The Experts

Investment in resources has peaked, but no boom/bust on the cards. But consumers are more anxious. What does this mean for interest rates and investors?

The Bureau of Resources and Energy Economics (BREE) has estimated that committed investment in resources and energy major projects in Australia eased just 0.3 per cent over the past six months to $267.6 billion at April 2013. The Westpac/Melbourne Institute index of consumer confidence fell by 7 per cent in May. All five components of the index fell in May. The index is only up 2.4 per cent over the year to May.

What does this all mean?

The Government’s chief resources forecaster, BREE, has confirmed that the first phase of the resources boom – the construction phase – has more than likely peaked. But certainly this is no ‘boom and bust’. Of the $268 billion of committed projects, only $8 billion is likely to move to completion stage in 2014 and $63 billion in 2015. So the construction phase is peaking but activity will remain high for quite some time to come.

Contrary to perceptions, both the number and value of publicly announced resource projects have increased over the past six months. The number of projects at feasibility stage has also gone up in what could adequately be described as ‘difficult’ conditions. Certainly those predicting a resources sector ‘boom and bust’ need to look at the hard data.

Clearly Aussie consumers have taken a downbeat view of the latest Federal Budget and weaker Aussie dollar. What did the damage to consumer sentiment in the past few weeks? We don’t know for certain. There were few nasties in the Budget but the projected deficit was a lot higher than expected. And then there is the Aussie dollar, down around US5 cents since the end of April.

Whatever did the damage, it is clear that consumers are less certain and that may affect spending. The Reserve Bank will keep a rate cut on the agenda at coming meetings. Still, it also needs to be mindful that there is a growing proportion of Aussie consumers that get worried that rates are being cut – worried that this signifies a weak economy. And there are also a lot of savers that don’t want rates to fall. So while the Reserve Bank may favour a rate cut, Board members may need to do more homework to determine if it will actually be positive.

What do the figures show?

The Bureau of Resources and Energy Economics (BREE) has estimated that there are 73 committed resource or energy projects as at April 2013 valued at $267.6 billion. As at October 2012 there were 87 projects valued at $268.4 billion.

There are also 113 Publicly Announced projects valued between $121-172 billion as at April 2013 up from 106 Publicly Announced projects valued between $91.0- 133.2 billion as at October 2012.

There are 174 projects at the feasibility stage valued at $232 billion; and 21 completed projects totalling $15.3 billion. As at October 2012 there were 171 projects at the feasibility stage valued at $291.9 billion; and 24 completed projects totalling $11.9 billion.

BREE has assessed the probability that a project at the Publicly Announced or Feasibility stages will progress to the Committed Stage within the next five years.

Consumers more anxious

The Westpac/Melbourne Institute index of consumer sentiment fell by 7.0 per cent in May to 97.6. The index is up 2.4 per cent over the year.

All five components of the index fell in May: The estimate of family finances compared with a year ago fell by 8.0 per cent; The estimate of family finances over the next year fell by 7.0 per cent; Economic conditions over the next 12 months fell by 13.4 per cent; Economic conditions over the next 5 years fell by 6.9 per cent; The measure on whether it was a good time to buy a major household item fell by 1.3 per cent.

What is the importance of the economic data?

BREE provide estimates of committed resource and energy projects in Australia every six months. The information is useful in tracking workflow for mining, engineering and construction sectors.

Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

Two Economic Insights: No boom and bust; Consumers more anxious

What are the implications for interest rates and investors?

The Reserve Bank has got it right in its assessment of the timing of the peak of the resources construction phase. But it will be heartened that construction and engineering activity is set to stay at high levels for some time to come. So there is no rush to ensure that other parts of the economy fill any void left by the resources sector. In fact the number and value of less advanced projects has gone up over the past six months, not down.

At the margin, the latest BREE figures will temper the desire for the Reserve Bank to cut rates again. But while the BREE report tempers rate cut expectations, the consumer confidence report boosts the chances of a near term rate cut. Whether it is the Budget, the weaker Aussie dollar, fears associated with generationally lower interest rates or just the frustration of waiting four months to the election, consumers remain anxious.

How did this year’s projected small budget surplus turn into a $19.4 billion deficit in the space of seven months? Well, in large part it reflects a sharp slowdown in the growth rate of taxation receipts and therefore overall revenue. Simply, businesses are selling goods but not getting as much for the goods, affecting their revenues and therefore the amount they pay in tax.

According to the Budget papers, at the time of the Mid-Year statement in October last year the projected budget surplus for 2012/13 was $1.1 billion. Now a deficit of $19.4 billion is projected. Policy decisions since the statement worsened the projected bottom line by $2.4 billion but “parameter and other variations” further pushed the budget towards deficit by another $18.1 billion. Of this, $16.4 billion related to receipts while only $1.7 billion reflected higher projected spending (or payments).

The writedown of ‘receipts’ can largely be interpreted in terms of slower taxation revenues. And the “parameter” or economic variable that is used to forecast these tax receipts is nominal GDP growth.

At Budget time last year, nominal GDP growth (growth of the economy including prices or inflation) was estimated at 5 per cent. At the Mid-Year review this estimate was scaled back to 4 per cent and now in the latest Budget nominal GDP is tipped to grow by just 3.25 per cent in 2012/13.

This estimate is broadly made up of “real” growth of 3.0 per cent and inflation of just 0.25 per cent – a 50 year low. Over the past 15 years, real growth has averaged 3.2 per cent, not far above the latest estimate. But the measure of prices has averaged 3.4 per cent, well above the 2012/13 estimate.

Blame discounting, slimmer margins, the higher Aussie dollar and weaker commodity prices. Treasury expects nominal GDP growth to recover, but still fall short of “normal” or average rates over the last 15-20 years. Effectively tax revenues were hit by the “perfect storm”. Now it is a case of determining when the storm ends.

The week ahead

In Australia, economic data or events will in short supply in the coming week with minutes of the last Reserve Bank Board meeting and consumer sentiment data vying for attention. In the US, the Federal Reserve chairman gives testimony on the economy and minutes of the last central bank meeting are issued. And “flash” readings on manufacturing activity are expected on Thursday across the globe.

In Australia, the week kicks off on Tuesday when the Reserve Bank releases minutes of the last Board meeting. This was the meeting held a fortnight ago that decided on another interest rate cut. The question is whether there is anything new to learn about the decision. The Reserve Bank released a statement after the rate decision and the quarterly Statement on Monetary Policy was issue last Friday.

Also on Tuesday the Bureau of Statistics releases data on entries and exists of new businesses over the past four years. The data includes rates of business survival so the information is especially relevant for banks, other credit providers and accountants.

On Wednesday Westpac and the Melbourne Institute release the survey of consumer sentiment for May. Over the past six months the consumer sentiment reading has been in “optimistic” territory – above a reading of 100. And while the index probably held above the 100 mark in May, it is uncertain how it tracked in the month. The Aussie dollar has eased, representing bad news for consumers. But the Federal Budget contained few ‘nasties’, perhaps providing some comfort for consumers.

Also issued on Wednesday is the latest survey of skilled job vacancies from the Department of Employment and Workplace Relations. Anything that could provide some clarity about where the job market was headed would be warmly viewed by investors and analysts.

The Tasmanian Budget is handed down on Thursday while surveys of inflation and unemployment expectations are issued by the Melbourne Institute on Thursday.

In the US, the week kicks off on Monday with the regional Chicago Federal Reserve index. And on Tuesday the regular weekly data on chain store sales is issued.

On Wednesday the Federal Reserve chairman Ben Bernanke gives testimony on the economy while on the same day the minutes of the last Federal Reserve policy setting meeting are issued alongside data on existing home sales. The Federal Reserve events are of most interest. If there are signs that the Fed is preparing for an ending of the quantitative easing cycle then the greenback will be given a further leg up.

In terms of data on existing home sales, economists expect that sales rose by 1.2 per cent in April.

On Thursday in the US, a raft of new economic indicators and surveys are issued. Data on new home sales is issued together with the Federal Housing Financing Agency home price index, the Kansas City Federal Reserve index, weekly data on jobless claims and the Markit “flash” reading on the manufacturing purchasing managers index (PMI) for May.

The jobless claims data is probably of most interest. If the job market continues its recovery, the Federal Reserve will be a step closer to ceasing the quantitative easing program.

Also on Thursday, Markit issues “flash” PMIs for China, France, Germany and the Eurozone.

And on Friday in the US, a measure of business investment – data on durable goods orders – is issued. Economists tip a 1.1 per cent lift in orders after the 5.8 per cent fall in March.

Sharemarket, interest rates, currencies & commodities

The US dollar has certainly moved back in favour over May. In part this reflects the gradual improvement of US economic data. But it is also in response to speculation that some Federal Reserve members are agitating for a scaling back or even cessation of the quantitative easing policy – effectively the printing of money. And further, the co-ordinated action of global central banks to ease monetary policy has also led to more positive views on the greenback. The thinking is that if policy is eased across the globe, this will serve to boost demand for US goods, lifting economic activity and demand for US investments.

Since the end of April the US dollar index has lifted by 2.3 per cent to the highest level in almost 10 months. And the index is only a smidgen below the highest levels in almost three years (since mid July 2010). The US dollar index hit a low of 72.9 in April 2011 and now stands at 83.6, a gain of 14.7 per cent. Since the lows, the index has generally trended higher but punctuated with various rallies and corrections.

The $64 question is whether the current upward spike in the value of the greenback will similarly be followed up with yet another correction/consolidation, or whether this is the real deal.

Our strategists have indicated a range for the Aussie dollar of US96-107 cents over the coming year. The lows of US96 cents may be realised in the short term, but the expectation is that it won’t hold for too long at those levels or go lower. If the US economy is recovering and has led need for quantitative easing, that is positive for the global economy, will boost demand for commodities and reduce scope for the Reserve Bank to cut rates.



Upcoming economic and financial market events


Australia


May 21 - Reserve Bank Board minutes - Minutes of May 7 meeting that decided to cut rates

May 22 - Consumer sentiment (May) - A flat result is likely, restrained by a weaker Aussie dollar

May 22 - Skilled vacancies (April) - One of the leading gauges of the job market
 


Overseas


May 22 - US Existing home sales (April) - A 1.2 per cent lift in sales is forecast by analysts

May 22 - US Federal Reserve minutes - Minutes of the April 30/May 1 meeting

May 22 - US Fed chief Bernanke testifies - Testimony to the Joint Economic Committee

May 23 - ‘Flash’ purchasing managers (May) - Gauges released in US, Europe and China

May 23 - US New home sales (April) - A modest lift in sales is expected

May 24 - US Durable goods orders (April) - A 1.1 per cent gain is tipped after the 5.8 per cent fall in March


First things first

This year (2012/13) the budget deficit is tipped to hit $19.4 billion (1.3 per cent of our economy or GDP). Last October, a surplus of $1.1 billion was expected.

Next year (2013/14) a deficit of $18.0 billion (1.1 per cent of GDP) is expected.

The budget is expected to return to balance (actually a small surplus of $849 million) in 2015/16.

Revenues are tipped to rise by 7.3 per cent in 2013/14 while real spending is tipped to rise by 4.3 per cent.

Net government debt is expected to peak at 11.4 per cent of GDP in 2014/15 .Previously net debt was to peak at 9.6 per cent of GDP. Whichever way you cut it, debt is low on a global perspective.

Did the Government get it right?

This is the last Budget by a minority Government before the Federal Election. So we were never going to get first-best outcomes. In fact if the Government had a choice, it probably wouldn’t be handing down a Budget at this time. Better that the election was out of the way and decisions could be made with a view of the longer term. Given the choice, it is unlikely that the Coalition, Greens or independent members would have opposed a decision to hand down a Budget after the election was out of the way.

So in many respects this is a housekeeping Budget by the Government. Still, the Budget also showcases many longer-term initiatives such as Education reform and the National Disability Insurance Scheme. The current Government has sought to leave a legacy – whether it is returned to power or not. It also allows the Government to claim that its focus is not just on the short term but on the longer-term prosperity of the nation.

Of course budgets are always a mix of politics and economics. That is a given. The Government of the day has its priorities and agenda and these are reflected in budget strategies, decisions and outcomes.

Clearly one of the clear stand-outs from this Budget – especially when you compare it with last year’s statement – is the absence of a Budget surplus. In fact the Budget is not expected to return to surplus for at least another three years.

But it was always going to be difficult to conjure up a surplus in the current financial year – it would have been the biggest turnaround in the Budget bottom line in over 50 years. But it was always the intention to reduce the size of the deficit that was most important, not the desire to produce a surplus (and a wafer-thin surplus at that).

This year the Government has rightly done away with the single-minded focus on surpluses. In its place is a desire to balance the budget, live within our means and improve social infrastructure.

So certainly this is a less “flashy” budget than last year, with the claim that the budget will return to surplus quickly and further that small surpluses will be achieved in the out-years. But this is where the Government gets it right – setting a path to surplus but not achieving it in a hurry. That is, aim to ensure that the economy continues to grow, thus lifting tax revenues and therefore gradually chip away at the deficit over the next three years.

The key initiatives of the Budget have all been outlined on one page in the Budget Overview document. And these are certainly not new but have been announced, telegraphed and or previously thrashed out. These include the Gonski education reforms; the national disability insurance scheme – DisabilityCare Australia; and the increase to the Superannuation Guarantee levy. There is more spending on health and infrastructure.

But there are a few nasties as well. The $5,000 baby bonus will be scrapped. The Government won’t proceed with the proposed increase to Family Tax Benefit A.

So overall, this is a less “flashy” Budget – very much a house-keeping or ‘workman-like’ Budget. Just ahead of the election it is not time for controversial, visionary decisions. Rather it is a time to portray the Government as a caring but economically responsible manager of the nation’s affairs.

What does it mean for Australia?

This Budget is very focussed on investment, and not just on the usual economic infrastructure like roads, but also social infrastructure such as health, provision of a disability insurance scheme and education.

The Government continues to focus on reducing the size of the budget surplus but the path is clearly flatter than that projected last year. In fact the net impact of budget decisions will actually increase the size of the budget deficit this year by $2.35 billion and lift the coming year’s deficit by $286 million. Where the Budget is expected to have an impact is on the out-years, from the 2014/15 year.

So austerity is ‘out’; rather the focus is on maintaining economic growth, ensuring that the very needy are supported while laying a groundwork for future social initiatives.

Overall then the Reserve Bank is not given fresh ammunition to cut interest rates. Not only has fiscal policy become more neutral in the short term, but the Aussie dollar has weakened, thus supporting businesses, and there are more encouraging signs for the global economy – especially in the US, China and Asia.

Who are the winners?

Schools: Commonwealth funding of $9.4 billion over six years

Farmers: Concessional government loans worth around $420 million to help farmers restructure their debts.

The disabled: the 0.5 per cent rise in 1.5 per cent Medicare levy to pay for the national disability scheme, raising about $3.3 billion.

Defence: spending increases slightly to $113 billion over the four years.

Pensioners: can sell their long-term home and invest up to $200,000 without affecting their pensions.

Drivers along the East Coast: $4.1 billion over a decade for upgrade work on the ageing Bruce Highway in Queensland and Federal, NSW government to each contributed $400 million to commence building the $3 billion tunnel linking F3 and M2 motorways in Sydney.

Single mothers and the unemployed on Newstart will be allowed to earn an extra $38 a fortnight, up to $100, before their benefits are scaled back.

Who are the losers?

Tax Payers: deferral of second round of tax cuts.

Families: The increase to Family Tax Benefit A worth a total of $1.8 billion for 2013/14 is to be scrapped.

Expecting families: The baby bonus is expected to be axed from March 2014 and replaced with a $2000 Family Benefit Part A payment for the first child or $1,000 for the second or subsequent child – which will cut out for those on household incomes above $110,000.

University students: changed payment structure for fees, scholarships and deductions including Student Start-up Scholarships as income contingent loans, rather than as grants. Total government saving of more than $2.5 billion.

Public servants: $580 million of cuts to the public service over the forward estimates.

Big business: crackdown on large company, multi-national tax minimisation schemes generating $4.2 billion of savings over the next four years. Monthly instalment payments (PAYG) for large taxpayers including trusts, superannuation funds, sole traders and larger investors generating $1.4 billion of savings over the next four years.

Smokers: cost of standard packet of 25 cigarettes rises by 7 cents.

Are the economic assumptions reasonable?

Federal Treasury hasn’t made too many changes to the forecasts made in the Mid Year statement, handed down in October last year.

Economic growth next financial year is seen as 2.75 per cent rather than 3.0 per cent. As a result unemployment is seen as a touch higher at 5.75 per cent rather than 5.50 per cent. And the all-important forecast which drives government revenues – nominal GDP – has been trimmed to show growth of 5.0 per cent next financial year, rather than the 5.25 per cent forecast made at budget time last year and the forecast of 5.50 per cent made at the time of the Mid Year review.

Overall we wouldn’t markedly disagree with the forecasts. Economic growth should be around 3 per cent – Treasury is actually looking for a softer outcome. And the jobless rate will be somewhere in the 5’s – an outcome that most countries would love to have.

It is the forecast for nominal GDP that could see the budget come unstuck or indeed come in better than expected. Over the past 15 years nominal GDP has grown on average by around 6.5 per cent a year. Over the next few years nominal GDP growth is seen around 5.0 per cent. If the Aussie dollar weakens, pushing up the cost of imported goods, and there is less discounting and margin trimming by businesses, nominal GDP growth could turn out to be higher. The other major uncertainty being export prices, which will depend on how quickly the global economy returns to full health.

For more Budget coverage, check out:

• Budget 2013 - what are the real issues?
• Budget special on Switzer TV
• Labor's trap for Tony Abbott

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The last time that money market interest rates were at current levels was 53 years ago. In March 1960 the minimum interest rate applied on loans accepted by authorised dealers on the short term money market was 2.69 per cent with the maximum rate of 3.38 per cent and an implied weighted average rate of 2.70 per cent.

Certainly very low interest rates were common through the 1940s, 1950s and most of the 1960s. For instance in 1952, the 3-month commercial bank deposit rate was just 0.71 per cent and even in 1956 it had lifted to only 1.25 per cent. Housing loan rates held at 5.00 per cent through 1959 and 1960. Trading bank overdraft rates were between 5.00-6.00 per cent in the late 1950s/early 1960s.

All these gems of information are contained in the hardcopy Reserve Bank Statistical Bulletins of the era and the forerunner – the Commonwealth Bank of Australia Statistical Bulletins.

Of course a key reason why interest rates were low was because wages and prices were under control. In the 1958/59 year, wages rose by 2.5 per cent, retail prices rose by 2.6 per cent and the consumer price index rose by 1.9 per cent.

Do these growth rates seem familiar? Wages are growing by 3.4 per cent currently with inflation around 2.5 per cent. Certainly other indicators are a bit different with the economy growing 7.0 per cent in 1958/59, but slowing to 4.4 per cent in 1959/60. And unemployment was hovering near 1-2 per cent in the late 1950s/early 1960s.

So could a cash rate near 3.0 per cent become the ‘new black’? If inflation sticks near 2.5 per cent and if Aussies continue to apply a conservative approach to taking on debt, a new economic glory period could be ushered in, similar to that which existed in the 1950s.

The week ahead

In Australia, the coming week is dominated by data on lending, wages and the Federal Budget. In China, top shelf economic data like retail sales and production are issued. And it is the same story in the United States. Not only are sales and production figures released but also inflation – consumer and producer prices.

In Australia, the week kicks off on Monday with data on housing finance, Reserve Bank statistics on credit and debit card lending and the NAB business survey. Reserve Bank Board members may wince if the March home loan figures print in line with expectations. Based on Bankers Association data, we expect that the number of loans to owner-occupiers rose by a super-strong 6.9 per cent in March while the value of investor and owner-occupier loans is tipped to have lifted by 8.0 per cent.

The NAB business survey should show an improvement in confidence levels in April although we wouldn’t expect much change in the measures business conditions and activity measures.

Also on Monday the credit and debit card lending data should show that consumers are reluctant to take on credit card debt and prefer to use debit cards to make purchases.

On Tuesday the Federal Government hands down the latest Budget. Unfortunately, despite all the advances in technology, the Budget is still released after a media “lock-up” period at 7.30pm Eastern time. But the presentation of Budget measures has certainly improved over time. Economists are generally expecting a small budget deficit around $10-15 billion (0.7-1.0 per cent of GDP) in 2012/13 with a similar deficit in 2013/14.

Also on Tuesday, broad figures on lending in the economy are released, covering new housing, personal, business and lease finance commitments. Recent data shows that lending is trending sideways.

And on Wednesday, the Bureau of Statistics releases key data on wages – the wage price index – together with new figures on car sales. The wages data should confirm that remuneration is growing at a sustainable pace with wages tipped to lift by 0.9 per cent in the March quarter, leaving the annual growth rate at 3.4 per cent.

And the ABS will recast the industry data on car sales in seasonally adjusted and trend terms. In April car sales were up 7.6 per cent on a year ago although the early timing of Easter would have bumped up the result.

In the US, a busy schedule of economic events awaits – in marked contrast to the previous quiet week. On Monday the week kicks off with data on retail sales and business inventories. Economists tip only a slight 0.1 per cent rise in sales in April following a 0.4 per cent decline in March. And on Tuesday, data on import and export prices is due.

On Wednesday a busy day is in prospect. Production figures hog the spotlight but capital flows data, producers prices, the National Association of Home Builders index and the New York Federal Reserve manufacturing survey are also slated for release. Economists tip small 0.1 per cent increases in production and core producer prices (excludes food and energy) in April.

On Thursday in the US, data on consumer prices is issued alongside housing starts and the Philadelphia Federal Reserve survey. And on Friday the leading index and preliminary consumer sentiment data for May are slated for release.

Elsewhere, pivotal Chinese economic data for April is released on Tuesday covering investment, production and retail sales. Modest improvements are expected in annual growth rates for each variable. Also over the week is finance data, covering outstanding loan growth, new yuan lending and M2 money supply.

Sharemarket, interest rates, currencies & commodities

The US Dow Jones index is at record highs. The broader S&P 500 index is at record highs. Even the German Dax hit record highs in early May. So what’s wrong with the Australian sharemarket?

In essence nothing. It gets down more to the composition of the market and the unsustainable highs reached in 2007. In 2007, the resources sector rode on the back of the once-in-a-generation gains recorded in commodity prices. The Chinese economy took off but miners and energy companies were unprepared for the sheer scale of raw material purchases. Demand exceeded supply for a raft of commodities, prices soared and resource producers benefitted from super-normal revenues and profits. And the moves were reflected in share prices.

But supply eventually had to catch up with demand and there was an unwinding of commodity prices, bringing resource profitability back to earth. And given the weight of resources in the Aussie sharemarket, the end result is an apparent under-performance of our bourse.

The ASX 200 would need to rise by around 32 per cent from here to re-visit the record levels of 2007. But that isn’t the whole story. Our sharemarket performance is more influenced by dividends than many other markets across the globe. If we instead focus on total returns, the Australian sharemarket only needs to rise around 2.5 per cent to return to record highs.

Healthcare, Industrials and Telecoms accumulation indexes are closest to record highs with the Telecoms sector lifting 13 per cent in the past month alone.



Upcoming economic and financial market events

Australia


May 13 - Housing finance (March) - An 8.0 per cent lift in the value of loans is expected

May 13 - Credit & debit card lending (March) - Conservative consumers are using debit cards more often

May 13 - NAB Business survey (April) - Business confidence may have lifted modestly

May 14 - Lending finance (March) - Covers housing, personal, business and lease loans

May 14 - Federal budget - A deficit near $11 billion is tipped for 2012/13

May 15 - Wage price index (March quarter) - Annual growth is seen steady at 3.4 per cent

May 15 - New car sales (April) - New car sales are up 7.6 per cent on a year ago
 


Overseas


May 13 - China economic data (April) - Production, investment and retail sales
May 13 - US Retail sales (April) - Economists tip a 0.1 per cent rise in sales

May 15 - US Producer prices (April) - The core rate is running at a 1.7 per cent annualised rate
May 15 - US Industrial production (April) - A small 0.1 per cent increase is expected

May 16 - US Consumer prices (April) - The core rate is running at a 1.9 per cent annualised rate


The Reserve Bank Board has cut interest rates by 25 basis points to 2.75 per cent. Equivalent official interest rates were last at these levels in 1959/60.The next RBA Board meeting is on June 4 2013.

The Reserve Bank has adopted the global central bank manta of “doing whatever it takes” to get the economy growing at a faster rate. There are risks in cutting rates to generational lows, but the Reserve Bank believes it is a risk worth taking. The Reserve Bank has flagged further rate cuts saying it has used only “some” of its scope to ease rates further.

What does it all mean?

Has anything changed since the last interest rate decision in May? In broad terms, nothing. If anything, the variables have been more mixed. But it is clear that the Reserve Bank believes that the economy can be growing at a faster rate. It first needed to check inflation data at the end of April. And that data confirmed inflation was under control. With the Aussie dollar still historically high, the Reserve Bank embraced the new manta of global central banks – the need to “do what it takes” to lift economic growth.

No doubt the Board gave serious thought to the question of whether a rate cut would actually prove beneficial or could do more harm than good. The risk is that a rate cut could cause Aussie consumers and businesses to actually become more negative, concluding that the economy was losing momentum and prompting money to be left in the bank rather than spent or invested. But the Reserve Bank believes that this is a risk worth taking.

While “official” interest rates are back to levels last seen in the 1960s, the rates that borrowers actually pay have further to fall. Variable housing rates are still around 60 basis points above the “emergency” levels seen in the global financial crisis. So further official rate cuts remain on the table.

If the Reserve Bank was to cut rates in the next few months it would likely be prompted by confirmation that inflation is contained, further evidence that the Aussie economy was tracking sideways, fresh global turmoil, especially combined with evidence of weaker US and Chinese growth, and a resurgent Australian dollar.

Can we regard official interest rates of around 2-3 per cent as the new ‘normal’? It’s important to remember that both inflation and interest rates held at very low levels over the 1950s and 1960s. So it is possible that we have entered a new era with economic growth around 3 per cent, inflation around 2.5 per cent and interest rates around 2-3 per cent.

Interest rate decision and past cycles

The Reserve Bank Board has cut the cash rate by 25 basis points to 2.75 per cent. The previous rate cuts were in December 2012 (25 basis points), October 2012 (25 basis points), June 2012 (25 basis points), May 2012 (50 basis points) and November and December 2011 (each by 25 basis points). Prior to those moves the Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.

In the last rate-cutting cycle the cash rate fell to a low of 3.00 per cent in April 2009. In the previous rate-cutting cycle the cash rate fell to 4.25 per cent in December 2001. In the two previous rate-cutting cycles, the cash rate fell to lows of 4.75 per cent.

The Reserve Bank looks more closely at the variable housing rate to gauge how close rates are to “normal”. Currently the variable housing rates of major banks are around 6.45 per cent, below the long-term average or “normal” rate of 7.20 per cent but well above the 41-year low of 5.75 per cent recorded in April-May 2009.

What are the implications of today’s decision?

The Reserve Bank is taking a risk, but it is a calculated risk. The Reserve Bank believes that this is a new environment where rate cuts don’t spark spending and borrowing booms or higher inflation. In short the mentality is different. Consumers and business are more conservative and are far more cautious about borrowing and spending outside their means. And from a big picture perspective, it always has to be remembered that around a third of people own their homes, a third rent and a third are paying off home loans. So only a third of families will potentially benefit from the rate cut.

We say home buyers ‘potentially’ benefit because not all are paying off variable rate loans. And for the wider economy if home buyers don’t elect to trim repayments then there isn’t a boost to spending or investment. The majority of home buyers have responded to recent rate cuts by electing to pay off loans at a faster rate rather than trim repayments.

Looking ahead there are good reasons to be positive. Consumers are spending again, albeit because there are plenty of bargains around. Home purchases continue to lift – in fact the home loan data to be released on May 13 should show a solid increase in new borrowings. And the European interest rate cut and US jobs data for April are clearly encouraging. Further we believe that the Australian economy is already powering out of a soft patch, and early data suggests that the Australian economy grew by 1.4 per cent in the March quarter or at an annualised pace of almost 6 per cent.

While consumers and businesses are reluctant to borrow, balance sheets are in very good shape, providing a solid platform for future borrowings and increased spending. The trap many analysts fall into is to focus on debt but neglect assets. Net wealth of Aussie consumers is back near record highs.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

It is always interesting in getting broad community perceptions about the state of the economy. Many people believe that the only sector of the economy that is growing is mining. In other words if the mining sector was excluded, then the rest of the economy would be going backwards. The only way to put this to the test is to assess comprehensive measures of the economy’s performance such as “The Australian System of National Accounts” for the 2011/12 financial year.

In 2011/12 the Australian economy grew by 3.4 per cent – the fastest rate in four years. And while the growth rate was above the decade average of 3.1 per cent, it was below the 20-year average of 3.5 per cent.

The Mining sector grew by 6.7 per cent in 2011/12, underpinned by a 17.1 per cent lift in the iron-ore sector. If the mining sector was excluded, growth would have been closer to 2.7 per cent, rather than 3.4 per cent.

But how reasonable is it to assume no growth in the mining sector? “Normal” growth of the mining sector over the past 10 or 20 years has been 3.2 per cent. So if the excess growth was removed, then the Australian economy would have grown by around 3 per cent – in other words, not too far from “normal”.

In 2011/12, 18.7 per cent of the economy’s growth came from Mining, followed by Health Care (11.0 per cent), Construction (9.3 per cent), Professional, scientific & technical services (8.6 per cent), Wholesale trade 7.8 per cent and Financial & insurance services (7.7 per cent).



The week ahead

In Australia a big week of economic events is scheduled including a Reserve Bank Board meeting and the quarterly Statement on Monetary Policy. A much quieter week is in store in the US. Meanwhile in China, trade and inflation data are released.

In Australia, the week kicks off on Monday with two key private sector reports and retail trade data. The first of the private sector reports is the TD Securities/Melbourne Institute monthly inflation gauge. This gauge is the only monthly measure of prices in the economy. And the report’s authors are amongst the most accurate in forecasting the outcome of the “official” Consumer Price Index. At present inflation is well contained.

The other private sector report on Monday is the ANZ Job Advertisements series. In the past this was a good gauge on hiring activity but now social media and employment agencies are more actively used.

And retail trade data for March and the March quarter are issued on Monday and we expect solid readings. Based on the CBA Business Sales Index, we expect that sales rose by 0.5 per cent in March. However note that there could be complications with the seasonally adjusted data given the early timing of Easter. For the quarter we expect real (inflation-adjusted) sales to have risen by 2.2 per cent after a 0.1 per cent rise in the December quarter.

On Tuesday the Reserve Bank Board will hand down its interest rate decision. While we don’t expect a rate cut, we wouldn’t completely rule one out either. It all gets down to the high value of the Australian dollar. The RBA has indicated that it will take the currency into consideration if it cuts rates. Not to drive the Aussie dollar down, rather to provide relief to affected businesses. And it is clear many parts of Corporate Australia are hurting.

Also on Tuesday there is a troika of data releases from the Bureau of Statistics (ABS): international trade, overseas arrivals and departures and house price indexes.

We expect further improvement in the trade situation with a surplus of $300 million tipped for March after a $178 million deficit in February. The publication, “Overseas Arrivals and Departures” has information on tourist movements as well as longer-term migration trends. Tourist arrivals and departures are both near record highs. And the House Price Indexes publication is only of passing interest: limited to just houses and less comprehensive than the RP Data/Rismark home value index.

On Thursday the Bureau of Statistics (ABS) will release the April labour market data. The employment figures have been volatile in recent months with the early timing of Easter one of the complications. But we expect that hiring rebounded in April with job numbers up by 15,000 and the unemployment rate easing from 5.6 per cent to 5.5 per cent. Given that many analysts believe a jobless rate of 5.0 per cent effectively constitutes full employment, the current jobless rate is hardly dire.

And on Friday the Reserve Bank releases its quarterly Statement on Monetary Policy. This should prove a very even-handed account of the state of the economy, but most interest will be in any commentary on the Australian dollar and the impact the currency is having on sections of Australian industry.

In the US, a quiet week is in prospect. On Tuesday, consumer credit data is due with the weekly data on home loans (mortgage market index) released on Wednesday, the weekly data on unemployment insurance claims on Thursday, together with wholesale inventories. And the week winds up with the April budget numbers on Friday.

Elsewhere, the Chinese trade data for April is issued on Wednesday with April readings on consumer prices and producer prices to be released on Thursday. On Friday, China releases a raft of financial figures including new yuan loans, M2 money supply and aggregate financing.

Finance ministers from the Group of Eight nations meet in the UK on Friday.

Sharemarket, interest rates, currencies & commodities

Can the Aussie sharemarket still be regarded as “cheap”? Well despite rising valuation levels over the past year, it is hard to say for certain that the market has moved from “cheap” to either fairly valued or even expensive.

Certainly valuations have lifted. According to FactSet, the forward price-earnings ratio (share prices compared with next year’s expected earnings) has lifted from 11.68 in May 2012 to 15.73 currently. The current forward PE estimate is certainly above the decade average of 14.55 and well above the 5-year average of 13.45.

But part of the complication is the relatively high proportion of financial assets held in cash and deposits rather than other financial assets. The latest data indicates that around 23 per cent of all financial assets are held in cash or bank deposits, well above the long-term (25 year) average of around 20 per cent. In fact if you go back to the decade before the global financial crisis, just over 18 per cent of assets were held in cash or deposits.

Now investors are unlikely to rush to embrace riskier assets, but certainly investors are getting less risk averse, putting more funds to work outside cash. So some “PE expansion” is to be expected as investors re-balance portfolios. But investors shouldn’t become complacent either. Earnings must rise to justify current PE ratios. And Australia is not as cheap as other markets: the US forward PE is 5.6 per cent below decade averages.

Upcoming economic and financial market events


Australia


May 6 - Monthly inflation gauge (April) - Good forecasting track record with “official” inflation data

May 6 - Job advertisements (April) - Has proven a less useful gauge on the job market

May 6 - Retail trade (March) - A 0.5 per cent lift in sales is tipped

May 7 - Reserve Bank Board - No change in rate settings is expected

May 7 - International trade (March) - A trade surplus near $300 million is expected

May 7 - Tourist arrivals (March) - Aussies are travelling overseas in record numbers

May 7 - House Price Indexes (March quarter) - The Bureau of Statistics measure of house prices

May 9 - Employment/unemployment (April) - We tip a 15,000 lift in jobs and 5.5 per cent jobless rate

May 10 - Statement on Monetary Policy - Quarterly economic assessment by Reserve Bank
 


Overseas


May 7 - US Consumer credit (March) - Credit is running at a 6 per cent annual rate

May 8 - China Trade (April) - Data on exports and imports

May 9 - China Inflation (April) - Consumer and producer prices

May 9 - US Weekly jobless claims - The job market continues to improve

May 10 - US Treasury budget (April) - The annualised deficit is near $900 billion, down from $1400bn

Private Sector Credit


Private sector credit (loans outstanding) rose by 0.2 per cent in March. Credit stands 3.2 per cent higher than a year ago but has grown at a 2.2 per cent annualised pace in the past six months – a 38-month low.



What do the figures show? 


Private sector credit (lending) rose by 0.2 per cent in March after a 0.2 per cent rise in February. Annual credit growth fell from 3.4 per cent to 3.2 per cent – the slowest pace in 19 months. 



Housing credit grew by 0.4 per cent in March after rising 0.4 per cent in February. Housing credit is up 4.4 per cent on a year ago – equalling the weakest annual growth in records going back to 1976. 



Owner occupier housing credit rose by 0.4 per cent in March to stand 3.9 per cent higher than a year ago. And investor housing credit lifted 0.4 per cent in March to be up 5.4 per cent over the year.



Personal credit rose by 0.1 per cent in March after rising by 0.1 per cent in February. Personal credit was down 0.1 per cent over the year, and has been falling in annual terms for 20 months.



Business credit was flat in March after falling by 0.2 per cent in February. Business credit is 1.6 per cent higher than a year ago, after being up 2.3 per cent in the year to February.



Monetary aggregates, M3 and broad money, are growing at the slowest pace in 30 months.


What is the importance of the economic data?

Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.


What does it all mean?

No change – Aussie consumers and businesses are still winding back debt levels. Still, it’s important to remember that credit is a lagging indicator – it reflects earlier decisions to increase borrowings and reduce outstanding debt. There are early indications in other statistics that people are starting to borrow again. But the pace of debt creation is not strong enough to offset debt repayment and refinancing activity.

Weak growth in outstanding debt together with low inflation means that the Reserve Bank can cut rates further if it believes it will be beneficial. But with less indebtedness and fewer people wanting to borrow, a rate cut could prove more negative – reducing the income of savers. It is a difficult environment for lenders.


On Wednesday the most authoritative monthly measure of home prices is released. The RP Data/Rismark home value index covers almost every single property transaction in Australia. And not only is the data produced on a monthly basis, the authors of the series are tracking transactions as they occur, so they maintain a daily measure of home prices.

In March, home prices seemingly shot the lights out, with the national measure up by 1.3 per cent. But as you would expect after such a stellar gain, some pull back occurred over April.

While there are still a few days of the month remaining, so far home prices have retraced by 0.6 per cent. But given that home prices similarly eased in April last year, that means that there has been little change in annual growth – home prices remain around 2.4 per cent higher than a year ago.

Interestingly, while home prices eased in most capital cities, in Adelaide, home prices have lifted 3.0 per cent so far in April to the highest levels in almost 2½ years. Prices are up 1.6 per cent on a year ago and it is likely that the April data will show annual home price gains in all capital cities.



The week ahead

In Australia a regular flow of economic data is expected over the coming week as investors count down the days until the May interest rate decision. In the US there is a packed schedule of data releases with jobs data the focal point.

In Australia, the week kicks off on Tuesday with the Reserve Bank’s private sector credit statistics (effectively data on loans outstanding). Consumers and businesses remain reluctant to take on new debt but attitudes should gradually change as confidence levels lift. We tip a 0.3 per cent lift in private sector credit in March.

On Wednesday there are three indicators to watch. Australian Industry Group releases its Performance of Manufacturing index while the Housing Industry Association releases data on new home sales and RP Data & Rismark issue their home value index. And mixed results are tipped. The PMI probably remained weak in April but new homes sales may have edged higher while home prices also are likely to have risen in April. Overall, results that suggest the Reserve Bank will leave rates on hold when the Board meets on May 7.

On Thursday the Bureau of Statistics (ABS) will release data on import & export prices together with building approvals. There is little interest in the data on trade prices given that the Consumer Price Index has already been issued. But building approvals may have risen by 3.0 per cent in March – another indicator pointing the way to stable interest rate settings.

And on Friday the ABS issues the producer price indexes publication. Not only does this publication show the prices businesses are paying for inputs but also the prices they are charging for final products. We tip a scant 0.1 per cent lift in output prices with growth over the year holding near 1.4 per cent. Also released on Friday is the Performance of Services index.

In the US, the week kicks off on Monday with data on personal incomes and spending as well as pending home sales. Incomes may have lifted by 0.4 per cent in March after a 1.1 per cent rise in February, suggesting consumer finances are in good shape. But economists expect little change in pending home sales in the month.

On Tuesday data releases include consumer confidence, home prices, employment costs and surveys of activity in both Dallas and Chicago. In addition the Federal Reserve kicks off a two-day meeting. The strongest reading is expected from home prices. Economists tip a 1 per cent lift in the Case Shiller measure of home prices in February after a similarly solid 1 per cent rise in January. But other readings may prove somewhat softer.

On Wednesday, the Federal Reserve will hand down its monetary policy decision. No change in rates or bond purchases is expected but the language may be more upbeat, especially about the recovery underway in the housing sector.

Also on Wednesday the ISM manufacturing index is issued together with car sales, construction spending and the ADP national employment index. Higher car sales and construction spending is expected but little change in manufacturing activity.

On Thursday the usual weekly data on new claims for unemployment insurance is released together with international trade and the Challenger survey of job layoffs.

And on Friday the spotlight is firmly focussed on the April employment data – the non-farm payrolls series. Economists are looking for a stronger outcome in April with 145,000 jobs created, up from 88,000 in March. The jobless rate is seen unchanged at 7.6 per cent, but any reduction in the jobless rate will be warmly viewed by investors. Also released on Friday are the ISM services index and factory orders.

Elsewhere, the official Chinese manufacturing index is issued on Wednesday with the HSBC survey variant released on Thursday. In Europe the European Central Bank hands down its rates decision on Thursday while manufacturing survey results are issued across the continent.

Sharemarket, interest rates, currencies & commodities

The official inflation data indicated that price pressures remain contained. At the same time economic data has generally proven encouraging. So where does that leave interest rate expectations? Currently market pricing suggests that there is a 41 per cent chance of a rate cut on May 7. So a rate cut is a possibility, not a probability. In fact only one interest rate cut is priced in over the next six months. It is a similar story with bank bills with the implied yield on the 90 day bank bill contract in December standing at 2.70 per cent. Low inflation gives the Reserve Bank scope to cut rates if its wants to. The question is whether it believes another rate cut is warranted.

In 2008 the Aussie dollar traversed a US38 cent range. In 2009 this gap between highs and lows fell to US31.6c, then to US21.9c in 2010, US16.9c in 2011 and in 2012 the Aussie dollar traded over a US12.8 cent range. Over the past 27 years the average annual movement in the Aussie has been US13.5 cents or a change of around 20 per cent. So volatility has fallen in recent years. And while 2013 is only just under four months old, the Aussie has moved less than US5 cents or 5 per cent over the year. In keeping with its new ‘safe haven’ status, the Aussie has also become more stable. Interestingly sharemarket volatility has also eased with the 11 per cent move between highs and lows this year around half the 20-year average.

Upcoming economic and financial market events


Australia


April 30 - Private sector credit (March) - Lending is lifting modestly. Growth of 0.3 per cent is tipped

May 1 - RP Data/Rismark home prices (April) - A 0.6 per cent decline is expected after the 1.3 per cent rise in March

May 1 - Performance of Manufacturing (April) - Manufacturers are still struggling with a high dollar

May 1 - New home sales (March) - Construction is beginning to recover

May 2 - Import & export prices (March quarter) - The Aussie dollar & oil prices are key influences
May 2 - Building approvals (March) - Volatile series – a 3 per cent lift in approvals is expected

May 3 - Producer Price Indexes (March qtr) - Measures of business inflation
 


Overseas


April 29 - US Personal incomes (March) - Incomes are forecast up 0.4 per cent; spending, up 0.2 per cent

April 29 - US Pending home sales (March) - A small 0.1 per cent rise is expected

April 30 - US Case-Shiller home prices (February) - Prices are up 8.1 per cent on a year ago

April 30 - US Consumer confidence (April) - Consumers are still uncertain about the future

May 1 - US ISM manufacturing (April) - The index is expected to be unchanged at 51.3 

May 1 - US Federal Reserve meeting - The Federal Reserve is watching & waiting

May 1 - US ADP employment (March) - A solid 145,000 lift in jobs is tipped

May 2 - US Trade (March) - The deficit may have narrowed from US$43bn to $42bn

May 3 - US Non-farm payrolls (April) - Job growth of 145,000 is expected

May 3 - US ISM services (April) - The gauge may have eased from 54.4 to 54.1


On Wednesday the March quarter inflation data is released – that is, the Consumer Price Index for the quarter is issued. Given that official data on inflation is only published quarterly, not monthly, the figures are worthy of some scrutiny. Of course the other regular gauge of inflation that is produced monthly is by TD Securities and the Melbourne Institute and it has proved a good guide to the official data.

The monthly inflation gauge for the March quarter was 2.3 per cent up on a year ago, up from 2.1 per cent in the December quarter. But the monthly data doesn’t line up precisely with the official quarterly data as shown by the inflation forecast from TD Securities. It expects the CPI to have lifted by 0.5 per cent in the quarter to be up 2.6 per cent over the year. Underlying inflation is tipped to be up 0.45 per cent in the quarter and 2.4 per cent on a year ago. (In the December quarter, annual headline inflation was up 2.2 per cent on a year ago and underlying inflation was 2.3 per cent).

In the March quarter, seasonal increases in prices occur for pharmaceuticals, school and university fees and alcohol & tobacco products but holiday travel and accommodation costs generally fall.

Two key influences are petrol and fruit & vegetable prices. Petrol may have risen around 1 per cent and fruit & vegetable prices rose in January and February before easing modestly in March.

The other key influence is the Aussie dollar, which probably kept downward pressure on imported goods in the quarter.

Generally businesses have been reluctant to lift prices given consumer caution to spend. But this caution is starting to dissipate, so the question is whether inflation will drift higher within the 2-3 per cent target band as the year progresses.



The week ahead

In Australia the focus is overwhelmingly on inflation figures to be released on Wednesday. In the US, housing sales data vies for attention with economic growth figures

In Australia, the week kicks off on Monday with the CommSec State of the States. This report is a quarterly assessment about how the state and territory economies are faring. In past quarters the resource regions have out-performed. But with mining companies now focussed on controlling costs, will this still be the case?

While the report focuses on how regions are currently performing, the analysis ties in nicely with CBAs recent report that provides some numerical forecasts about future growth.

On Tuesday, all that the official Federal statistical agency can offer up is a survey of motor vehicle use for the past financial year. Of course this data is important for a raft of businesses and government departments to enable them to plan what services to provide whether it be roads, public transport, service stations or mechanical repairs.

On Wednesday the latest inflation figures are released. Or, more specifically, the quarterly Consumer Price Index will be issued. And it will be a surprise if the data doesn’t confirm that inflation is well ensconced in the Reserve Bank’s 2-3 per cent target band. The ‘headline’ measure – which can be somewhat volatile – is expected to show that prices rose by 0.5-0.7 per cent in the quarter and by 2.6-2.9 per cent over the year.

But the ‘underlying’ rate of inflation – which strips out volatile elements like petrol and fruit and vegetable prices – also probably rose by 0.5-0.7 per cent to stand 2.4-2.6 per cent higher than a year ago.

Also on Wednesday the Reserve Bank Deputy Governor, Philip Lowe, delivers a speech entitled “The Journey of Financial Reform” to the Australian Chamber of Commerce in Shanghai. This doesn’t sound like the forum that will provide new insights into monetary policy. But stranger things have happened.

And also on Wednesday, the Department of Education, Employment and Workplace Relations releases its monthly Skilled Vacancies report. This traditionally doesn’t set the markets alight and there are only tenuous links to employment data. But the report may generate extra attention in a quiet week.

In the US, the week kicks off on Monday with data on existing home sales for March. Home sales have lifted for the past two months and economists believe that it will make it three from three with annualised sales up from 4.98 million to 5.01 million. The Chicago Federal Reserve index for March is also issued.

On Tuesday the usual weekly data on chain store sales will reveal more on the state of consumer spending. And on the same day the Federal Housing Financing Agency release its February survey of home prices. Housing demand and supply are back in balance and home sales are rising with the January FHFA measure up 0.6 per cent. Higher home prices make it more likely consumers will spend in future.

Also in the US on Tuesday data on new home sales is released together with the influential Richmond Federal Reserve survey. New home sales are tipped to have lifted from an annual rate of 411,000 to 420,000.

And also on Tuesday, the Markit group releases early data (or “flash”) readings on the health of manufacturing sectors in the US, China, France, Germany and the Eurozone. There is too much in the way of “knee-jerk” reactions to questionable economic data, so hopefully these surveys won’t attract attention.

On Wednesday, a key gauge of business investment is released – new orders for “durable” goods – goods that are expected to last three year or more. The data is volatile but economists expect a 1.7 per cent decline in March after a 5.6 per cent rise in February. Excluding transport, orders are tipped to rise 0.6 per cent after a 0.7 per cent fall in February.

On Thursday the usual weekly data is released on new claims for unemployment insurance.

And on Friday the first ‘cut’, or the ‘advance’, reading of economic growth in the March quarter will be issued. After scant 0.4 per cent growth in the December quarter, economists are focussing on a 3.0 per cent lift in GDP with the range of forecasts between 2.5-3.7 per cent according to Thomson Reuters.

The final estimate for consumer sentiment in April will also be issued on Friday.

Sharemarket, interest rates, currencies & commodities

The US earnings season cranks up a notch in the coming week. On Monday, 49 stocks are expected to report including Caterpillar and US Airways. On Tuesday there are 126 companies listed including Apple and AT & T. On Wednesday earnings results are expected from 174 companies including Barrick Gold, Boeing, Credit Suisse, Ford and Procter & Gamble. On Thursday around 270 companies should issue profit results including 3M, Colgate Palmolive, Exxon Mobil, Time Warner Cable and Amazon. And on Friday there are around 45 companies listed including Chevron and Goodyear Tire.

Global sharemarkets have been up and down; economic data has proven mixed – in Australia and overseas; and commodity prices have weakened. So what have financial markets concluded? Current market pricing indicates a 27 per cent chance of a rate cut in May 7, suggesting rates will most likely stay on hold.

Upcoming economic and financial market events


Australia


April 22 - CommSec State of the States - Quarterly state & territory performance ratings

April 23 - Survey of Motor Vehicle Use - Insights into consumer & business behaviour

April 24 - Consumer Price Index (March qtr) - Inflation is well contained

April 24 - Speech by RBA Deputy Governor - Speech by Deputy Governor, Philip Lowe
 


Overseas


April 22 - US Existing home sales (March) - A small rise in sales is expected

April 23 - US FHFA home prices (February) - Closely-watched regional economic survey

April 23 - US New home sales (March) - A 2.2 per cent lift in sales is tipped

April 23 - US Richmond Fed survey (April) - Influential regional survey

April 23 - “Flash” manufacturing surveys - Flash readings in China, the US and Eurozone

April 24 - US Durable goods orders (March) - A 1.7 per cent fall is forecast after a 5.6 per cent gain in February

April 26 - US Economic growth (March quarter) - Economists tip 3.0 per cent annual growth

April 26 - Japan “Flash” manufacturing (April) - Early gauge of April activity


‘Wait and see’ mode: The Minutes concluded: “Overall, recent data suggested that interest-sensitive parts of the economy were responding to the historically low levels of lending rates and it remained likely that this had further to run.” 



What do the Minutes reveal? 


“Overall, recent data suggested that interest-sensitive parts of the economy were responding to the historically low levels of lending rates and it remained likely that this had further to run. At the same time, the factors weighing on the economy – including the high exchange rate, the waning growth of mining investment, and fiscal consolidation – were likely to persist. The key issues were what the balance of these factors would turn out to be.”



“With growth forecast to be a little below trend in 2013, and inflation close to target, members judged that it was appropriate for the stance of policy to be accommodative. The outlook for inflation, as currently assessed, would provide scope for further easing should that be necessary to support demand. At this meeting, the Board's judgement remained that, on the information currently to hand, the most prudent course was to hold rates steady and to continue to assess developments over the period ahead.” 



Job market mixed: “Firms in some industries had shown a willingness to add to their workforce – including in the construction industry – and recent labour market data had been mixed.”



Housing outlook: “Over the past few months, housing loan approvals had picked up for both owner-occupiers and investors, and stronger conditions in the established housing market more generally were expected to support moderate growth of dwelling investment this year.”



Stronger consumption: “Recent indicators suggested that growth of consumption had increased over recent months after a softer December quarter. The value of retail sales picked up strongly in January and the Bank's liaison pointed to further growth in February and March.”



Investment insights: “Information from the Bank's liaison indicated some willingness on the part of firms outside the mining sector to increase investment spending, especially on information technology assets and systems.”


What is the importance of the economic data?

The Reserve Bank releases minutes of the monthly Board meeting a fortnight after the event. The minutes provide insight into central bank thinking on rate settings


What does it all mean?


The Reserve Bank couldn’t say it any better. Interest rate settings are on hold. If rates were to move in any direction it is more likely to be down. But the RBA isn’t laying the groundwork for a major easing of monetary policy. To the contrary – the RBA believes that low rates are working to boost growth..

The Reserve Bank has plenty of ammunition to use to boost growth if it needs to with the cash rate at 3 per cent and inflation expected to be in the target band.

·       CommSec expects the Reserve Bank to stay on the interest rate sidelines.