Reserve Bank Governor Testimony

• The Reserve Bank Governor has delivered testimony to the House of Representatives Economics Committee.
• The Governor has delivered his clearest statement yet that the economy is lifting and the focus is now on ensuring that the inflation is contained, households don’t over borrow and, more importantly that growth is manageable.
• The clear sense from today’s testimony to the Parliamentary Economics Committee is that Reserve Bank officials are extremely comfortable with current settings. “We have signalled the likelihood, if the economy evolves more or less as expected, of a period of stability in the cash rate. As well as the low level of interest rates generally, a sense of stability should be of some help for businesses and households as they form their plans”.
• The tone and comments from the testimony is consistent with CommSec’s view that the cash rate will remain on hold until later in the year before lifting.

The post RBA Governor promotes interest rate stability appeared first on AdviserVoice.

• The wobbly start to the year for share markets continued over the past week. While the news out of Europe and the US was mostly good, a greater than expected fall in a Chinese manufacturing conditions PMI weighed globally along with worse than expected Australian inflation data locally. As a result global and Australian shares mostly fell and bond yields declined, particularly in the US. Globally, the biggest issue for investors in the short term remains a combination of profit taking after last year’s strong gains in share markets and high levels of investor sentiment that may need to be worked off a bit. But the fundamental outlook is fine.
• China was perhaps the biggest source of nervousness over the last week with various growth indicators showing a loss of momentum. GDP growth slowed to 7.7% in the December quarter, industrial production, retail sales and fixed asset investment also slowed a bit and the HSBC flash PMI for January slowed more than expected likely influenced by the slowdown in industrial production late last year. However, while uncertainty regarding China is high at present not helped by a lack of transparency from the People’s Bank of China regarding its periodic liquidity squeezes there are several reasons not to be too concerned. First, Chinese growth is still exceptionally strong, eg, GDP at +7.7% year on year, industrial production at +9.7% year on year and retail sales at +13.6% year on year. Second, the growth readings and the PMI have been bouncing around the same range for the last two years now and since growth is just above the Premier’s growth floor of 7% it would appear the Government is happy with this. Finally, there are no signs of the sort of excesses that normally presage a sharp collapse: inflation is low, the trade balance is in surplus, China is a global creditor, public debt is low by US, European, Japanese, Indian and Brazilian standards and property prices are up but not out of line with urban income growth which is running around 10% year on year.
• While Chinese growth scares may linger, it’s hard to see a hard landing and eventually investors will get used to circa 7.5% growth in China. With Chinese shares amongst the cheapest in the world (with a forward PE of 7.2 times), we continue to see good value there from a medium term perspective. Particularly so relative to say India which is trading at a circa 60% premium to China in terms of its PE ratio, but has much weaker growth and much higher inflation. Best to stay overweight China.
• In other news, the IMF followed the World Bank in revising up its global growth forecast for this year from 3.6% to 3.7%, after 3% growth in 2013. While the IMF is just playing catch up to what the economic indicators and share markets have been telling us, it is noteworthy that it’s the first time in several years that the IMF has started the year off with an upwards revision to its growth forecasts.
• The US Treasury provided a reminder the US debt ceiling needs to be increased, formally by February 7, but at the latest by end February after which the US Government will run out of money. While the usual brinkmanship can be expected, it’s virtually certain it will be raised again as Democrats and Republicans are in a temporary truce as highlighted by the bi-partisan budget deal to avert another Government shutdown, House Speaker Boehner has indicated he is determined to avoid default and given the mid-term elections it’s not in the Republican’s interest to get blamed for any crisis that would flow from default.

Major global economic events and implications

• US economic data was mixed with essentially flat jobless claims, a fall in the Markit manufacturing PMI albeit to a still reasonable 53.7 and a stronger than expected gain in existing home sales. The overall impression is that US growth has picked up pace to around 3% but is a long way from booming.
• While the headlines have been a bit messy, December earnings results in the US have improved over the last week with now 73% of results beating earnings expectations and 67% exceeding sales expectations. The consensus now estimates earnings growth for the quarter at 6.3%, which is up from 4.9% two weeks ago.
• While business conditions PMIs disappointed in China and a bit in the US too, this was not the case in the Eurozone where the composite PMI rose to its highest since June 2011 driven by both manufacturing and services and is now at a level consistent with quarterly GDP growth of around 0.4%, up from 0.1%.
• Reserve Bank of India proposals to introduce an inflation target of 4% are welcome given its chronic inflation problem, but concerns from the Finance Minister warn that it may not have Government support.

Australian economic events and implications

• Australian economic data was somewhat disappointing with a further fall back in consumer confidence and higher inflation. December quarter inflation, coming in at double consensus expectations with a 0.8% gain, or 2.7% for the year was disappointing, and substantially reduces the possibility of another interest rate cut. However, it’s not bad enough to bring on a rate hike either as inflation excluding volatile items (like fruit and vegetables) was just 0.6% quarter on quarter or 2.6% year on year, the big driver of inflation has been government decisions with government related prices and charges up 5.7% over the last year relative to private sector inflation of just 1.8% and finally there is no sign the economy is overheating warranting higher rates.
• Our view remains that the RBA will leave interest rates on hold for an extended period, ahead of a modest rate hike around September/October.

Major market moves

• Share markets mostly fell not helped by the weaker Chinese PMI.
• Bond yields mostly fell as share markets fell, except in Australia where higher inflation left them little changed.
• Commodity prices were mixed with higher gold and oil prices, but lower base metal prices on China worries.
• While the $A had a brief inflation inspired bounce, the weaker Chinese PMI meant it was short lived.

What to watch over the next week?

• In the US, the big focus will be the Federal Reserve which is expected to announce a further $US10bn tapering of its quantitative easing program on Wednesday, taking it from $US75bn a month to $US65bn. Recent US economic data provides confidence that the US economy is picking up pace in line with Fed expectations but with pockets of uncertainty remaining and inflation remaining very low there is no case to accelerate the pace of tapering. The Fed is expected to remind us that further tapering is conditional on sustained economic improvement and that rate hikes remain a long way off even though unemployment at 6.7% is approaching the Fed’s 6.5% threshold beyond which it would consider raising rates. It will also be the last meeting before Ben Bernanke hands over to Janet Yellen as Fed chair.
• On the US data front expect a slight fall in new home sales (Monday) but a continuing rise in house prices (Tuesday), a solid rise in durable goods orders (also Tuesday) and a 3% annualised gain in December quarter GDP data (Wednesday) driven by solid growth in consumption and investment and positive contribution from trade. US December quarter earnings results will continue to flow.
• In the Eurozone, business and consumer confidence data for January (Thursday) are expected to confirm the ongoing economic recovery. Unemployment (Friday) is expected to have remained at 12.1% in December and inflation is also likely to have remained below 1% in January (also due Friday).
• In China, the official PMI (Friday) is expected to fall a bit further consistent with the HSBC flash PMI.
• Japanese data due Friday is expected to show a pick-up in household spending, strong growth in industrial production, further labour market improvement and a further modest rise in core inflation.
• In Australia, the NAB’s business survey (Tuesday) is likely to show a further slip in confidence after its post-election bounce, new home sales (Thursday) are likely to be solid and credit growth (Friday) is likely to remain subdued. Export and import price data (Thursday) will likely to show a further fall in the terms of trade.

Outlook for markets

• Global shares are likely to push higher this year underpinned 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, particularly with investor sentiment at pretty high levels.
• Australian shares are likely 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. Cyclical shares like resources and industrials that underperformed over the last year are likely to outperform in 2014.
• 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 uncertainties and RBA jawboning all working against it. 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

————————–

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 January 24, 2014 appeared first on AdviserVoice.

• The past week was relatively quiet with the approaching deadline to avert a US government shutdown weighing on US shares but Australian shares managing their seventh straight week of gains reaching a new 5 year high.
• We are now coming up to crunch time in the US for Congressional negotiations regarding government funding and the debt ceiling and this is causing investor nervousness. A new funding resolution needs to be agreed by October 1 to avoid a government shutdown and the debt ceiling needs to be raised by mid to late October to avoid a partial US government default on its obligations. However, we have seen this movie before in 2011 and with the fiscal cliff and after the usual nerve wracking political argy bargy some sort of last minute deal is likely. With the US budget deficit having fallen to 4% of GDP (from a 2010 peak of above 10%) it’s harder for the Republicans to push too hard without risking causing a crisis that just alienates the public, which they probably don’t want to do ahead of mid-term elections next year. So the most likely outcome is that budget funding will be agreed at the last minute to avert a shutdown in the week ahead or if there is a shutdown it will be short lived. The debt ceiling negotiations are perhaps the bigger risk as President Obama is so far refusing to negotiate, with the Republicans thinking that he will in the end. So both sides could end up playing a game of chicken with the risk of a miscalculation. But here again the most likely outcome is a last minute deal, but it could get quite uncertain in the interim, which could unnerve share market investors. It’s interesting to note that past US government shutdowns, and there were 17 between 1976 and 1996 have had a mixed impact on markets. In fact the 32 day shutdown over late 1995 to early 1996 actually saw US shares gain 0.5%.
• With the dust settling from the German elections, the focus is now on Chancellor Merkel’s negotiations to form a coalition with the Social Democrat Party. Coalition governments are the norm in Germany so there is nothing to be alarmed about. A coalition with the SDP (or even the Greens) probably makes it easier at the margin for Merkel to agree to support peripheral Eurozone countries. Don’t expect a big change though. The failure of the anti Euro Alternative for Germany party to even gain a place in parliament highlights that Germans are happy with the Euro, and the stronger than expected support for Merkel in the elections highlights that they are happy with the way she has been dealing with things. So basically more of the same.

Major global economic events and implications

• US data was somewhat mixed, certainly not enough to raise market expectations for Fed tapering next month. On the soft side consumer confidence fell slightly in September as did the preliminary Markit manufacturing conditions PMI and pending home sales fell. Against this, durable goods orders for August remain consistent with a recovery in business investment, house prices continue to rise, new home sales rose strongly in August, new mortgage applications rose again and jobless claims fell.
• US June quarter data also highlighted the deleveraging that has occurred in the US. Total credit has fallen to 330% of GDP from a 2009 peak of 362% and this has largely been driven by sharp falls in the ratio of household debt to GDP (to 78% from a peak of 95%) and financial sector debt (to 84% from a peak of 119%). But even the public debt to GDP ratio has slowed to a crawl and even fell slightly last quarter from a peak of 90% of GDP thanks largely to reduced budget deficits. So the argument that the US has made no progress in reducing debt is nonsense. Household wealth is also up strongly providing a strong support to consumer spending.
• Eurozone business conditions PMIs confirmed that the recovery in Europe is continuing . Credit growth remains poor though, highlighting that the recovery is still gradual and in its early days.
• Japanese inflation of 0.9% year on year in August adds to confidence deflation is ending but it needs to broaden out as inflation ex food and energy is still -0.1% year on year.
• China’s HSBC manufacturing PMI rose more than expected  confirming that the soft patch in economic growth through the first half of the year is over.

Australian economic events and implications

• The RBA’s Financial Stability Review was generally positive with banks and businesses being seen as in good financial shape and households generally remaining cautious with little financial stress. Four things stood out though. First, the RBA appears to see the increase in bank dividends and high payout ratios as being consistent with Australian banks having capital ratios ahead of minimum requirements. Second, the RBA is reminding banks to maintain prudent lending standards. Third, while it does not appear to be alarmed by the hotting up residential property market yet it has started down a path of “jawboning” by warning buyers to have realistic price growth expectations. Finally, it has signalled it has concerns that recent changes to self-managed super fund rules allowing them to gear into property may make SMSF funds a vehicle for property speculation. However, this relates more to commercial property as this comprises 77% of SMSF direct property holdings.
• It was a light week on the data front in Australia with only job vacancies being released. While they rose 3.1% over the 3 months to August they are still down 20% year on year and indicate ongoing labour market softness.

Major market moves

• Share markets were mixed over the last week. Down in the US, Europe and parts of Asia with the US budget and debt debates not helping, but up slightly in Japan and Australia.
• Commodity prices fell slightly as the US dollar rose slightly and this saw the $A move down a bit
• Bond yields generally fell as mixed data saw reduced expectations for a Fed taper in October. They rose in Italy though as political uncertainty continued regarding Berlusconi’s party’s’ support for the Government.

What to watch over the next week?

• In the US, the main focus will be on the ISM manufacturing and services conditions indicators (which are due Tuesday and Thursday) and are likely to show that business conditions remain at solid levels and employment data (Friday) which are expected to show a gain of 180,000 jobs in September with the unemployment rate holding around 7.3%. Robust ISM indicators and stronger than expected jobs growth would likely boost speculation of a start to tapering when the Fed meets at the end of the month. A speech by Ben Bernanke on Wednesday will also be looked at for clues on this front.
• In Europe, the ECB is expected to leave monetary policy unchanged when it meets Wednesday, with Mario Draghi, expected to reiterate that it retains an easing bias.
• Japanese industrial production data for August (Monday) is expected to show a sharp rebound after July weakness and the Tankan business survey (Tuesday) is expected to show further improvement. Friday’s Bank of Japan meeting is expected to see no change in monetary policy with the recovery currently on track.
• In China, the official manufacturing conditions PMI for September (Tuesday) is expected to confirm the improvement in conditions already reported by the flash HSBC PMI.
• In Australia, the Reserve Bank (Tuesday) is expected to leave the cash rate unchanged at 2.5%. While the minutes from its last meeting indicated a clear easing bias, it has also reiterated that if there is to be another easing it’s not imminent. While the $A has had a bit of a bounce since the September meeting highlighting the case for another cut, working in the other direction are the continuing improvement in housing related indicators and the election related boost to consumer and business confidence. To help push the $A lower though, it would make sense for the RBA to reintroduce an explicit easing bias into its post meeting statement rather than risk confusing the market yet again as to whether it has one or not.
• On the data front in Australia expect credit growth (Monday) to have remained modest but with some signs of a pick-up in growth in housing credit, continued strength in house prices and a 0.3% gain in August retail sales (both Tuesday) and a rebound in August new home sales but a slight fall back in building approvals after a huge bounce in July (both Wednesday). Data for the trade balance and AIG PMIs will also be released.

Outlook for markets

• Shares are at risk of hitting a speed bump in the month ahead reflecting seasonal weakness and the threats posed by the US budget and debt ceiling negotiations and a return of Fed taper fears.
• However, any pullback is likely to be just another bull market correction which should be seen as a buying opportunity as the broad trend in shares remains up. Valuations remain reasonable, monetary conditions are set to remain easy, and profits are likely to improve next year as global and Australian growth picks up. So by year end we see further upside in global and Australian shares with gains continuing next year. Australian shares look they could hit 5500 by year end, with a little help from a Santa rally.
• Government bond yields are falling after having risen too far too fast, but are likely to resume a gradual upwards trend as the global economy continues to pick up momentum and as Fed tapering comes back into focus. Low yields and an unwinding of years of massive inflows point to poor sovereign bond returns ahead.
• The downtrend in the $A is likely to resume once extreme shorts have been squeezed out, tapering comes back into focus and as the RBA retains an easing bias.

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

—————————

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 27 September appeared first on AdviserVoice.

• While share markets mostly rose over the past week helped by a delay to action regarding Syria and on the back of more evidence that the global economy is improving, gains were limited as bond yields rose sharply as stronger US data fuelled expectations that the Fed will start to taper its monetary stimulus this month.
• In Australia, the focus in the week ahead will likely be on the aftermath of the Federal election which if the polls and betting agencies are correct will see a new Liberal/National government. Based on stated policies, key policy changes under a Coalition Government are likely to be the abolition of the mining and carbon taxes, reduced company tax but offset by a levy on large companies to pay for paid parental leave, a refocusing in government spending towards infrastructure, a delayed increase in the superannuation contribution, smaller government, a greater focus on returning the budget to surplus and a range of inquiries (including into the labour market and productivity) which will likely pave the way for less regulation and more economic reform. The likely change in Government towards what would appear to be a more business friendly approach will probably provide a boost to confidence and past experience points to a post-election bounce in shares. This has averaged 5.4% over three months for elections since 1983. However, much will depend on whether conservative forces gain control of the Senate – the prospect of a double dissolution election next year would not go down well – and how hard the new Government goes in cutting spending with an announcement on this front likely in November.
• While an attack on Syria has been delayed it still looks likely with a key US Senate committee approving it, on the grounds its limited and tailored and doesn’t involve troops on the ground. It now goes to a Congressional vote on September 9. As with all US led military interventions in the Middle East, the concern is that it will lead to a wider confrontation threatening oil supplies. Given this it wouldn’t be surprising to see further share market weakness and oil price strength in the run up to any strike, even though Syria only produces 300,000 barrels of oil a day. This is consistent with past experience which saw share market weakness/oil price strength in the run up to interventions followed by a recovery in share markets from around the time it commences. The 1991 Iraq invasion, the December 1998 bombing of Iraq, the March 2003 Iraq invasion and the March 2011 Libyan bombing saw US shares fall 5.6%, 3.5%, 14% and 6.3% respectively in the run up only to see the losses recovered within two months. A similar pattern could be expected this time around, particularly as it becomes clearer that any intervention will be limited and that surrounding countries are unlikely to become involved.

Major global economic events and implications

• US economic data was mostly positive, adding fuel to expectations that the Fed will soon start to slow its monetary stimulus. The ISM manufacturing conditions index improved further in August, the non-manufacturing ISM rose to its highest since 2005, labour market indicators improved, construction spending rose solidly and auto sales rose to their highest since 2007. However, higher mortgage rates and higher oil/gasoline prices are clearly a bit of a headwind for US growth and so if the Fed slows its monetary stimulus following its September 17-18 meeting, as appears likely, it may only cut it back by $10bn a day.  
• Final Eurozone business conditions PMIs confirmed the recovery already evident in the flash readings. As expected the ECB and the Bank of England left monetary policy unchanged but with the ECB retaining a dovish bias. Italy remains a risk point though with the threat remaining that members of Berlusconi’s party will withdraw support for the Government if Berlusconi is forced out of his Senate seat.
• In Japan, the Bank of Japan left monetary policy unchanged but Governor Kuroda made clear it can respond if a planned hike in the GST impacts growth. The Yen fell through 100 to the $US as a result.
• Chinese business conditions PMIs mostly improved in August or stayed around solid levels, adding to confidence that 7.5% growth remains on track for this year. House prices continued to rise in August but the new Chinese leadership seems to be less concerned about it, perhaps concluding that demand curbs are ineffective and the only solution is via increases to supply.

Australian economic events and implications

• In Australia, June quarter GDP data showed that growth remains sub-par at 0.6% quarter on quarter or 2.6% year on year, the same pace it has averaged since the June quarter 2012, reflecting soft consumer spending and investment. The bad news is that growth is below the pace necessary to stop unemployment rising, but the good news is that growth has not collapsed. Other indicators presented a soft picture as well with retail sales very weak, business conditions PMIs still soft and the trade balance back in deficit.
• However, there are some positive signs: house prices continue to rise, building approvals rebounded in July consistent with an ongoing recovery in dwelling construction, household savings remain high at 10.8% indicating a significant buffer in household budgeting, productivity growth is solid at 2.2% and inflationary pressures are weak with falling real unit labour costs and a benign reading on inflation from the latest TD Inflation Gauge.
• The RBA surprised no one in leaving interest rates on hold. What was surprising though was that its post meeting statement was virtually identical to that from last month leaving out yet again any explicit easing bias. As a result it has yet again missed an opportunity for a free kick in pushing the $A down. The risks still point down though for rates particularly if the $A holds up from here, economic data remains soft and the post-election Government embarks on more spending cuts.

Major market moves

• Share markets mostly rose on the back of good economic data and the delay to any attack on Syria, but with gains limited as Fed tapering looks likely this month. Australian and Japanese shares fell slightly.
• While the $A rose earlier in the week as the RBA left out any explicit easing bias from its post meeting statement and GDP growth was fractionally stronger than expected, its gains were limited as the $US strengthened.
• Bond yields rose sharply in most major countries, including Australia, as stronger US data fuelled expectations for Fed tapering. US and Australian ten year bond yields rose to their highest since 2011.

What to watch over the next week?

• Globally, Syria will probably be the big one to watch with the US Congressional vote on approving a US strike. Don’t expect much from the G20 leaders’ summit though, other than the usual hot air from such events – it’s unlikely to have any impact on what the Fed does or on what the US does regarding Syria.
• On the data front the focus is likely to be on China though with key activity data due Tuesday likely to show that the improvement in growth evident in July continued into August. In particular, growth in industrial production is likely to have continued to edge higher rising 9.9% year on year, up from a low of 8.9% in June. Meanwhile, inflation (Monday) is likely to show a slight moderation on the back of a fall in food prices.
• In the US, it’s a pretty quiet week till Friday when August retail sales are expected to show a 0.3% gain and producer price inflation data is expected to remain benign. Consumer confidence data will also be released.
• In Australia, the aftermath of the election will likely dominate. On the data front though it will be interesting to see whether the NAB business confidence survey (Tuesday) and the consumer sentiment survey (Wednesday) show an improvement on prospects for a change of Government. Odds are they probably will. Expect an ongoing rising trend to be evident in housing finance data (Monday) but another round of soft jobs data (Thursday) with employment likely to be flat and unemployment rising to 5.8% from 5.7%.

Outlook for markets

• Shares are vulnerable over the next month or so with various events and risks that could trigger investor nervousness including the Fed’s September meeting where it will likely start to taper its monetary stimulus, US Government funding and debt ceiling negotiations, the nomination of the next Federal Reserve chairperson, various imbalances in the emerging world, a likely military intervention in Syria, political instability in peripheral Eurozone countries and post-election fiscal tightening in Australia.
• However, a pullback should be seen as a buying opportunity as the broad trend in shares is likely to remain up: valuations are not dirt cheap but they are not expensive either; monetary conditions will remain very easy with interest rate hikes a long way off in the US and in other developed countries and interest rates still at risk of falling further in Australia; and the gradually strengthening global growth outlook points to stronger profits ahead. So by year end we see further upside in global and Australian shares.
• Despite the bond sell off so far this year, sovereign bond yields still remain low and point to low medium term returns from bonds as yields gradually adjust higher in response to the improving global growth outlook. An unwinding of years of massive inflows into bond funds though runs the risk of causing a more aggressive rise in bond yields and hence losses on sovereign bonds.
• With commodity prices in a downtrend and the Australian economy deteriorating versus the US, it’s likely the $A will fall further. Given its overvaluation in terms of relative prices and costs, expect the $A to fall to $US0.80.

————–

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 6 September appeared first on AdviserVoice.

• Share markets had another volatile week with concerns about a strike on Syria weighing on confidence, and emerging market assets, particularly currencies, coming under significant pressure.
• The concern in the run up to any US led military involvement in the Middle East is that it will lead to a wider confrontation threatening oil supplies. It’s no different in the case of Syria with worries that it may draw in Iran or Israel. So even though Syria is just a tiny oil producer (about 300,000 barrels a day) the talk of intervention has contributed to a small spike in oil prices and share market jitters. While such concerns invariably are not realised, past experience points to share market weakness/oil price strength in the run up to any intervention followed by a recovery in share markets from around the time it commences. The 1991 Iraq invasion, the December 1998 bombing of Iraq, the March 2003 Iraq invasion and the March 2011 Libyan bombing saw US shares fall 5.6%, 3.5%, 14% and 6.3% respectively in the run up to the events only to see the losses recovered within two months afterwards. I would expect a similar pattern this time around, particularly as it becomes clear that any intervention will be limited and that surrounding countries are unlikely to become involved.
• Meanwhile, the rout in emerging markets, and notably the currencies of India and Indonesia, continued with Fed taper fears combining with current account and budget imbalances to worry investors. Both Indonesia and Brazil hiked their benchmark interest rates again to combat inflation and support their currencies and this will only further weaken their growth outlook making them even less attractive to foreign investors in the short term. This problems in the emerging world look like having a way to run yet.
• More broadly, Syria and emerging world uncertainty has added to an already longish worry list for investors in the short term that includes the Fed’s taper decision, coming negotiations to fund the US Government and raise its debt ceiling, the nomination of the next Fed Chairperson, the German election, political instability in peripheral European countries and the prospect of a post election fiscal tightening in Australia. This vulnerability is enhanced because September is normally the weakest month of the year for US shares (with an average monthly decline of 0.8% since 1985) and October is normally the weakness month of the year for Australian shares (with an average monthly fall of 0.7% since 1985). As a result, shares remain at risk of further weakness in the month or two ahead. However, most of these worries should ultimately be resolved in an unthreatening way allowing a strong rebound in share markets into year end as seasonal strength returns.

Major global economic events and implications

• US economic data was mixed highlighting the difficult decision the Fed will face at its September 17-18 meeting in terms of whether to taper its monetary stimulus or not. On the positive side consumer confidence and house prices rose, jobless claims fell and June quarter GDP growth was revised up from 1.7% to 2.5% thanks to stronger contributions from trade and inventories. But against this, durable goods orders were weak (albeit with a still reasonable underlying trend) and pending home sales slipped again. Higher mortgage rates and now higher oil/gasoline prices are clearly a bit of a headwind for US growth. The net result may be that the Fed will either delay the start of tapering till later in the year or alternatively just cut it back by $10bn a day.  
• German, French and Italian business confidence readings confirmed the ongoing recovery in the Eurozone.
• Japanese data for July was mostly favourable with falling unemployment, a rise in the jobs to applicant ratio, growth in household spending, a solid bounce back in industrial production with a higher August PMI pointing to more strength and fading core pressures. Abenomics looks to be working albeit it’s a slow process.

Australian economic events and implications

• In Australia, while business investment rose a much stronger than expected 4% in the June quarter, this masked a decline in plant & equipment investment which is what feeds into GDP estimates. More importantly business investment plans were revised down for this financial year and now point to a 1% fall in investment this financial year using a comparison of past investment intentions with actual outcomes or an 11% fall based on a comparison of investment plans for 2013-14 with those made for 2012-13 a year ago. However, whether it’s a 1% fall or an 11% fall the outlook for business investment is poor with weakness pretty much across the board, highlighting the need for further monetary easing in Australia.
• Meanwhile, credit growth remained subdued in July albeit with signs of a bottoming and there was mixed news in relation to housing with a fall in new home sales but another rise in housing affordability to its best in a decade pointing to an ongoing housing recovery ahead.
• The June half profit reporting season is now essentially complete. Results have been weak but not as bad as feared and dividends have increased by 10% which partly explains why the Australian share market has performed reasonably well in August. Overall, results have been a little bit better than expected with 39% of companies exceeding analyst expectations as against 27% missing expectations. 64% of companies have seen their profits rise from a year ago and 60% of companies have increased their dividends from a year ago as against only 12% which have cut them. And while corporate outlook comments have been subdued, the fact they haven’t been too gloomy is a good sign.
• Consequently, and because the bad news had already been factored in we haven’t seen the earnings downgrades some had feared. Earnings expectations for 2012-13 are little changed at -0.5% (with resources earnings down by around 21% but with earnings for the rest of the market up by around 6%). And for 2013-14 earnings growth expectations remain around 13%, made up of a 35% gain for resources and 8% growth for the rest of the market. As a result of increased dividends from resources stocks, dividend growth ran much stronger than earnings last financial year, rising by around 10%. Reflecting the better than feared results and increasing dividends, 53% of companies have seen their share price outperform the market on the day their results were released. Key themes are ongoing cost control and weak revenue growth, but a prospective boost to profits from the lower $A and for iron ore companies from a higher iron ore price. Strong dividend growth reflects both a degree of comfort with the profit outlook along with pressure from shareholders for increased dividends.

Major market moves

• Shares had a rough week, not helped by worries about a strike on Syria and problems in some emerging countries.
• Commodity prices were mixed with gold and oil up on Middle East uncertainty, but metal prices down.
• A stronger $US and weaker metal prices saw the $A fall.
• Bond yields fell in the US, Germany, Japan and Australia partly as a bit of safe haven buying crept back in.

What to watch over the next week?

• In the US, the focus is likely to be on the manufacturing conditions ISM (due Monday) and payroll employment data (Friday) as guides to whether the Fed will commence tapering its monetary stimulus this month. Both may not provide decisive readings though with the ISM expected to slip slightly to 54 from 55.4 and payroll employment growth expected to be around 180,000 which is solid but not overwhelmingly strong. The Fed’s Beige Book of anecdotal indicators along with trade data and the non-manufacturing ISM will also be released.
• In the Eurozone, final manufacturing PMIs (Monday) and services PMIs (Wednesday) are expected to confirm the recovery already reported in the flash estimates. The ECB and the Bank of England are both likely to leave monetary policy unchanged when they meet Thursday, but indicate they retain easing biases.
• The Bank of Japan is also expected to leave monetary policy unchanged on Thursday.
• In Australia, the focus will no doubt be on the election to be held on Saturday 7^th September. The RBA meets Tuesday but, given the proximity to the election and its signal that another interest rate cut is not imminent, rates are likely to be left on hold. However, the post meeting statement is likely to retain an easing bias, particularly with the capex outlook weakening further and inflation benign, which the RBA is likely to act upon at its October or November meetings unless the $A falls rapidly.
• On the data front expect a solid bounce in July building approvals after a sharp fall in June, soft June quarter company profits and continued modest growth in RP Data’s house price series (all due Monday), continued weak growth in retail sales (Tuesday) and June quarter GDP growth (Wednesday) to have remained subdued at 0.5% quarter on quarter or 2.4% year on year. While consumer spending and building activity look to have been weak in the June quarter, trade is likely to have provided a modest boost to GDP growth. Data for the June quarter current account deficit, the trade balance and the AIG’s business conditions PMIs will also be released.

Outlook for markets

• Shares are vulnerable over the next month or two with various events and risks that could trigger investor nervousness including the Fed’s September meeting where it may start to taper its monetary stimulus, US Government funding and debt ceiling negotiations, the nomination of the next Federal Reserve chairperson, various imbalances in the emerging world, a possible military intervention in Syria, political instability in Italy and the election in Australia.
• However, a pullback should be seen as a buying opportunity as the broad trend in shares is likely to remain up: valuations are not dirt cheap but they are not expensive either; monetary conditions will remain very easy with interest rate hikes a long way off in the US and in other developed countries and interest rates still at risk of falling further in Australia; and the gradually strengthening global growth outlook points to stronger profits ahead. So by year end we see further upside in global and Australian shares.
• Sovereign bond yields still remain low and point to low medium term returns as yields gradually adjust higher in response to the improving global growth outlook. An unwinding of years of massive inflows into bond funds though runs the risk of causing a more aggressive rise in bond yields and hence losses on sovereign bonds.
• With commodity prices in a downtrend and the Australian economy deteriorating versus the US, it’s likely the $A will fall further. Given its overvaluation in terms of relative prices and costs, expect the $A to fall to $US0.80.

——————–

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 August 30 appeared first on AdviserVoice.

Investor Sign posts, week beginning 21 July, 2013

Upcoming economic and financial market events

Australia

July 22: State of the States – CommSec’s quarterly assessment of state/territory economies

July 24: Consumer Price Index (June Qtr) – We expect that prices rose 0.4% to be up 2.4% over the year

Overseas

July 22: US Existing home sales (June) – A modest lift in sales is tipped

July 23: US Home prices (May) – Data from the Federal Housing Finance Agency

July 23: US Richmond Fed index (July) – A key regional survey

July 24: “Flash” manufacturing gauges – Released in US, China and Europe

July 24: US New home sales (June) – Sales are tipped to have lifted by 1.9%

July 25: US Durable goods orders (June) – A modest 0.5% increase is expected

The big picture

• We know that the Aussie dollar has lost altitude in the past couple of months, but how far has it fallen, and how does the decline compare with corrections in the past?
• According to data from Thomson Reuters, the Aussie dollar peaked in April at US105.82c – the highest rate in three months. But in the following three months the Aussie has fallen by 15 per cent, touching US89.98c on July 12 according to the financial newswire.
• That three-month drop was the biggest in almost two years, just short of the 15.3 per cent decline recorded in October 2011 when the currency fell from US110.8c to US93.86c over a same three-month period. To find a larger drop, you actually have to go back to the midst of the Global Financial Crisis in January 2009 when the Aussie slumped almost US17 cents over a three-month period.
• The Reserve Bank believes the latest fall in the Aussie dollar is well over-due. As the chart shows, for the better part of a year the Aussie dollar had broadly trended sideways, holding between US101-106c. But over the same period commodity prices gradually trended lower.
• The break in the traditional link between the Aussie dollar and commodity prices was unusual. The Aussie dollar has always been regarded as a “commodity currency” given Australia’s high reliance on commodities or raw materials for export income.
• In part the Aussie dollar’s relative strength up to April 2013 was due to Australia’s economic out-performance. But in mid April that out-performance was re-assessed as stronger US economic data called into question the need for super-stimulatory US monetary policy settings.
• Interestingly it now appears that the Aussie dollar has fallen too far. If the Reserve Bank agrees and next week’s inflation data is on the high side of expectations, then interest rates will be kept steady at the August Board meeting.
  • In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.
  • In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
  • On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
  • On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
  • Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
  • The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
  • Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
  • On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
  • In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
  • On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
  • On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
  • Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
  • And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.
  • The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
  • The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
  • There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.

The week ahead

In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.

• In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
• On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
• On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
• Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
• The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
• Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
• On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
• In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
• On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
• On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
• Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
• And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.

Sharemarket, interest rates, currencies & commodities

• The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
• The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
• There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.

The post Investor Signposts: Week Beginning July 21 2013 appeared first on AdviserVoice.

Investor signposts July 14, 2013

Australia

July 15   Lending finance (May) – Covers personal, business, housing and lease loans

July 15   New vehicle sales (June) – Sales hit record highs; up 5.5% over the year

July 16   Reserve Bank Board minutes – Minutes of meeting held on July 2

July 18   Detailed employment (June) – Detailed jobs data including regional unemployment

Overseas

July 15   Chinese economic data – Includes economic growth, retail sales & production

July 15   US Retail sales (June) – Non-auto sales may have lifted 0.4%

July 16   US Consumer prices (June) – Core prices are expected to lift by 0.2%

July 16   US Industrial production (June) – Analysts tip a 0.3% increase

July 17   US Testimony by Fed chairman – Testimony by Federal Reserve chairman Ben Bernanke

July 17   US Housing starts (June) – Economists tip a lift from 914,000 to 950,000

July 17   US Federal Reserve Beige Book – Covers conditions across Federal Reserve districts

July 18   US Philadelphia Fed survey (July) – Influential regional survey

The big picture

A fair bit of economic and financial information is released each week. Some of the information is readily dissected by analysts and investors. But there is also a healthy amount of information that gets neglected.

And included in the latter category is a raft of statistical information that is produced by the Reserve Bank. When the Bulletin was issued monthly, data had less chance of being missed. But with new statistics and information released irregularly online, it requires more diligence to check the changes.

In late June the RBA issued detailed data on bank lending. The figures showed that the weighted interest rate of loans less than $2 million stood at a record low of 7.00 per cent in the March quarter, while the interest rate on loans above $2 million was also at a record low of 5.15 per cent. Businesses may be complaining about weak consumer spending but there can be few complaints on interest costs.

But businesses aren’t rushing for the cheap rates. New credit approvals in the March quarter were down 9.5 per cent on a year ago. However the rush to reduce outstanding debt has come to an end. The value of outstanding debt hit a four year high of almost $698 billion, up 9.3 per cent on the low reached in June quarter 2011.

The construction sector now accounts for just 4.0 per cent of all outstanding loans, a record low, and well off the highs of 6.3 per cent set 20 years ago. The share of loans to the manufacturing sector also stands at a record low of 5.7 per cent while agriculture accounts for 8.4 per cent of lending. The biggest grouping is “other” at 49.5 per cent, followed by finance and insurance at 14.9 per cent and retail, wholesale trade, transport and storage at 14.8 per cent.

Interesting to note that operating income of banks peaked at $24.4 billion in the June quarter 2010 and is currently down almost 6 per cent. So to maintain profits, banks have had to keep cutting costs. Operating expenses have been pared back by 13.4 per cent over the same period. And interestingly, the other challenge that banks have had in trying to maintain profits is a rising tax take. Income tax paid by banks hit a record $12 billion in the year to March 2013, up 21.5 per cent on the year to March 2010.

• In Australia, there are few highlights in the coming week. Economic data is basically drawn from the “second shelf” but the Reserve Bank will issue minutes of the July 2 Board meeting on Tuesday. In China a gamut of key economic data is released on Monday including June quarter economic growth data. And there is the usual bevy of US economic data over the week including testimony from the Federal Reserve chairman.
• In Australia, the week kicks off on Monday when the Bureau of Statistics (ABS) publishes lending finance and new vehicle sales data. The lending finance figures are the most comprehensive compilation of new lending or commitment data, covering personal, business, housing and lease loans. At present new lending commitments are travelling sideways.
• The data on new vehicle sales is basically a recast of the industry figures that have already been released from the Federal Chamber of Automotive Industries. The ABS will merely present the sales data in seasonally adjusted and trend terms. In June, new vehicle sales were at record highs and up 5.5 per cent on a year ago. Government incentives to business to purchase vehicles as well as end of year sales underpinned activity in the month. And Australia’s top selling vehicle? The Toyota Hilux.
• On Wednesday the ABS issues data on imports of goods (merchandise imports) for June as well as figures on building work in the March quarter and a census of motor vehicles as at January this year. The imports data may give insights into the strength of consumer and business spending.
• On Thursday the ABS releases detailed data on the job market. Included are regional estimates of unemployment as well as unemployment and participation rates for different age groups. And on Friday the ABS issues a survey of physical activity that should be of interest to businesses in the health sector.
• Turning our attention outside Australia, the week kicks off on Monday when China issues major data for the month of June and the June quarter. The economic growth figures for the quarter are issued together with indicators such as retail sales and industrial production for the month. Clearly this data has the potential to move share and currency markets.
• In the US, the week kicks off on Monday with data on retail sales and business inventories to be issued alongside the Empire State index. Economists expect the healthy pace of consumer spending to continue with the retail sales measure that excludes car sales, gasoline and building materials expected to rise by 0.3 per cent.
• On Tuesday a bevy of data is slated for release in the US. As well as the customary weekly report on chain store sales, data on consumer prices, industrial production and capital flows are also issued. Economists expect that inflation remained contained in June with core consumer prices (excludes food and energy) tipped to lift 0.2 per cent in the month and 1.6 per cent over the year. Economists also expect that industrial production rose by 0.3 per cent in June.
• On Wednesday the Federal Reserve chairman, Ben Bernanke, delivers semi-annual monetary policy testimony before the House Financial Services Committee with follow-up testimony to the Senate Banking Committee on Thursday. Bernanke will be under pressure to explain his views on tapering monetary policy stimulus.
• On Wednesday the Beige Book is issued – a summary of conditions across the Federal Reserve district offices. More than likely comments will refer to healthy demand for homes and firmer construction activity. But the main uncertainties concern the state of consumer spending as well as labour market conditions.
• Also on Wednesday, data on housing starts is issued. Economists are tipping a near 4 per cent lift in starts in June to a 950,000 annual rate. A firmer job market, firmer population growth and low interest rates support housing activity.
• On Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with the leading index and the influential Philadelphia Federal Reserve survey.
• The US profit-reporting season kicked off on Monday with Alcoa the first of the S&P 500 stocks to report earnings. Three stocks followed on July 10 and, at the time of writing, JP Morgan Chase and Wells Fargo were due to report on July 12.
• Of stocks in the S&P 500 index, Citigroup is scheduled to report earnings on Monday while seven stocks are listed to report on Tuesday including Goldman Sachs, Coca Cola, Yahoo and Johnson and Johnson.
• On Wednesday, amongst the 16 stocks listed to issue profit results are American Express, Bank of America, eBay, Intel, and US Bancorp. On Thursday, 29 companies from the S&P 500 index are due to report earnings including Advanced Micro Devices, Google, Microsoft, Safeway and Verizon. And on Friday, 12 companies are expected to issue profit results including General Electric, Honeywell and State Street Corp.
• And in Australia over the coming week the major mining houses issue production reports covering the June quarter.

The week ahead

In Australia, there are few highlights in the coming week. Economic data is basically drawn from the “second shelf” but the Reserve Bank will issue minutes of the July 2 Board meeting on Tuesday. In China a gamut of key economic data is released on Monday including June quarter economic growth data. And there is the usual bevy of US economic data over the week including testimony from the Federal Reserve chairman.

In Australia, the week kicks off on Monday when the Bureau of Statistics (ABS) publishes lending finance and new vehicle sales data. The lending finance figures are the most comprehensive compilation of new lending or commitment data, covering personal, business, housing and lease loans. At present new lending commitments are travelling sideways.

The data on new vehicle sales is basically a recast of the industry figures that have already been released from the Federal Chamber of Automotive Industries. The ABS will merely present the sales data in seasonally adjusted and trend terms. In June, new vehicle sales were at record highs and up 5.5 per cent on a year ago. Government incentives to business to purchase vehicles as well as end of year sales underpinned activity in the month. And Australia’s top selling vehicle? The Toyota Hilux.

On Wednesday the ABS issues data on imports of goods (merchandise imports) for June as well as figures on building work in the March quarter and a census of motor vehicles as at January this year. The imports data may give insights into the strength of consumer and business spending.

On Thursday the ABS releases detailed data on the job market. Included are regional estimates of unemployment as well as unemployment and participation rates for different age groups. And on Friday the ABS issues a survey of physical activity that should be of interest to businesses in the health sector.

Turning our attention outside Australia, the week kicks off on Monday when China issues major data for the month of June and the June quarter. The economic growth figures for the quarter are issued together with indicators such as retail sales and industrial production for the month. Clearly this data has the potential to move share and currency markets.

In the US, the week kicks off on Monday with data on retail sales and business inventories to be issued alongside the Empire State index. Economists expect the healthy pace of consumer spending to continue with the retail sales measure that excludes car sales, gasoline and building materials expected to rise by 0.3 per cent.

On Tuesday a bevy of data is slated for release in the US. As well as the customary weekly report on chain store sales, data on consumer prices, industrial production and capital flows are also issued. Economists expect that inflation remained contained in June with core consumer prices (excludes food and energy) tipped to lift 0.2 per cent in the month and 1.6 per cent over the year. Economists also expect that industrial production rose by 0.3 per cent in June.

On Wednesday the Federal Reserve chairman, Ben Bernanke, delivers semi-annual monetary policy testimony before the House Financial Services Committee with follow-up testimony to the Senate Banking Committee on Thursday. Bernanke will be under pressure to explain his views on tapering monetary policy stimulus.

On Wednesday the Beige Book is issued – a summary of conditions across the Federal Reserve district offices. More than likely comments will refer to healthy demand for homes and firmer construction activity. But the main uncertainties concern the state of consumer spending as well as labour market conditions.

Also on Wednesday, data on housing starts is issued. Economists are tipping a near 4 per cent lift in starts in June to a 950,000 annual rate. A firmer job market, firmer population growth and low interest rates support housing activity.

On Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with the leading index and the influential Philadelphia Federal Reserve survey.

Sharemarket, interest rates, currencies & commodities

The US profit-reporting season kicked off on Monday with Alcoa the first of the S&P 500 stocks to report earnings. Three stocks followed on July 10 and, at the time of writing, JP Morgan Chase and Wells Fargo were due to report on July 12.

Of stocks in the S&P 500 index, Citigroup is scheduled to report earnings on Monday while seven stocks are listed to report on Tuesday including Goldman Sachs, Coca Cola, Yahoo and Johnson and Johnson.

On Wednesday, amongst the 16 stocks listed to issue profit results are American Express, Bank of America, eBay, Intel, and US Bancorp. On Thursday, 29 companies from the S&P 500 index are due to report earnings including Advanced Micro Devices, Google, Microsoft, Safeway and Verizon. And on Friday, 12 companies are expected to issue profit results including General Electric, Honeywell and State Street Corp.

And in Australia over the coming week the major mining houses issue production reports covering the June quarter.

The post Investor Signposts: Week Beginning July 14 2013 appeared first on AdviserVoice.

What does it all mean?

• Aussie consumers and businesses are spending a little bit more freely. According to the latest Commonwealth Bank Business Sales Indicator (BSI), economy-wide spending grew by 1 per cent in trend terms in May, after a 1.2 per cent lift in April and a 1.1 per cent gain in March.
• Retailers have reason to be more confident, and despite the recent fall in the Aussie dollar it is still a case of keeping prices lower to attract customers and prevent them flocking to overseas web sites.
• The Reserve Bank is unlikely to shift its rhetoric in the near future. The economy is improving of a low base, however the recovery is still fragile. An ongoing improvement in confidence is necessary to support activity levels, and the perception of lower interest rates will certainly support sentiment.

What do the figures show?

• The recovery in economy-wide spending is consolidating. According to the latest Commonwealth Bank Business Economy-wide spending is now recording firm growth, in marked contrast to the weakness exhibited from May to September last year. According to the latest Commonwealth Bank Business Sales Indicator (BSI), economy-wide spending grew by 1.0 per cent in trend terms in May, the ninth constructive monthly increase in spending. Over that past three months sales have lifted on average by 1.1 per cent a month – the strongest growth in six years.
• The seasonally-adjusted measure of sales leapt by 5.2 per cent in May – the strongest increase in five years. The BSI had previously eased by 0.1 per cent in April after lifting by 1.3 per cent in March. Annual growth in spending now stands at 10.3 per cent in seasonally adjusted terms, up from 5.9 per cent in April.
• The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities. And in line with the practice of the Bureau of Statistics with its retail trade data, seasonally adjusted and trend estimates of the BSI are obtained by applying statistical software. The seasonally adjusted and trend BSI results are derived from the same SEASABS statistical software. This allows analysis of the broader underlying trends that may be hidden in the raw data.
• Across sectors, seven of the industry sectors fell in trend terms in May but declines were fairly modest. Amongst the weakest sectors in May were Mail Orders & Telephone Order Providers (down 1.6 per cent) with Automobiles & Vehicles, Business Services and Hotels & Motels all losing 0.6-0.7 per cent.
• In contrast the large Retail Stores sector (31.5 per cent of the BSI) rose by 2.3 per cent in May with both Utilities and Wholesale Distributors & Manufactures up 1.4 per cent.
• In annual terms in May, the BSI was up 7.4 per cent on a year ago – the best growth since December 2007. Six of the 20 industry sectors contracted in May, up from five sectors in April and four sectors in March. Spending in Business Services fell for the third straight month, down 6.2 per cent and the biggest fall in around 5½ years. And sales at Mail Orders & Telephone Order Providers fell at a 28.1 per cent annual pace in May after rising at an annual rate of around 20 per cent between March-June 2012.
• Strongest growth was recorded by the large Retail Stores sector, up 12.9 per cent on a year ago, while the Wholesale Distributors & Manufactures sector was up 11.0 per cent, followed by Utilities, up 9.2 per cent, Government services, up 8.6 per cent.
• None of the states and territories recorded weaker sales in trend terms in May. Sales rose most in NSW (up 1.9 per cent), followed by the ACT (up 1.5 per cent), South Australia (up 1.0 per cent), Queensland (up 0.6 per cent), Western Australia (up 0.3 per cent), Northern Territory and Victoria (up 0.2 per cent) and Tasmania (flat).
• The trend BSI has now risen for two years in the Northern Territory, for 23 straight months in both Queensland and South Australia, for 20 straight months in ACT and for 14 straight months in Tasmania.
• In annual terms, no state or territory had sales below a year ago. Strongest growth was posted in ACT (up 13.3 per cent), followed by South Australia (up 12.2 per cent), NSW (up 8.8 per cent), and Queensland (up 7.5 per cent).

What are the implications for interest rates and investors?

• Consumer spending is expanding at a reasonably constant rate across the country. Overall the economy remains patchy at present and policymakers will want more consistent readings on the economy before deciding on any shifts in monetary policy. CommSec expects the next rate cut to take place in August.

The post Strongest lift in spending in six years appeared first on AdviserVoice.