This week Australia's two main sentiment indicators, the NAB business survey as well as Westpac's consumer confidence, showed the gap between mood in the corporate world and among households is increasing.
While rising profits have made firms increasingly optimistic, subdued wage growth is keeping households pessimistic.
Such a divergence is rare, Capital Economics says. It expects this gap to narrow in the coming months - but only because business confidence looks likely to fall as consumer confidence remains subdued.
The current low level of consumer confidence is at odds with the recent strength of its underlying drivers, economist Kate Hickie says.
"In particular, job growth has been strong and petrol prices have been falling. But it appears that other factors, such as record high household debt and the prospect of surging utility bills, are exerting more influence."
With these drivers set to persist, confidence is likely to remain subdued, he says.
"With retail energy prices rising by as much as 20 per cent, households are set to face significantly higher utility bills in the coming months."
At its current level, consumer confidence is consistent with a slowdown in real consumption growth to around 2.0 per cent by the end of this year, Hickie adds.
"Given that confidence tends to lead spending by around half-a-year, if confidence stay subdued in the coming months that means that consumer spending is likely to remain subdued into 2018 as well."
In contrast, business confidence has been propped up by rising corporate profits, but with firms facing increasing energy costs too, we doubt business confidence will continue to rise.
This in turn would prevent a predicted robust pick-up in business investment.
"We expect that the annual rate of real GDP growth will slow from an average of 2.5 per cent in 2016, to no higher than 2.2 per cent in 2017," Hickie says.
Talking about ultra-accomodative rates around the world and who's ready to hike, here's a good overview:
Global Central Bank Update: Canada hikes rates for the first time in 7 years, a 25 bps move to 0.75%. pic.twitter.com/C3t3V1vt7q
— Charlie Bilello (@charliebilello) July 14, 2017
There is little doubt the RBA is behind the curve on tightening monetary policy, given rate changes today take another one to two years to have their full effect, the AFR's Chris Joye writes:
The RBA's super-stimulatory monetary policy settings have bequeathed Australian families with an unprecedented 190.4 per cent household debt-to-income ratio; the most expensive house prices in history (the median Sydney house price is now $1,050,000); and an off-the-charts leap in the nation's house price-to-income ratio to 6.5 times, which according to UBS is uncharted territory.
For years the RBA's financial (in)stability department has erroneously alleged that there was nothing to worry about here while we repeatedly warned them of these outcomes. The unanticipated consequences of this policy failing are sundry.
For now let's focus on superannuation and the possibility it could be woefully inadequate for many savers' retirement income needs given an unexpected increase in their future living costs.
When former Treasurer Paul Keating introduced compulsory superannuation in 1992 the household debt-to-income ratio was just 73 per cent, the median Sydney house price was $161,000, and UBS's house price-to-income ratio was merely three times. All these metrics have sadly multiplied in the years since.
Crucially, about eight in 10 of the retirees Keating was targeting in 1992 owned their homes outright with no outstanding mortgage debt.
Fast forward to 2017 and affordability problems have pushed the home ownership rate down with many Australians suffering from "financial repression". This refers to the process by which artificially cheap money transfers wealth from savers to borrowers (and hence renters to owner-occupiers). More than 30 per cent of all families now rent with many left with little choice but to do so for the remainder of their lives.
Australian families are also entering their twilight years with more mortgage debt than ever before. RBA data shows that whereas households aged 55 years and over had debt-to-income ratios less than 50 per cent as recently as 2002, today this number is converging on 100 per cent.
Many retirees will arrive in their late 60s and 70s with debt-servicing obligations for years to come. Those who rent will grapple with a similar fate insofar as their monthly living costs will be heftier than the debt-free owner-occupied dream they once envisioned.
Following the Bank of Canada's rate rise this week - somewhat unthinkable just two months ago - it's worth asking if the RBA's cash rate is too low.
The two economies are frequently compared, not least due to their dependency on commodity exports (even though Canada focuses on oil, while Australia's biggest export is iron ore).
Deutsche economist Adam Boyton reckons it's worth looking at the main trading partners for some guidance, and in this case the gap between Chinese and US growth.
"The current 75 basis point gap between the RBA cash rate and the BoC's overnight rate is not particularly out of line with the respective pace of GDP growth in China and the United States," he says.
It's more likely the period of RBA policy rates being a long way above Canadian rates is over on account of the moderation of growth in China and ongoing growth in the US.
Meanwhile, domestic conditions also suggest the current rate difference is about right, Boyton continues, looking at the respective unemployment rates (see chart).
He concedes that an aggressive rate hike cycle from the BoC while the RBA remains firmly on hold would be "stretching things somewhat".
"That said, another 25bp hike from the BoC in October would not leave us thinking that the RBA's cash rate looked 'too low' relative to that in Canada."
Coles has been urged to freshen up its marketing and loyalty programs, with analysts saying price reductions alone won't help Australia's second largest food retailer regain momentum from Woolworths.
Coles cut the shelf price of about 30 bread varieties and baked goods by as much as 35 per cent on Wednesday in an attempt to improve its price competitiveness with Woolworths and build its leadership reputation in fresh food.
However, in a move that escalated fears of a full-blown price war, Woolworths responded within hours, reducing prices to match or undercut those at Coles.
Deutsche Bank analyst Michael Simotas said Coles' price cuts were the highest-profile price investments for some time, but did not constitute strong price leadership and were unlikely to be enough to regain the value perception advantage Coles had lost to Woolworths over the last year.
"The prices have not been dropped materially below those of Woolworths – in some cases they are slightly lower and in other cases they remain higher," Simotas said.
As part of its "everyday value" strategy, Coles has "permanently" reduced shelf prices on about 4100 products to build customer trust and insists its prices are still cheaper than Woolworths.
However, Deutsche said Coles' focus had been on staples such as bread, milk, eggs and roast chickens, where demand does not usually rise in response to lower prices.
"Overall, we believe Woolworths has continued to gain momentum relative to Coles," Simotas said in a research note.
"[Woolworths] is enjoying the benefits of stronger supplier support and improving customer perception which is enabling it to regain some of its lost market share."
Singapore's economy grew in the second quarter, narrowly dodging a recession thanks mainly to robust growth in its electronics and precision engineering industries due to strong global demand for semiconductors and semiconductor manufacturing equipment.
The economy expanded at 0.4 per cent in the April-June period from the previous three months on an annualised basis, lower than predicted. The economy contracted by 1.9 per cent in January-March, weakening more than the earlier estimate of a 1.3 percent contraction.
Gross domestic product grew 2.5 per cent in the second quarter from a year earlier, unchanged from a revised first quarter growth figure, and below forecasts of 2.8 per cent growth.
"The disappointment in the GDP data was predominantly in the manufacturing sector ... (which is) at odds with the strength of the sector seen in other export oriented economies in the region," said ANZ chief economist Southeast Asia Sanjay Mathur.
Mathur said the current growth-inflation mix did not suggest any shift to the current neutral policy stance of the Monetary Authority of Singapore.
Singapore has been among a number of export-reliant Asian economies to benefit from a general uptick in global demand since late last year, enjoying strong sales of its tech products.
Japanese human resources giant Persol has made a $778 million takeover bid for labour hire and maintenance group Programmed Maintenance.
The $3.02 per share bid represents a 68 per cent premium to their $1.80 price before the securities were placed in a trading halt this morning.
The directors of Programmed have unanimously recommended shareholders accept the offer, which is subject to regulatory approval including from the Foreign Investment Review Board.
The Japanese takeover comes amid consolidation in the Australian services industry, with Downer EDI trying to secure full control of Spotless.
Persol is one of Japan's biggest staffing companies, with 32,000 employees. Its $5.7 billion market capitalisation dwarfs Programmed's market capitalisation of $463.5 million.
The European Central Bank is likely to signal in September that its bond-buying scheme will be gradually wound down next year and ECB chief Mario Draghi could give the next clue on the plans in late August, the Wall Street Journal says.
According to the paper, the European Central Bank will signal a tweak to its policy outlook at the September 7 meeting.
"This is another story that suggests the ECB is going to prepare markets in the autumn for a tapering," said Rabobank fixed income strategist Lyn Graham-Taylor.
"We still think this is more likely to come in October but the market is reading it as sign that QE is going to come to an end, and so pushing bond yields higher."
Bonds across the eurozone came under fresh selling pressure after the report, with German Bund yields coming off a one-week low hit earlier in the session and then turning higher on the day. Near the close, it was up 2 basis points to 0.53 per cent.
In Europe, expectations have ramped up that extraordinary monetary stimulus will end sooner rather than later, given impetus by a June 27 speech by ECB chief Mario Draghi in which he opened the door for policy tweaks.
This has prompted many investors to shed their holdings of eurozone government bonds, and yields have shot up in the past two weeks.
Draghi is scheduled to speak at the Federal Reserve's Jackson Hole symposium just two weeks before the ECB's September 7 meeting. He will be returning to the conference for the first time in three years, when he laid the foundations for the ECB's massive asset purchase program.
"The direction and timing of the communication would make sense to us," ABN Amro economist Nick Kounis said in a note.
"Indeed, our base case is that the ECB will announce a tapering of its asset purchases from January 2018 onwards at the September meeting. At the same time, we think the ECB will try to sweeten the pill by making tapering slow and signalling that rate hikes are a long way off."
David Jones' crucial like-for-like sales have fallen for the year with its parent company blaming the decline on weak consumer confidence in Australia.
Woolworths Holdings, the South African retailer that has owned the Australian department store chain for three years, says David Jones' comparable sales fell 0.7 per cent in the year to June 25. It is the first time full-year sales have dropped under the new owner.
"Whilst relevant market share has grown, sales growth slowed in the second half (at DJs), as falling consumer confidence resulted in lower footfall," the company said in a trading update.
David Jones' overall sales increased 1 per cent in Australian dollar terms, however the collapse of Dick Smith electronics concession stores last year has dented growth by about 1 per cent.
Woolworths Holdings' other Aussie retail business, the Country Road Group, suffered a 0.4 per cent drop in like-for-like sales while overall sales rose 5.1 per cent, in Australian dollar terms.
Bullish investors aren't ready to call it quits just yet, extending yesterday's rally as most sectors apart from telcos post gains.
The ASX is up 0.5 per cent at 5764.6 points, putting the market on track for a 1 per cent weekly gain.
It's the big banks doing most of the heavy lifting this morning after their US peers rose strongly overnight ahead of several majors posting quarterly earnings.
ANZ is up 1 per cent, NAB has risen 0.8 per cent and the other two have added 0.6 per cent.
BHP has hopped back above $25, rising another 0.3 per cent in what's been a bumper week for the Big Australian.
But other miners, including gold and coal miners are among the biggest drags on the index.
Whitehaven is down 2.4 per cent, South32 has lost 0.5 per cent and Newcrest has lost 1.5 per cent.
The US profit reporting season looks likely to be a key market driver over the next couple of weeks, says CMC chief market analyst Ric Spooner.
"Full valuations suggest that the market is yet again going into this reporting season anticipating results to outperform consensus analyst expectations," he says.
"Another good US profit reporting season will be very supportive for stock markets and continue the current bias against being too trigger happy in response to potential risk events. However, full valuations mean there's not a lot of margin for error."
SPONSORED POST
It's steady as she goes, with no real moves in US equities, says IG strategist Chris Weston:
These limited moves are seemingly a reflection of low impact data releases (we have seen US PPI, weekly jobless claims and the monthly budget statement). Perhaps, also a reflection that in latter European trade when we get the June US CPI (ex-food and energy), in which the market expects stabilisation and an unchanged read of 1.7% yoy, or 0.2% mom.
While, as we know, the Federal Reserve prefer to focus on core PCE as their inflation input, the market is far more sensitive to CPI print, so the US session and also for Asia-based traders, today is just a day of pre-positioning in rates and USD positions and assessing the risk in the portfolio. Of course, second derivatives of these markets, such as gold and silver, will also be in play.
Recall, there have been three downside misses in a row in this data point, so a fourth would not be taken well at all. 'Real' (or inflation-adjusted bond yields) could have a sizeable drop, with traders suggesting there is an elevated chance of a turn in the Fed's language and more voters join Patrick Harker's camp and re-consider whether a December hike is such a good idea. Market pricing (in the fed funds future) on the probability of a December hike would drop from where it sits now at 50% to closer to 40%.
It will be interesting to see how influential a weak or somewhat stronger inflation read would be taken by equities, notably tech, where a move in bond yields should throw this sector around. So if running positions in the Nasdaq 100 this data point is an event risk.
One could suggest that Fed Chair Yellen's second testimony has reinforced this message of close inflation-watching, with mentions in the testimony of "we're watching inflation very carefully in light of low readings. I think it's premature to conclude that the underlying trend is falling well short of 2%". As many have rightly suggested, it's somewhat of a gamble reducing its balance sheet and hiking again in December to bring the 'real' fed funds rate towards the neutral real fed fund rate, if inflation then subsequently moves even lower.
With these dynamics in play, traders are also keeping a very beady eye on AUD/USD, although AUD/JPY trending nicely to the upside and we have seen EUR/AUD and GBP/AUD finding sellers too. However, it's AUD/USD which always gets the market's attention first and foremost and we can see price moving nicely into and through some very interesting levels.
One level to focus on is the 2016 downtrend at $US0.7720, where the pair has close the session above. A weak US CPI print could push the pair into 78c and we start considering the implication of a potential break above the 2016 high of $US0.7835.
It would be "quite challenging" for the US to reach the 3 per cent growth target set by President Donald Trump, Federal Reserve Chair Janet Yellen told a Senate panel overnight in a hearing focused on regulatory reform and a discussion of lagging productivity.
Trump has pledged to boost annual growth to 3 per cent, the average for much of the last 70 years, and predicated an earlier tax plan on reaching that figure.
The Fed, the Congressional Budget Office and others are of the view that an aging population and lagging productivity mean the economy's potential has downshifted to around 2 per cent growth or less - a fact that has profound effects on national wealth as the slower pace compounds over time.
"I think it is something that would be wonderful if you could accomplish it," Yellen said at a Senate committee hearing. "I think it would be quite challenging," and require a broad set of changes from tax reform to an improved education system that adds to labour productivity.
Yellen's appearance before the Senate Committee on Banking, Housing and Urban Affairs covered much of the same ground as her session with a House committee on Wednesday where she said the Fed's plans for further gradual rate increases and a slow drawdown of its balance sheet remain on track.
She also indicated the Fed agreed with some of the suggested changes to the current bank regulatory system that congressional Republicans and the administration have advocated, such as easing the strict Volcker rule on bank securities trading, and limiting application of the most stringent regulations to only the very largest institutions.
However the Senate panel pressed her for ideas about boosting economic growth, asking whether Trump's goal is achievable, and whether things like tax reform in particular might help.
Yellen said she would not offer specific details on a topic that is Congress' prerogative. But she said there was "general agreement that there are distortions in the corporate tax code" that could be changed to improve productivity.
In general, she said that moving annual productivity growth back above two percent - about double the pace of recent years - would be a monumental task.
Here's the overview of how markets performed last night:
- SPI futures down 9 points or 0.2% to 5684
- AUD +0.7% to 77.34 US cents (Overnight: 0.7675 - 0.7740)
- On Wall St, Dow +0.1%, S&P 500 +0.2%, Nasdaq +0.2%
- In New York, BHP +0.4%, Rio -0.3%
- In Europe, Stoxx 50 +0.4%, FTSE -0.1%, CAC +0.3%, DAX +0.1%
- Spot gold -0.1% to $US1218.76 an ounce
- Brent crude +1.1% to $US48.24 a barrel
- Iron ore +2.9% to $US65.91 a tonne
- Dalian iron ore -1.8% to 479 yuan
- Steam coal +0.7% to $US83.80, Met coal -4.1% to $US164.00
- LME aluminium untraded, last bid +1.7% at $US1922.50 a tonne
- LME copper -0.5% to $US5875 a tonne
- 10-year bond yield: US 2.34%, Canada 1.91%, Germany 0.60%, Australia 2.68%
The Australian dollar has risen to its highest against the greenback since March, extending its advance in the wake of a dovish message from US Federal Reserve chair Janet Yellen. There may be more gains ahead today.
Yellen's comments to US lawmakers on Wednesday and overnight signal that while the central bank remains keen to continue to lift rates, there's no rush and the Fed may be close to a neutral rate. The Fed has lifted rates twice this year and expectations remain for a third increase before the end of the year, with most bets on December.
The Aussie was last up 0.7 per cent to US77.34¢; it peaked overnight at US77.40¢, the highest it has traded since it reached US77.50¢ in March. It's next high point is US77.78¢ in November. With its latest rally, the Aussie has now risen 7.3 per cent against the US dollar this year.
While a weaker greenback has been the main driver, the recent gains have also had been helped by a lift in commodity prices.
The spot price of iron ore advanced 2.9 per cent. Oil rose 1.3 per cent overnight. In London, aluminium rose nearly 2 per cent, the biggest one-day increase in nearly three months, as concerns over potential supply curbs by China sparked a rally.
Also boosting the Aussie is lingering speculation that a rate rise by the Bank of Canada this week could prompt the RBA to signal a shift in its thnking.
The Aussie and kiwi dollar both outperformed overnight "on speculation their respective central banks will soon follow BoC rhetoric", ANZ said.
Westpac economist Imre Speizer said he could see the Australian dollar rising further still before the weekend.
"This five-day-old impressive run has potential to reach US77.50¢ - the March peak," he said.
Wall Street posted slight gains overnight and the Dow hit another record high close, with financials rising ahead of profit reports due Friday from several big US banks.
The financial index was the best performer among the 11 major S&P sectors, ending up 0.61 per cent.
Quarterly earnings kick off on Friday with three of the biggest US banks including JPMorgan Chase, Wells Fargo and Citigroup reporting results.
"People are a trying to buy in ahead of tomorrow," said Brad McMillan, chief investment officer for Commonwealth Financial.
Analysts estimate second-quarter earnings for S&P 500 companies rose 7.8 per cent from a year ago, with financials projected to have had the third-best profit growth among sectors.
"There is good reason for investors to be optimistic about the financial sector," said Randy Frederick, vice president of trading and derivatives for Charles Schwab.
"We just had two rounds of stress tests that every single bank passed with flying colours. In general, the banking industry is in very good shape right now," he said.
The Dow Jones Industrial Average rose 20.95 points, or 0.1 per cent, to 21,553.09, the S&P 500 gained 4.61 points, or 0.19 per cent, to 2,447.86 and the Nasdaq Composite added 13.27 points, or 0.21 per cent, to 6,274.44.
The S&P 500 healthcare index was up 0.09 per cent, barely moving on news of US Senate Majority Leader Mitch McConnell's unveiling of a revised healthcare bill.
"Even if this bill is passed, there will be multiple iterations of healthcare legislation to come," said Jamie Cox, managing partner at Harris Financial Group.
"This is not a watershed moment like the Affordable Care Act, where it altered the healthcare industry," he said.
Hospital and insurer groups have been vocal against proposed Medicaid cuts which could result in lower revenues for hospitals like Community Health Systems Inc and Medicaid insurance specialists like Molina Healthcare and Centene.
Investors are eager to move past the healthcare bill and onto comprehensive tax reform, though Congress's ability to address it soon are in doubt, Cox said.
Good morning and welcome to the Markets Live blog for Friday.
Your editor today is Jens Meyer - please send any comments or feedback on how we can improve this blog to jmeyer@fairfaxmedia.com.au
This blog is not intended as investment advice.
Fairfax Media with wires.
1 new post(s) available. View post(s) Dismiss