The Experts

Eye on the data - what's out this week

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Some investors in Australia are taking a dim view of the record-breaking performance by the US sharemarket. They conclude that the US gave the world the global financial crisis, pushing the US and a host of other countries in recession. While the US economy has been improving, there is a long way to go to reach full recovery. So how can both the Dow Jones and S&P 500 indexes be perched at or near record highs?

Well there are a few factors to consider. First, interest rates have been close to zero in the US, so – unlike Australia – there have been less attraction for US investors to leave their money in cash. Further, up until relatively recently, home prices have been flat or falling. So the sharemarket has been the default option for investors to direct their funds.

But US companies have also been making money – especially multinationals earning money from Asian economies. Corporate profits stand at record highs, broadly doubling over the past three years. The low US dollar has been encouraging foreign investment. And forward-looking investors are encouraged by the early signs of economic recovery, providing further reasons to put money in shares.

But Australian investors have few reasons to be downbeat. While the ASX 200 and All Ordinaries indexes have some way to go to reach record levels, that is only part of the story. In Australia, investors are not just focussed on share prices, they are also focussed on the dividends paid by companies. So it is the total return that matters.

The All Ordinaries Accumulation index hit 5½-year highs on May 14 and currently stands just over 3 per cent away from the record high set on November 1 2007. But more importantly for longer-term investors, total returns on shares have lifted by 171 per cent over the past decade, or a solid average return or 17.1 per cent a year.


The week ahead

In Australia, the key piece of economic data in the coming week is business investment (private capital expenditure or capex) on Thursday. In the US, economic growth, consumer confidence and housing market data all vie for attention over the coming week.

In Australia, the week kicks off on Monday when the Bureau of Statistics (ABS) releases a publication entitled National Regional Profile 2007 to 2011. Essentially this publication contains data that shows how various regions compare on specific indicators. So the data is useful for businesses and governments.

On Tuesday the ABS releases data on Australian exporters as well as Australian industries for the last financial year. In addition the ABS releases some preliminary data on the Balance of Payments, providing an early indication of the contribution of trade to economic growth in the March quarter.

On Wednesday the ABS issues data on construction, with the figures showing work completed in the March quarter as well as the work remaining to be done. The data on completed home building plugs straight into the calculation of economic growth in the March quarter (the economic growth data to be released on June 5).

On Thursday the ABS issues data on business investment as well as building approvals. The estimate of completed investment is important in calculating how fast the overall economy grew in the March quarter. But also released are the second last estimates of spending in the 2012/13 year and the second estimates of spending in the 2013/14 year.

Overall we expect that business investment grew by 4.5 per cent in the March quarter after falling by 1.3 per cent in the December quarter. The planned investment data for 2013/14 should confirm that business spending has peaked but is easing only modestly from highs.

The dwelling approvals data has followed a zig-zag pattern in recent months but fell by 5.5 per cent in March to be up 3.9 per cent on a year ago. A rebound in approvals is likely to have occurred in April.

In the US, the week kicks off on Tuesday with the Case-Shiller measure of home prices for March and the May estimate of consumer confidence. Home prices are 9.3 per cent higher than a year ago, showing the strength of the housing rebound. And the gauge of consumer confidence probably rose in line with the more timely University of Michigan measure of consumer sentiment, reflecting higher home prices and share prices.

On Wednesday the usual weekly data on housing finance activity is released while on Thursday the weekly data on jobless claims is issued together with pending home sales and the preliminary economic growth figures for the March quarter. The “flash” or advance reading on economic growth showed the US economy expanding at a 2.5 per cent annual pace.

And on Friday in the US, personal income and spending figures are released together with the influential Chicago purchasing managers’ index and the final estimate of consumer sentiment for the month of May. The latest data shows that consumers are more confident and are spending. Consumer sentiment hit a near 6-year high according to preliminary data. And personal spending has risen for five straight months, up 0.2 per cent in March.

Sharemarket, interest rates, currencies & commodities

The Reserve Bank and Aussie businesses have both been hoping for a weaker Australian dollar, and now they have their wish. But while some are happy with the Aussie’s fall from grace, others – especially Aussie consumers and budding overseas travellers – are less cheery. Still, that is always the case with the currency – there are always winners and losers when it undergoes its customary gyrations.

Since the end of April the Aussie dollar has fallen around US7 cents against the greenback or around 5.5 per cent. While the Aussie has fallen sharply against the US dollar, it has actually fallen further against the Chinese renminbi and Malaysian ringgit (down around 6 per cent against both currencies).

On a trade weighted basis the Aussie has only lost just over 4 per cent but that is because of the weakness of the currency of our second largest trading partner, Japan. The Aussie has slipped only 1 per cent against the yen since the end of April and is also down just 0.6 per cent against the New Zealand dollar and down 1.3 per cent against another “commodity currency’ – the South African rand.

So where does the Aussie dollar go from here? While some have been quick to write off the Aussie, saying that it could fall to US90c, it is important to more thoroughly assess strengths and weaknesses before jumping to that conclusion. The Aussie is supported by its AAA credit rating, relatively high interest rates, favourable budget deficits and debt comparisons, stronger economic growth and the strong trading relationship between Australia and China.

The only real “negative” is speculation of a scale-back or end to quantitative easing in the US, supporting the US dollar. But if the US dollar is appreciating because the economy is strengthening, that should translate to stronger global economic growth and commodity demand. We see the Aussie in a US96-107c range over the coming year.

Upcoming economic and financial market events


Australia

May 29 - Construction work done (March quarter) - The data on home building plugs into economic growth calculations
May 30 - Business investment (March quarter) - Spending on equipment and buildings
May 30 - Building approvals (April) - Volatile leading indicator of new residential construction
May 31 - Private sector credit (April) - Loans outstanding probably rose by 0.2-0.3pct
 


Overseas

May 28 - US Case-Shiller home prices (March) - Prices are up 9.3 per cent on a year ago
May 28 - US Consumer confidence (May) - Higher share prices and home prices are boosting confidence
May 30 - US Economic growth (March qtr, prelim) -  Advance estimate showed 2.5% economic growth
May 30 - US Pending home sales (April) - The housing market is showing solid signs of recovery
May 31 - US Personal income (April) - Spending has lifted for the past five months
May 31 - US Consumer sentiment (May, final) - Consumer sentiment hit a near 6-year high in May

Published: Monday, May 27, 2013

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