The Experts

Investor signposts - week beginning 10 February 2013

At the start of the year we penned the following to represent our interest rate views. “Confidence is a key issue. If global risks recede then consumers and businesses will become more confident to invest, employ and spend. But it will take a few months for the Reserve Bank to be confident enough that this is occurring. In the first half of the 2013 the RBA may want to ‘top up’ the stimulus – especially with inflation contained and borrowing weak. But if the global and domestic economies become more settled and growth rates lift, then attention will turn to lifting rates late in 2013. A likely range for cash rates in 2013 is 2.75-3.50 per cent.”

And six weeks into the year, with the first Reserve Bank Board meeting behind us, we see no reason to change our view. If new problems crop up on the global stage or our domestic economy loses momentum, then the Reserve Bank could cut rates one last time. We don’t believe the Reserve Bank wants to cut, but the option is there, especially with inflation under control. But unemployment is not a major consideration. It is always important to remember that monetary policy is forward looking. The employment data is very much backward looking, reflecting decisions made 5-6 months ago and much has changed over that time.

If the hurdles are cleared over the next few months then the Reserve Bank will shift from an “easing bias” to a “neutral stance” – where rates could move either way. And the further we go without a major new negative development or catastrophe, the more likely that the Reserve Bank will start thinking about lifting rates.

Strangely, when we made our interest rate views known early this year, they were the focus of derision by some, but now the views are considered much more mainstream. As always, much can change in a short space of time, so it is important to stay alert to new trends.

The week ahead

A relatively quiet week is in prospect for domestic and US economic data. In Australia, lending and sentiment figures dominate. In the US, a number of “top shelf’ indicators are scheduled including retail sales and production.

In Australia, the week kicks off with housing finance data on Monday. Home buyers and investors are still reluctant to take on new debt according to data from the Australian Bankers Association (ABA). On the basis of the ABA data we expect that the value of loans fell by 2.5 per cent in December after a 0.6 per cent gain in November.

On Tuesday the National Australia Bank business survey for January is issued together with Reserve Bank data on credit and debit card lending figures. Business confidence lifted in December, and on the basis of improved global economic data and higher domestic share and home prices, there are good reasons to expect that confidence improved again in January.

The Reserve Bank data likely showed that credit card lending remained out of favour in December with consumers electing to pay for purchases with their own funds (debit cards).

On Wednesday Westpac and the Melbourne Institute release the February consumer sentiment index data. However the weekly Roy Morgan survey shows that confidence has been zig-zagging sideways since mid-January, but on balance it is down by over 4 per cent. The date of the federal election certainly hasn’t lifted consumer confidence levels.

Also on Wednesday the ABS issues the latest lending figures – the most comprehensive figures on lending in the economy including housing, personal, commercial and lease loans. Consumers and businesses are still more inclined to cut debt levels than take on new debt.

And on Thursday the ABS releases detailed employment data covering regional and demographic groups.

In the US, the week begins with monthly budget figures on Tuesday. The figures should show whether the budget deficit is showing signs of improvement.

On Wednesday retail sales data is released together with figures on export and import prices and business inventories.

On Thursday the regular US weekly data on new claims for unemployment insurance (jobless claims) is issued alongside data on natural gas inventories.

And on Friday in the US industrial production, consumer sentiment and capital flows data are released. The most important data is production, largely following a zig-zag course over the past nine months, although with a subtle upward trend. Indeed capacity use has lifted from 78.3 per cent to 78.8 per cent over the past four months.

And there are a number of key international talk-fests to monitor in the coming week. On Monday the Eurogroup meeting is held with the EU Economic and Financial Affairs Council meeting on Tuesday. Also on Tuesday, President Obama delivers the State of the Union address while European Central Bank President Mario Draghi will meet Spanish lawmakers. And on Thursday and Friday the G20 meeting of finance ministers and central bank governors is held.

Sharemarket, interest rates, currencies & commodities

In the coming week the Australian profit-reporting (earnings season) gets into full swing. On Monday amongst the companies that are expected to report are Hills Holdings and JB Hi-Fi.

On Tuesday, results include those from Bradken and BWP Trust.

On Wednesday earnings results are expected from Ansell, Boral, Commonwealth Bank, Computershare, CSL, Carsales.com; Domino’s Pizza, Goodman Fielder, Leighton Holdings, OZ Minerals, Stockland, Skilled Group and WorleyParsons

On Thursday, Adelaide Brighton, Alumina, Dexus Property, Downer EDI, GPT, Mirvac, Rio Tinto, SAI Global and Wesfarmers are included in a packed schedule of earnings results. David Jones is also expected to report quarterly sales. And on Friday, Charter Hall and Sims Metal are listed to report earnings while a trading update is expected from ANZ.

Financial markets have not totally given up hope of further rate cuts, but expectations have certainly been wound back. The overnight indexed swap market has fully factored in one more rate cut, but only in nine months’ time. Interestingly the implied yield on 90 day bank bills is 2.78 per cent in June but is higher at 2.80 per cent in December.

The Reserve Bank would have to be happy about the recent nexus between the Aussie dollar and commodity prices. Over the past three months the CRB futures commodity index has lifted by just over 4 per cent while the Aussie dollar has actually eased by around 1 per cent. And the comparisons against some of our major commodities are even more significant. Iron ore prices have lifted 27 per cent over the past three months with thermal coal and nickel both up 17 per cent.

Upcoming economic and financial market events 

Australia

 February 11 - Housing finance (December) - Lending may have fallen 2.0-2.5 per cent 
February 12 - Credit & debit card lending (December) - Consumers prefer debit cards to credit cards 
February 12 - NAB Business survey (January) - Confidence is starting to recover 
February 13 - Consumer sentiment (February) - Consumers are neither super-optimistic nor pessimistic 
February 13 - Lending finance (December) - Covers housing, commercial, personal and lease finance    

Overseas

February 12 - US Treasury budget (January) - Monthly data on federal budget position 
February 13 - US Retail sales (January) - Economists tip a 0.3 per cent rise in sales
 February 15 - US Industrial production (January) - Capacity use has crept up to a healthy 78.8 per cent
February 15 - US Consumer sentiment (February) - Consumers are gradually becoming more confident 
February 15 - US Capital flows (December) - Capital inflows totalled $52.3 billion in November 