Kohler's Week: Rio/ANZ, Technology, Oil, US Jobs & Rates, Employment, 1stAvailable, Clean TeQ, SocietyOne

Last Night

Dow Jones, down 0.27%
S&P 500, down 0.27%
Nasdaq, down 0.25%
Aust dollar, US74.2c

Rio/ANZ

The World Has Gone Mad Department: Rio Tinto is cutting capital expenditure by $2.5 billion plus operating costs by $1 billion and ANZ is raising $3 billion in new equity, in each case in order to pay the dividend.

Rio is robbing its future to pointlessly (in my view) pay a dividend that few mining investors are very interested in anyway, and ANZ is setting up a kind of Ponzi scheme, in which new money services the old.

As a shareholder in one or both of these companies you might disagree, and I get that if ANZ cut the dividend it would be Armageddon, but it seems to me that the yield obsession has got to an altogether absurd level when companies are cutting back capex or raising new equity in order to pay the dividend. 

Technology

A lot of my time these days is spent talking to digital entrepreneurs, either for Eureka Report, The Australian or the Qantas inflight channel, or just because it interests me, and this week has been no different. Today I want to discuss some of the implications of what I’ve been learning.

I remember in the 1990s when the internet was new and was pretty much just a vast library. Basically there were web pages, and outfits like Yahoo, Netscape and Alta Vista sorted them and helped us find them. Everybody got quite excited about it, and as The Economist explained in this article a week ago, the 64 biggest Silicon Valley companies were capitalised at $US2.4 trillion in September 2000, the peak of the bubble. Now there are 99 listed tech companies worth more than $1 billion with a total value of $2.8 trillion, an increase of 75 per cent in 30 months.

The digital revolution is now much broader than just the internet. As I see it, there are three things going on, all of them very disruptive:

1. Packet broadcasting and communication
2. Organisation and auctioning
3. Human replacement

1. The internet is no longer just a place where you can find information, like a library. The technology that underlies it, called packet switching, is starting to be used for every form of communication because it’s efficient and powerful. I’m far from an expert on this stuff, but even I can see that video and audio are going digital and increasingly being organised into “packets” that can be sent via the internet, either to one individual, a few, or many (everyone). (The way the internet works, as I understand it, is that the “packets” of data are despatched separately and then reassembled at the other end, even when it’s “streamed” content.) 

Anyway, the important thing about the way the internet was set up is that no one owns it: everyone can easily connect to it and can either send stuff to or receive it from everyone else, individually or in groups. Traditional TV and radio broadcasting, by contrast, is done over networks that are owned and licensed – unless you’re one of the chosen few, you can only receive, not send. But now everyone is sending, from individuals on YouTube, Instagram and, above all, Facebook to incredibly powerful new companies like Netflix.

Everyone is now connected to everyone else. Facebook, Google and Twitter have become industrial titans merely by facilitating this and selling ads alongside the material that’s being shared, and a whole new breed of broadcasters are emerging, such as Apple and Netflix, that charge consumers for content.

Traditional broadcasters and media companies are struggling to deal with this because it’s hard to get their heads around the implications of a ubiquitous, two-way network that connects everybody. It’s been there for 25 years or so, but those firms that have relied for their profits on owning a licence or expensive equipment such as a printing press are still finding it difficult to figure out how to make money when those things are no longer needed. The assets that matter now are an innovative culture and an R&D budget. 

2. The other thing that the internet is doing increasingly well is organising people and arranging auctions. To some degree this is an extension of point no.1 but it’s such a big extension it’s worth a point of its own. 

The pioneer of this was probably eBay, founded in 1995 and it was a big part of the first internet boom. Pierre Omidyar, who thought of it, found a way to run simple reverse auctions for people to sell things to each other, with a ratings system attached to build and record trust.

That idea, including the rating system to build trust, has now basically expanded into every part of life. Accommodation is rated and organised by such things as Airbnb and Trip Adviser; transport by Webjet, Wotif, Uber, Go Catch, Goget; services by operations like Freelancer; money by the peer-to-peer lenders that I’ve been bringing to you via the Eureka Interactive interviews, including this week’s one with Matt Symons of SocietyOne (see below). And increasingly these operations are turning into auctions rather than vendor pricing, because they can, and that’s what consumers want. 

Consumers understand and prefer auctions because they can set the prices rather than the vendors of the product or service. 

And when you get down to it, the key thing the internet is doing is transferring power and knowledge to consumers. That’s the essence of the revolution: by connecting everybody to a two-way network the internet transfers power from the owners of capital to consumers. It’s inevitable, in my view, that everything will eventually be auctioned and everyone will be a potential supplier of goods, services and information, and the winners will be (already are really) the organisers of this, not the suppliers themselves. That will be the end point of the digital revolution

3. Human replacement is not really to do with the internet but it’s mostly digital. I’m talking about mechanical and software robots – algorithms and artificial intelligence. And the mechanical ones are all operated digitally. Jobs are being permanently replaced by machines and will never come back. What will the people affected do? Not sure, but something else.

Dennis Gartman had some interesting comments on this subject this week in response to Donald Trump claiming he can bring back jobs to Americans from Mexico, and I don’t think I can do any better than what he wrote.

“When The Donald gets up in front of the world on Thursday evening and says that he can bring those jobs back from Mexico, someone wise on the stage will tell him that those jobs he’s talking about have disappeared.

Creative destruction… capitalism… progress… productivity “sent” those jobs away and only a demagogue will try to convince the uneducated that he has the power to bring them back. He is not God. He needs to learn that fact and his supports need to understand that too. Those jobs are indeed gone, and the foreman in “The Boss’s” song was right: “They ain’t comin’ back” and we are all the better for that fact. 

Blacksmithing was once a fine, honourable and valuable job in every community in the US; but blacksmiths and horses were “trumped” by autos and Detroit, and by the mass production of nails, which were as important to blacksmiths of the 17th, 18th and 19th centuries as was the shoeing of horses. Typesetting was once a learned profession with a long apprenticeship for a job that paid high wages but with working conditions of the worst sort. Now there are virtually no typesetters of any kind left anywhere, replaced completely by the computer, the word processor and the printer… doing a far better job than the typesetting/linotype operator could ever do.

Tires? They were once the lifeblood of Akron, Ohio… the “Rubber Capital of the World” as we who grew up there proudly referred to it… back in mid-century last as the tires upon which the nation’s… and to a great extent, the worlds… autos ran were manufactured there by the tens of millions. Now there are few if any tires manufactured in Akron, Ohio and the factory workers who did that ugly, hot work have been replaced by ultra-modern production lines driven by robots and computers, producing better quality tires that last three times longer than those produced by the hands of the URW back then. Such is progress; but were those jobs lost over-seas? No, in reality they were lost to technology.

Typists and secretaries? This is a swiftly diminishing occupation here and around the world. USAToday reports that between ’02 and ’12 the US lost 112,000 “word processors and typists” who had been earning $30k/year and whose future at the turn of the century appeared secure. It was anything but secure, as the word processor on our desks supplanted those jobs en masse. 

Were they lost overseas? No. Are they every coming back? Certainly not. Are they missed? Not really and we are all more productive as a result. Note then the picture included here this morning the page previous of an ultra-modern auto manufacturing operation. Do you see any workers there? No, for there are none to be found in many instances. The operations are done by machines, driven by robots and/or computers, doing the work… consistently and almost errorlessly… that humans once did. Were these jobs lost overseas? No, they were, again, lost to technology. 

'The Donald' would have us believe that these jobs went to Mexico, or to China, or to South America or to Africa, but in reality these jobs simply disappeared. They do not exist. When did you last speak to a telephone operator? That was once a fine job prized by women entering the job market, but the computer has replaced them in a race of technology and productivity, freeing those same women to do other jobs… higher paying jobs… jobs that require educations and technological skills.”

Dennis is right – we are more productive as a result of this new wave of supplanting human workers with machines, and that should end up being a good thing. But it could be difficult along the way.

I don’t have all the answers for what this means for investors, except to say something that I have said before: get on the train, don’t lie on the tracks.

Oil

According to Charles Dumas of Lombard Street Research, the oil price collapse has shifted about 2 per cent of global GDP from producers to consumers, and as a general rule people in pain react faster than those with a gain. For that reason the near-60 per cent collapse in the price since July last year has so far been more notable for its effect on the share prices of energy companies, as well as the fiscal budgets of OPEC members, than anything else.

Anatole Kaletsky says: “One reason investors have been slow to recognise the macroeconomic benefits of low oil prices, is the state of denial among energy experts about the oil market itself. This phase of denial may also now be ending, as energy investors recognise the economic and political fundamentals that are likely to keep oil prices low for years ahead, even if the world economy accelerates strongly, as it did after the oil price crash of 1986.”

However the winners – consumers – are now starting to respond, especially in the US, where they’re having what they call 'driving season', which is emphasising the savings. Consumers have now decided that the low fuel prices are here to stay and are spending their savings.  

This is unambiguously good economic news. And is a strong offset to my commentary last week about what the drop in commodity prices is saying about the global economy.

US Jobs and Rates

There was nothing in this morning’s American payrolls report to change the Federal Reserve’s mind about raising interest rates in September. New jobs totalled 215,000 in July and unemployment stayed at 5.3 per cent. Unusually, that was exactly in line with the Wall Street Journal survey of market expectations ahead of time. Also, the numbers for May and June were revised up by 14,000.

Hours worked continued to expand solidly (see graph from Societe Generale):

So the general view is that the Fed is definitely going to “lift-off” interest rates next month. As David Kotok of Cumberland Advisors wrote in a brief note this morning (he seems to be on a fishing trip): “In basketball, when a player is open, they take the shot. That’s the name of the game. After the taper tantrum a few years ago, the Fed was open and missed its free shot. The markets were already adjusted and had an expectation that the Fed would lift off. That time around, the Fed blew it. This time around, the most advertised and anticipated play is the set up for a September hike. Markets, economists, and analysts expect it. At Leen’s Lodge here in Maine, an overwhelming majority expects it. The biggest risk is if the Fed does not move.”

Earlier this week, the President of the Atlanta Federal Reserve Bank, Dennis Lockhart, changed the language around the Fed’s interest rate manoeuvrings in an interview with the Wall Street Journal, when he said: “I think there is a high bar right now to not acting, speaking for myself. It will take a significant deterioration in the economic picture for me to be disinclined to move ahead.”

Previously the onus was on the economy improving, that the Fed was data dependant and would start raising rates if the economy continued to improve. Now it seems to be that rates will go up unless the economy deteriorates – a significant difference.

He then qualified it with stuff like: “I don’t think it would be a big policy error to wait somewhat longer. I’m not one to quibble over one meeting or so. But I do think we are close.” And: “the process of interest rate normalisation is going to be a gradual process so we will continue to have quite accommodative policy for quite some time.”

Nevertheless, traders have never been more convinced that US rates will start rising in September:

There are a couple of things that flow from this.

First, bonds: As discussed here before, bonds have been in a 30-year secular bull market, from which two questions arise: when will it end and will the end be nasty? Markets tend not to make major bottoms or tops smoothly. That’s because they are still (mostly) controlled by humans, and humans get emotional and tend to stampede. 

There was an amusing, and perhaps important, exchange between Carl Icahn and the head of BlackRock, Larry Fink, recently in which Icahn got stuck into Fink for selling too many high-yield bond ETFs, so that at some point when interest rates start rising, everyone will try to sell and there’ll be carnage. ETFs are just one part of the bond market now; the bigger problem is that bond yields are low (prices are high) because an awful lot of investors bought them, not at high yields but low yields – for capital gain. 

Icahn’s point is that even those who have bought high-yield bond ETFs to improve their retirement incomes will stampede out of them to protect their capital when prices start falling.

If, as I suspect, the bond market is a “pass the parcel” bubble rather than a place to find yield, then the end of the bond bull market will be very rocky and could start with a crash.

This is my biggest concern at the moment: stocks and bonds don’t move in lock step, but they are connected. Assets are valued by the analysts and professionals who set prices by discounting future cash flows to a present day number using a discount rate that consists of the bond rate plus a premium for risk. If the bond rate goes up, the discount rate increases and the present value goes down. That doesn’t necessarily change the inherent quality or value of a business, but it does change its price because it alters the way the marginal pricers do their sums.

This effect will be muffled by the fact that analysts have tended not to fully believe the decline in bond yields, and have not adjusted discount rates entirely in line with them. That means there should be a buffer between bonds and equities.

The other thing about US interest rates of particular relevance to us is the impact on the US dollar. It’s generally assumed that “liftoff” will give the US dollar another shove and confirm its new secular bull market. The US dollar index has already appreciated 22 per cent in the past 12 months and many commentators believe this is just the beginning. I do too, although this graph from Credit Suisse via Business Insider has got me thinking:

That confirms that there is more to an exchange rate than the interest rate differential; investments are not just about yield, but also capital gain, and that depends on the health of the economy.

On balance I think the US dollar will keep appreciating because the US economy is stronger than most, and definitely stronger than ours, which is so reliant on China. If I’m right, that means the Australian dollar will keep falling.

Employment

There was much confusion about the jobs data on Thursday – employment up by a stronger-than-expected 38,500 but unemployment also up from 6.1 to 6.3 per cent. I thought it was pretty good. 

All these numbers result from statistical fiddling in a way, the unemployment rate more so than employment. That’s because it’s a percentage of people looking for work, not the actual number of people without a job (see below). 

Those out of work know who they are and know whether they want a job or not. If they’ve registered, they’re unemployed; if they haven’t, they’re not counted. I reckon there are really only two things that matter: are there more or less jobs around, and what does the Reserve Bank think about it (which turns into interest rates)?

As for the first – yes there are more jobs, quite a few more. And the fact that there are more people looking for work is a good thing, not bad, whether that’s because of rising population or more people deciding to register because they think it might be worthwhile.

As for the RBA and interest rates – on Tuesday the Governor said: “While the rate of growth has been somewhat below longer-term averages, it has been associated with somewhat stronger growth of employment and a steady rate of unemployment over the past year.” Over the past year the unemployment rate has fluctuated between 5.9 and 6.3 per cent, so he calls that “steady” and Thursday’s increase keeps it in that range. In any case, the employment surveys have become very unreliable because of ABS funding cutbacks, so Mr Stevens probably doesn’t take too much notice of it.

Overall, the report shows that the economy is doing OK, probably better than previously thought, and it won’t make any difference whatsoever to interest rates, and whether the RBA cuts again or not.

On the subject of employment and unemployment, I saw a pithy commentary paraphrasing Abbott and Costello this week, in the manner of “Who’s On First", from the US National Business Economics Issues Council, via Cumberland Advisors:

COSTELLO: I want to talk about the unemployment rate in America.

ABBOTT: Good Subject. Terrible times. It’s 5.6 per cent.

COSTELLO: That many people are out of work? 

ABBOTT: No, that’s 23 per cent.

COSTELLO: You just said 5.6 per cent.

ABBOTT: 5.6 per cent unemployed.

COSTELLO: Right, 5.6 per cent out of work.

ABBOTT: No, that’s 23 per cent .

COSTELLO: Okay, so it’s 23 per cent  unemployed.

ABBOTT: No, that’s 5.6 per cent .

COSTELLO: Wait a minute! Is it 5.6 per cent  or 23 per cent ?

ABBOTT: 5.6 per cent are unemployed. 23 per cent are out of work.

COSTELLO: If you are out of work, you are unemployed.

ABBOTT: No, Congress said you can’t count the “out of work” as the unemployed. You have to look for work to be unemployed.

COSTELLO: But they are out of work!

ABBOTT: No, you miss his point.

COSTELLO: What point?

ABBOTT: Someone who doesn’t look for work can’t be counted with those who look for work. It wouldn’t be fair.

COSTELLO: To whom?

ABBOTT: The unemployed.

COSTELLO: But ALL of them are out of work.

ABBOTT: No, the unemployed are actively looking for work. Those who are out of work gave up looking; and if you give up, you are no longer in the ranks of the unemployed.

COSTELLO: So if you’re off the unemployment rolls, that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment rate just goes down because you don’t look for work?

ABBOTT: Absolutely it goes down. That’s how it gets to 5.6 per cent. Otherwise it would be 23 per cent.

COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to have people stop looking for work.

ABBOTT: Now you’re thinking like an economist.

COSTELLO: I don’t even know what the hell I just said!

ABBOTT: Now you’re thinking like a politician.

Interviews

1. 1stAvailable. This is a tiny ($9m market cap) start up that’s operating a booking service for health professionals – doctors, dentists etc. It’s an interesting subscription business (the doctors pay) and the CEO, Klaus Bartosch, who I interviewed on Wednesday, is an impressive guy. You can read and watch the interview here.

2. Clean TeQ. Fascinating business – been going for more than 15 years, but only recently got its act together and worked out a plan. The company is based around technology called continuous ion exchange, licensed from a Russian research institute. It’s doing water purification in China, and has turned into a mining company in NSW, with plans to dig up and concentrate, using its technology, a metal called scandium – very rare and more than $2000 per kg. The stuff is used for fuel cells and as an alloy with aluminium. Sam Riggall, the CEO, is an ex-Rio exec and came to Clean TeQ from Robert Friedland’s Ivanhoe Mines. Friedland is the biggest shareholder in Clean TeQ. I interviewed Sam on Thursday. You can watch the interview here.

3. SocietyOne. This is the last of my peer-to-peer to lender interviews, and the most impressive. Matt Symons started SocietyOne three years ago and it now has a $40 million book, having raised about $30 million from the likes of James Packer and Lachlan Murdoch, among others. Here is the interview

Cricket (60, all out)

What’s the difference between an Australian cricketer and Cinderella? Cinderella knew when to leave the ball.

Readings & Viewings

Catastrophic spelling error sees Australian croquet team take to field in 4th test.

When robots eliminate jobs, humans will find better things to do. (Probably)

This is worth reading – the RBA’s head of financial stability, Luci Ellis’s opening statement to the House of Reps inquiry into home ownership.

This Facebook patent would allow lenders to determine credit worthiness by looking at your “friends”.

A nice piece by Rod Liddle of The Spectator about Ted Heath being discovered to have been a, er, pederast.

I really liked this interview by Andrew West of the Religion and Ethics Report on Radio National with a Dutch philosopher. He says the proportion of the world’s population that identifies as religious is growing, not shrinking – because they have more children.

Panicking is a horrible investment strategy.

Donald Trump’s allure: ego as ideology.

Why do some people kill animals for fun? This lecturer in forensic criminology doesn’t know. Me neither.

A form guide for the Speaker race.

Koukoulas: Is the Australian economy gaining strength?

Winners of the 2015 National Geographic photo competition. Wonderful pictures.

This is a very moving call into a London radio station. It’s an 85-year-old man who cares for his 100-year-old wife (“I’m the original toy boy”) - "it would be kinder if she could just go to sleep and not come back again,” he said.

Interesting interview by Jim Cramer with the CEO of Live Nation about the changing face of the music industry.

Inside the failure of Google , an expensive attempt to unseat Facebook.

Stephen Roach: Market manipulation goes global.

Donald Trump is part of a wider phenomenon throughout the democratic world.

The five reasons the Trans Pacific Partnership trade deal has stalled.

Happy Birthday Garrison Keillor, who turned 73 yesterday. He announced the other day that this year’s will be the last Prairie Home Companion, that delightfully wry radio show that he started in 1974. Here’s an episode from last year. 

And here’s a delightful sketch called “The Secret Life of Lutherans”. Very funny.

Last Week

By Shane Oliver, AMP

Investment markets and key developments over the past week

It’s been a mixed week for shares with Eurozone and Japanese shares up, but US shares pulling back on some earnings disappointments and falls in biotech shares and Australian shares falling partly due a capital raising and disappointing earnings update from ANZ weighing on bank shares. Bond yields generally rose and commodity prices remained under some pressure as the $US rose in response to increased expectations of a Fed rate hike in September. Despite this the $A rose slightly as the RBA dropped its reference to a further depreciation being likely and necessary.

RBA a bit more comfortable with the economy, but pressure likely to remain to cut again. As widely expected the RBA left interest rates on hold, but in appearing a bit more comfortable about the labour market and the value of the $A appears to have softened its easing bias. More fundamentally the RBA appears to be revising down its assessment of potential growth in the economy – partly reflecting slower population growth. Despite this, and while it’s a close call, it’s likely that the RBA will cut rates again before year end reflecting the poor business investment outlook, greater than expected weakness in commodity prices, the $A remaining too high given the slump in commodity prices, a likely loss of momentum in home price growth and to offset a de facto monetary policy tightening that is flowing from higher bank mortgage rates.

Potential real economic growth in the Australian economy likely has slowed thanks to lower population and productivity growth and reflecting the secular headwind from now falling commodity prices. In estimating the medium term return potential for Australian shares we have been assuming that it has slipped just below 3 per cent. However, while this could imply less slack in the economy than previously thought, even the RBA still sees spare capacity remaining. Spare capacity is evident in the 14.5 per cent labour force underutilisation rate and record low wages growth.  The combination of lower potential growth and low inflation also means a lower natural (or normal) rate of interest which in the US, Europe and Japan has seen interest rates fall to around zero. In other words lower potential growth in the economy does not necessarily mean the end to interest rate cuts. In fact it might add to the case for lower rates.

The RBA does it again on the Australian dollar. By deleting the comment that it sees a further depreciation in the value of the Australian dollar as “likely and necessary” at a time when the Australian dollar is ripe for bounce with high levels of shorts the RBA risks a re-run of the mistake it made earlier last year when it dropped a reference to the Australian dollar being “uncomfortably high” which saw it rebound in value and spend much of the year stuck around $US0.93/94, which in turn harmed the economy. Jawboning the Australian dollar lower costs the RBA nothing so it would have made sense to continue with it.

Major global economic events and implications

US economic data was the usual mixed bag, consistent with growth running around 2.5 per cent at present. On the soft side the ADP employment survey, construction spending and the July ISM manufacturing conditions index were all weaker than expected. Against this, the Markit manufacturing PMI held solid at 53.8 and the services conditions PMI rose to strong levels with the ISM services index at its highest since 2005, unemployment claims remain low and vehicle sales rose more than expected. Meanwhile, the core private consumption deflator, which is the Fed's preferred measure of inflation, remained low at 1.3 per cent year on year in June. The debate about the timing of the Fed's first rate hike continues to rage with one Fed official indicating he would most likely vote for September but another being a bit more circumspect as to the timing. By the time it actually happens it will be the most anticipated rate hike ever so should hardly be a surprise to anyone (except perhaps in terms of the precise timing).

The US June quarter earnings reporting season has lost a bit of momentum in the last week or so and top line growth remains weak but it has still come in better than expected. We are now 90 per cent done and 74 per cent of companies have beat on earnings, 49 per cent have beat on sales and earnings growth expectations for the 12 months to the June quarter have improved from -5.3 per cent at the start of July to -0.3 per cent.

Eurozone business conditions confirm little impact from the Greek debacle in July. Final estimates show just a minor fall in the composite PMI to a still solid 53.9 (from 54.2 in June), a level which along with various confidence indicators points to a further slight acceleration in the pace of economic growth. While the risk of periodic Greek blow-ups remains the combination of attractive valuations, ongoing ECB quantitative easing and improving growth continue to make Eurozone shares relatively attractive.

Japanese recovery continues. While Japan’s services conditions PMI fell in July this was more than offset by a strong gain in its manufacturing conditions PMI leaving business conditions overall at a level consistent with continuing growth.

China’s business conditions PMIs, partly highlight the adjustment taking place in the Chinese economy with the Markit manufacturing PMI at its lows for the last four years but the services PMI rising to around its highs for the last four years. So yes growth has slowed but not nearly as much as a focus on manufacturing alone might suggest.

Australian economic events and implications

Australian economic data was messy. To be sure June retail sales data were impressive contributing to strong June quarter real retail sales growth, manufacturing and services conditions PMIs both rose nicely in July, new home sales remain strong, home price growth accelerated in July and employment growth was very strong. Against this, unemployment rose back to 6.3 per cent re-establishing a rising trend, ANZ job ads fell in July, the trade deficit widened in June with net exports looking like they will detract solidly from June quarter GDP growth and the TD/Melbourne Institute Inflation Gauge indicated inflation remains low. The basic message remains one of continuing sub-par economic growth and low inflation.

In terms of home price growth, while Sydney and Melbourne are very strong, gains in the rest of Australia remain very modest running at just 0.9 per cent year on year on average. Interestingly, there is a degree of mean reversion or catch up evident in the surging Sydney property market. As can be seen in the next chart it underperformed over the 2003-2012 period and so the rebound in relative performance versus the rest of Australia since is partly making up for that.

While the June half earnings reporting season is underway, too few companies have reported so it’s far too early to draw any general conclusions, but it’s interesting that while Rio's profits were down sharply they were stronger than expected and it continues to ramp up dividends which is appropriate as its hardly the time for miners to be ramping up investment, whereas ANZ's capital raising and earnings update highlight the environment has become tougher for the banks.

Next Week

By Craig James, Commsec

Wages back in focus

Just like the official data on consumer prices, data on wages only comes around once every three months in Australia. The wage cost index is released on Wednesday with average weekly earnings on Thursday.

But the week kicks off on Monday with the Bureau of Statistics (ABS) releasing broad data on lending – data on new finance commitments for housing, personal, business and the lease loans category. In May, new loans fell by 2.6 per cent after rising by 3.6 per cent lift in April. New loans are up 9.7 per cent over the year.

On Tuesday, ANZ and Roy Morgan release the weekly consumer confidence survey while Westpac and the Melbourne Institute release their monthly consumer confidence survey on Wednesday. The questions are effectively the same and the surveys cover the same time period. Confidence levels have improved.

Also on Tuesday, National Australia Bank releases its monthly business survey. In June, business confidence was at a 21-month high while business conditions were at an 8-month high. Clearly the rate cut in May has helped together with the Federal Government budget initiatives for small business.

On Wednesday, the June quarter wage cost index is released. We expect that wages grew by 0.7 per cent in the quarter to lift the annual growth rate from 2.3 per cent to 2.4 per cent. The good news for businesses is that wage costs are contained. The bad news for retailers and other consumer-dependent firms is that wages are just covering prices at present. That means that consumers need to be careful with their purchases and businesses need to keep costs and margins down. The job market is improving but there is still a degree of spare capacity available.

Also on Wednesday the Reserve Bank releases the latest data on credit and debit card lending. In May the average credit card balance was 1.2 per cent down over the year. Consumers are still winding back credit and are reluctant to take on additional debt. Currently around 60 per cent of CBA credit-card holders pay off their cards in full in the 55 day interest free period.

On Thursday the ABS releases the average weekly earnings figures. The data is important because it shows wages in dollar terms as opposed to the wage cost index that measures growth of wages. The data is also available for industries.

There are also two speeches to watch over the week. On Wednesday the Deputy Governor of the RBA, Philip Lowe, delivers a speech in Perth. And on Friday, Assistant Governor, Economic at the RBA, Christopher Kent, delivers a talk covering “Recent Labour Market Developments”. This talk should prove interesting as the Reserve Bank mulls whether the “speed limit” of the economy has changed.

Busy times ahead in China

A quiet week is in prospect on the economic front in the US, however Chinese data will be the main focal point for investors. As noted last week, Chinese inflation data is released on Sunday (August 9) while key monthly activity data is issued on Wednesday. Also over the week, money and lending figures will be released in China.

In the US, the Columbus Day holiday kicks off proceedings on Monday.

On Tuesday, wholesale inventories and trade data are released alongside non-farm productivity measures and weekly chain store sales figures. Economists tip a 0.3 per cent rise in wholesale inventories.

On Wednesday, the monthly Federal Budget figures are released together with the weekly data on mortgage applications. Economists tip a US$117 billion budget deficit in July.

On Thursday the regular weekly data on claims for unemployment insurance is issued together with retail sales data. Economists tip a 0.4 per cent lift in July retail sales, an improvement on the 0.3 per cent slide in June. Excluding autos, sales may have risen by 0.5 per cent.

And on Friday in the US, data on producer prices is released together with industrial production, business inventories and consumer sentiment. Economists tip a modest 0.1 per cent rise in core producer prices (excludes food and energy), a 0.3 per cent rise in production and modest improvement in consumer sentiment from 93.1 to 94.0.

In China, there are early economist forecasts for the Chinese monthly activity data, although they may shift in coming days. Broadly, retail sales in July are expected to be up 10.6 per cent on a year ago with production up 6.6 per cent and investment up 11.5 per cent in the seven months to July on a year earlier.

Sharemarket, interest rates, currencies & commodities

The Australian profit-reporting season moves from second gear into third gear over the coming week.

On Monday, earnings are expected from Ansell, JB Hi-Fi and Bendigo & Adelaide Bank. On Tuesday, Cochlear, Bradken and Transurban are expected to report earnings.

On Wednesday, amongst those scheduled to issue their profit results are Commonwealth Bank, REA Group, CSL, AGL Energy, Echo Entertainment, Computershare, Primary Health Care, Carsales.com, Dexus Property and OZ Minerals.

On Thursday, earnings are expected from Tabcorp, Telstra, Mirvac, Fairfax Media, and Goodman Group.