AdviserVoicePre-Election Economic & Fiscal Outlook Archives - AdviserVoice

Weekly market & economic update: week ending August 16

Sun, 18 Aug 2013 21:55:50 +0000

Key events of the past week and implications

The past week saw more good data out of the US and Europe, but share markets were mixed with worries about Fed tapering weighing and pushing bond yields higher globally.
Several Fed officials have left the impression the Fed is on track to start tapering in September, but the initial move is likely to be modest with additional moves contingent on further economic improvement. Our view remains that while tapering is a potential short term threat to markets, its unlikely to derail the cyclical rally in shares as tapering will only occur in response to stronger growth and won’t signal higher interest rates.
Although turmoil in Egypt has the potential to be a source of nervousness Egypt is not a major oil producer and only around 2% world oil consumption flows through the Suez Canal.
In Australia, the Treasury’s Pre-Election Economic and Fiscal Outlook added nothing new to the economic and budget projections released in the Government’s economic statement two weeks ago. But it did provide another reminder of the latest budget blowout and how Australia’s public finances are in a rather unfortunate shape given the biggest boom in our history.

Major global economic events and implications

US economic data was mostly ok.
US economic data was mostly ok. To be sure mortgage applications remained weak on the back of rising mortgage rates and bond yields, industrial production was flat in July and manufacturing conditions slipped a bit in August according to a couple of regional business surveys. But this was more than offset by a fall in jobless claims to their lowest since October 2007, another sharp rise in home builders’ confidence, positive news on retail sales, a small rise in small business optimism and signs that inflation may be troughing in reinforcing expectations that the Fed will taper in September.
The news out of the Eurozone was particularly good, with GDP rising 0.3% in the June quarter signalling an end to 18 months of recession. A rising trend in PMIs and business confidence points to continued recovery in the current half albeit at a soft pace. The return to growth has been led by France and Germany, but Spain and Italy are also seeing a slowing in the pace of their contractions.
Japan’s June quarter GDP disappointed with 0.6% growth thanks largely to a detraction from inventories and weak business investment. Underling final demand was solid though, but it’s likely that further monetary stimulus to maintain downwards pressure on the Yen will be required. On this front the Bank of Japan’s balance sheet has been flat for two months now and needs to start rising again for the Yen to fall and Nikkei to rise.
On the profit front, the US June quarter profit reporting season is now largely done with 72% surprising positively on earnings and 55% on revenues and earnings growth coming in at around 3.6% compared to expectations of 1% a month ago. In Europe, profit results are a bit more subdued with 54% better on earnings but 57% better on revenue. In Asia 60% have exceeded on earnings and 52% on revenue. Overall good but not booming.
Indian economic data remained poor with weaker industrial production and worse than expected inflation.

Australian economic events and implications

Australian economic data was a mixed bag with business confidence and conditions remaining weak but consumer confidence rising in August and continuing to trace out a gradual rising trend which should augur well for consumer spending. Interestingly the rise in confidence appears to reflect more cheery home owners, after the latest rate cut, and coalition voters presumably feeling happier at the prospect of a change in Government. Meanwhile wages growth remained benign in the June quarter suggesting no threat to inflation from labour costs.
We are now about 30% through the June half profit reporting season. So far results have not been fantastic but they have not been as bad as feared which explains why the market has held up ok, nothwithstanding offshore influences. 41% of companies have exceeded expectations, which is down from the February reporting season but not bad compared to the last few years; 33% of results have been below expectations though which is well up; 68% of companies have seen their profits rise from a year ago; 65% of companies have increased their dividends from a year ago and only 9% have cut them; and there have been more positive outlook comments than negative. Reflecting the better than feared results, 55% of companies have seen their share price outperform the market on the day their results were released. Key themes remain ongoing cost control and weak revenue growth. The prospective boost to profits from the lower $A and for iron ore companies from a higher iron ore price may be helping investors look through disappointing results.

Major market moves

Shares were mixed over the past week – down in the US on taper fears and in Japan, but up in Australia, China and most of Asia.
Commodities rose on the back of good global growth news and oil prices helped a bit by turmoil in Egypt.
Despite higher commodity prices the Australian dollar fell slightly.
Bond yields were led higher as Fed taper fears intensified and as European economic data impressed.

What to watch over the next week?

In the US, the minutes from the last Fed meeting (Wednesday) will likely be the highlight with investors searching for more clues as to when the Fed will start to taper its quantitative easing program. On the data front expect a 1% rise in existing home sales (Wednesday) but a fall in new home sales (Friday) after a surge in June, a continued gain in house prices (Thursday) and the flash Markit PMI for August (Thursday) to improve slightly.
Preliminary August manufacturing PMIs will also be watched closely in the Eurozone (Thursday) and are expected to show a continuing trend improvement.
The flash HSBC manufacturing conditions PMI for China will be released Thursday and is expected to show a slight improvement after falling sharply in recent months.
In Australia, the focus is likely to be on the minutes from the RBA’s last Board meeting (Tuesday), which are expected to confirm that it retains an easing bias but that it has been weakened following the last rate cut.
The June half Australian profit reporting season will hit its peak with 90 major companies due to report, including Amcor, Coca-Cola Amatil, BHP, QBE, Boral, Fairfax, IAG and Lend Lease. Consensus estimates for 2012-13 earnings growth have slipped to -0.5% from +12% earlier this year, so a lot of bad news is factored in. Domestically exposed cyclicals are vulnerable to further weakness. On the positive side though, ongoing cost control and the fall in the $A are likely to be supports for the profit outlook going forward, with the fall in the $A to date potentially boosting profits by around 4.5%.

Outlook for markets

Shares are vulnerable to a near term correction after having become overbought following the rally from late June. Potential triggers include: the Fed tapering its monetary stimulus, US Government funding and debt ceiling negotiations, China and the profit reporting season in Australia. However, the broad trend in shares is likely to remain up: valuations are no longer 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.
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, expect the $A to fall to $US0.80.

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

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PEFO non-event; Businesses still gloomy

Tue, 13 Aug 2013 21:50:38 +0000

Pre-Election Economic & Fiscal Outlook; NAB business survey

Pre-election economic outlook results almost identical.

No change: It was almost certain that the Pre-Election Economic & Fiscal Outlook (PEFO) figures were going to be the same as those in the Economic Statement, a document released on August 2 just before the election was called on August 4. There were no surprises. The figures were almost identical.
Soft business survey: The NAB business confidence index weakened from minus 0.4 points to minus 2.8 points in July. The business conditions index improved from minus 7.5 points to minus 6.6 points. The survey was conducted from July 25-31, that is, before the Economic Statement was released, before the Federal Election was called and before the Reserve Bank cut interest rates to 53-year lows.
Inflationary pressures emerging: The NAB business survey showed purchase costs lifting at a 1.2 per cent quarterly pace in July, up from 0.4 per cent. Wage costs rose at a 1.3 per cent quarterly pace, up from 0.7 per cent.

What does it all mean?

There was never going to be any surprises in Federal Treasury’s assessment of the economy. The Federal Government made sure of this by releasing the Economic Statement a few days before calling the election. It wouldn’t have been a good look if an election was called and then Treasury revealed a blow-out in the Budget and projections of slower economic growth and higher unemployment. Better the Government release the bad news rather than be accused of failing to reveal the true state of the nation’s finances.
To recap, Federal Treasury is tipping slower growth this year and higher unemployment and a budget deficit of $30.1 billion this year rather than $18.0 billion.
Interestingly not all the figures in the PEFO document were the same as the August Economic Statement. The PEFO projects a fiscal balance deficit of $22.1 billion in 2014/15 and the Economic Statement shows a deficit of $22.2 billion. Curious, but essentially splitting hairs.
Overall the budget deficit and debt levels are low on a global scale but arguably should be even lower for an economy benefitting from a China mining boom.
The latest business survey suggests that little has changed over the past month. And while it was obvious that there would be no ‘new news’ in the PEFO, it would also have been generally expected that there would be few changes in the business survey. The $64 question is how businesses are feeling now that there are new Budget numbers, an Election has been called and interest rates have been cut.
The bottom line is that Aussie businesses will only start to cheer up when the election is out of the road.
The PEFO highlights the challenges that lie ahead for the next Government. Any responsible Government would announce a fundamental review of tax measures after the election including the GST and state government reliance on stamp duty and land tax.
Scare campaigns being run by both sides of politics concerning the nation’s finances need to end as they are contributing to depressed business and consumer confidence.

What do the figures show?

Pre-Election Economic & Fiscal Outlook (PEFO):

The budget deficit for 2012/13 is still estimated at $19.4 billion or 1.3 per cent of GDP. But compared with the May Budget, the 2013/14 budget deficit is now tipped at $30.1 billion (1.9 per cent of GDP), up from the earlier estimate of $18.0 billion (1.1 per cent of GDP).
Looking further out: the 2014/15 budget deficit is forecast at $23.97 billion (1.5 per cent of GDP); the 2015/16 budget deficit $4.71 billion (0.3 per cent of GDP); 2016/17 budget surplus $4.03 billion (0.2 per cent of GDP).
Federal Treasury now tips 2.5 per cent economic growth in current year, down from the May budget forecast of 2.75 per cent.
The jobless rate now seen to average 6.25 per cent this year, up from the previous forecast of 5.75 per cent.
Nominal GDP expected to grow by 3.75 per cent, down from the previous forecast of 5.0 per cent.
Consumer price index to average 2.5 per cent this year, up from the previous forecast of 2.25 per cent.
Net debt is expected to peak as a proportion of GDP in 2014/15 at 13 per cent ($212.1 billion) and fall to 12.7 per cent in 2015/16 ($219 billion).

National Australia Bank Business Survey:

The NAB business confidence index weakened from minus 0.4 points to minus 2.8 points in July. The business conditions index improved from minus 7.5 points to minus 6.6 points.
The index of trading conditions improved from minus 6.5 points to minus 4.4 points; employment improved from minus 6.1 points to minus 4.9 points; profitability deteriorated from minus 8.7 points to minus 11.4 points; and forward orders deteriorated from minus 5.4 points to minus 6.1 points – the 20^th straight month that forward orders have contracted.
In terms of business conditions, NAB noted: “While solid improvements in business conditions were reported in retail, mining and recreation & personal services, these gains were largely offset by weaker conditions in finance/ business/ property, construction and transport & utilities. The still weak set of industry conditions suggests the lower Australian dollar is providing little support to activity domestically – especially in the trade dependent manufacturing industry, which experienced the weakest conditions since March. Forward looking indicators of activity suggest little near-term revival in business conditions, with forward orders, employment conditions, stocks and capacity utilisation all remaining well below long-run average levels.”
Inflationary pressures increased in July. The monthly reading of labour costs rose at a 1.3 per cent quarterly rate in July after a 0.7 per cent rise in June. Prices fell by 0.1 per cent after a 0.2 per cent fall in June. Retail prices rose by 0.2 per cent in July after rising at a 0.3 per cent quarterly rate in June. And purchase costs rose at a 1.2 per cent quarterly rate in July, up from 0.4 per cent in June.
Capacity utilisation lifted from 79.3 per cent in June to 79.9 per cent in July, but still below the long-term average of 81.2 per cent.
The proportion of firms reporting that they did not require credit stood around 66 per cent in July.
- The Pre-Election Economic & Fiscal Outlook document is released by Federal Treasury after an election is called. It contains the latest economic assumptions and Budget projections.
- The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
The PEFO document and latest business survey have no major implications for financial markets. The economy is locked in a holding pattern until the election is held.
The PEFO highlights the fact that all sources of government revenue should be up for review after the election. No matter what party takes Government, there is a revenue problem to be addressed. And no option should be ruled out. Any responsible Government needs to assess all taxation measures and that includes the GST.

Why is the data important?

The Pre-Election Economic & Fiscal Outlook document is released by Federal Treasury after an election is called. It contains the latest economic assumptions and Budget projections.
The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications?

The PEFO document and latest business survey have no major implications for financial markets. The economy is locked in a holding pattern until the election is held.
The PEFO highlights the fact that all sources of government revenue should be up for review after the election. No matter what party takes Government, there is a revenue problem to be addressed. And no option should be ruled out. Any responsible Government needs to assess all taxation measures and that includes the GST.

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