Reserve to hold fire on rates
The bank believes the lower Australian dollar will help boost the economy in much the same way as would have happened had it cut rates.
When the board last met on May 7 it cost US102¢ to buy an Australian dollar. It now costs close to US96¢, a slide of 6 per cent. Against a broader mix of currencies the Australian dollar has slipped 4 per cent.
If sustained, the cut will give Australian exporters 4 per cent more for their overseas sales than before the dollar fell and will pressure the importers who compete with them to charge 4 per cent more in Australia.
Treasury secretary Martin Parkinson told economists after the May budget that, "as a crude rule of thumb, a cut of five or six cents on the US dollar exchange rate probably boosts real gross domestic product by about a quarter of a percentage point over a year".
Dr Parkinson is a member of the Reserve Bank board.
The ANZ's count of job advertisements slid a further 2.4 per cent in May to be down 10 per cent since the start of the year. An average of 132,500 job advertisements were posted per week in May, well down on the average of 188,600 posted in late 2010. It is the weakest reading since the 2009 global financial crisis.
"It is a relatively moderate rate of decline, but it is one that is unfortunately likely to be consistent with a continuing moderate rise in Australia's unemployment rate," ANZ economist Ivan Colhoun said.
In a further sign of a softening labour market the Bureau of Statistics reported on Monday that wages grew just 0.7 per cent in the first quarter of the year after climbing 0.7 per cent in the December quarter, the slowest pace since late 2009.
Company profits were up a better-than-expected 3 per cent in the quarter, but when mining profits were stripped out the remaining non-mining profits climbed just 0.4 per cent. Manufacturing profits slid 6.6 per cent in the quarter and 8.2 per cent over the year.
The Australian Industry Group performance of manufacturing index remained weak in May, climbing 7.1 points to 43.8 on a scale where anything less than 50 points means the sector is shrinking.
Separately released retail sales figures showed spending growing, climbing 0.2 per cent in April after falling 0.4 per cent in March.
"After a burst in January and February, sales flattened out," said Westpac economist Matthew Hassan. "It is broadly in line with consumer confidence which began the year with a promising rally, but then faltered in April, turning negative in May."
Spending on household goods jumped 3.8 per cent in the first two months of the year, but then slipped 2.4 per cent in March and April. Spending in department stores climbed 1.3 per cent before sliding 2.3 per cent.
Spending is growing at a trend rate of 0.6 per cent a month in NSW, 0.4 per cent in Victoria and Queensland and just 0.1 per cent in Western Australia.
RP Data reports that home prices turned down again in May, slipping 1 per cent in Sydney, 3 per cent in Melbourne and 1.3 per cent in Brisbane.
Frequently Asked Questions about this Article…
Yes — the article says the Reserve Bank board was expected to keep interest rates on hold at its Tuesday meeting. The bank is comfortable holding rates because the lower Australian dollar is already acting like a monetary loosening by boosting export competitiveness and supporting the economy, reducing the need for an official rate cut.
The Australian dollar has fallen about 6% against the US dollar (and roughly 4% against a broader basket). If that weakness is sustained, exporters would effectively receive about 4% more for overseas sales, while importers who compete locally may face pressure to charge roughly 4% more in Australia.
Job advertisements have slid to their weakest level since the global financial crisis: ANZ reported a 2.4% fall in May and a 10% decline since the start of the year, averaging 132,500 ads per week versus 188,600 in late 2010. ANZ economists say this moderate decline is consistent with a likely moderate rise in Australia’s unemployment rate — a trend investors should watch as it can affect consumer spending and corporate earnings.
Wages grew just 0.7% in the first quarter after a 0.7% rise in the December quarter — the slowest pace since late 2009. Slower wages growth can weigh on consumer spending, profit margins for some companies, and influence central bank thinking, so investors tracking consumer-facing sectors and interest-rate-sensitive assets should pay attention.
Overall company profits were up a better-than-expected 3% in the quarter, but when mining profits are removed, non-mining profits rose only 0.4%. That divergence highlights the importance of separating mining sector performance from broader corporate results when assessing earnings prospects for portfolios.
Manufacturing profits slid 6.6% in the quarter and 8.2% over the year. The Australian Industry Group’s manufacturing index remained weak at 43.8 (below 50 means contraction), signaling the sector is shrinking — a negative sign for industrial stocks and companies linked to domestic manufacturing demand.
Retail sales rose 0.2% in April after a 0.4% fall in March, so spending has flattened after early-year gains. Household goods spending jumped early in the year then slipped in March and April. Consumer confidence rallied early in the year but turned negative in May, suggesting caution for investors in retail and discretionary sectors until spending and sentiment stabilize.
Yes — RP Data reported home prices turned down in May, slipping about 1% in Sydney, 3% in Melbourne and 1.3% in Brisbane. Falling prices can affect rental yields, mortgage-backed exposures and consumer confidence, so property investors should monitor local price trends and broader economic indicators like jobs and wages.
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