor disclosure on remuneration details as well as companies with poor overall governance structures might see significant ‘against’ votes in 2014.

The post Advance Australia (equities) Fair! Themes for investors in 2014 appeared first on AdviserVoice.

Dominic Rossi

Global stock markets had another stellar year in 2013 as the S&P 500 Index notched record after record. Investors are likely to remain well disposed to equities in 2014 due to the same underlying reason – the prospect of sustained economic progress in the US.

Indeed, the US economy is as healthy as it has been in the past 20 years thanks to the structural improvements in its fiscal and trade deficits. In 2009, the US fiscal deficit was 10% of GDP, or about US$1.5 trillion (A$1.7 trillion). By 2015, this shortfall is forecast to be only 3% of GDP, which is comparable to trend GDP growth and allows the US to stabilise its debt levels. For the first time in 30 years, the trade position has improved during a time of economic growth and the reason for that is shale energy. These narrowing deficits have helped to stabilise the US dollar, which is one of the reasons commodity prices and some emerging markets have been under pressure.

The rally in the US stock market has helped restore the confidence and net worth of consumers. One important point to recognise about the US stock market is that it is a source of economic strength as well as an outcome of it. A hefty chunk of US wealth is invested in the stock market and, despite wealth inequalities, a rising stock market helps the economy. We now have the prospect of the US economy growing at a sustainable 3% real rate in a low-inflation environment, which means the Federal Reserve can afford to prune, or taper, its asset buying. This is a broadly supportive environment for developed world equity markets.

A further rerating of equities is possible but there is less potential for earnings growth to take stock prices higher. The US is the place likely to deliver the best earnings growth, but generally stock prices will rise faster than profits. It follows that valuations would move higher and investors should be aware that there is some risk that equities could become expensive and prompt corrections.

Worrying Europe

While investors can expect the US economy to expand, nominal economic growth will remain low. As inflation is generally tame across major economic areas, the logic for tighter monetary policy is simply not there. Discussions about the rapid normalisation of rates appear overdone. Real interest rates are likely to remain negative for some time given the debt dynamics of developed economies. Public debt levels today are higher than they were in 2008 due to the transfer of debt from the private to the public sector.

Despite the pressing need, the tapering or the unwinding of quantitative-easing support will be a focus in 2014. Once tapering begins in the US, it will present a bigger challenge to Europe than it does to the US because of the deflationary dynamics in Europe. Given that the US labour force participation rate is historically low – having fallen to a 35-year low in 2013 – and real incomes are not growing in the US, there is little to prompt the Fed to taper. It would be best to see 3% growth and material improvements in employment before tapering begins.

Although we’ve seen some incipient signs of recovery in Europe, this should be viewed as a statistical event coming off extremely low levels of growth. There is little inventory in Europe, so even a slight shift in demand affects industrial production and growth. A modest cyclical improvement should not be confused with a structural recovery, as the preconditions are not yet in place for the latter to occur.

This broader structural adjustment process is expected to persist for another two or three years. While there has been some progress, such as with unit labour costs in the peripheral countries, it has come with high social costs and there is still the risk that Europe faces a deflationary future given government policies. An inflation rate of close to 0% is not inconceivable next year. Nominal economic growth could thus amount to around 1%. Given that 10-year government bonds are in the region of 4.1% in countries such as Italy, the debt problem is worsening. Countries need primary surpluses just to even out the compounding interest effects. This makes it hard for Europe to grow out of its debt problems. Investors can expect some form of debt default (via rescheduling or restructuring) sooner or later in the eurozone. The key weakness for Europe’s equity market remains an undercapitalised banking system exposed to peripheral sovereign debt risk. Our research shows that while the strong banks have become healthier, the weak banks are in worse shape.

The improvement in European equity markets seen thus far has been largely driven by rebounding or economically sensitive areas with low returns on equity such as Greek banks. This is not the kind of rally to get excited about. The euro at its current level also represents something of a headwind to further progress. Valuations remain attractive, however, and half of the stocks in the European market have a dividend yield above the yield on credit, where yields are close to historic lows.

The better placed

In Japan, investors are waiting for evidence of Prime Minister Shinzo Abe’s commitment to his third arrow of structural reform. The equity market in Japan tends to be policy driven. The first two arrows of Abe’s radical economic program – fiscal spending and monetary stimulus – should lead to faster in GDP growth in the next 12 months. Against this backdrop, there is room for Japanese equities to move higher. But whether this rally will turn into a multi-year bull market is another matter. Delivering on the third arrow is the key and this requires some bold policy adjustments. Japan’s long-term real growth rate will not increase unless the workforce expands or productivity improves. There are two routes to boosting the workforce; increasing female participation rates, or immigration; the latter is an unlikely option.

The stable-to-stronger US dollar is putting downward pressure on commodity prices and, by extension, some emerging markets. Emerging markets now require a more nuanced strategy that recognises the divergent drivers within the emerging world. From 2003 to 2007, the rising tide of China and the weaker US dollar/strong commodity prices lifted many emerging countries. We are in a different environment now where the underlying heterogeneity of emerging markets has reasserted itself. Some markets will stumble, some will thrive.

In my view, emerging markets must turn away from export-led economic models and embrace structural reform. Those that do, such as China, should do well while those that do not may face headwinds. It is clear that emerging markets can no longer rely on the benefits of a weak US dollar and elevated commodity prices.

In terms of risks, the evolution of the credit cycle in China is a worry given the lack of transparency surrounding the country’s financial system. It’s clear that credit creation in China has outpaced economic growth for some time and the country’s debt is now equal to about 200% of GDP. In a country that does not have mature western-style financial markets, the extent of the debt compared with the size and experience of the financial system is a concern. The question is how a country like this could deal with deleveraging. Ultimately, investors can expect a lower rate of economic growth in China due to these challenges.

Over the past decade, commodity-producing nations prospered and investors rerated sectors and stocks connected to hard assets such as metal miners and steel companies. At the same time, intangible assets were devalued. It’s likely that we will see a rerating of companies with intellectual property in healthcare, technology and finance. These sectors are the ones that will lead stock markets.

Within pharmaceuticals, for example, we are on the verge of major therapeutic breakthroughs in areas such as oncology. In IT, internet companies remain innovative and valuations look cheap. The telecoms sector looks likely to be the beneficiary of M&A activity, especially in Europe, where regulators may take a positive view of any consolidation that increases capital investment. Lastly, while regulatory pressures plague financial services, there is scope for valuations to re-rate from low levels over the next few years.

by Dominic Rossi, Global Chief Investment Officer, Equities at Fidelity

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• The past week saw a bit of nervousness in investment markets early on regarding the prospects for a Fed tapering in December, as the initial news from the 3^rd Plenum in China disappointed some and economic data was mixed. However, most share markets rose helped by dovish comments from Fed chair nominee Yellen.
• After a huge beat up, the vague nature of the communiqué from the 3rd Plenum in China disappointed some and this initially weighed on the Chinese share market. However, a leaked document to be formally released in the week ahead provided more details and a bit more confidence particularly in terms of faster progress in financial market liberalisation even though its suggests a less ambitious approach to reforming the imbalance between central and local government finances and to rural land ownership. What is clear though is that the focus of the Chinese leadership will be on reforms to allow market forces to play a more decisive role in the economy. However, the reform process will be gradual.
• In the US, fears of an imminent Fed tapering continue to wax and wane following the stronger than expected jobs report and comments from various Fed officials. But the key message seems to be that while tapering is likely to be discussed in December, it’s a long way from being a sure thing with voting Fed Presidents giving the impression that it’s too early and importantly vice-chair Yellen in testimony for her nomination hearing saying the economy is performing short of potential and needs to improve if the Fed is to reduce monetary stimulus. Yellen’s comments don’t preclude a tapering in December (as tapering could simply be offset by more dovish guidance on interest rates) but they do suggest that the probability of a December move is a bit less than 50/50. More broadly she sees the benefits of quantitative easing exceeding the costs, indicated little change in the approach the Fed has pursued under Bernanke and her testimony and the reaction of Senators to it suggests little risk she will not be confirmed.
• More broadly, Janet Yellen’s comments, combined with indications from both the ECB and the Bank of Japan, mean that global monetary conditions will remain very easy through next year. This along with still reasonable valuations and improving global growth means a very positive environment for shares.
• Australian politics descended into a bout of silliness with talk of a Government shutdown should the Federal debt ceiling not be increased. Some Australian politicians seem to be going through a bit of “me tooism” after the shutdown and debt default talk in the US. The bottom line is that whether the debt ceiling is raised to $400bn as the Opposition suggests for now or the $500bn the Government is demanding is on no consequence as Federal debt is only around $275bn at present and unlikely to reach the lower level of $400bn by 2016 or 2017. So forget the shutdown talk – it’s not going to happen. In fact it would make more sense to abolish the ceiling as it has no effect in terms of constraining debt anyway. The issue is a giant ho hum for financial markets.

Major global economic events and implications

• It was a light weak for US economic data but what was released was soft with a fall in small business optimism, a further decline in new mortgage applications a slightly worse than expected trade deficit and only a marginal fall in jobless claims. Good news from a major retailer about sales though helped boost confidence.
• The Eurozone economic recovery continued in the September quarter but only very slowly with a 0.1% quarterly rise after the 0.3% gain in the June quarter. Germany, Spain and Portugal grew slightly but France and Italy contracted slightly. Obviously this is not enough to deal with massive unemployment, high debt levels and falling inflation. Fortunately though the pick-up in business conditions PMIs and confidence measures seen over the last year points to further growth ahead and more monetary easing is likely on the way from the ECB.
• Japanese GDP growth slowed pretty much as expected in the September quarter to 0.5% quarter on quarter from 0.9% in the June quarter on the back of slower growth in consumption and investment. Leading indicators point to a rebound in the current quarter though. Other Japanese data was mixed with a slight fall in confidence and a tertiary activity index but a rising trend in machinery orders and falling bankruptcies.
• Another interest rate hike in Indonesia, along Indian data showing with much weaker than expected industrial production and 10% consumer price inflation highlighted the problems facing some key emerging countries.

Australian economic events and implications

• Australian economic data was mixed with a stronger than expected gain in housing finance, confirming that the housing recovery remains intact, and a rise in consumer confidence but a fall in the NAB’s measure of business confidence and very soft wages growth. Weakness in wages growth is to be expected given the soft labour market and as such is not surprising. What it does mean though is that there is no inflation pressure coming through from labour costs so it helps confirm that there is plenty of scope for a further rate cut if needed. But what is clear though is that the broad bounce in business and consumer confidence remains intact – the NAB measure remains well above recent lows – and construction finance and building approvals indicate the housing recovery includes an upswing in dwelling construction. As such we see the RBA remaining on hold.

Major market moves

• While share markets initially had some wobbles on the back of taper talk in the US and the vague communiqué from the Third Plenum in China they bounced back strongly after dovish comments from Fed chair nominee Yellen and as more details emerged regarding the Plenum. Most share markets saw solid gains, with Australian shares coming in little changed as falls in bank shares weighed a bit.
• Commodity prices were mostly a bit weaker, including the oil price which is being weighed down by increasing US supply. In fact the US produced more crude oil than it imported last month. Soft commodity prices weighed slightly on the $A.
• Bond yields rose in Australia but fell in the US and Europe on the back of Yellen’s dovish comments and mixed economic data.  

What to watch over the next week?

• In the US, attention will likely focus on the release of the minutes from the Fed’s October meeting (Wednesday) for further guidance on the chance of a December tapering. The trouble is that it is now very dated given dovish comments by various Fed officials, particularly by Janet Yellen. On the data front, expect a modest rise in the November NAHB home builders conditions index (Monday) as a result of the ending of the government shutdown, but the shutdown is likely to have weighed on October data due Wednesday for retail sales resulting in just a 0.1% gain and existing homes sales which are expected to have fallen slightly. The preliminary Markit PMI for November (Thursday) is also likely to show a post shutdown bounce. Meanwhile, expect the CPI (also Wednesday) to show inflation running at just 1.1% year on year.
• In the Eurozone the focus will likely be on preliminary November business conditions PMIs (Thursday) which are likely to show a continuing rising trend.
• China’s flash HSBC manufacturing conditions PMI (Thursday) is expected to show a stabilisation around the October reading of 50.9 consistent with continuing solid growth and details from the Plenum will also be scrutinised.
• In Australia, the minutes from the last RBA meeting (Tuesday) will likely confirm that it retains a mild easing bias and that its more concerned about the strong $A than rising house prices at this stage. Attention will focus on the minutes of the RBA’s monthly policy meeting (Tuesday). Speeches by Assistant Governor Debelle (Wednesday) and Governor Stevens (Thursday) will also be watched closely.

Outlook for markets

• After solid gains from early October lows and with technical and sentiment indicators a bit stretched a short term correction or consolidation in shares would not be surprising. However, the trend in shares is likely to remain up as valuations remain reasonable, monetary conditions are set to remain very easy and profits are likely to improve next year as global and Australian growth picks up. Australian shares remain on track to hit 5500 or even higher by year end, with a little help from a Santa rally.
• Government bond yields are likely in a gradual upwards trend as the global economy continues to pick up momentum and as Fed tapering eventually occurs. Low yields and an unwinding of years of massive inflows point to poor sovereign bond returns ahead. However, dovish forward guidance from central banks is likely to ensure the rising trend in yields remains very gradual.
• Expect the $A to be buffeted in the short term between signs Australian rates have bottomed and stable growth in China but talk of Fed tapering & RBA jawboning. The medium term trend in the $A is likely to remain down.

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.

The post Weekly market & economic update – 15 November 2013 appeared first on AdviserVoice.

Principal Global Investors released its monthly Central Bank Watch for August 2013.

Principal Global Investors yesterday released its monthly Central Bank Watch for August 2013.

Rates are expected to remain low throughout 2014 and the report suggests that the Australian economy could do with additional policy stimulus to address the risks posed by the slowing Chinese economy and the sluggish non-mining recovery.

The report includes the analysis of current monetary policy in the US, England, Europe, Japan and Canada.

To read the full report, click here.

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The Chinese economy grew at 7.5 per cent annual pace in the June quarter – in line with forecasts.The economy grew by 1.7 per cent in the June quarter, up from 1.6 per cent in the March quarter.

Retail trade rose at a 13.3 per cent annual rate in June – the best growth rate in five months. Industrial production rose by a smaller-than-expected 8.9 per cent annual rate in June.

Urban investment rose at a 20.1 per cent annual rate in the first six months of 2013, mildly below forecasts.

What does it all mean?

What do the figures show?

Chinese economic data

Why is the data important?

China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

The post CommSec: New data allays fears about Chinese economy appeared first on AdviserVoice.

What does it all mean?

The Reserve Bank Governor may be regarded as an optimist, but he is better regarded as a realist. His reading of latest economic evidence suggests that the Australian economy is in good shape, and he is keen that all Australians are made aware of the facts. The last few talks by the Reserve Bank Governor have been on the theme that Australians have become too gloomy:

“our domestic tendency towards the ‘glass half empty’ view”.

This is another talk on the same theme.

Pessimists have raised various issues from time to time. The Reserve Bank Governor has attempted to deal with these one by one, using facts rather than fallacies or fears to address the issues. Issues include the outlook for China, bank funding, dwelling prices, and the risk of another crisis. But he doesn’t just present the positive angle to the story but also addresses “what if” questions such as the response to a serious slump in China.

Whether you are pessimist or optimist, the Reserve Bank Governor’s speech is worth a read. In his usual impassioned and clinical way he addresses issues calmly and rationally. The overwhelming conclusion being that Australia is well placed to deal with any shocks.

The Reserve Bank Governor reportedly noted that policy settings are about right. While that doesn’t preclude a rate cut in August, the factors would need to present, such as further instability in Europe and a low domestic inflation result. CommSec is still pencilling in a rate cut over the next few months.

“The Lucky Country”

One point the Governor has sought to emphasise is that our good economic circumstances are not owed purely to luck. That is, we went into the crisis in good shape, with the flexibility to cut rates and with a solid financial system. In essence we made our own luck.

The Reserve Bank Governor also wanted to dispel myths about the Chinese economy. He noted that the recent slowdown was planned by the Chinese authorities and is very much just a cyclical slowdown, rather than something more long-term or structural.

“The data are quite consistent with Chinese growth in industrial output of something like 10 per cent, and GDP growth in the 7 to 8 per cent range.”

Governor Stevens also sought to dispel myths about Australia housing prices. Rather than being expensive, he believes that housing affordability is the best since 2002:

“Australian dwelling prices on a national basis have in fact declined and are now about where they were in 2002. That is, housing has become more ‘affordable’. Four or five years ago we supposedly had a housing affordability ‘crisis’. Now it seems that the problem some people fear is that of housing becoming even more affordable.” (his emphasis)

On the question of whether housing is over-valued, his arguments show that he isn’t convinced:

“But it has to be said that the housing market bubble, if that’s what it is, seems to be taking quite a long time to pop – if that’s what it is going to do. The ingredients we would look for as signalling an imminent crash seems, if anything, less in evidence now than five years ago.”

In terms of bank funding vulnerabilities, again the Reserve Bank Governor says there are grounds for optimism:

“A reasonable conclusion is that the degree of vulnerability to a global panic of any given magnitude appears to have diminished, rather than grown, over the past few years.”

The Governor has highlighted a number of developments that have worked to strengthen our economy:

“Some of the adjustments we have been seeing, as awkward as they might seem, are actually strengthening resilience to possible future shocks. Higher – more normal– rates of household saving, a more sober attitude towards debt, a re-orientation of banks’ funding, and a period of dwelling prices not moving much, come into this category.”

So what would happen if there was a slump in China? The following highlights the clinical way that the Governor addressed potential risks in the speech:

“If the thing that goes wrong is a serious slump in China’s economy, the Australian dollar would probably fall, which would provide expansionary impetus to the Australian economy. But more importantly, we could expect the Chinese authorities to respond with stimulatory policy measures. Even if one is concerned about the extent of problems that may lurk beneath the surface in China – say in the financial sector – it is not clear why we should assume that the capacity of the Chinese authorities to respond to them is seriously impaired. And in the final analysis, a serious deterioration in international economic conditions would still see Australia with scope to use macroeconomic policy, if needed, as long as inflation did not become a concern, which would be unlikely in the scenario in question.”

What are the implications for investors and interest rates?

The Reserve Bank’s Governor’s speech is designed to outline the facts rather than fallacies about Australia’s economic performance and the potential to handle future shocks. If businesses and consumers become more confident about Australia’s position, they will be more likely to get back to the business of spending, investing and employing.

The Reserve Bank Governor reportedly noted that policy settings are about right. While that doesn’t preclude a rate cut in August, the factors would need to present, such as further instability in Europe and a low domestic inflation result. CommSec is still pencilling in a rate cut over the next few months.

The Chinese purchasing managers’ index result is encouraging. The Chinese economy is lifting after the self-imposed slowdown. But more importantly authorities are well placed to provide stimulus to the economy with inflationary pressures now more settled and activity only recovering slowly at this stage.

25 July 2012

The post The truth about the economy & optimism on China appeared first on AdviserVoice.

• Chinese retail sales in April were up 14.1 per cent on a year ago (consensus 15.2 per cent); industrial production was up 9.3 per cent (consensus 12.0 per cent) – a near three-year low; and fixed asset investment over the first four months of 2012 was up by 20.2 per cent (consensus 20.5 per cent).
• The slower pace of growth combined with other data showing that inflation is in control gives Chinese authorities’ scope to ease bank reserve requirements.
• The Aussie dollar fell from US100.65c to US100.20c in response to the production and sales data. Our currency strategists believe the Aussie could ease to US98 cents in the next few months.

 What does it all mean?

• The continued easing of inflationary pressures and sluggish economic data keeps the door ajar for Chinese authorities to stimulate the economy. Consumer prices fell in the latest month while producer or business prices are lower than a year ago. In addition data on investment, production and retail sales were below market expectations.
• While the door is open for an easing of bank reserve requirements or lower interest rates, it is clear from the central bank’s quarterly report that it will weigh factors carefully before seeking to boost growth. The People’s Bank of China noted yesterday that “The overall price trend is falling, but it has not yet stabilized, and we need to closely watch the upside risk for prices in the future.” China hasn’t cut the bank reserve requirement since February.
• While it’s encouraging that the central bank wants to be respected for inflation-fighting credentials, at the same time there is the risk that policy could remain too tight for too long, putting at risk near term economic growth. Every central bank has to strike a balance between growth and inflation and China’s central bank is no different.
• CommSec expects China to ease bank reserve requirements in May, with a move possible as early as this weekend.
• Until China starts to ease monetary policy there will be downward pressure on the Australian dollar. In addition, investors will prefer defensive and high dividend paying stocks in Australia such as Telstra and major banks in preference to resource stocks.

 What do the figures show?

• The annual rate of consumer price inflation eased from 3.6 per cent to 3.4 per cent in April. Over the month prices fell by 0.1 per cent after rising by 0.2 per cent in March. Economists had tipped a 0.2 per cent fall in prices
• Food prices were up 7.0 per cent on a year ago (7.5 per cent in March), while non-food prices were up by 1.7 per cent on a year ago (1.8 per cent in March).
• Food prices plunged 0.9 per cent in the month while non-food prices rose by 0.3 per cent. Pork prices were up 5.2 per cent on a year ago, well down on the 56.7 per cent annual price increase in July last year.
• Producer prices (business inflation) fell by 0.7 per cent in the year to April (a 28-month low) after contracting 0.3 per cent in the year to March. Producer prices rose by 0.2 per cent in the month.
• Industrial output expanded at a 9.3 per cent annual pace in April, the slowest pace in 35 months and below forecasts centred on a result near 12.0 per cent.
• China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 20.2 per cent in the first four months of 2012, modestly below forecasts (20.5 per cent) and down from 20.9 per cent in the January-March period. Investment growth is the slowest in over 9 years (since December 2002).
• Retail sales grew at a 14.1 per cent annual rate in April, down from 15.2 per cent in March and below forecasts centred on 15.2 per cent annual growth.
• National real estate development investment rose at an 18.7 per cent annual pace in the first four months of 2012, down from 23.5 per cent in the March quarter.

Data released earlier

• China’s trade balance soared in April. The trade balance continued to expand, moving from a deficit of US$31.48 billion in February to a surplus of US$5.35 billion in March and to a surplus of US$18.4 billion in April. Economists had tipped a surplus of $8.5 billion in April. Exports were up 4.9 per cent on a year ago (consensus +8.5 per cent) while imports were up 0.3 per cent (consensus +11.0 per cent).

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around the middle of each month. Quarterly GDP data is released around the 16th of January, April, July and October. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• While the Chinese authorities have been successful in engineering an economic slowdown to weed out inflation pressures, now the real test has arrived. China’s central bank must determine the size and timing of economic stimulus to ensure the slowdown doesn’t turn into something more dramatic.
• An easing of bank reserve requirements over the weekend would be well regarded. But until the stimulus arrives, the Aussie dollar will remain under downward pressure and investors will be reluctant to embrace mining and energy shares. Our currency strategists have revised forecasts for the Aussie dollar, now believing that it could fall to US98 cents in the short term before lifting to US105 cents later in the year.
• A weaker Aussie dollar would prove beneficial for most Australian businesses. However if the Aussie falls sharply, it will reduce scope for the Reserve Bank to trim interest rates.

The post Door opens for Chinese stimulus appeared first on AdviserVoice.

• Retail sales in December were up 18.1 per cent on a year ago (consensus 17.2 per cent); industrial production was up 12.8 per cent (consensus 12.2 per cent); but fixed asset investment over 2011 was up by 23.8 per cent (consensus 24.1 per cent).
• Good news for Australia. The solid, sustainable rate of economic growth in China is clearly a good outcome for Australian raw material suppliers. The Aussie dollar held near US103.5 cents after the results while the sharemarket was up 54 points.

What does it all mean?

• Usually there are no significant surprises with Chinese economic data – results tend to come in broadly in line with economist forecasts. But not so this month, with most of the readings ahead of consensus estimates. Overall, the results indicate that the Chinese authorities have engineered a ‘soft landing’ with activity growing at a more sustainable rate and inflation on the way down.
• At first glance economic growth of 8.9 per cent hardly sounds like a ‘soft landing’. But when you consider that the economy had been growing at a near 12 per cent rate and that the long-term average growth rate is 9 per cent, the latest economic growth reading appears spot on.
• At the margin, the firmer-than-expected economic readings reduce the urgency for a significant easing of monetary policy. But as is the case here in Australia, policy certainly doesn’t need to be as restrictive, keeping the door open for a gradual lowering of bank reserve requirements.
• Some view the glass as ‘half-full’, others as ‘half-empty’. While the Chinese economy will likely slow further in 2012, it remains in strong shape and should be supported by judicious easing of monetary policy.
• You couldn’t have conjured up a better outcome for Australia. Our major trading partner is continuing to grow at a solid, sustainable rate and it is still poised to ease policy gently to maintain the current growth pace. Clearly there are challenges ahead but you would argue that both Australia and China are amongst the best placed economies to ride through challenging global conditions over the next few months.
• In commenting on the latest economic data, China’s statistical bureau chief was reported as saying that December quarter growth was “normal” but that growth was likely to ease further in coming quarters as the government tried to restructure the economy in favour of consumption rather than investment. The stats bureau chief was further quoted as saying that it will be difficult to maintain steady growth over 2012.

What do the figures show?

• The Chinese economy grew at an 8.9 per cent annual rate in the December quarter (consensus 8.7 per cent), down from 9.1 per cent in the previous quarter. In constant price terms the Chinese economy grew by 2.0 per cent in the December quarter, down from 2.3 per cent in the September quarter but in line with forecasts.
• Over 2011 consumption contributed 51.6 per cent to economic growth; investment contributed 54.6 per cent while net exports detracted 5.8 per cent from the growth pace.
• Industrial output expanded at a 12.8 per cent annual pace in December, up from 12.4 per cent in November and above forecasts centred on a result near 12.2 per cent. Production is still well off the highs of 20.7 per cent annual growth in January/February 2010.
• China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 23.8 per cent annual pace in 2011, modestly below forecasts (24.1 per cent) and down from 24.5 per cent in November.
• Retail sales grew at an 18.1 per cent annual rate in December, up from 17.3 per cent in November and above forecasts, centred on 17.2 per cent annual growth.
• China processed 39.23 million tonnes of crude oil in December (9.24 million barrels per day), beating the previous record in November.

What is the importance of the economic data?
China’s National Bureau of Statistics releases its monthly economic statistics around the middle of each month. Quarterly GDP data is released around the 16th of January, April, July and October. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• At face value the firmer-than-expected Chinese economic data may translate to less urgency to ease monetary policy in both China and Australia. However we believe that the case for an easing of policy remains, but it should be applied judiciously. CommSec expects the Reserve Bank to cut rates by 25 basis points in February, in part because lending rates are still modestly above the Bank’s favoured 15-year average. The People’s Bank of China is also likely to ease bank reserve requirements by 50 basis points to 20.5 per cent within the next fortnight, but wait to assess further data before moving again.
• The latest Chinese economic data is supportive for Australia’s mining, energy and agricultural sectors. The Chinese economy is arguably faring much better than many of the gloomier economists had expected. There are challenges ahead but China faces them from a position of strength.

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