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Australian Markets Update 3 September

The Spendathon

The Australian economy is running hot, with real GDP growth of 1.2% QoQ and 3.3% YoY in Q2. "Commodities Boom Mark II" was a strong driver of the result, with net exports adding 0.4ppts to growth and the terms of trade rising 12.5% QoQ to exceed the peak reached during the pre-financial crisis commodities boom. Incomes boomed, with real gross domestic income rising 4% to be 8.2% higher in annual terms. But the surprising (and concerning) feature of the release was the resounding strength of the household sector, with household consumption soaring 1.6%. Moreover, households dipped into savings to fund these purchases, with the savings rate falling to 1.5% in Q2 from 3.4% in Q1. Ultimately, this will be a concern for the RBA, as it is all too aware that Australia cannot accommodate a twin household consumption and terms of trade boom, and will therefore need to lift interest rates before year-end (see In Focus article on page 2 for more detail).
In addition to the strong Q2 GDP print, this week's July data roll call showed that the economy has maintained solid momentum entering Q3. Retail sales rose by a solid 0.7% in July, the best monthly rise since March. Meanwhile, building approvals increased 2.3% in the month, while house prices up 0.4% and private sector credit rising 0.1%.
Another week has passed, and we are still yet to know the outcome of the Federal election. Currently, the ALP has the support of Greens MP Adam Bandt and Independent MP Andrew Wilkie, meaning that it can count on the support of 74 seats, while the Coalition has 73. Both major parties can thus still form government with the support of the three remaining independent MPs, with a decision possible by early next week (see In Focus piece on page 4 for more).

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Australian Markets Update 27 August

Grinding Higher

It has been almost a week since the Federal election and it is still uncertain as to whether the ALP or Coalition will form a minority government. The official AEC results have the ruling ALP holding 72 seats and the Coalition holding 73 seats. Four independents and one Greens party member will round out the numbers in the House of Representatives, and it is these five non-major party parliamentarians who will decide which party will form government (see In Focus article on page 6 for more detail).
Partial indicators of business investment for Q2 were mixed this week; while construction work done was strong, capex data showed significant falls in machinery, plant and equipment spending. Despite this, next week's National Accounts release is expected to show some acceleration in real GDP, with solid but unspectacular economic growth of 0.7% QoQ and 2.6% YoY (for ANZ's complete GDP preview, please refer to the In Focus piece on page 2, and partial data previews on page 7).
While real GDP will be moderate as the economy transitions from public to private sector drivers of growth, measures of national income are expected to surge on the back of higher contract prices for iron ore and coal which will see the terms of trade hit a new record high. This income boost is expected to translate into an investment boom in 2010-11, with investment intentions in this week's capex survey showing an increase of over 30% in nominal terms.
Current RBA forecasts are predicated on a moderate outlook for consumer spending, with cautious households making way for the investment boom. However, a fall in the savings ratio and pick up in household consumption remains a key upside risk to forecasts of growth, inflation and interest rates. As such, developments in the household income and spending accounts will be watched very closely as part of next week's GDP release, as will next week's July retail sales and credit data.

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Australian Markets Update 20 August 2010

A Close Call

Australia's Federal Election on Saturday is shaping up for one of the closest results in 50 years, with the latest poll showing the two-party preferred vote is split 50-50.
The tightness of the race has raised the possibility of a hung parliament which would be the least desirable outcome for financial markets, most notably the AUD.
The Labor Party has promised to return the budget to surpluses of A$3.5bn in 2012-13 and A$4.5bn in 2013-14. The Coalition has refused to put its policies into the Commonwealth Treasury for official costing, instead choosing a private accounting firm. According to these figures, the Coalition will deliver surpluses of A$6.2bn in 2012-13 and A$7.3bn in 2013-14.
Key differences on economic policy surround company tax rates, parental leave, mining taxation arrangements, broadband and superannuation (see In Focus article on page 2 for more details).
Australian economic data this week were generally on the soft side. Most important for the inflation outlook, both measures of wages, the Wage Price Index and Average Weekly Ordinary Time Earnings both came in below expectations at 0.8% QoQ (see Weekly Data Wrap on page 9 for further detail). No wonder the RBA seems relatively comfortable, with its August Board Meeting Minutes maintaining a fairly neutral tone.
However the RBA clearly retains a medium-term tightening bias, with a speech by RBA Deputy Governor Ric Battellino today fairly upbeat and focusing on Australia's positive growth outlook and the risks posed by capacity constraints. While believing that inflation may be a "smaller problem" than in previous commodity booms, Battellino believes that "we need to remain alert to the risks."
With this in mind, global uncertainties have lowered bond yields in the US, Europe and Australia and are presenting an opportunity for Australian debt holders to fix rates current attractive levels (see In Focus article on page 6 for more details).

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Australian Markets Update 6 August 2010

RBA COMFORTABLE, AT LEAST FOR NOW

The RBA this week left the cash rate unchanged at 4.5%. The tone of the accompanying Statement had a neutral tone, suggesting the Bank is comfortable with the current setting of monetary policy, at least for now.
The RBA also left its economic forecasts broadly unchanged in today's quarterly Statement on Monetary Policy. However with underlying inflation already forecast near the top of the target band and economic growth above-trend until late 2012, any small upside surprises will require an interest rate response.
Indeed, we view the risks to the RBA's forecasts as tilted to the upside. The capacity pressures, both in labour and product markets, arising from the 'Commodities Boom Mark II' could turn out to be more powerful than currently envisaged by the RBA. Indeed the export sector is booming, with the trade balance surging to a record high of A$3.5bn in June. While higher contract prices for iron ore and coal were the key drivers, with resource export values up 11.1%, manufactured exports also rose 3.5% and rural exports gained 6.1%. Moreover, we can expect further gains in rural export values with wheat prices rallying 70% in the past month.
There is also a significant risk the rise in the household savings rate envisaged by the RBA does not eventuate amidst such a positive economic backdrop, resulting in upward surprises on household consumption, growth and inflation.
For now however, growth in interest-rate sensitive sectors of the economy remains soft. Building approvals slumped another 3.3% in June and retail sales rose a meagre 0.2%, although this was largely driven by weak food sales and lower prices due to discounting. Retail sales volumes for Q2 were strong at 0.8%.

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