GDP +3% in 2012 Interest rates lower AUD above parity

Transcription

1 GDP +% in 1 Interest rates lower AUD above parity Sydney 1 October 1 Michael Workman Senior Economist Commonwealth Bank of Australia - (1) michael.workman@cba.com.au 1

2 Important Information This advice has been prepared without considering your objectives, financial situation or needs, and before acting on the advice, you should consider its appropriateness to your circumstances. Commonwealth Bank of Australia ( CBA ) as a provider of investment, borrowing and other financial services undertakes financial transactions with many corporate entities in Australia. This may include any corporate issuer referred to in this report. For US and US investors: If you would like to speak to someone regarding the subject securities described in this report, please contact Commonwealth Australia Securities LLC (the US Broker-Dealer ), a broker-dealer registered under the U.S. Securities Exchange Act of 19 (the Exchange Act ) and a member of the Financial Industry Regulatory Authority ( FINRA ) at 1 (1) This report was prepared, approved and published by Global Markets Research, a division of Commonwealth Bank of Australia ABN AFSL 9("the Bank") and distributed in the U.S. by the US Broker- Dealer. The Bank is not registered as a broker-dealer under the Exchange Act and is not a member of FINRA or any U.S. self-regulatory organization. Commonwealth Australia Securities LLC ( US Broker- Dealer ) is a wholly owned, but non-guaranteed, subsidiary of the Bank, organized under the laws of the State of Delaware, USA, with limited liability. Please see further disclaimers at the back of this document. Please also view our website at for a more detailed disclaimer.

3 Our View Downside risks to global growth, but Asia to outperform Asia s superior growth to continue - US & EU have BIG problems; EU workout a long-run problem, weighing on growth and markets, lifts volatility; growth skewed towards Asia ultimately commodity supportive; concerns over commodity price collapse look overdone. Australia chasing trend growth and well placed to deal with global problems Asian skew, capex boom and policy flexibility support growth here; AUD, commodity focus and household savings driving shift to patchwork economy; domestic risks are mining capex peak, weaker h/hold income & lower terms-of-trade. Economic policy and markets EU risks will keep share markets volatile. US problems will keep USD weak. More rate cuts likely as inflation stays low. Bond yields and swap rates to edge lower. AUD trading in a USD1.-1. range, with weak USD.

4 The Australian Dollar AUD near parity reflects very weak US Dollar. High AUD driving structural change, by changing relative prices. Factors supporting AUD: %pa CBA TEI & THE CASH RATE Cash rate (lhs) Interest rates here are well above very weak US, EU & Japanese economies; Commodity prices remain relatively high and China s growth outlook is good; Governments have AAA credit ratings. Factors negative for AUD: CBA TEI* (adv 9 mnths,rhs) * Deviation from trend Jul-97 Jul-99 Jul-1 Jul- Jul- Volatility in share markets usually means USD buying/aud selling China s growth numbers will not always be good; %pa Trading range of USD.98 to 1. likely.

5 The AUD USD 1. AUD/USD FORECASTS USD 1. Index COMMODITIES & AUD/USD (USD terms) USD AUD/USD 1.1 AUD/USD, rhs CBA (f) Dec 9 Dec 1 Dec 11 Dec 1 Dec 1 1 USD Commod Index, lhs Source: CBA Sep 98 Sep Sep Sep 1 CBA (f).7.. AUD fundamentals supportive: USD weakness; high Asian & commodity exposure; large positive interest rate differential; strong financial position; AAA rating and sound financial system. AUD short term is lower after weak China data & lower iron ore prices.

6 USD The AUD cycles December 198: AUD floats at USD.99 AUD peaks at USD.9 on 1 March 198 AUD floats 1 Dec8 at USD.99 March 198: Labor Party wins election. 8 March 198: AUD devalued 1% to USD.89 Strong USD & AUD falls Rising interest rates and higher commodity prices -8 February 198: MX Missile Crisis 1 May 198 Keating Banana Republic comment on radio Commodity prices at record lows 1 February 1989: Keating comments talk down AUD October 1987: Stockmarket crash February 199: in Australia One Nation September 198 : Statement First downgrade of Australian sovereign debt rating 8 July 198: Keating changes foreign investment rules and RBA raises rediscount rate to 1%. AUD hits record low of USD.71 during day and closes at USD.1 October 1989 : Second downgrade of Sovereign debt rating Kuwait invaded by Iraq Aug 9 August 1991: Failed Russian coup Oil prices spike in Gulf War I Federal election dates: March Dec July 1987 March March March 199 Oct Nov 1 9 Oct World bond Nov 7 markets sell-off on 1 August 1 US inflation fears March 199 Howard Gov t elected Interest rates cut 1 times from Jan 199 to Dec 199, from 18% to.7% Commodity prics 19 December 1991: falling from June 97 Keating becomes Prime Minister October 199: Metals prices reach record lows. AUD low of USD.1 S&P Sovereign Debt Rating changes AA+ Dec 8 AA Oct 89 AA+ 17 May 99 AAA 17 Feb Average Annual Trading Range AUD/USD, : 1USc June 1997: Asia crisis begins, THB floats RBA lifts rates times from.7% to 7.%, from July to Dec 199. Commodity prices rising July 1998: Metals prices reach record lows. AUD low of USD.81 Japan in recession: JPY & AUD weaken May 1999 S&P Upgrade Interest rates cut times from July 199 to July 1997, from 7.% to.% Commodities recover April 99 YK related selling Oct 99 IMF packages for Asia: Markets rally, Jan 98 Russian debt crisis Ruble devalued Gold falls to USD7/oz AUD low of USD. on 8 Aug 99. LTCM on Sept 98 RBA lifts rates: Nov 1999, Feb, April, May & August WTC 11 Sep 1 AUD dip,.8 RBA cash rate changes Mar. May.7 Aug. Nov. 8 Aug 7. 7 Nov.7 Feb 8 7. Mar 7. Sep Oct. Nov. Dec. Feb 9. 8 Apr. 7 Oct 9. Nov. Dec.7 Mar 1. 7 Apr 1. May 1. Nov Nov 11. Dec 11. May 1.7 June. Oct. Oct Moody s upgrades Australia to Aaa RBA lifts rates in May & June AUD falls to USD.7 as USD rises. US stockmarkets fall. Oil hits $7/bbl AUD low of USD.77 on April 1. Jan-8 Jan-88 Jan-9 Jan-9 Jan- Jan- Jan-8 Jan-1 Updated 1 October 1 March S&P upgrades Australia to AAA USD weakens as US shares fall 9 Oct Howard Gov t re-elected RBA lifts rates Nov & Dec. Commodity prices rising Oil prices spike until Gulf War ends 1 April Uridashis lift AUD Oil prices hit $1/bbl Mineral commodity prices at yr highs Nov 7 Rudd Gov t elected USD weaker Fed cuts rates US sub-prime Problems Aug 7 on AUD collapses as USD rises on Sub-prime crisis Commodity prices slump. Oil prices hit $7/bbl Aug 7 RBA cuts rates Sep 8, to 8 Apr 9 Sep 8 Lehman Bros collapse, US Fed cuts to zero, Dec 8. RBA lifts rates Oct 9 to Nov 1 AUD low of USD.1 on 7 Oct 8 AUD at year high of 1.18, 7 July 11. USD falls as Fed does Quantitative Easing, Mar 9 USD US & EU growth data weakens, Commodities Iron ore prices & shares dip. US Fed recover says low rates strongly till 1. RBA cuts in Nov & Dec 11, in May 1, June & Oct

7 Importers Heaven: AUD strong against EUR & GBP. GBP AUD/GBP & AUD/EUR EUR 11 JPY AUD/JPY & AUD/USD USD 1.1. AUD/GBP, lhs.8 AUD/JPY, lhs AUD/EUR, rhs AUD/USD, rhs.. Jan- Jan- Jan- Jan- Jan-8 Jan-1 Jan-1. Jan- Jan- Jan- Jan-8 Jan-1 Jan-1. AUD at EUR.79..and GBP.. Should stay around those levels till year end. AUD/JPY stuck in the JPY78 to 8 range. 7

8 AUD Forecasts peak in December? Exchange ratesaud/usd AUD/JPY AUD/EUR AUD/GBP AUD/NZD AUD/CHF Mar Jun Sep Dec 1(f) Mar 1(f) Jun 1(f) Dec 1(f) Dec 1(f)

9 The European Threat The base case Base case is the Eurozone survives. Maybe without Greece in years time? But Eurozone recession continues and then a weak recovery. Strong nations would also suffer in a meltdown. Eurozone lessons: %pa CBA TEI & THE CASH RATE. - CBA TEI* (adv 9 mnths,rhs) * Deviation from trend.8-8 Jul-97 Jul-99 Jul-1 Jul- Jul- lend directly to banks avoids adding to sovereign debt. Cash rate (lhs) throwing enough money at a problem will bury it for a while but the problem remains; austerity only works as long as the voters are happy to put up with it; extreme fiscal austerity is counterproductive. Interim solution: unlimited ECB operations and other support. Allow Stability Fund to Funding channels for banking system under strain as bad debts cause problems. %pa 8-9

10 Australia: 1 GDP:.% 1-1 %chg AUSTRALIA: GDP Qtr Sep 1f =.8% Annual %chg CBA forecast - - Jun-1 Jun-11 Jun-1 Jun STRONGEST GROWTH OUTLOOK Iron ore, coal & LNG construction & exports. Mining: equipment, transport & services. Infrastructure roads, rail, water, power, utilities. Outbound tourism & internet buying. MODERATE TO LOW GROWTH OUTLOOK Staples groceries, food, hardware. Cafes, restaurants, communications/phones. Consumer spending on services: health, education & travel. Discretionary retail clothing/shoes, cosmetics, a/visual. Manufacturing metals & wood related. Imported car sales. New housing construction headed for modest recovery. SECTORS WITH DOWNSIDE RISK Retail exposed to internet-based alternatives Manufacturing local car & food industry, textiles Domestic & Inbound tourism. Some education. 1

11 State Growth: WA outperformance..in most areas Investment, spending & jobs Index 1 1 STATE BUS. INVESTMENT Index Sep 8 = 1 1 WA 1 11 Index HOUSEHOLD SPENDING Sep 8 = 1 %pa 7. CBA TEI & THE CASH WA RATE VIC Index 11 %pa JOBS BY STATE (Jan 1 =1) WA QLD 1 NSW 1 VIC 8 Mar-8 Mar-9 Mar-1 Mar-11 Mar CBA TEI* (adv 9 mnths,rhs) Cash rate (lhs) QLD * Deviation from trend Jul-97 Jul-99 Jul-1 Jul- Jul- 1 Mar-8 Mar-9 Mar-1 Mar-11 Mar-1 NSW NSW Qld Vic SA Tas 98 Jan-1 Jan-11 Jan-1 Jan-1 Jan-11 Jan WA s outperformance to continue. Projects underway, population growth higher. 11

12 Inflation at.%...rising to.% in 1. INFLATION % (annual % change) % % INFLATION (annual % change) % Local services Underlying inflation RBA target Headline inflation 1 Mar- Mar- Mar-8 Mar-1 Mar-1 1 AUD influenced prices - Mar- Mar-8 Mar-1 Mar-1 - CPI running at.%pa & underlying measures at.%pa. CPI has 8% goods and % services. AUD effected inflation at -1.%pa. Local inflation (services) at.%pa. 1

13 Wages: Up.7%pa. AUSTRALIAN WAGES % % (annual % change) Private Public Sep-98 Dec-1 Mar- Jun-8 Sep-11 Total Wages growth near.7%pa. Mining Mfg Utilities Construct. Wholesale Retail Accom. etc Transp Communic. Fin & insur Rent & Hiring Prof Serv. Admin Serv. Gov't Education Health Cult & rec Pers & other WAGE PRICE INDEX (% annual growth) Total =.7% Business surveys suggest slower wages growth coming as unemployment rate rises. 1

14 Jobs: slowing to 1k per month. ' 8 EMPLOYMENT ' 7 LABOUR MARKET. % ' 1 Full-time (lhs) Unemployment rate (lhs) Part-time (rhs) 7 Jan-9 Jan-1 Jan-11 Jan-1 Jobs growth expected to slow to 1k/mth. But new additions are 1k per month. Employment growth (rhs).8 - Jan-8 Jan-9 Jan-1 Jan-11 Jan-1 Jan-1 National unemployment rate likely to rise to.% to.8% in late

15 National Jobs - growth by sector. JOBS GROWTH BY SECTOR 's Mining Health Prof serv Education PBS Communic Manufact Wholesale Agri Rental EGW Cult Accomm Pers Fin & insur Admin Retail Transp Gov admin Construct Year to August k Gains are in Mining, Health & Resources Government Spending on services: health, education, entertainment, property. Losses are in sectors exposed to: High AUD Weak consumer spending Eg tourism, transport, manufacturing, retail & Construction downturn. 1

16 State Jobs Diverging. 11 F/T JOBS BY STATE (Jan '1 = 1) 11 UNEMPLOYMENT BY STATE % % Tas 11 WA Qld Vic Qld NSW SA Vic NSW SA... Tas 9 Jan-1 Jan-11 Jan-1 Jan-1 Jan-11 Jan-1 9 WA. Jan-1 Jan-11 Jan-1 Jan-1 Jan-11 Jan-1. Jobs market slowing. NSW & Vic sideways till 1. WA is the stand out, but strong jobs growth may be coming to an end in QIV. Unemployment rates headed higher, except in WA. 1

17 Retail Spending: Ability v Willingness Ability to spend is strong Household incomes, up %pa. Wages & jobs growth helps. Spending on services rising twice as fast as retail spending. Overseas travel up 1% on a year ago. Retail spending is about % of ALL household spending on goods and services. Willingness is in doubt Consumer caution prevails. Confidence low. Driven by lots of bad news from EU & US. Jobs market could be more of a negative in 1. Appears to be differences between women & men about outlook. Spending leakages were also important Utilities costs, rents, petrol & interest rates up. Bank deposits up. More overseas travel, less inbound tourism. More internet sales (% of total?). Higher AUD means falling goods prices. 17

18 Confidence: Not Happy, Jan. Are we in Athens yet? CONSUMER SENTIMENT Index Index Index CONFIDENCE & CONDITIONS (smoothed) Index 1 Personal Finances 1mo ahead Time to buy a dwelling 1 1 Business conditions Business confidence Consumer sentiment -1 Source: NAB -1 Source: Melbourne Institute Jul- Jul-7 Jul-8 Jul-9 Jul-1 Jul-11 Jul-1 - Jan- Jan- Jan-7 Jan-9 Jan-11 - Consumer confidence weak.but RBA rate cuts may be working. Personal finances and time to buy dwelling have risen good news for CBA. Current unemployment rate.% (worst in. years). Business confidence also poor. Big business worse than small business. 18

19 Retail Earlier Boosted by $.8bn Handouts & Tax Cuts; Now Unwinding % RETAIL TRADE (% change) % Annual (rhs) RETAIL TRADE BY CATEGORY (annual % change) Food Depart. Clothing 1 9 RETAIL SALES % (trend, annual % change) % Western Australia H/H good Total +.% Australia -1 Monthly (lhs) - Jul-1 Jan-11 Jul-11 Jan-1 Jul Other Café & Res. - Rest of Australia Jul- Jul-8 Jul-1 Jul-1 Retail up.% on a year ago. Erratic..and headed back to - % p.a. range. Govt handouts ($.8bn May & June), plus tax cuts lifted retail growth above trend. Retail is $1.bn per month, about % of ALL household spending.. WA is the stand-out big jobs & income growth over past years. 19

20 But..Consumers Keen on New Cars 's AUST. NEW CAR SALES (mth moving average) 's Total sales headed for 1.7 million in 1, up 7% on Commercial lhs SUVs, lhs SUVs are the big growth segment, up % on a year ago. They need BIGGER, more expensive tyres..a$bn a year business. 1 Cars, rhs Jan-9 Jan-1 Jan-11 Jan-1 Jan-1 Imports have 8% of market. Major threats to local makers are higher AUD, rising domestic cost base, lower offshore production costs, imported fuel-efficient & hybrid cars, changing consumer preferences.

21 More travel (offshore) and higher bills reducing discretionary spending 's 7 AUD/USD & TOURISM AUD/USD 1.1 UTILITIES SPEND % ($bn & % of after tax income) $bn/qtr. 9 RENTS, UTILITIES & RATES % (annual % change) % 1 1 AUD/USD, rhs 1. Spending as % of after tax income,,lhs Spending,rhs 1 Utilities 1 Departures, lhs Arrivals, lhs Purchase, rates & maintenance Rents 8 Jan-9 Jan-1 Jan-11 Jan Mar-81 Mar-87 Mar-9 Mar-99 Mar- Mar-11 Sep- Sep- Sep- Sep-8 Sep-1 Sep-1 Overseas departures were 8k in Aug., up %pa. % above arrivals. Higher charges in essential items are reducing discretionary retail spending. Utility (electricity, gas & water) prices are % higher over the past years. 1

22 Consumer Caution deposits to $7bn, up 9% pa. 1 %pa CREDIT CARD ACTIVITY (%pa, smthd) source RBA %pa 1 $bn HOUSEHOLD ASSETS $bn 8 SAVING RATIO % % 9 Balances 9 Dwellings, lhs Deposits, rhs Total Accounts Avge balance - per card Jan-8 Jan-9 Jan-1 Jan-11 Jan-1 Credit card usage slowing again..debit cards as well. Higher cash deposits shows precautionary savings rising firmly. Saving ratio at 1%, highest since 198s. - RBA Mar-7 Mar-8 Mar-9 Mar-1 Mar-11 Mar-1 - Sep-7 Sep-8 Sep-88 Sep-9 Sep- -

23 Australian Interest Rates Lower INTEREST RATES 9-1 % % Basic mortgage rate Variable mortgage rate %... RBA CASH RATE PRICING Cash rate %..... Cash mth yr swap Jan-9 Jan-1 Jan-11 Jan-1 Jan-1.. months ahead. 1 months Source: Reuters ahead. Jan 11 Apr 11 Aug 11 Nov 11 Mar 1 Jun 1 Oct RBA cut cash to.%, more coming. Markets see.% cash in mid 1. Cash rate has averaged.1% since.

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25 Bonds Australian 1 Year Yields at Year Lows. US also low. CASH & BONDS -1 % % 8 8 US BOND YIELDS % % 1... % SPREAD TO GERMAN 1YR BUND %. 7 1 year Spain... US 1yr (rhs) Cash year. US yr, (lhs) 1.. Italy. 1 Jan- Jan- Jan- Jan-8 Jan-1 Jan Jan-1 -Mar-1 18-Jun-1 1-Sep Feb-1 -Apr-1 -Jun-1 -Aug-1 Low global bond yields driven by EU risks, weak US growth and QE in US. Australian 1 year bonds were under % briefly. Growth pessimism rules markets, low inflation favours bonds. Lower cash favours cyclical shares?

26 Interest Rate Forecasts Interest rates Cash Rate 9 Day Bank Bill Year Swap Year Swap 1 Year Swap 1 Year Bond Mar Jun Sep Dec 1(f) Mar 1(f) Jun 1(f) Sep1(f) Dec 1(f)

27 Population: National 1.%...WA.%. %pa ABS11 POPULATION GROWTH (annual % change) Qld Vic NSW WA %pa Tas.. Jun- Jun- Jun- Jun- Jun-8 Jun-1 Jun-1 SA 's 1 1 ABS POPULATION GROWTH Moving annual total Net Overseas Nat Increase Dec-97 Dec- Dec- Dec- Dec-9 National population growth at 1k (1.%pa) gives underlying housing demand of 17k. WA s population growth strong at.1%pa. Boosted by interstate & overseas migration. 7

28 Population: Baby Boom & Ageing BABY BOOM ' (Births, annual total) ' AGE GROUPS % (% share of total population) % 1 8-7yrs lhs) -1yrs (rhs) 7+ yrs (lhs) POPULATION GROWTH ' ' 18 1 (rolling annual total) Source: ABS Cat. No. 11. Natural increase Net migration ABS Cat. No Jun-9 Jun-9 Jun-98 Jun- Jun- Jun-1 Jun-8 Jun-88 Jun-9 Jun- Jun- Jun-1 Jun-8 Jun-88 Jun-9 Jun- Jun- Jun-1 Baby boom will lift demand for education services over next 1 years. Aged care demand rising as proportion of population over 7 years old rises (% to 9%?). Higher net migration driving population growth. 8

29 Housing: New construction slowing. s TOTAL RES. BLDG APPROV. annual total s Vic 's... CONSTRUCTION LOANS (mthly, 's) Vic 's... Qld NSW. 1. NSW WA SA WA QLD 1.. Jan- Jan- Jan- Jan-8 Jan-1 Jan-1. Jan-9 Jan-1 Jan-11 Jan-1. Building approvals data trending lower in most States, especially Victoria (the main builder). We expect national dwelling approvals to be near the 1k level in 1 and 1 in 1, after 18k in 11 and17k in 1. 9

30 House prices flat. Lending recovery coming. HOUSE PRICES $s CBA median house price $s 9 9 AUST. HOME LOANS & RATES (ex-refinance) s % 1 8 Syd Perth 7 Mortgage rate, rhs 8 Bris Adel 7 Melb Hob Mar- Mar-8 Mar-1 Dec- Dec-1 Number, 's, lhs 1 Jan- Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-1 Median house price for Adelaide, on CBA data, was $8k, in Sept. 1, down %pa. Lending growth is relatively weak, and moving sideways (ex refinancing). Low interest rates will slowly lift borrowing & turnover.

31 Shares ASX gradually higher. AUD assets expensive from offshore. 1 1 SHARE MARKETS S&P, lhs 8 1 S&P & ASX ASX (lhs) S&P (rhs) Index 1 AUD & ASX ASX (lhs) AUD/USD, rhs USD ASX, rhs Jan-Jan-Jan-Jan-Jan-8Jan-1Jan-1 9 -Jan-1 8-Mar-1 -Jun-1 18-Sep-1 Share markets wobbly. ASX expected to be 7 in December 1. AUD/USD and ASX have some relationship? A lower AUD means higher ASX? Investors prefer high yielding stocks, like Telstra, Woollies, Wesfarmers & the banks. REITs also popular as yields look attractive with RBA rate cuts Jan-1 8-Mar-1 -Jun-1 18-Sep-1.9 1

32 Commodities Phases of the Boom Prices, Investment & Volumes. COMMODITIES & TERMS OF TRADE Index (Index, quarterly) Index 1 Source: CBA $bn 1 Source: BREE, CBA MINING CAPEX $bn 1 $bn EXPORT VOLUMES ($bn per qtr) Resources $bn CBA Commodity Price Index, USD (lhs) CBA (f) Less Advanced Projects 7 Manufacturing & other Services Terms of trade (rhs) Mar 9 Mar 99 Mar Mar 7 Mar 11 Advanced/ Committed Mining Projects Rural Sep-7 Sep-8 Sep-98 Sep-1 Higher prices & profits drive mining investment.and then higher exports. Prices peaked in 11, investment to peak in 1/1, export volumes to rise.

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