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There is not a lot in the form of mind altering data for Australia this
week. For Oz it’s all 2nd and third tier stuff, but the flow is steady. I’m
probably going to be more interested in the consumer related data flow this
week. That is, motor vehicle sales data today (1130) and the consumer
sentiment numbers on Wednesday (1030), although we do get some useful
construction data on Wednesday and Thursday and of course trade price data
on Friday (1130).
Naturally enough, my interest in the consumer related data results from
this supposed debate going on about the health of the consumer, which I
briefly touched on last week. As I mentioned last week, the retail
association argues the sector is struggling. The monthly retail sales data
would support that view, although more reliable data elsewhere doesn’t. As
a reminder, the broader measures of consumer data in the national accounts,
the fact that retailers were a key employer in 2010 etc etc, all suggest
consumer spending is robust.
Indeed when I speak to retailers myself (mainly senior sales staff), and I
have across several major Australian cities, the feedback I get is
consistent with that view. Responses typically suggest that sales have been
“solid”, “pretty good” or “strong but certainly not a record year”. This
makes sense. I mean to believe that consumer spending is weak you
literally, I mean literally, have to accept that of the 360 odd thousand
new employees we’ve seen this year – roughly $15bn in additional post tax
income or $1.25bn per month (5% of retail) – none of them need to eat or
wear clothes, have any furniture or even live anywhere – not to mention the
fact that they have must have absolutely no interest in anything else.
Other than that, we get TD’s inflation gauge today, DEWR’s skilled vacancy
index Wednesday (11) and consumer inflation expectations (Thursday 1030).
Looking across the Tasman (NZ) we do actually get some mind altering data
out and the big news is the CPI on Thursday (0845 Oz time). We already know
the drill here. The GST increase on October 1, by itself should lead to
about a 2% (give or take) increase in prices for the quarter. With that in
mind, I’m looking for a 2.6% quarterly lift which is only a touch above the
RBNZ’s forecast of 2.3%q/q (which is also the market forecast). Annually,
CPI should rise to just below 5% from a 1.9% increase in Q3.
Otherwise the Kiwi’s also put out retail sales on Friday (also 0845).
Remember the common perception is that a GST bring forward prior to the
introduction of the GST caused a surge in sales which subsequently caused
sales drop in November. For mine the argument is theoretically unsound and
I would suggest instead that there are problems with the seasonal factors.
The market is looking for a 1.2% lift in sales for the month (November).
For the rest of the globe, we get a reasonable flow of data although not
much of it from the US. Indeed, it’s Martin Luther King Day so markets are
closed on Monday. For the rest of the week we get the Empire State
Manufacturing survey on Tuesday (alongside TIC flows and the NAHB housing
market index). Wednesday we see construction work done and housing starts
with the Philly Fed index and existing home sales due Thursday. The general
flow of the data is expected to be fairly solid with housing data forecast
to pick up and the manufacturing surveys expected to remain elevated.
The big guns are out on Thursday with China’s GDP data, CPI, retail sales
and industrial production (all expected 1300 Oz time). It’s all expected to
be pretty strong with GDP in particular forecast at 9.4% in Q4 from 9.6% in
Elsewhere just watch out for the German Zew and Ifo surveys and in the UK
we get CPI, retail sales and labour market data. The BoC also meet (no
Hope you have a good week.
The RBA’s meeting this Tuesday is unlikely to produce another rate hike, we got that when the commercial banks hiked following the November 2 meeting. In terms of market pricing, no economists expect the RBA to hike and futures have no chance of hike priced in and if anything, a very modest chance of a cut – don’t get excited about that though.
There is a lot of talk about the prospect of a more dovish RBA statement following the decision and while that’s always a possibility I’m not sure that the RBA or indeed the RBA board will be feeling that dovish.
You have to acknowledge, and I do, that it has been a good week for the bears (on the economy at least). At face value the retail figures and the soft GDP figures suggest the economy is slowing sharply and certainly some commentators believe just this. Nevertheless, and as I briefly discussed on the day, the headline GDP figure gives a misleading signal as the weakness was driven by base effects, statistical noise and producers underestimating growth (running down inventories).
Consequently I think it’s wrong to conclude from these figures that the economy is slowing sharply. Domestic demand growth (what consumers, business and government actually spend) is still robust, rising 0.6%q/q after 4 quarters of growth averaging 1% and annually, growth is an above trend 4.4%.
I mean it doesn’t make a lot of sense to conclude the Australian economy is slowing. Interest rates are only at average levels. They are not restrictive and I don’t think it’s accurate to suggest that the nation is straining under the weight of restrictive monetary policy. Moreover, jobs growth is very strong and the unemployment rate is very low. Note that we get another update on the labour market this Thursday (1130) and the median market expectation is that 20K (me at 15k) jobs were created. The unemployment rate is forecast to dip to 5.3%.
This, by the by, is one of the reasons I don’t think we can be confident of the signal the monthly retail numbers are giving – you don’t usually have a sluggish retailing sector when jobs growth is so strong. Don’t forget we have been here before, numerous times. Mid-year for instance, things were looking dire in the retail space, along comes an ABS revision and all of a sudden things weren’t so dire.
The opposite occurred this time round. Monthly retail sales were looking solid, along comes one weak month and some revisions, all of a sudden things look soft. My point is, you’re not going to get an accurate picture of the retailing environment when they are subject to such swings (something that it evident in the monthly retail components as well, swings have been huge). Nor are you going to get an accurate picture of the retailing environment from the retailing association. So think big picture, look at the whole canvass and you’ll be able to make a more precise assessment of where the Australian economy sits – and of course profit from any mispricing.
For instance, IBs look expensive for mine. Not even one rate hike is priced into the curve at this point (46% to June) and while I reckon future rate hikes will occur less frequently, I don’t quite think they’ll be that infrequent. I still think there will be 2 rate hikes in the first half, at this stage one each in Q1 and Q2, based largely on global growth prospects – which is why I think 10yrs look expensive as well.
Risk appetite is coming back, the global economy is much, much stronger in the 2H10 than had been projected and there is no sign of this material slowing that has been continually touted. 2011 will no doubt be more of the same – except much stronger. There is an extraordinary amount of policy stimulus globally and that doesn’t look like its going to change any time soon. Indeed the Bernank is apparently about to argue on 60 minutes (11am today Oz time) that he won’t rule out further quantitative easing. US data outside of that is reasonably light and includes initial jobless claims (Thursday), trade data and the Michigan consumer confidence survey (both Friday). The US government then plans to sell $66bn in coupons this week and monetise (this week alone) up to 1/3 of it by buying $15-$22bn worth of treasuries off itself and printing the money to do it.
In Europe , watch out for German factory orders (Tuesday), and then German trade data and industrial production on Wednesday. The UK has industrial production on Tuesday and the BoE meeting Thursday (no changes expected). Otherwise watch out for Chinese trade data on Friday and central bank meeting in Canada , NZ (Thursday morning at 7am) and South Korea (no changes expected).
Don’t forget ICAP’s charity day this Wednesday – dig deep, as all profits earned go toward helping those in need and as we know, good things happen to charitable people. So let’s be charitable!
Hope you have a great week…
Well unfortunately, we didn’t get much from IMF meetings held this weekend. The rhetoric was kinda there – finance ministers agreeing to cooperate on exchange rates and to hold further discussions (G20 meetings) in November. Agreement is going to be extremely difficult to achieve in practice though. The IMF and the US take the position that China’s FX reserve accumulation is responsible for global imbalances. Emerging nations for there part suggest that it isn’t the accumulation of FX reserves, but the Fed’s ultra loose monetary policy that is causing problems.
Regular readers will know my view – it is very clearly the Fed. I mean think about it. China didn’t force US consumers to gear up to their eyeballs taking out loans they couldn’t afford – maxing out their credit cards etc. Consequently, China is not responsible for either the GFC or the US trade deficit – for the global imbalances the US keeps going on about. Moreover when other nations intervene in FX markets, they are responding to the depreciation of the USD –caused entirely the Fed’s ultra loose policy and ongoing threats to print more money. They’re not responding to any action that China has taken.
The US doesn’t acknowledge any of this however, so it going to be difficult to discuss anything. In fact many US politicians spend their time ranting on about China – how they undermine US export opportunities and so take American jobs. Of course from their point of view, the yuan is just providing one enormous export subsidy. The fact that Chinese workers get paid about 1/10 of a US worker is apparently irrelevant.
In all of this I haven’t seen a figure the US would be happy with – it’s unclear just how much of a revaluation they want. So since 2005 we’ve seen something like 18%, which obviously hasn’t calmed US fears. Then again can anything assuage US fear? Back in the 80’s, a time when the US was attacking Germany and Japan about the value of their currencies, the US managed to convince the Japanese (the Plaza accord in ‘85) to a 40% appreciation of Yen over a 2 yr period. This by the by was a complete failure of a policy and did little to fix trade imbalances on a sustained basis (in fact the trade balance with both countries continued to deteriorate through the 90’s).
China’s rhetoric to date suggests they will be less amenable to such dramatic action. No doubt the Asian financial crisis of ‘97 is very fresh in their mind and consequently, they want to ensure that the Yuan appreciates only gradually and that they don’t freely float the currency prematurely. As we found out in 1997, the consequences of acting too early can be severe.
There is an important point behind all of this with serious implications for Australia. Namely, the Fed are probably going to print more money. If they can’t get an agreement with other countries to revalue their exchange rates, then they’ll force it upon them. This means the AUD will, in all likelihood, smash though parity. Now we know how this works – a higher AUD means less tourists, it means lower profits for other exporters including our miners etc etc. It means a lower terms of trade. Lower profits mean lower national income; it means smaller budget surpluses; all of which suggests lower economic growth for Australia – and lower inflation.
Magnitudes are obviously very difficult to work out and exchange rate impacts have generally become more muted as they say. Yet they’re not completely irrelevant – especially given the importance of the mining boom to future growth – and if the AUD continues to rise, there will be implications for monetary policy.
At this stage I’m leaving my forecasts as they are, but none of us should make any mistake – things are very fluid. So I’m sticking with 2 rate hikes this year predicated on an elevated Q3 CPI print, solid domestic growth data and a pick up in global growth. If all that happens but AUD is at $1.10 then make that 1 rate hike (maybe). Much depends on the Fed and note that the next meeting (at which they are expected to print) would be the day after the RBA’s meeting (November 5) which will make things very interesting, very close and obviously lifts the bar for a hike.
Leaving that for now and looking to the week ahead – data for Australia is reasonably light although under the circumstances quite important. Home lending data is released today (1130) and for mine this is a key indicator. Expectations are that loans will rise 1% in August (my forecast also). Other than that we get NAB’s business confidence measure (Tuesday, 1130) and Westpac’s consumer confidence update (Wednesday, 1030). Across the Tasman the kiwis put out August retail sales on Thursday (mkt at 0.3% me at 0.5%). For the rest of the region, keep a close eye on Chinese trade data on Wednesday.
US data includes the FOMC minutes (Tues morning), retail sales, CPI, Empire State index, Michigan confidence (all Friday night) and a whole bunch of Fed speakers (including Bernanke on Wednesday). Finally in Europe we get German and UK CPI and Euro zone industrial production. Otherwise check out the attached calendar.
Hope you have a great week…