Investor Signposts: week beginning 11 December 2011
Are Aussie consumers starting to spend again?
Are Aussie consumers starting to spend again? The latest national accounts data tends to suggest that they are with the broadest measure of spending – household consumption – rising by 1.2 per cent in the September quarter to stand 3.8 per cent higher than a year ago.
Perhaps we have spent so much time focussing on the narrower measure of "retail trade" that we have missed the big picture story? Certainly consumers are indeed spending more on "experiences" nowadays rather than physical goods. That is, we are spending on things like travel and buying fewer coats, shoes and televisions.
The 3.8 per cent annual growth of consumer spending was the strongest result in three years. And indeed the quarterly growth rate was the second strongest recorded in almost four years. So the result looks impressive.
But it needs to be kept in perspective. Over the past 50 years, "normal" annual growth of household spending was 3.8 per cent, so growth has merely returned to "normal".
And there were some special factors. Purchases of cars soared by 7.1 per cent in the September quarter as the industry recovered from the supply issues associated with the Japanese earthquake earlier in the year. Car sales had fallen by 5.3 per cent in the June quarter.
Hotels, cafes and restaurants did well in the September quarter, up by 3.1 per cent, after a 3.5 per cent lift in the June quarter. This provides support for the theory of "consumer experiences" – more people are getting out with friends and families to enjoy a meal. Contrast this with a 3.2 per cent fall in clothing sales.
Purchases of beer, wine and spirits also rose by 3.9 per cent in the September quarter - perhaps to accompany a meal at a BYO? Alcohol sales also rose by 3.4 per cent lift in the June quarter.
Other areas to record lower spending were "communications" (down 0.2 per cent), transport services (down 1.1 per cent) and "electricity gas and other fuel" (down 2.2 per cent).
Overall, it gives the impression that Aussies got out an about in late winter/early spring.
And there were also interesting results on gambling. In the September quarter the downtrend in gambling continued, accounting for just 2.8 per cent of all spending and down from record highs of over 4 per cent set around a decade ago. The Aussie consumer is clearly changing.
The week ahead
With only three weeks to the end of the year, you would think that we would be in wind down mode by now. But there are still a number of key indicators to be released in Australia. And in the US, the Federal Reserve holds its last meeting for 2011.
In Australia the week kicks off with data on home loans on Monday. There has been a recovery of sorts in the past six months with the number of loans for owner-occupiers trending higher. But much of the activity has been driven by home buyers refinancing loans given the attraction of lower fixed rates and competitive deals. We expect that the number of loans to owner occupiers rose one per cent in October but the actual value of loans may have eased by two per cent.
The October trade figures are also released on Monday with another healthy surplus expected of around $2 billion.
On Tuesday data on dwelling starts (commencements) is released together with the NAB business survey. Business owners should be a little more confident following the November rate cut. But little joy is expected on home building with starts likely to have fallen 2 per cent in the September quarter.
The December consumer sentiment survey is released on Wednesday with skilled vacancies data out the same day. Consumers should be happy – especially following another rate cut and with petrol prices falling and the Aussie dollar rising. Thrown in for good measure will be a speech by Reserve Bank Deputy Governor Ric Battellino.
On Thursday data on car sales is released together with the September quarter financial accounts. Car sales have risen for four of the past five months but the industry body – the Federal Chamber of Automotive Industries – expects that car sales fell by around 3 per cent in seasonally adjusted terms in November.
In the US, the week kicks off with the monthly budget figures on Monday while retail sales data follows on Tuesday together with the meeting of Federal Reserve policymakers. It may seem surprising but consumers are still spending freely with retail sales expected to have lifted 0.5 per cent in November after a 0.5 per cent increase in October.
The Federal Reserve policymakers may be a little more positive in their commentary but clearly there is no need for change in policy settings at present – in either direction.
In terms of the other indicators to be released, data on producer prices, industrial production and the current account are due on Thursday with the Empire State and Philadelphia Fed indexes thrown in for good measure. And figures on consumer prices are released on Friday.
The latest interest rate cut may finally entice a few investors back to the sharemarket. And if it is dividends they are after, then certainly there are a raft of opportunities. Of the major companies the stand-out is Telstra with a dividend yield of 8.6 per cent. But the major banks are also offering trading on healthy dividend yields of around 6-7 per cent with Westpac current yielding 7.2 per cent. As always, investors need to factor in future movements in share prices and the potential for dividends to be maintained. But it is food for thought after two consecutive rate cuts and forecasts of further reductions ahead.
Interest rates, currencies & commodities
If the world was headed for tougher times, one indicator that would show this would be the Baltic Sea freight index – a measure of the cost to ship dry commodities like iron or wheat. And while the Baltic index has eased from around 2,150 points to 1,850 points since late October, it remains significantly above lows of 1,250 points seen in April and August and 1,050 points recorded in February. Of course it bears watching over coming months, especially with reports that Chinese iron ore inventories are near record levels.
Our currency strategists have twigged their forecasts for 2012. The Aussie dollar is now seen under pressure in the first half of 2012, dragged down by expected weak economic conditions and ongoing break-up risks in the euro zone. But overall we expect the currency zone to remain intact and conditions should improve in the second half of the year.
The Aussie dollar is expected to ease to US95 cents by June 2012 before rebounding to US100 cents by end year. Against other currencies, the Aussie could ease to JPY71 yen by June but recover to JPY78 by the end of 2012. And the Aussie is expected to hold between US74-77 cents over 2012.
Financial markets have retained their aggressive expectations for interest rate cuts over 2012. The overnight indexed swap market expects the cash rate to fall to around 3.44 per cent in a year's time but interestingly a 25 basis point rate cut isn't only fully factored in by April 2012. We expect at least one more interest rate cut and have assumed a 25 basis point drop at the February 7 Board meeting. Interest rate settings still haven't hit "normal" yet – the assumption being used by the Reserve Bank as the average housing rate over the past 15 years.