The big picture

A few months ago, the consensus view of economists was that unemployment would lift to at least eight per cent. We have always believed that this view was way too pessimistic, believing that unemployment would top out between 6.5 to 7.0 per cent, below the 30-year average of 7.1 per cent. But even our view now looks too pessimistic.

Companies are now scrambling to re-hire staff, and with mixed success. And across a number of sectors the term “skills shortage” is again being used.

A recent survey by the Clarius Group found that in seven of 19 skilled employment categories there was an under-supply of workers or a situation where demand was balanced with supply. Clarius also predicted that IT, engineering and accounting professionals were likely to be in short supply in the next six to 12 months.

According to Peoplebank, Australia’s largest recruitment firm, there was a “noticeable firming” in demand for contractors in the IT sector in late June which continued into July. Peoplebank says that the contract sector is one of the first to respond to changes in the economy so the recent pick-up may point to firmer hiring. The lift in demand for contractors is particularly noticeable in Perth where demand is at pre-December levels.

Another survey of 404 finance and human resource managers conducted by recruitment firm Robert Half found that over 60 per cent believe there is a shortage of quality finance and accounting professionals. The study found that many firms were effectively hiring “second best” candidates, hoping to upskill them over time.

Certainly in the mining and engineering sector the trend has been to hire, not fire, workers. Macarthur Coal has restarted idle excavators at Coppabella and Moorvale mines. At the Moorvale mine 22 former workers were rehired. At Coppabella, contractor Leighton Holdings has also put on 22 workers.

In August, Xstrata is expected to re-open its Oaky No.1 underground coal mine in Queensland, nine months after closing it due to weak demand. When the mine was closed in December 190 contractors and 40 full-time staff lost jobs. In the short-term, it will redeploy workers to restart production with possible contracting opportunities.

In Western Australia, the Chamber of Minerals and Energy has echoed concerns of the state’s Premier about a major skills shortage. The Chamber believes that 26,000 mining-related workers will be required by 2013. Premier Barnett wants more relaxed rules on visas to allow skilled migrants to fill positions.

And Coal India is looking to make some quick acquisitions in Australia. Coal India says that the gap between coal demand and supply is likely to reach 200 million tonnes over the next two years, necessitating “immediate acquisition of coal resources abroad” – basically Australia or the US – creating job opportunities.

The week ahead

The Reserve Bank always seems to dominate the economic calendar and the coming week is no different. The Reserve Bank Board meets to decide interest rate settings on Tuesday while the quarterly Statement on Monetary Policy is issued on Friday.

The Reserve Bank won’t be hiking rates just yet, but a watering down of the monetary policy stance is likely. While a discrete change from an easing stance to neutral may not occur, the Reserve Bank will serve to reduce expectations for another rate cut in the current cycle.

The Reserve Bank Governor has already highlighted some key issues to be addressed over coming months and these will likely be fleshed out further on Friday. Most analysts will be expecting more comments on household debt and housing supply/prices, if only for clarification of Reserve Bank concerns.

In terms of economic data, the PMI is released on Monday. Retail spending is due out on Tuesday and probably rose 0.2 per cent in June. While consumers remained active, discounting will hold down the dollar value of overall spending. Data on tourist arrivals is also released on Tuesday together with the Bureau of Statistics house price indexes. The performance of services index is released on Wednesday.

International trade figures for June are issued on Wednesday and we expect that the red ink flowed for a third straight month with a deficit around $800 million expected in the month.

Employment figures for July are released on Thursday. And consistent with trends over the past year we expect that unemployment continued to creep, rather than leap higher over the past month. Employment probably fell by 20,000 in July reflecting the inflow of new workers with unemployment edging up to 5.9 per cent.

Economic data to be released in the US in the coming week will prove a real test for the more upbeat tone on financial markets. As always, most eyes will be on the employment (non-farm payrolls) data on Friday. But also in the frame are the ISM manufacturing gauge (Monday), personal spending (Tuesday) and ISM services gauge (Thursday).

Non-farm payrolls are tipped to have fallen by around 300,000 in July. While the figure is still large, it would still signify that the job losses are getting progressively smaller. Unemployment probably edged closer to 10 per cent, lifting from 9.5 per cent to 9.7 per cent.

The ISM manufacturing gauge probably rose from 44.8 to 47 in July with the services gauge up from 47 to 48. Readings in line with these forecasts, or a touch higher, together with further improvement in payrolls will continue to breathe life into the current stock market rally.

Other US data to watch includes construction spending and car sales (Monday), pending home sales (Tuesday), factory orders (Wednesday) and consumer credit (Friday).

Share market

The US profit-reporting season is winding down and the Australian earnings season is moving into full swing. It is clear – especially judging from the companies that have reported so far – that profits slumped over the past year. But for investors that is already ancient history. Investors will want to hear how companies are travelling at present as well as gleaning how they expect to perform over the next six months. No doubt the rhetoric will be reasonably upbeat – certainly far more positive than if the same reports were made just a month or so ago. The interesting question is whether the profit season will have any impact on the local market or whether we continue to almost slavishly follow the lead set in the US.

Hills Industries is expected to report on Wednesday. On Thursday Alumina, Bradken, News Corp, Tabcorp and West Australian Newspapers are all slated to release earnings. And ResMed is scheduled to report on Friday.

Interest rates

The last rate cut was in April, and with the RBA signalling that further rate cuts are unlikely, speculation centres on when the first rate hike will occur. In December 2001, the RBA cut rates to a low of 4.25 per cent and then issued the first rate hike six months later in May 2002.

In the two previous cycles the gap between the last rate cut and first rate hike was a little longer. It was a break of 11 months in 1999 and a gap of just over 12 months in 1994.

But as the Reserve Bank Governor said on Tuesday, there are no rules with monetary policy. It has been noted in the past that monetary policy is art, not science. Interest rates are at 49-year lows and the longer that they remain super-low, the greater the risks of imbalances developing such as a housing bubble.

Currencies and commodities

Despite recent strong gains for the Aussie dollar, our CBA strategists have elected not to change their forecasts. The Aussie dollar is tipped to be around US84 cents by end year and US89 cents by June 2010. Underpinning the forecasts is an expectation of gradual recovery for the global economy with China and other emerging nations being key drivers of the upturn. 

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