WEEKLY ECONOMIC COMMENTARY Week beginning 5 th December 2016 ECONOMIC DATA ROUNDUP DATA RELEASED LAST WEEK Economic Data Period Actual Previous Building Approvals October +3.0% -8.7% Private Sector Credit October +0.5% +0.4% Private New Capital Expenditure (capex) Sept Quarter -4.0% -5.4% Retail Sales October +0.5% +0.6% Residential building approvals fell by 12.6% in October, building on the 9.3% fall recorded in September and are now down 24.9% for the year. After a long period of strength, housing approvals have fallen this month, down 3.4% (-5.7% annually) while the more volatile other (or apartment) category fell a sharp 24.8% (-42.6% annually). Private sector credit was up 0.5% in October to bring annual credit growth to +5.3%. This month s increase was driven by a 0.6% increase in housing credit (now up 6.4% annually) and business credit which increased 0.5% (to be up 4.4% annually). Personal credit was flat in October and is down 1.1% over the year. Total private new capital expenditure (capex) fell 4.0% in the September quarter and is now 16% lower than a year ago. After three straight quarterly rises, non-mining investment fell 2.3% this quarter to be up 4.8% annually, while mining investment fell 7.2% in the quarter to be 35.1% lower over the year. The component of the capex data that plugs into the upcoming GDP data machinery and equipment investment, fell 1.9% which was a weaker outcome than expected. Looking at the 12 detailed industries (in current price terms), only one industry (I.T.) reported an increase in capex in the quarter. Updated investment plans continue to point to a flat non-mining investment outlook and lower mining capex. Capex and mining is still declining Retail sales were up 0.5% in October with annual growth now at 3.5%. Household goods sales were up a solid 0.7% after the sharp 2.6% rise last month, while food sales (the largest component of the retail basket) increased by 0.6% thanks to supermarket and grocery stores. The volatile department store category fell 0.4% while clothing sales also fell 0.4%. In other releases, the NAB online retail sales index increased by 0.5% in October, much slower than the previous month (+1.4%), with year on year growth also slowing to 13.5% from 14.6%. Data over the next week Economic Data Date Period Forecast Previous ANZ Job Ads 05 Dec November n/a +1.0% Company Profits 05 Dec Sept quarter +3.0% +6.9% Current Account Balance 05 Dec Sept quarter -$12.5bn -$15.5bn Economic Growth (GDP) 05 Dec Sept quarter +0.2% +0.5% RBA Board Meeting rates decision 06 Dec December 1.50% 1.50% Trade Balance 08 Dec October -$650m -$1.227bn Housing Finance 09 Dec October -1.0% +1.6% Weekly Market Commentary 1
ECONOMIC COMMENTARY LAST WEEK Uncertainty over future US policy as well as new concerns in Europe (the upcoming Italian referendum on constitutional reforms) has seen investors turn a little cautious last week. Some positive US data, a spike in the oil price (more detail below) and expectations of higher US inflation pushed bond yields higher late in the week. US ten year bond yields are now trading at their highest level since July 2015. OPEC members met last week in Vienna to discuss cutting production, but not all members were in agreement before the meeting. Crude oil was up over 5% on Monday only to fall by almost the same amount a day later as OPEC members haggled ahead of their meeting. The final outcome was a deal to reduce production by 1.2m barrels per day (a reduction to global supply of around 2%) and there appears to be an expectation that non-opec members will cut product by a further 0.6m barrels. This was the first reduction in eight years, and resulted in the oil price rising by $4 or more than 9%. Local data added to the bearish sentiment with a higher than expected fall in building approvals and a September quarter capex report showing a little more slowdown in the mining sector, but only a modest rise (at most) in non-mining investment. This adds more reason for the RBA to remain comfortably on hold for the moment which saw local yields move higher last week. By the close of trading on Friday, the 90-day bank bill was trading at 1.77% from 1.76% a week earlier. In the long term maturities, 3 and 10 year bond yields closed the week higher at 1.97% and 2.87% respectively, from 1.92% and 2.76% a week earlier. CURRENCY The Australian dollar started the week with a rally benefitting from fluctuating commodity prices, especially oil. Despite the rise in oil, the Aussie seemed to find resistance around USD0.75 on several occasions last week, not helped by a stronger US dollar. Despite the stronger US dollar, our currency is also finding support from stronger oil, iron ore and coal prices. By the close on Friday, the Australian dollar was trading at USD0.7404 compared to USD0.7435 a week earlier. EQUITIES Better than expected US economic data (GDP) pushed stocks higher early last week, but the US share market appears to be questioning the recent surge in prices since the Presidential election and have halted their rally. By Wednesday, share markets were closing in the red as falling commodity prices (apart from oil) weighed on the resource sector which also saw some profit taking after the recent strong rally. The spike in oil on Thursday was enough to see our share market post a solid gain with energy and resource stock the out-performers, but Friday saw a negative close to the week as the oil price retreated taking related stock lower. By the close on Friday the S&P/ASX200 Index was trading at 5,444.0 compared to 5,507.8 a week earlier. THIS WEEK There is plenty of data and events for financial markets over the coming week. Recent partial data suggest that this week s September quarter GDP numbers will slow substantially. However, this looks to be already factored in and, as such, is likely to have a limited impact on markets. Analysts will have a close eye on the wage measure within the GDP data, as weakness in wage growth remains a key risk to the RBA s inflation outlook. It is widely expected that the RBA meeting will have no trouble in coming to a no change policy decision this week, with little change to the accompanying statement and hopes that the US raises interest rates next week. INTEREST RATE VIEW While there is only a 2% probability of the RBA cutting rates this week, the expectation that US rates are going up next week, for the first time since late 2014, is now fully priced in (i.e. the probability is 100%). Our futures market continues to price in a slight increase in the official cash rate over the next 12 months Economic Data 12 months ago 6 months ago 3 months ago 1 month ago Now Official Cash Rate 2.00 1.75 1.50 1.50 1.50 90 day Bank Bill 2.30 2.00 1.73 1.76 1.77 180 day Bank Bill 2.39 2.14 1.93 1.99 2.01 1 year swap 2.21 1.89 1.66 1.74 1.79 3 year swap 2.29 1.83 1.63 1.84 2.10 5 year swap 2.63 2.09 1.87 2.17 2.58 10 year swap 3.10 2.38 2.07 2.45 2.99 AUD/USD 0.7316 0.7253 0.7544 0.7669 0.7404 S&P/ASX200 Index 5,151.6 5,318.9 5,372.8 5,180.8 5,444.0
CHART OF THE WEEK The world s most liveable cities Coming up with a list of the world s best cities is a near-impossible task. The bustle and hum of megacities like São Paulo or Tokyo might be too much for some people; others might struggle with the pace of life in Cleveland or Frankfurt. A ranking released on August 18th by our corporate cousin, the Economist Intelligence Unit, attempts instead to quantify the world s most liveable cities - that is, which locations around the world provide the best or the worst living conditions. The index, measured out of 100, considers 30 factors related to safety, health care, educational resources, infrastructure and the environment to calculate scores for 140 cities. Those that score best tend to be mid-sized cities in wealthier countries. Melbourne tops the list for the sixth year in a row (see chart, right), and six of the top ten cities are in Australia or Canada. But Sydney, Australia s largest city, drops out of the top ten due to fears over terrorism. Damascus is the lowest-ranked city with a rating of just 30.2 out of 100, scoring poorly in all categories (understandably, due to Syria s ruinous civil war). Kiev, the only European city in the bottom ten, performs better for health care and education but has a low stability score due to Ukraine s ongoing conflict with Russia. Increased instability over the past year has caused a drop in the score of nearly a fifth of the 140 cities surveyed (see chart, below). Ten of these cities are in Western Europe, notably Paris, which has suffered multiple terrorist attacks. Some American cities, including Atlanta, San Francisco and Chicago have also dropped down the rankings after spikes in civil unrest.
CHART OF THE WEEK Source: The Economist 18 th August 2016, by the Data team.
About Rural Bank and Rural Finance Rural Bank has been a wholly-owned subsidiary of Bendigo and Adelaide Bank Limited since 2010 and is the only Australian-owned and operated dedicated agribusiness bank in the country. From 1 July 2014, Victorian agribusiness lender, Rural Finance joined Rural Bank as a division of Bendigo and Adelaide Bank Limited. As a specialist rural lender, Rural Finance has been fostering the sustainable economic growth of rural and regional Victoria for more than 65 years. Together, Rural Bank and Rural Finance are supporting farmers and farming communities by providing them with specialist financial tools, industry insights and investment into the future of the Australian agribusiness sector. Rural Bank s specialist farm finance tools are available nationally via a network of banking partners, including Bendigo Bank and Community Bank branches and Elders Rural Services. Additionally, Rural Finance has a network of offices across regional Victoria. Postal Address: PO Box 3660, Rundle Mall, SA 5000 Telephone: 1300 660 115 Facsimile: 08 8121 0106 service@ruralbank.com.au www.ruralbank.com.au Postal address: 57 View Street Bendigo VIC 3550 Telephone: 03 5448 2600 Facsimile: (03) 5441 8901 admin@ruralfinance.com.au www.ruralfinance.com.au Disclaimer: This report has been prepared by Rural Bank Treasury and is based on information obtained from public sources that are believed to be reliable. Whilst all care has been taken in compiling the information in this report, Rural Bank and Rural Finance make no representation as to the accuracy, completeness or timeliness of such information. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Rural Bank and Rural Finance and are subject to change without notice. Rural Bank and Rural Finance have no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein changes or subsequently becomes inaccurate. This report is provided for informational purposes only and does not take into account personal circumstances, objectives, financial situation or needs. The information contained within this report should not be relied upon without consulting independent, professional advice carefully to consider the appropriateness of the advice to your personal circumstances. Rural Bank and Rural Finance disclaim all liability in relation to any loss or damage suffered by the use of or reliance upon any information contained herein or in any attachment or annexure hereto by any person. Copyright Rural Bank Ltd ABN 74 083 938 416 AFSL/Australian Credit Licence 238042 and Rural Finance a Division of Bendigo and Adelaide Bank Ltd ABN 11 068 049 178 AFSL/Australian Credit Licence 237879