Upcoming economic and financial market events

Australia

30 June
  • Private sector credit (May): Housing credit is growing, but other lending is becalmed.
1 July
  • Retail trade (May): We tip a 0.4pct increase in sales.
  • Building approvals (May): Another solid increase in approvals is tipped, up by around 7pct.
2 July
  • International trade (May): A small deficit of $100 million is expected.
Overseas
30 June
  • US Consumer confidence (June): Little change is expected with shares down and gasoline up.
1 July
  • US ISM manufacturing (June): A modest lift to 44.0 – but still indicating that the sector is contracting.
2 July
  • US Non-farm payrolls (June): The peak for job losses has passed, but a decline of 300,000 is tipped.
The big picture

The past financial year has been nothing short of amazing. Many events have stood out: the freezing up of global credit markets, the collapse of Lehman Brothers, the dramatic loss of confidence across the globe – causing economies to slide, and the extraordinary efforts taken to stabilise financial systems and economies.

But when people look back at the figures, 2008/09 will stand out for the extraordinary volatility. On the Australian sharemarket, the All Ordinaries traded through a record range of just over 2,260 points. The intra-day high of 5,351 points set on 1 July 2008 gave way to the low of 3,090 set on 10 March. In percentage terms, the 42 per cent shift from the highs to the lows of the year was the biggest in 21 years. Only the 1987/88 period has been more volatile in the modern era with a drop of 50 per cent from the highs to the lows.

While the Australian sharemarket is recovering from the lows, it will still end the year with total returns down 25 per cent. This will be the second “down” year after a fall of 12.1 per cent in 2007/08 and the biggest fall in sharemarket returns in 27 years. But in each of the four previous years sharemarket returns were above 20 per cent. So once you average returns for the past six years it comes out as growth of 11 per cent a year – better than the 10 per cent average return over the last 20 years.

On currency markets, the Aussie dollar traded through a record US38 cent range against the greenback over 2008/09. The Aussie hit highs of US98.49 cents on 15 July before falling to US60.04 cents on 27 October. The 39 per cent movement between the highs and lows was more than double the average 15 per cent annual movement that has been recorded by the Aussie dollar over time. And probably just as remarkable is the fact that the Aussie dollar has rebounded from levels near US63 cents in March back to US80 cents.

And there have been the incredible swings on commodity markets. In July, oil hit a record high of US$147.27 a barrel. But by December, prices had retraced to US$32.40 a barrel. And in the six months since, oil prices have doubled to US$70 a barrel. Who would want to be a forecaster?

On interest rate markets, the Reserve Bank slashed the cash rate from 7.25 per cent to three per cent in the space of six months. In percentage terms, interest rates have never fallen so far, so fast. And indeed the rate cuts have worked their magic – that is, together with the stimulus applied by the Federal Government. Because while developed economies tumbled one-by-one into recession, Australia avoided a similar fate.

The Australian economy grew by 0.4 per cent in the March quarter after contracting by 0.6 per cent in the December quarter. Economists now generally expect our economy to be flat to slightly lower over 2009 before growing again in 2010. In fact, the Organisation of Economic Co-operation and Development (the OECD, which largely follows Federal Treasury’s line) expects the Australian economy to grow by 1.2 per cent in 2010, ahead of the 0.7 per cent lift for other OECD nations. Unemployment is tipped to peak near 7.9 per cent, pointing to an upgrade in Federal Treasury’s forecasts.

The week ahead

Market-moving Australian economic data is back on the radar screen after an absence of almost two weeks. Private sector credit or lending figures are released on Tuesday with retail trade and building approvals on Wednesday and international trade on Thursday. In addition, the Performance of Manufacturing index is issued on Wednesday with car sales data on Friday.

Overall, the economic data is expected to be encouraging. CommSec expects retail trade to have risen by 0.4 per cent in May after a 0.3 per cent increase in April. When you consider “normal” growth of retail spending is around 0.4 to 0.5 per cent a month, it does appear that the recent lift in consumer confidence is translating to greater activity at cash registers.

However we will have to wait a few months to get clearer readings of consumer spending. Lower interest rates, lower petrol prices and government stimulus payments have boosted consumer purchasing power over the past few months. And next Wednesday tax cuts will give consumers more reason to visit shopping malls.

The other piece of positive economic news is expected to be the building approvals result for May. CommSec tips a seven per cent increase in council home building approvals after a 5.1 per cent lift in April. Certainly the housing finance data points to stronger home building, driven in large part by the first home owners boost. And with home prices now rising across most of the country, investors are also drifting back to the residential property market.

The May trade result is unlikely to shake financial markets – a modest deficit around $100 million is tipped. But keep a watch for industry data on car sales on Friday. The June figures will be boosted by medium and large businesses taking advantage of the government rebate. The main problem that businesses have been facing is that car dealers don’t appear to have enough stock of vehicles to meet demand.

In the US, again all eyes will be on the monthly employment figures (non-farm payrolls) in a holiday-shortened week. Usually the data would be released on Friday, but it will be published on Thursday in the coming week given that the Independence Day holiday will be observed on Friday.

We expect that payrolls contracted by around 300,000 in June, continuing the steady improvement over the past four months. Employment is still falling, albeit the slower rate of decline accounts for the greater optimism by forward-looking sharemarket investors. The unemployment rate may edge up from 9.4 per cent to 9.7 per cent.

Of the other US data, consumer confidence data is released on Tuesday together with house prices and the Chicago purchasing managers index. The ISM manufacturing index is issued on Wednesday together with the ADP employment report, construction spending, car sales and pending home sales data.

Sharemarket

Given that the June quarter is fast coming to an end, that means we are not far off the US reporting season. In fact Alcoa will kick off the second quarter earnings reports on 8 July with investment banks to report in the week beginning 13 July. Research from investment house Zacks suggests that US earnings per share is expected to fall 21.2 per cent in the second quarter with around three-quarters of companies to produce earnings below that of a year ago. But the good news is that currently earnings upgrades outnumber cuts by a 5:4 margin.

The steel and banking sectors are expected to produce the biggest declines in earnings while the medical and oil refining sectors are expected to be amongst the best performers.

Interest rates

The OECD has released its latest assessment on “rich” economies. And contained in the latest assessment are projections of short-term interest rates. While these figures are unlikely to be discrete forecasts of what central banks are likely to do, they are estimates of where market “short-term interest rates” are expected to be over the coming 18 months. Interestingly, the forecasts appear to factor in another small quarter per cent rate cut in Australia, around September. But in 2010, interest rates are expected to rise. The forecasts suggest that short-term interest rates will lift by around a quarter of a percent rate in April, July and October, taking short-term rates to around 3.5 per cent by the end of next year.

Currencies and commodities

Currency and commodity markets have proved incredibly volatile over the past week. For instance the Euro rose by US2.5 cents on one day, only to give back the gains the next day. And base metal prices have been regularly recording daily gains and losses of around five per cent. Given there has not been any “fundamental” changes over the past week, we can confidently put the moves down to profit-taking by global fund managers and hedge funds. The CRB commodity index had been on track for one of the biggest quarterly gains in 50 years, so clearly the sector was ripe for profit-taking activity.

Looking ahead, one indicator to keep an eye on is the Baltic Dry freight index – an indicator of shipping costs for bulky commodities like iron ore. After almost tripling from April to early June, the Baltic Dry index has since shown signs of consolidation. Importantly, however, the index has held onto most of the gains recorded over the past three months and currently stands 156 per cent higher than the early April lows.