Labour market conditions had remained subdued: RBA Board

The September RBA Board Minutes look a little dated. The RBA Board meeting preceded the recent data batch which showed that the Australian economy is travelling along better than what the RBA has assumed in its growth forecasts. And the recent slide in the AUD, if maintained, means that the RBA is likely to upgrade its growth and inflation forecasts.

The Minutes are “neutral” in their outlook for monetary policy, as they have been this year. But concerns change over time. One way to assess the evolution in the Board’s thinking on considerations for policy is to look at what has changed in the narrative from the previous month’s minutes.  And on that score, the Bank has some growing concerns around house price growth. The Minutes note that, “policy also needed to be cognisant of the risks to future growth that could accompany a large further build‑up in asset prices, particularly if that was associated with an increase in leverage.”  Indeed, a decent chunk of the Minutes are attempts to jawbone the housing market.

Stevens just recently stressed that the RBA has done as much as they can in creating a backdrop that should support economic growth¹.  Stevens all but ruled out any further rate cuts by stating that “further inflating an already elevated level of house prices seems an unwise route (to reduce unemployment)”.  House price data for August showed that prices surged again in Sydney and Melbourne over the month. And the most recent loan data showed that investor loans are around their highest share on record of total loans.

On the labour market, the Board stated that “labour market conditions had remained subdued” and that “forecasts of a period of below‑trend growth in economic activity meant that it would be some time before the unemployment rate declined consistently”. The most recent jobs figures (published after the September meeting) recorded a huge 121k spike in employment and a large 0.3ppt fall in the unemployment rate to 6.1%.  Cutting through the monthly noise shows that trend employment growth is running at 20k on a three‑month basis. Employment growth around this level is in line with a flat unemployment rate. And coupled with the positive leading indicators suggests that the RBA is, in our view, being overly pessimistic in its assessment of the jobs market. The risk is that the unemployment rate starts to decline ahead of the RBA’s expectations.

There was very little from the Bank on inflation given the SMP was published last month just after the QII CPI.  Nonetheless, we note that the softer AUD, if sustained, is likely to mean that inflation runs ahead of RBA forecasts (the latest RBA forecasts used an AUD worth 93 US cents).

The good economic data reads since the last RBA meeting, coupled with the slide in the AUD, has seen market pricing for a further rate cut wane substantially. We have been arguing for some time that market pricing was overstating downside risks to the growth and inflation outlooks. Our base case has the RBA on hold until Q1 2015 where we have pencilled in a rate hike.

———-

¹“The Economic Scene” – Glenn Stevens address to a CEDA Luncheon, Adelaide 3 September 2014

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The big picture

• One of the sleeper issues at present is population growth. The latest data showed that Australia’s population grew by 1.6 per cent in the year to September, the slowest growth rate in four years and well down from the peak growth (40-year high) of 2.2 per cent in December 2008. Slower immigration is the culprit here, not the number of babies being born, and largely due to Government policy.
• Now those in favour of a ‘small Australia’ would conclude that the slowdown in population growth is a favourable development. But they may not hold those views next time interest rates go up, especially if the Reserve Bank singles out the tight job market as one of the prime drivers behind the decision. Because the strong global demand for our resources and demographics both indicate that demand for labour will remain strong in coming years. The challenge for Australia is to ensure that labour supply lifts to meet that higher demand. If it doesn’t then the one thing that economics shows is that something has to give – and most likely that means higher wages, and potentially higher prices.
• As noted by Professor Peter McDonald, one of the best demographers in Australia, “barring a major downturn in the world economy, labour demand is likely to remain very strong into the future.” McDonald argues that there needs to be urgent action on skills development, the need for significant growth in public infrastructure, and a “planned, well-managed immigration program.”
• McDonald notes that the government’s permanent migration program and domestic sources of workers have been insufficient to meet the strong demand for labour so the gap has been filled by temporary migrants. The question is whether this is a desirable or sustainable situation. But whatever is eventually decided by policymakers, the simple fact is that the Government must ensure that an efficient, streamlined system is in place so that businesses can get the staff they need. Supply of labour has to lift to meet strong demand otherwise the consequences will be higher inflation, slower economic growth or both.
• The other point by McDonald is that “substantial future population growth” over the coming decade is embedded in the economy. The higher population growth must be planned for, especially in terms of infrastructure demands.

The week ahead

• A busy week lies ahead with a speech by the Reserve Bank Governor probably the stand-out. Meanwhile there is a bevy of ‘top-shelf’ economic indicators for release in the US and the latest monthly readings on the Chinese economy will be released on Friday.
• On Thursday morning Australian time (Wednesday lunch-time in New York) the Reserve Bank Governor will deliver a speech simply titled “Economic Conditions.” Clearly the RBA Governor will have a broad canvas to paint on, but it will be a timely update of the latest views on the economy. No doubt businesses have been giving RBA liaison officers fairly down-beat views on the economy. The question is whether the Governor will remain upbeat about 2011/12.
• In terms of economic data, most eyes will be on the NAB business survey on Tuesday and the consumer sentiment report on Wednesday. While the business sector is generally finding life difficult at present, it still is largely positive about the future. And consumer confidence may have improved a tad, but nothing too dramatic. People still haven’t got the sense that things are back to ‘normal’.
• In terms of the other economic indicators, data on lending finance kicks off the week on Monday. Consumers and businesses are more inclined to save, rather than spend, but there has been a modest pick-up in new lending in the past few months that deserves to be monitored.
• On Wednesday, the Bureau of Statistics and Federal Treasury will publish the quarterly data from Treasury’s TRYM economic model. At face value this seems exceedingly dull, but the data will contain the latest estimates on wealth – most likely at record highs.
• And on Thursday, the Bureau of Statistics will recast the latest industry figures on car sales to take account for seasonal factors. The industry data indicated that 93,984 vehicles were sold in March, just under 1 per cent lower than a year ago. However when seasonal factors are taken into account, we believe that car sales rose by 1 per cent in the month. Still, the broad trend is that car sales are going largely sideways.
• In the US, there is a bevy of ‘top shelf’ indicators due for release in the coming week. Data on retail sales is released on Wednesday with producer prices (business inflation) set down for Thursday while figures on consumer prices and industrial production are both issued on Friday.
• Overall the results should be reasonably healthy. Economists tip a 0.5 per cent lift in retail sales (up 0.6 per cent if car sales are excluded) while production is expected to have lifted by 0.5 per cent in March after a flat reading in February. The prices data should confirm that deflation is no longer a concern, but – at present anyway – inflation is not an issue either. Core rates of both producer and consumer prices probably rose by 0.2 per cent in March.
• Of the other data/events, on Tuesday, trade figures are released alongside import & export prices and the monthly Budget results. On Wednesday the latest Federal Reserve Beige Book is issued – covering conditions across Fed districts. And on Friday consumer sentiment, capital flows and the Empire State survey are other indicators to watch.
• The other event to keep on the radar screen is the usual monthly download of Chinese economic statistics. On Friday, figures on retail sales, production, investment and inflation are all issued. Interestingly the Chinese trade data is also issued – on April 10 – this Sunday.

Sharemarket

• The Australian sharemarket is a mere 10 per cent away from record highs. Sounds too good to be true? What we are tracking is the value of all shares – the amount of stock on issue multiplied by the share price. This accounts for the fact that companies raised equity capital in the global financial crisis as well as the fact that share prices have recovered post GFC. The value of all shares stands at $1,583 billion, down from the highs of $1,772 billion in late 2007. But some sectors have done even better. Market capitalisation of the ASX 200 Resources sector stands at $388 billion, just under 2 per cent below the record high of $395 billion set in May 2008. Notably 25 per cent of the entire sharemarket is accounted for by the top 200 resource stocks, a smidgen below the record high set in July 2008.

Interest rates, currencies & commodities

The Aussie dollar has had an amazing rebound in a short time period, lifting from US97.25c on March 17 to US104c on April 4 – a gain of around 7 per cent. Clearly sharemarkets across the globe similarly rebounded from lows, highlighting the fact that the Aussie is very much a ‘fair weather friend’. When there are concerns about the health of the global economy the Aussie dollar is one of the first to be sold, but it is quickly back in favour when sentiment improves. Consumers would expect that the strong Aussie translates into lower prices for gadgets and indeed that has proved correct. Australia is the fifth cheapest of 26 countries in the world to buy the new Apple iPad 2 device according to our new CommSec index. The CommSec iPad 2 index is a modern way of looking at purchasing power theory. That is, the theory that the same good should be sold for the same price across the globe once taking into account exchange rates. As it turns out there are still significant differences in prices across the globe.

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• Employment fell by 10,100 people in February – the biggest decline in 18 months (since August 2009). Economists had tipped job gains of 20,000 (range from -10,000 to +35,000 jobs). The January result was revised sharply lower to show growth of 7,700 people (previously +24,000). Full-time employment rose by 47,600 in February (January jobs were down by 12,300) and part-time jobs fell by 57,700 (January jobs rose by 20,000).
• The unemployment rate was unchanged at 5.0 per cent. The participation rate fell from a downwardlyrevised 65.8 per cent to 65.7 per cent. The working age population rose by 19,200.
• Average hours worked rose by 1.1 per cent in February after falling by 0.8 per cent in January.
• Across the states and territories unemployment rates in February were: NSW 4.8 per cent (4.9 per cent in January); Victoria 5.0 per cent (5.1 per cent); Queensland 5.6 per cent (5.6 per cent); South Australia 5.8 per cent (5.4 per cent); Western Australia 4.2 per cent (4.6 per cent); Tasmania 5.6 per cent (6.4 per cent); Northern Territory 2.3 per cent (2.4 per cent); ACT 3.5 per cent (3.4 per cent).
• Employment rose most in NSW (up 22,400) followed by South Australia and Northern Territory (up 400). Jobs fell most in Queensland (down 22,100) followed by Western Australia (down 10,600), Tasmania (down 500) and Victoria and the ACT (both down 200).

What does it all mean?

• There are clear signs that the Aussie economy is losing momentum. Jobs are now falling, adding to data showing stagnant retail spending, weak housing market and contracting activity in manufacturing, services and construction sectors. Over the last three months employment has fallen by 2,300 people and this highlights that the recent weakness is not an aberration. In fact employment started to slow before the floods and cyclone hit.
• The rapid fire rate hikes and sluggish consumer activity is starting to show cracks in the labour market data. More and more businesses are telling us that conditions are tougher now than at the height of the global financial crisis and earlier this week the NAB business survey highlighted the weakness in business trading conditions. Profitability is being squeezed, the employment index remains weak and forward orders are being pared back – all a clear sign that businesses are finding times tough.

• The Reserve Bank had warned that the job market would slow, and clearly it got that one right. The central bank has also been anticipating a softening of conditions in the labour market going forward – in line with the weak growth forecasts for the first half of 2011. In fact the Reserve Bank expects the unemployment rate to only slide by 0.5 per cent over the coming two years. No doubt in the longer term an improvement in productivity and a pickup in skilled migration is what is needed to ensure that these forecasts are met. The jobs data gives the Reserve Bank further reason to stay on the interest rate sidelines.
• Not only did employment fall in the latest month but the January result was sharply downgraded. While the good news is that full-time jobs in the month, it is important that the figures are not taken too literally. It is hard to believe that full-time jobs would soar almost 48,000 just as part-time jobs were falling by almost 58,000. The volatility over the last few months means that trend estimates are probably more accurate and these show a slowdown in job creation.
• Again it’s hard to believe that Western Australian jobs would fall at the same time the unemployment rate was easing. Or that unemployment in Tasmania could fall from 6.4 per cent to 5.6 per cent in the space of a month.
• It is important to highlight that the data is backward looking, capturing how the economy was tracking around 4-5 months ago. And even more forward looking indicators like the job ads series suggest that while employment growth will remain a feature it is likely to be a less robust in the near term.
• Overall it is unlikely that the Reserve Bank will be pursuing further interest rate rises anytime soon. While CommSec had expected the next rate hike to take place in May, there is clearly an array of risks to our call. And if activity levels remain subdued over the next couple of months it is possible the anticipated May rate hike could be pushed out by a number of months.

What do the figures show?

Labour force

• Employment fell for the first time in 18 months in February, falling by 10,100 workers. Full-time employment rose by 47,000 after falling by 12,300 in January. Part-time employment fell by 57,800 after rising by 20,000 in January.
• The annual employment growth rate eased from 3.3 per cent to 3.0 per cent.
• The unemployment rate remained steady at 5.0 per cent. The participation rate eased from 65.8 per cent to 65.7 per cent.
• Average hours worked rose by 1.1 per cent in February after falling by 0.8 per cent in January. Over the year average hours worked rose by 2.3 per cent.
• NSW (up 22,400) led the job gains in February, followed by South Australia and Northern Territory (up 400). Jobs fell most in Queensland (down 22,100) followed by Western Australia (down 10,600), Tasmania (down 500) and Victoria and the ACT (both down 200).
• Across the states and territories unemployment rates in February were: NSW 4.8 per cent (4.9 per cent in January); Victoria 5.0 per cent (5.1 per cent); Queensland 5.6 per cent (5.6 per cent); South Australia 5.8 per cent (5.4 per cent); Western Australia 4.2 per cent (4.6 per cent); Tasmania 5.6 per cent (6.4 per cent); Northern Territory 2.3 per cent (2.4 per cent); ACT 3.5 per cent (3.4 per cent).
• The working age population rose by 19,200 in February after lifting by 19,000 in January. The working age population grew by 1.80 per cent over the past year – the smallest gain in 50 months.

What is the importance of the economic data?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
• If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.

What are the implications for interest rates and investors?

• CommSec expects the jobless rate to ease to around 4.5 per cent over the coming year. But if the Federal Government was to provide a much needed boost to labour supply by lifting the migrant intake and easing work visa restrictions, the job market may not need to tighten as much as expected.
• We expect the job market to remain relatively healthy particularly in the second half of the year. However the job market may trend sideways for the next couple of months. Our equity media analysts maintain their hold rating on SEEK Limited
• We are hearing that global fund managers are looking to exit positions in Australia, concerned by our softer economy and uncertainty about proposed taxes on carbon and the resources sector. The high Australian dollar and softening in the job market are yet further reasons for investors to be looking at economies in the upswing phase with the key candidate being the United States. While we are not revising down our sharemarket forecasts, they are under review.

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• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 2.9 cents per litre to 139.2 cents a litre in the week to March 6 – a near 29 month high. Over the past three weeks the national average price has lifted by 4.4 cents per litre.
• Motorists are likely to see a further increase in petrol prices over the coming weeks. While the Singapore unleaded price has lifted by more than US$15 a barrel in the past three weeks, it has only partially filtered through to the terminal gate (wholesale) price – which gained 6 cents a litre in the last three weeks. CommSec expects pump prices to rise by a further 4 cents a litre in the next fortnight.
• Job market looks set to tighten further. The Advantage internet job index rose by 6.1 per cent in February. The ANZ job ads index rose by a 1.2 per cent in February after an upwardly revised 3.0 per cent rise in the prior month.
• The construction sector is still contracting despite a modest improvement. The Performance of Construction index rose by 4.4 points to 44.6 in February.

What does it all mean?

• At present petrol prices are going only one way – up. Petrol prices have surged by almost 3 cents a litre in the past week and are holding near 29-month highs and unfortunately for motorists it is unlikely to get any better over the next couple of weeks.
• The political instability in the Middle East and North Africa is the key driver of near term prices. And given the current tensions in the Middle East, the Singapore unleaded price has surged by over US$15 a barrel in the past three weeks and is holding at 30-month highs. Unfortunately for motorists the Australian dollar can only do so much, and as such most of the increase in the global oil price will need to filter through to domestic pump prices.
• The terminal gate price (wholesale) is certainly responding, lifting a sizeable six cents a litre since bottoming out three weeks ago. CommSec expects prices to increase by 4 cents a litre in the next fortnight, taking the national average price to around $1.44 a litre. At the high point of the discounting cycle petrol will be trading well above $1.50 a litre.
• The labour market has been the shining indicator over the past year and the latest job ads data suggests that employment growth is likely to be healthy in coming months. The Advantage job index has once again tracked higher after a bout of recent weakness, while the ANZ job ads series has once again shown moderate growth. Importantly while the labour market is likely to strengthen in coming months it is unlikely to see robust growth akin to 2010 – especially given that the domestic economy has lost momentum in recent months.
• The labour market will be one of the key hot issues that the Reserve Bank will be focusing on in coming months. As long as the supply of labour remains adequate, the Reserve Bank can remain on the interest rate sidelines.

What do the figures show?

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 2.9 cents a litre to 139.2 cents a litre in the week to March 6. The metropolitan price rose by 3.0 c/l to 139.1 c/l, while the regional average price rose by 2.7 c/l to 139.3 c/l.
• Average petrol prices across states over the past week were: Sydney (up 2.1 cents to 138.7 c/l), Melbourne (up 3.5 cents to 138.7 c/l), Brisbane (up 3.0 cents to 140.7 c/l), Adelaide (up 4.8 cents to 139.5 c/l), Perth (up 3.2 cents to 138.8 c/l), Darwin (up 4.1 cents to 143.1 c/l), Canberra (up 0.3 cents to 134.0 c/l) and Hobart (up 3.1 cents to 144.1 c/l).
• Today, the national average wholesale (terminal gate) stands at a near 29-month high of 133.7 cents a litre, up 3.7 cents a litre over the past week.
• Last week, the key Singapore unleaded petrol price rose by US$4.83 (4.1 per cent) to US$123.60 a barrel – a 30 month high. And in Australian dollar terms the Singapore gasoline price rose by $4.68 (4.0 per cent) over the week to $121.88 a barrel.

Performance of Construction:

• The Performance of Construction index rose by 4.4 points to 44.6 in February. Any reading below 50.0 indicates the sector is contracting. Houses, apartments, and commercial construction were all below 50, while the engineering sector expanded after contracting in the prior month.

Job advertisements:

• The Advantage internet job index rose by 6.1 per cent in February. Job ads were strongest in the ACT (up 15.3 per cent) followed by Queensland (up 8.3 per cent), NSW (up 6.4 per cent), Western Australia (up 6.1 per cent), Victoria (up 4.9 per cent), South Australia (up 4.4 per cent), and Tasmania (up 1.5 per cent). Across sectors, gains were recorded for Transport (12.8 per cent), Administration, clerical and office support (11.4per cent) and trade services (10.3 per cent). Declines were recorded only in education (-0.8 per cent).
• Similarly the combined number of internet and newspaper job advertisements, as tracked by ANZ, rose by 1.2 per cent in February after a upwardly revised 3.0 per cent increase in January. Internet job ads rose by 1.0 per cent in the month, while newspaper job ads rose by 4.4 per cent. In annual terms job ads are up 19.3 per cent.

What is the importance of the economic data?

• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.
• The monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.
• The monthly Performance of Construction Index is a gauge of operation conditions across residential, commercial and engineering construction. The PCI is useful not just in showing how the construction sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment..

What are the implications for interest rates and investors?

• The lift in the price of petrol is further bad news for motorists, taking precious spending dollars out of consumer pockets. Retailers already have to contend with the effects of the weather on seasonal spending, consumer conservatism and higher utility prices.
• Filling up the car with petrol is the single biggest outlay that Aussie households make each week so changes in petrol prices have a big impact on the budget and spending patterns. The average household is paying almost an additional $30 a month more on petrol compared with just over six months ago.

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• The Reserve Bank Board has left the cash rate at 4.75 per cent at its second meeting for 2011. The next meeting is on April 5 2011.
• The Reserve Bank Board provided a relatively short accompanying statement. The statement suggested that the Reserve Bank remains comfortable with how labour market conditions are evolving at present – noting that “reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.”

Click here to download this document (pdf)

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• Employment rose by just 2,300 people in December, well below forecasts centred on job gains of around 25,000 (range from +10,000 to +40,000 jobs). The November result was not revised – recording job growth of 54,600 people. Full-time employment rose by 1,700 in December (November jobs were up by 55,400) and part-time jobs rose by 600 (November jobs fell by 800).
• Despite the meagre job growth, the unemployment rate fell from 5.2 per cent to 5.0 per cent. The main reason for the drop in unemployment was an apparent fall in the number of people in the workforce. The participation rate fell from a record high of 66.0 per cent to 65.8 per cent. The working age population rose by 19,700.
• Average hours worked fell by 0.2 per cent in December but rose by 2.8 per cent over the year.
• Across the states and territories unemployment rates in December were: NSW 4.6 per cent (5.0 per cent in November); Victoria 4.9 per cent (5.5 per cent); Queensland 6.0 per cent (5.6 per cent); South Australia 5.6 per cent (5.6 per cent); Western Australia 4.4 per cent (4.5 per cent); Tasmania 5.0 per cent (5.4 per cent); Northern Territory 2.6 per cent (2.7 per cent); ACT 3.3 per cent (3.2 per cent).

Click here to download this document (pdf)

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• Retail spending rose by just 0.3 per cent in November after the 0.8 per cent slide in October. However Nonfood retailing rose by 0.5 per cent. Over the past year retail spending has risen by just 1.3 per cent – marking the second weakest reading in five years (surpassed only by the 1.0 per cent annualised growth rate in the year to May 2010).
• In annual terms, sales at chain stores were up 0.6 per cent on a year ago – the weakest annual growth in records going back 16 years. Sales at smaller retailers were up 2.4 per cent on a year ago.
• The job market is losing steam. The Advantage internet job index fell by 2.3 per cent in December – marking the biggest fall in job advertisements since July 2009.
• The national average terminal gate or wholesale price of petrol eased modestly from 26-month highs over the past week and stands at 123.4 cents a litre. However the weaker Australian dollar and rise in global oil prices is likely to see pump prices track higher in coming weeks.

What does it all mean?

• The Australian economy is losing momentum. Not only are manufacturing, services and construction sectors going backwards but retail spending is barely growing. And now there are signs that the job market is stalling.
• Job advertisements have recorded the biggest monthly fall in 18 months in December, adding to the weaker result in November. The labour market has been the shining indicator however the consecutive slide in the Advantage job index suggests that job growth going forward is likely to be much more sedate.
• The domestic economy is certainly facing headwinds, with the higher Australian dollar curbing tourism and making exports less competitive. At the same time the conservative attitudes of consumers have ensured that retail activity remains weak. In fact the slide in job ads in the retail sector was a substantial 12 per cent in December.
• Retailers have certainly done it tough over the past year. Annualised growth in sales is holding at a paltry 1.3 per cent – the second worst reading in more than five years and a far cry from the decade average growth of 6 per cent. In fact retail activity levels were much more buoyant during the global financial crisis, with annualised growth rates of around 6-7 per cent. It is clear that the cumulative rate hikes have taken their toll on the household budget, and as a result discretionary spending is being pared back.

• The tightening of monetary policy and unwinding of stimulus has been the key reason for the turnaround in the fortunes of the retail sector. The domestic economy is not shooting the lights out and retail activity is virtually non-existent. As the larger department and chain stores can attest, annualised sales are growing at the weakest levels in records going back 16 years. Even the modest 0.5 per cent lift in non-food retailing in November is hardly remarkable, especially when you consider that sales plummeted by 1.9 per cent in the prior month.
• A breakdown of the retail sales data across the states suggests that Queensland is faring far worse than other states. In smoothed terms retail sales in Queensland are growing at the slowest annual rate in records going back 28 years. However given the recent floods, there may be a pickup in activity levels as households replace damaged items such as furniture, carpets and start rebuilding.
• No doubt part of the slide in retail sales can be blamed on lower prices, rather than weaker spending, given the widespread discounting taking place across the retail sector. However weaker volumes are clearly playing their part. Prices of some goods are coming down because our dollar is strong, but plenty of retailers are cutting prices because consumers refuse to spend.
• Motorists need to prepare for higher petrol prices over the next fortnight. The wholesale price of petrol has eased modestly but the rise in the Singapore unleaded price and slide in the Australia dollar will filter through to pump prices over the coming fortnight. In fact in Australian dollar terms the Singapore unleaded price is trading at 27- month highs.
• Even retailers have been selling fuel in some states at or near cost – due to increased competition – and clearly this is an unsustainable scenario in the longer term. The bottom line is that pump prices are set to rise over the next couple of weeks.

What do the figures show?

Retail trade:

• Retail trade rose by just 0.3 per cent in November after a downwardly revised 0.8 per cent slide in October. Nonfood retailing rose by 0.5 per cent in November after the 1.9 per cent slide in the prior month. Over the past year retail trade lifted by just 1.3 per cent – marking the second weakest reading in five years (surpassed by the 1.0 per cent annualised growth rate in the year to May 2010).
• Sales by chain stores and other large retailers rose by 0.2 per cent in seasonally terms in November while sales by smaller retailers rose by 0.5 per cent. In annual terms sales at chain stores were up 0.6 per cent on a year ago – the weakest annual growth in records going back 16 years. Sales at smaller retailers were up 2.4 per cent on a year ago.
• During November, sales increased most at other recreational good retailers – including sporting, entertainment and toy retailers – (up 4.9 per cent), followed by furniture, floor coverings, and houseware goods retailing (up 1.5 per cent) and footwear and other personal accessory retailers (up 1.5 per cent). Sales fell most at newspaper and book retailing (down 1.3 per cent), followed by clothing retailers (down 0.3 per cent).
• Across the states sales lifted most in the ACT (up 1.0 per cent), followed by NSW and Tasmania (both up 0.6 per cent) and Victoria (up 0.2 per cent). Sales was weakest in the Northern Territory and South Australia (both down 0.9 per cent), followed by Western Australia (down 0.2 per cent). Sales were flat in Tasmania.

Petrol prices:

• The national average wholesale (terminal gate) price hit a 26-month low high of 124.2 cents a litre on December 31st but has eased marginally from those levels – down 0.8 cents over the week. Just over two months ago (October 1) the terminal gate price stood at an 11-month low of 111.6c/l.
• Last week, the key Singapore unleaded petrol price rose by US$2.18 (2.1 per cent) to US$105.35 a barrel. And in Australian dollar terms the Singapore gasoline price rose by $3.06 (3.0 per cent) over the week to $106.06 a barrel – a 2- month high.

Job advertisements:

• The Advantage internet job index fell by 2.3 per cent in December – “indicating an unexpected softening in the jobs market”. The authors of the report also note “An interest rate hangover brought about by seven consecutive rises and a grab for cash by the major banks late last year still appears to be having a negative impact on the job market. A weakening job market nationally, coupled with significant job losses in Queensland, is like to set a negative tone for early 2011”. In December gains were recorded in only engineering (1.7 per cent) and human resources (1.2 per cent). While significant losses were recorded by retail (-12.0 per cent), followed by tourism and hospitality (-10.8 per cent). All states were down except for Western Australia which recorded growth of 1.2 per cent in December.

What is the importance of the economic data?

• The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
• The monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.
• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. National average retail prices are calculated as the weighted average of each State/Territory’s
  metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.

What are the implications for interest rates and investors?

• The sluggish activity levels in the retail sector will need to turnaround pretty quickly to justify a further rate hike in the first half of 2011. Rather it is more likely that retailers will need to continue discounting in coming months especially given the economy was already struggling before the Reserve Bank delivered the November rate hike.
• Consumers will only start to spend again when they become more confident – an extended period of interest rate stability will help.
• The job market is still in good shape, but with the economy losing momentum, employment gains are likely to be much more subdued. Already the tourism, retail and hospitality sectors are curbing future
  employment with jobs ads sliding in December– adding a further drag on consumer spending and economic growth.

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

What does it all mean?

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

What do the figures show?

Car sales:

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

What is the importance of the economic data?

• The Federal Chamber of Automotive Industries release figures on new car sales at the start of each month. The data is useful in gauging consumer spending behaviour.

What are the implications for interest rates and investors?

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

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• At the last Reserve Bank board meeting members took some time to consider bank funding costs. Members explicitly stated that there was a possibility that banks would increase interest rates on loans by more than the cash rate due to funding cost pressures.
• “Members noted that lending rates might increase by more than the cash rate, but this tendency would not be lessened by delaying a change in the cash rate. Lending rates had been rising relative to the cash rate since the global financial crisis, and the Board had taken this into account in setting the cash rate.”
• The decision to lift interest rates in November was clearly touch and go. Consumer spending was soft, housing had turned down, business conditions were mixed and inflation was under control. But the Reserve Bank judged that economic conditions were more likely to improve with inflation trending higher, justifying a pre-emptive rate hike.
• The Reserve Bank has explicitly noted that the higher rates by banks will be taken into account in future rate decisions, suggesting that rates are now on hold until February 2011.

What does it all mean?

• The latest Reserve Bank board minutes reveal that the decision to lift interest rates was certainly not taken lightly. Rather the result was finely balanced given the soft near term conditions in consumer spending, business investment and housing activity. Most of the discussion in the latest board minutes has unsurprisingly portrayed a similar view to the Statement on Monetary Policy, which was released a few days after the last board meeting, however the dialogue on banking funding costs was certainly revealing.
• Board members discussed the pressure on bank funding costs, highlighting that there was a case for banks to lift interest rates on mortgages by more than the cash rate. And interestingly board members came to the conclusion that had interest rates remained on hold it was unlikely to alter the fact that funding pressures remained an ongoing issue for the banks.
• Federal politicians would do well to read the Reserve Bank comments on bank funding costs. The Reserve Bank explicitly states that there was a case for banks to lift rates by more than the cash rate. The Treasurer must now explain whether the Government fundamentally disagrees with the Reserve Bank.
• The minutes suggest that board members were if anything a touch optimistic about the global recovery that was taking place. And more encouragingly the central bank had become more comfortable with the Chinese growth story. Members noted that downside risks to China were diminishing and a further degree of uncertainty had been removed from the global economy. The robust growth in the Asian region strength in commodity prices, will continue to boost Australia’s term of trade and in turn strength growth and activity in the mid-term – essentially highlighting the reason why the Reserve Bank decided to raise interest rate in a pre-emptive strike against future inflation.
• On the domestic front Board members were conscious that the domestic economy was already responding to the previous interest rate hikes. There were clear signs that the demand in the housing market was showing signs of easing, with house prices tracking sideways. CommSec expects further consolidation in the housing sector given the sharp slide in housing finance over the past year and the expected increase in the supply of new homes in coming months.
• In terms of the Australian dollar the central bank is well aware that the Australian dollar is effectively acting as a quasi rate hike – curbing exports receipts, while slowing manufacturing activity and having a detrimental impact Economic Insights RBA highlights pressure on bank funding on the tourism sector. Encouragingly the strength of the Aussie will support the Reserve Bank’s efforts in keeping
  inflation low.
• Looking forward the limited spare capacity in the labour market, and the resulting growth in wages will be central to the trajectory of rate hikes over the coming year – especially given that the domestic recovery is only in its infancy. In recent times wage growth had remained solid and while it has not had a major impact on the inflationary front it is likely to be an area that the Reserve Bank monitors closely over the coming year. CommSec would expect labour shortages are likely to become more prominent over the coming year.
• All in all the latest minutes highlights that the latest rate hike has provided the Reserve Bank a degree of flexibility on the interest rate front. And while the near term domestic data looks patchy the Reserve Bank remains confident about the outlook.
• Looking forward, CommSec believes that a pause at the next board meeting would be the best outcome. And the latest minutes suggest the Reserve Bank is comfortable with the current interest rate settings. It is clear that the Reserve Bank is unlikely to move on interest rates until more robust economic data is available.

What do the figures show?

Minutes from the November 2010 Reserve Bank Board meeting

Consumer spending & housing

• While liaison and recent data on retail trade provided a picture of varied conditions across the different segments of the retail market, they mostly suggested that consumers were still cautious in their spending and that discounting was extensive.
• In the housing market, conditions had softened relative to earlier in the year, with national housing prices broadly flat over recent months. Auction clearance rates remained around long-run average levels. Loan approvals had drifted down over the course of the year and growth in housing credit had been moderate over recent months. Other forms of household credit had been flat recently and liaison with retailers had noted a pick-up in cash payments relative to credit cards.

Mixed business conditions

• Business conditions remained generally favourable, although there were clear differences across sectors and regions. Indicators of investment intentions were mostly positive, particularly for the resources sector, where the pipeline of work to be done was large.

Bank funding costs

• Domestically, the most recent data showed a continuation of the trends in bank funding that had been apparent for some time. The shares of relatively high cost funds, such as domestic deposits and long-term debt, had continued to rise, while the share of short-term debt had continued to fall. Members were briefed on developments in funding costs. Most banks had reported a small reduction in net interest margins in their most recent half-yearly accounts, though some had experienced an increase. Deposit competition appeared to have levelled off in recent months. In debt markets, spreads on short-term bank bills had narrowed to be not far above pre-crisis levels. Spreads on longer-term bank debt had stabilised at levels that were significantly higher than before the crisis. This was slowly adding to the banks’ cost of funds as banks rolled over debt issued earlier at lower spreads. Members noted that there was a possibility that banks would increase interest rates on loans by more than any move in the cash rate.

Domestic Economy & inflation

• Overall, members considered that developments in terms of activity and inflation were broadly consistent with the central scenario the Bank had envisaged for some months. The outlook for growth in the resources sector was very strong and GDP growth was expected to rise gradually. While inflation had moderated, it was likely that the decline was now largely complete; inflation was expected to remain around the current level for several quarters, but was likely to move higher thereafter.

Finely balanced decision

• As in October, a case could be made for waiting a little longer: the expected pick-up in domestic growth would be only in its early stages; the latest CPI outcome had been relatively good; and credit growth and housing prices were subdued. In addition, the exchange rate had appreciated over the past month, and quite significantly over a longer period, which would dampen inflation pressures somewhat. There might also be a case for waiting to see if the Federal Reserve’s upcoming announcement had a significant further effect on the exchange rate.
• On the other hand, some of the uncertainties that had been a reason to keep interest rates steady over the past few months had lessened recently, even though they had not dissipated completely. Compared with several months ago, downside risks to the global economy had still not materialised in any significant way. Indeed, the uncertainty regarding the outlook for the Chinese economy had lessened, commodity markets had strengthened and the outlook for investment had firmed. With only a relatively modest amount of spare capacity in the economy, a gradual upward trend in inflation remained likely over the medium term. If monetary policy was to be conducted in a forward-looking way, these developments meant there was a case for increasing interest rates at the current meeting.

The decision

• Members considered that the arguments were finely balanced. However, with the flow of information over the past month generally suggesting that the medium-term economic outlook remained one of strengthening economic activity and gradually rising inflation, the Board judged that the balance of risks had shifted to the point where a modest tightening of monetary policy was prudent. Members noted that lending rates might increase by more than the cash rate, but this tendency would not be lessened by delaying a change in the cash rate. Lending rates had been rising relative to the cash rate since the global financial crisis, and the Board had taken this into account in setting the cash rate. It would continue to take account of any changes in margins in its decisions in the period ahead.

What is the importance of the economic data?

• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

• Board members are cautiously optimistic on the recovery in the global economy, highlighting that downside risks are diminishing. However the recent interest rate hike is likely to result in a softer domestic economy in the near term. The latest rate hike has given the central bank a degree of flexibility in future interest rate decisions and as such CommSec expects interest rates to remain on hold well into the New Year.

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• Employment rose by 29,700 in October, in line with forecasts centred on job gains of around 20,000. Fulltime employment fell by 14.100 and part-time jobs rose by 43,800 – the biggest gain in 15 months.
• The unemployment rate rose from 5.1 per cent to a six-month high of 5.4 per cent as job growth was outpaced by the rise in new entrants. The size of the labour force rose by 0.5 per cent in October – matching the largest monthly increase in 21 months.
• The participation rate rose from 65.6 per cent to 65.9 per cent. Average hours worked rose by 0.5 per cent. Hours worked are up 3.7 per cent over the year. The working age population grew by 19,800 in October.
• Chinese consumer prices rose at a 4.4 per cent annual pace in October – the fastest pace in over two year.
• China’s industrial production and retail sales slowed in annual terms in October. Urban property prices continue to moderate.

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