Eureka's Week: Retail, super, election, valuation vs economics, the commodity bubble, China and iron ore, global warming
Last night | Retail | Super | Fear and Loathing on the Campaign Trail | Valuation vs. economics | The commodity bubble | China and iron ore | Global warming | Readings & Viewings | Last week | Next week
Last night
Dow Jones, down 1.05%
S&P 500, down 0.85%
Nasdaq, down 0.41%
Aust. dollar, US72.6c
Retail
US stocks are down this morning despite a fairly strong gain in retail sales for April, which confirm that there's very little wrong with the American economy at the moment. Wall Street chatter has it that the share market is down because of lower oil prices, which is actually the main reason retail sales are up in the month.
The overall gain in retail sales was 1.3 per cent. “Motor vehicles and parts dealers” were up 3.5 per cent and gasoline stations, 2.2 per cent. Department store sales rose 0.3 per cent in the month and fell 1.7 per cent over 12 months.
But the most interest thing is that “nonstore retailers” (online) are doing best overall. The month gain for them was 2.2 per cent, but for the year it was 10.2 per cent – the highest annual growth of any category.
Earlier in the week Macy's reported weak earnings and in general department store sales are declining. An economist told Business Insider that it wasn't due to weak consumer spending, but the shift in spending to online. A fund manager with Penn Mutual said: “"The convenience factor is a big driver of the way consumers are spending today, and the entire experience of going to the mall just seems as though it's becoming less part of the American lifestyle, particularly for the younger generation — the millennials.”
During the week Myer reported sales growth of 2.1 per cent for the third quarter, which was slightly better than expected. Opinions among analyst varied: Deutsche Bank stifled a yawn, for example, and said they prefer JBH and HVN; UBS said it was “solid” and “pleasing”, and that positive momentum was building across the business, and they upgraded to a buy.
UBS included Myer in its daily note under the heading “Emerging Industrials”, which must be a first for the 116-year-old retailer, but that's the point really – it's a turnaround, and what's more Richard Umbers' strategy is very focused on bricks and mortar, not online.
And there's no doubt that online shopping is slower to take off here than in the US. Malls are still full of people and new international chains keep opening stores all the time. There's not much doubt that, so far anyway, Myer's main problem is the proliferation of international stores like Uniqlo that seem to be doing really well, rather than the online ones.
The question, to which I don't have an answer, is whether we're just a year or two behind the US or whether there is something more fundamental going on here. I suspect it's the former although we are often seen as early adopters of technology, so maybe not. But if it is, then retailers like Myer are stuck on the level crossing with a train coming at them.
Super
To recap: there are three changes proposed, one of them agreed between the coalition and the ALP, and two that I think will end up agreed.
The limit on post-60, tax-free withdrawals from super is agreed (the coalition says $1.6 million and the ALP says earnings of no more than $75,000, which is the same thing), while the lifetime cap on non-concessional contributions of $500,000 and the reduction in annual concessional contributions to $25,000 is not yet agreed.
The ALP is trying to use the backdating of the lifetime cap to July 1, 2007 (when Peter Costello changed everything – see below), to its political advantage, but my unfounded suspicion is that it privately agrees with that and will do it if it could get away with it without appearing to break a promise.
So I suspect the contribution caps will happen, although the retrospective element may – just may - be dumped.
My view, overall, is that Peter Costello's 2006 budget was a shocker – worse even than 2014. Here is the section of his speech that year on superannuation:
“Mr Speaker, tonight I release a plan to simplify and streamline superannuation. This plan represents the most significant change to Australia's superannuation system in decades. It will sweep away the current raft of complexity faced by retirees, increase retirement incomes, give greater flexibility as to how and when superannuation can be drawn down, and improve incentives for older Australians to stay in the workforce.
“At the core of the plan is the proposal to exempt Australians aged 60 or over from any tax on their end benefits where these are paid from a taxed superannuation fund. This would apply from 1 July 2007. There would be no tax on a lump sum. There would be no tax on a superannuation pension. This would be the most direct way of cutting through the complexity of the current system.
“Reasonable benefit limits would be abolished. Age based limits would be abolished. A simple universal contribution limit would apply. People would not be forced to draw down on their superannuation. The self-employed would be able to claim a full deduction for their superannuation contributions. The self employed would be eligible for the Government co-contribution. It would be easier for people to find and transfer their superannuation between funds.
“It is also proposed to halve the pension assets test taper rate from $3.00 to $1.50 per fortnight for every $1,000 of assets above the free area with effect from 20 September 2007. The current taper rate of $3.00 means that a retiree loses more age pension than they earn on their additional savings if they do not achieve a return of at least 7.8 per cent a year. This is a large disincentive to save for retirement.”
That's it, the whole thing – the rest of the speech was an orgy of handouts and tax cuts. But with those four paragraphs, Peter Costello ruined Australia's retirement savings system, possibly forever, by making it unsustainable. It's been a wonderful decade, but it could never last – because the commodities boom that he was relying on was actually a bubble (see below).
Many (most?) other countries, mainly the US and UK, have a system where contributions into super, and the earnings within super, are tax-free, and you pay the full margin rate when you take it out. Simple, appealing.
Costello turned that on its head, while also maintaining the tax concessions on the money on the way in and lifting restrictions on the amount that can be paid in.
Presumably he had to tie all the senior Treasury bureaucrats to chairs and gag them while he did this. Treasury people who were around at the time told me in the Budget lock up this month that they had vehemently disagreed with Costello's 2006 changes but weren't able to prevail.
We are now reaping what Costello sowed. Six years of budget deficits (so far) have put Treasury in charge of superannuation policy and they have swung the pendulum right back the other way. That is, the clamp has come on both ends – deposits and withdrawals.
There was no need for this to happen. We could have kept Australia's over-complicated system of tax concessions in and tax concessions out, and everyone would have been happy that at least they knew what the policy was and it wasn't going to change.
Now no one can have any faith in retirement policy because it sits at the end of a swinging political/bureaucratic pendulum.
Having said all that, even if all the changes happen as currently proposed, super will still be a decent tax concession and worth using to the maximum.
I still think we'd be better off going to the US system of tax-free on the way in, and full tax on the way out, but it's too late for that, and we don't want any more changes!
Fear and Loathing on the Campaign Trail
Election campaigns, as opposed to normal politics, are three-way wrestling matches between political parties and the media. That's what normal politics is like, of course, but campaigns are brief, intense bursts of it with the volume turned up to 11 and the press pack treated like schoolkids on an excursion.
Anything can happen, including a first term Coalition losing to an inexperienced Labor team, or a hung Parliament with the Greens holding the balance.
Does any of it matter? Yes of course, although I'm not as concerned as most about a hung Parliament, especially if people like Bob Day, Nick Xenophon and David Leyonhjelm have the balance of power, and I must say even Richard di Natale is not the usual Greens ratbag.
Here are a couple of charts from Shane Oliver that depict the impact of elections and political parties on share market returns:
These are basically meaningless and/or inconclusive. The Labor years include the global bear market of the mid-70s, caused by the first oil shock, post-Vietnam War inflation and the Nixon shock of 1971, and well as the great crash of 2008.
So the course of the market after elections is all over the place – no discernible trend, so the average is meaningless.
This time around there isn't much difference between the parties (there usually isn't in Australia, which is lovely!): they are both in favour of jobs and growth, although the ALP probably skews a little more towards government intervention to achieve it, and the leaders are both basically good, sensible men who seem unlikely to turn out to be incompetent or insane afterwards (as has happened the last few times).
So I think we can safely either ignore the campaign completely, or view it as harmless entertainment and get on with our lives.
Speaking of election campaigns, this week Rolling Stone magazine reprinted some of Hunter S Thompson's book on the 1972 US election, “Fear and Loathing on the Campaign Trail”. It begins:
“One afternoon about three days ago the Editorial Enforcement Detail from the Rolling Stone office showed up at my door, with no warning, and loaded about 40 pounds of supplies into the room: two cases of Mexican beer, four quarts of gin, a dozen grapefruits, and enough speed to alter the outcome of six Super Bowls. There was also a big Selectric typewriter, two reams of paper, a face-cord of oak firewood and three tape recorders – in case the situation got so desperate that I might finally have to resort to verbal composition.”
Ha!
Valuation vs. economics
There was an important piece in Jeremy Grantham of GMO's quarterly letter this week. It was written by Ben Inker, GMO's co-head of asset allocation (GMO stands for Grantham, Mayo, & van Otterloo – it's a Boston-based fund manager, and Grantham is one of the more famous and erudite investors around).
Anyway, Inker has compared the impact of economic events and valuation on investment returns, and the results are very striking indeed. As is often the case, charts tell the story.
Every month, I (and everyone else) focus on US payroll data as a significant market event. Inker has taken consensus forecasts for this data compared with actuals going back to 1997 and then looked at the impact on the S&P 500:
Now that is what I call a surprising chart!
On the first day, the market impact is what you'd expect: positive surprises produce an average 0.24 per cent positive return for the day, while negative surprises give an average return of just 0.02 per cent.
But after that it's all the other way. After a month it's a one per cent return after a negative surprise and 0.2 per cent after a positive surprise, and that persists right out to three years.
“Does this mean that investors should sell when the payroll data surprises to the upside?” asks Inker. “Probably not. It's not a particularly huge effect, and there are many possible reasons why it could have wound up looking odd.”
Inker then looks at the impact on returns of having a starting valuation that is cheap on the same day when payrolls come out:
And he has done the same for all days, not just payroll days:
That's pretty clear, wouldn't you say?
What happens is that the impact of starting with a cheap valuation – according to the “cyclically adjusted price earnings ratio”, or the Shiller P/E – is around three basis points on the first day. But then it compounds every day.
As Inker says: “Gravity is far and away the weakest of the four fundamental forces of nature, but it is unique in that it always acts in the same direction and does so over arbitrarily large distances. The impact of valuation is small over a single day - since 1964, being cheap led to positive 0.015 standard deviation event above average in that day – but as the number of days grows the impact becomes more material.”
He then goes further and looks at the impact across other markets of the more important GDP data (yes, this is a tremendous piece of work). Here's the result:
As Inker points out, since 1980 you could have made money watching GDP, but in the opposite way you might have expected: the reality is, the worse the GDP growth, the better the stock market returns, and vice versa.
The same applies over the longer term:
This is an incredible chart. It means that the best way to make money from economic growth is to buy the countries that grow the slowest!
He then did the same thing on starting valuation and subsequent return, using P/E ratio in December 1979 as the starting point and looking at returns over the following 35 years.
His comment: “The correlation was a stunning -78 per cent, and the benefit to that knowledge was profound. The cheapest quarter of countries outperformed the most expensive quarter by an enormous 5.1 per cent per year for 35 years. A dollar split among those countries would have turned to 26.4 dollars in real terms, while a dollar invested in the expensive countries would have grown to only 4.9 dollars. And that is from information that was actually readily knowable at the time, no clairvoyance needed.”
The commodity bubble
Jeremy Grantham's own contribution to the GMO quarterly was almost as interesting, especially for us in Australia.
He opens by saying the only thing that matters with asset allocation is sidestepping a bubble – “at other times, traditional diversification will usually be good enough.”
Every major bull event is called a paradigm shift at the time, he says, “but they almost never exist. Almost never. But not never, ever.”
Actually in 1999 he presented 28 major bubbles of the past and called the score: “mean reversion 28; paradigm shift, nil!”
But in 2005, with oil over $US100 a barrel, Grantham weakened and called oil a “paradigm shift”, not a bubble. He believed we were running out of oil.
And then in 2011 he asked himself: “If we were running out of low-cost oil … why should we not run out of other finite resources? That everything finite runs out is known by everyone except madmen and economists (said Kenneth Boulding). Also, China uses a much larger fraction of total global minerals than it does of oil.”
“So, predisposed to see signs of finite resources running out, I saw in 2011 a series of remarkable resource statistics. The most extreme among them, iron ore, was measured as a 1 in 2.2 million possibility. This data made me believe that China's growth, together with increases in world population was causing us to be facing “peak everything”.
“But alas, I was fooled – along with the CEOs of all the miners – by China. The four sigma event did NOT occur because minerals were running out.”
Of course Grantham wasn't the only investor fooled in 2011.
Here's what happened to commodities:
The bubble in commodities was not caused by massive speculation, momentum or skullduggery, according to Grantham, although these components had a lot of impact.
It was 60 per cent China – the sheer magnitude and 30-year length of its growth surge, the “remarkable” late acceleration of the growth rate, and then finally the abrupt cessation of growth.
“I had warned of trouble if China slowed its growth for demand for minerals quickly. They did far worse than that. They absolutely stopped growing at all.
Between 1981 and 2013, China's demand for iron ore grew at a compound annual growth rate (CAGR) of 10 per cent. Between 2000 and 2011 it was 16 per cent. Between 2011 and 2013, it was minus four per cent.
By the time China's growth in demand for iron ore and coal had stopped dead, the miners spent $US1.25 trillion in expansion to keep up. Due to the long time lags, new capacity will be coming online for the next two or three years – into a glut.
“If China's growth were to average a reasonably strong 4 per cent a year for the next 10 years, its GDP will rise by 48 per cent.
“If China simultaneously succeeds in lowering its share of capital spending to GDP to 32 per cent in 10 years – which is its intention – then the need for growth in capital-spending type resources will be about nil (47 per cent x 100 = 47, goes to 32 per cent x 148 = 47).
“There is therefore unlikely to be a quick or dramatic recovery in demand for metals. Stock prices, on the other hand, from these beaten-down levels (of late 2015) are much harder to predict.
“My suggestion of a positive intermediate-term (10-year) outlook for mining resources therefore seems to have been a major error, especially for iron ore and bauxite.”
China and iron ore
Which brings us to what's happening in China and iron ore right now, and therefore what's happing with BHP, RIO and FMG.
Basically, the Chinese economy is responding to government stimulus and the rest of this year it looks we'll see a pick-up in metal and coal prices for the rest of this year, and therefore some strength the miners' share prices.
Grantham's gloom is about the long term; the short term looks better.
Here's a chart of the so-called Li Keqiang index, which tracks new loans, electricity consumption and rail volumes, and is a better indicator of the Chinese economy than the official figures.
The prices of both steel and iron ore have lifted sharply …
Largely as a result of a big increase in residential construction.
And the other thing is that the strategy of BHP and Rio (and Vale) to drive the high-cost Chinese producers out of business seems to be working. China's iron ore mine production is down 10 per cent, but because Fe content is also declining, actual iron output is down 20 per cent, according to ANZ's commodity team. As a result of share of imports is soaring:
A couple of words of warning, however.
ANZ's China economist, Raymond Leung, reports that the economic rebound is not Xi Jinping's priority – he wants structural reforms, not a V shaped recovery.
On Monday (9 May), the People's Daily published an in-depth interview with an ‘unnamed official' who indicated that the letter “L” is a better description of China's growth path. The following day, the newspaper released a speech made by President Xi Jinping during a training session for provincial officials. The speech, titled “Do not abuse the concept of the New Normal”, explained in detail his views of China's “New Normal” and supply side structural reforms.
“We believe that President Xi is not impressed by the apparent economic rebound in recent months which reflects a resurrection of the ‘old economy', says Leung.
Second, a huge discrepancy has opened up between the quarter on quarter data and year on year, displayed in this chart:
RBA's economists say: “A more statistically sound approach is to annualise the past four quarters, which results in annual GDP growth of 6.3 per centy/y, below the NBS's reported rate of 6.7 per cent y/y. This is the largest discrepancy since the q/q data began and will only reinforce skepticism about the accuracy of the official data and the lack of transparency around their measurement.”
And finally, a lot of the growth that we're seeing in the economy is in prices, not volumes, which may simply be a function of too much money chasing too few goods. That won't last.
Also, productivity is falling, apparently without end:
Source: GaveKal
At the same time, capital outflow continues to leak out of China at an increasing rate. This is probably great for asset prices elsewhere in the world, especially real estate, but can't be that great for China itself.
All of which highlights the two fundamental problems with China: first, it's impossible to know what's actually going on, and second there's far too much debt.
Normally you'd look at the debt, the falling productivity, leaking capital outflow and the lack of transparency and head for the hills, but China is not a normal country. There are an awful lot of people and they are getting a lot richer.
As for BHP, RIO and FMG – they have each got their cash costs down to about $US15 per tonne, which is a great achievement, which not only improves their existing profits it seriously improves their leverage to the iron ore price.
As I have already mentioned this year, no Australian equities portfolio in 2016 is complete without one or more them.
Global warming
Just one more thing from Jeremy Grantham. He included this chart of global temperatures:
And he concludes: “Sadly, it has become obvious that the recent talk in Paris of limiting warming to 1.5 degrees Celsius is toast, as it were. And the dreaded 2 degrees Celsius is highly unlikely to be the limit of our warming.
“Let me just make the point here that those who still think climate problems are off topic and not a major economic and financial issue are dead wrong. Dealing with the increasing damage from climate extremes and, just as important, the growing economic potential in activities to overcome it will increasingly dominate entrepreneurial efforts in future decades.
“As investors we should try to be prepared for this.”
Readings & Viewings
I've been taking Restavit (doxylamine) for a while to help me sleep, until I listened to this item on Norman Swan's Health Report this week. It convincingly links anticholinergic drugs, including doxylamine, to increased risk of dementia and reduced cognitive function. In short it makes you stupid. I'm stupid enough already, so that's it for Restavit! As a result, I've had a rough week, big trouble sleeping – but it's worthwhile.
and here's the list of drugs that are anticholinergic (it's a long list, and includes things like Valium, Atropine, Dimetapp, Seroquel, Dramamine and Phenergan). Damn it! But worth a look.
Chris Joye in the AFR: The RBA has lost the plot.
Anatole Kaletsky: As central bankers worldwide continue to struggle to boost growth, inflation, and unemployment, the real issue is not whether more powerful monetary instruments are still available. The question is whether using them is necessary – or even threatens to do more harm than good.
It's been a messy first week, but both leaders survived, which is the point of the exercise.
I don't agree with this, but it's worth reading: there's a real choice in this election.
This, I agree with – Turnbull and Shorten are both good options for Prime Minister.
So far Tony Abbott is being good in this campaign, but Peta Credlin is being bad.
Mohamed El-Erian: sorting fact from fiction in the debate about US debt.
The turnaround in financial flows from China.
Donald Trump's success is neither improbable or surprising.
An interesting examination of Trump's language ($).
The GOP's electoral-map problem is not about Trump. It's about demographics.
Paul Krugman on Trump: the making of an ignoramus.
Trump Apocalypse Watch (this is good).
The longer Bernie Sanders stays in the race, the more he tugs Hilary Clinton to the left.
This is a 1 hour 15 minute interview with Jon Stewart, formerly of The Daily Show. Most attention was paid to his attacks on Trump, but I thought the interesting bit was his comments on Clinton after about 26 minutes, for example: “There are politicians who are either rendering their inauthenticity in real enough time to appear authentic, and then there are politicians who render their inauthenticity through … it's like when your computer … if you have a Mac and you want to play a Microsoft game on it … and there's that weird lag. That's Hilary Clinton. What gives me hope is that there's a delay, which means she's somehow fighting something. I've seen politicians who don't have that delay and render their inauthenticity in real time, and that's when you go – that's a sociopath.”
This is a remarkable video: At twilight at the Brooklyn Navy Yard, Duke Riley released thousands of birds with LED lights strapped to their legs, illuminating the sky in a choreographed flight pattern.
Eliminating all disease would not cause us to live significantly longer.
A global survey found that only 46 per cent of executives believe that purpose meaningfully informs their decisions, despite the fact that companies that have a clear purpose are more likely to see revenue growth and avoid flat or declining business.
Five burning issues for the Australian banks.
Noam Chomsky: American power under challenge.
A point of view worth reading, even if you disagree with it – as I do. “The superannuation changes are seriously good. The Coalition must fight for them.”
Reasons to be positive about the Australian market.
Is the online advertising bubble starting to pop? Yeah, I reckon so.
Blockchain is useful for a lot more than just Bitcoin.
There's a central contradiction with blockchain.
Here's the search result for “Australia” in the latest release of the Panama Papers. There are a few interesting names there, including NAB, BHP and ANZ, but I couldn't find M Turnbull.
A nice story about a family-owned grocer in Clifton Hill, called the “Flower of Sorrento”.
Before you tell your life what you intend to do with it, listen for what it intends to do with you. Before you tell your life what truths and values you have decided to live up to, let your life tell you what truths you embody, what values you represent.
On this day in 1939, Lina Medina became the youngest confirmed mother in history, at the age of five! I think she's probably still the record-holder.
Happy Birthday David Byrne. Here he is doing Psycho Killer live.
And happy birthday Jack Bruce, the bass guitar from Cream, one of my favourite bands in the 60s. He'd be 73 today, if he hadn't died in 2014. Here is Cream's farewell concert, if you've got a spare 50 minutes.
And finally, happy birthday Mark Zuckerberg, the founder of Facebook – a person who really can be said to have changed the world. And he's only 32 today.
Last week
Shane Oliver, AMP
Investment markets and key developments over the past week
Despite ongoing global growth fears and mixed earnings news, share markets in the US, Japan and Australia gained over the last week with a fall in the Yen helping Japanese shares and the recent RBA rate cut continuing to help Australian shares. However, European shares fell slightly and Chinese shares remained under pressure. Bond yields were little changed, the $US edged up slightly and commodity prices were mixed with oil up but metals down.
Another Greek blow up looks unlikely for this summer. Renewed Grexit fears helped set off share market turbulence around mid-last year (and mid-2010, mid-2011 and mid-2012) but the same looks unlikely this time around. With Greece agreeing various reforms on pensions, taxes and contingent spending cuts it looks likely to pass the first review of its latest aid program. European creditors are now starting to discuss debt relief based around longer maturities and lower interest rates. There is a way to go, but at this stage it looks like another Grexit scare won't be back in the headlines this year.
Impeachment trial of Brazilian President Rousseff only the beginning. While Brazil's Senate vote to commence an impeachment trial of Dilma Rousseff was greeted positively by the Brazilian share market, Brazil has a long way to go to get back on track. Vice-president Michel Temer who is now acting president is unlikely to change economic policy significantly, the trial will likely take months, then the outcome can be challenged and even if President Rousseff is ultimately removed it should be recognised that it won't necessarily do anything to solve Brazil's fundamental problem. A new election would help but that could be some time away and it's not clear that it will result in a government focussed on undertaking the necessary economic and political reforms to get Brazil's economy back in shape. In other words Brazil's problems are much bigger than Rousseff - they have just been exposed by the commodity slump.
Lowering Australia's inflation target would be madness. Back around 2007-08 when inflation had pushed above 4 per cent (both headline and underlying) some commentators were seriously arguing that the RBA cannot fight rising global commodity prices and so should just raise its inflation target. Now were hearing that with inflation below target the RBA should just lower its target with some using the same argument about falling global commodity prices. This is nonsense. The whole point of having an inflation target is to anchor inflation expectation around the target. If it is just raised or lowered each time it looks like being seriously breached due to commodity price movements or whatever then those expectations - which workers use to demand wages gains, companies use in setting wages increases and prices and which help drive future inflation - will simply move up or down depending on which way the target is changed. This is why it took so long to get inflation back under control in the 1970s and 1980s and why Japan has struggled to end deflation over the last two decades. The RBA should simply ignore such calls.
Major global economic events and implications
US data was a little stronger with small business optimism up in April and strong readings for job openings and hiring suggesting that the labour market is strong and the slowing in payrolls seen in March may be an aberration. That said unemployment claims have edged up over the last couple of weeks, although the rise over the last week may be due to special factors as it was driven by just New York.
Eurozone industrial production fell but German factory orders rose.
Japan's leading economic indicator rose in March, but various economic confidence indicators fell not helped by the Kumamoto earthquake and underlying wages growth remained soft.
Chinese CPI inflation was unchanged at 2.3 per cent year on year in April, with non-food inflation remaining low at just 1.1 per cent yoy. There was good news though with producer price deflation continuing to recede from -4.3 per cent yoy to -3.4 per cent yoy. This is a good sign. Meanwhile Chinese export and import growth slowed back a bit in April but the decline in underlying foreign exchange reserves continued to slow suggesting that capital outflows are continuing to slow as a degree of stability has returned to the Renminbi (albeit this partly dependent on what the $US does).
Indian economic data disappointed with weaker than expected industrial production and higher inflation.
Australian economic events and implications
Australian data was a bit light on, but the highlight was a bounce in consumer confidence that took it above average and to its highest since January 2014 – rate cuts work at least in the short term! This doesn't appear to have been driven by reaction to the Budget (which looks neutral relative to last year), but rather appears to reflect reaction to the RBA's latest rate cut which is a positive sign. That said consumer sentiment is volatile month to month and remains below levels associated with strong growth.
Meanwhile Australian housing finance was a bit stronger than expected in March driven by loans going to investors to buy new properties. The broad trend is still down but there has been a bit of a bounce in investor loans. Strength here is likely to be limited though given ongoing APRA vigilance. Finally, ANZ job ads slowed a bit again in April, consistent with some moderation in employment growth after last year's surge.
Reflecting the downside risks to inflation we are now allowing for two more rate cuts from the RBA this year taking the cash rate down to 1.25 per cent.
Next week
Craig James, CommSec
Jobs data in focus
Just like the US, jobs data is the dominant monthly economic release. The April data is due on Thursday. In Australia the week kicks off on Tuesday with the release of the minutes of the last Reserve Bank Board meeting. The Board members agreed at the meeting to cut interest rates so investors will be looking for further insights behind the decision.
Also on Tuesday, the weekly consumer sentiment reading is released by Roy Morgan and ANZ. Through the election campaign this sentiment gauge will attract more than the usual attention.
And the key economic data on Tuesday from the Bureau of Statistics (ABS) are the estimates of new vehicle sales for April. The industry data from the Federal Chamber of Automotive Industries has already indicated that auto sales hit record highs over the past year.
On Wednesday the ABS releases the March quarter data on wages. Wages grew by 2.3 per cent over the past year. And while the annual growth rate is the lowest on record, it still exceeds that of consumer prices. In the March quarter wages probably grew by 0.6 per cent, keeping annual growth near record lows. The real wage gains will serve to support consumer spending over 2016 in addition to lower debt repayments.
On Wednesday, the Reserve Bank Assistant Governor Guy Debelle delivers a speech in Beijing.
Arguably the highlight of the weekly finance diary occurs on Thursday when the ABS releases the job market data for April. Figures have been somewhat patchy in recent months with the job market seemingly pausing for breath after out-sized increases in late 2015.
We expect that jobs grew by 20,000 in April, but with more looking for work, the jobless rate will be little changed near 5.7-5.8 per cent.
The Federal Government's economic strategy is focused on jobs and growth so both the Apri and May labour market results will be highlights in the election period.
And on Friday, the Commonwealth Bank releases its business sales index – a gauge of economy-wide spending obtained by assessing credit and debit card transactions.
Mixed bag of US economic data
An eclectic mix of economic data is scheduled in the US over the coming week.
On Monday, the week kicks off in the US with release of capital flows data for March together with the New York Federal Reserve manufacturing index and the housing market index from the National Association of Home Builders. The NAHB index may have edged higher from 58 to 59 in May.
On Tuesday in the US the usual week measure on chain store sales is issued. In addition the consumer price index is released with housing starts and industrial production. An encouraging 2.8 per cent lift in housing starts is tipped while production may have only edged higher by 0.2 per cent in April after falling by 0.6 per cent in March.
And inflation probably remained contained. Core consumer prices (excludes food and energy) may have lifted 0.2 per cent in April, keeping the annual rate near 2.2 per cent.
On Wednesday the Federal Reserve releases minutes of its last interest rate setting meeting. While analysts will pore over the details, the Federal Reserve is in no rush to lift interest rates.
Also on Wednesday the usual US weekly data on home purchase and refinancing is issued. While in China the April data on home prices is expected.
On Thursday, in the US the weekly figures on claims for unemployment insurance are released together with the leading index, national activity index and the influential Philadelphia Federal Reserve survey. The leading index may have posted a moderate 0.3 per cent gain in April
And on Friday data on existing home sales is due for release in the US. Sales may have edged 1.3 per cent higher in April after a solid 5.1 per cent gain in March.
Sharemarket, interest rates, currencies & commodities
While some analysts fret that the world economy is not growing fast enough, commodity prices have generally risen over 2016. Now some will attribute the gains to the weaker US dollar. (A weaker greenback improves the purchasing power of non-US buyers for dollar-denominated commodities). But there needs to be some fundamental demand also to support prices rather than just currency effects.
Oil has lifted by around 20 per cent in US dollar terms as key producers attempt to stabilise prices near US$40-45 a barrel. Iron ore has lifted 26 per cent while zinc has been the out-performer of base metals, up 16 per cent.
But from Australia's point of view, the 19 per cent lift in the gold price stands out. Prices in Australian dollars are nearing record highs with a gold price of US$1,265 an ounce and Aussie dollar of US73 cents being one of the possible combinations to see the milestone achieved.