Steady As She Goes

New estimates released over the past week show that Australians have never been wealthier. In the September quarter, each Australian was worth just over $310,000 while debt was a more modest $22,100. Although details weren't provided, no doubt the strong performance of the sharemarket over the past two years added most to wealth gains, taking over from soaring house prices in the previous three years. Overall, wealth grew by just under 77% in real (price-adjusted) terms over the past five years, the largest gain for an equivalent period in the 45-year history of the series.

Also, home construction is still not keeping pace with population growth, creating the risk of a rental crisis. The value of new construction loans fell to near three-year lows in November, down almost 12% from a year earlier. Not only does the weakness in new construction lending augur softer times ahead for builders and tradespeople, it points to challenging times ahead for renters. The rental vacancy rate is already low at 2.3%, well below the 15-year average of 3.3%. And the lack of new construction suggests that the vacancy rate will tighten further in coming months, pushing up rents. The silver lining is that the higher rent levels should translate to higher property prices, eventually encouraging investors back into the market.

The major event in the coming week is the release of the latest inflation figures. Inflation data is important in all major economies, but the figures are even more keenly awaited in Australia given that the data is only published quarterly, not monthly.
The consumer price index (CPI) is published on Wednesday, and forecasts cover a wide range from a modest rise of 0.4% to a more lofty increase of 0.8%. A result at the low end of the range would see annual inflation fall from 3% to 2.6%; a 0.8% quarterly rise would keep it at 3%. Meanwhile, annual underlying inflation should remain modest near 2.5%, keeping the Reserve Bank on the interest rate sidelines.

A key factor restraining the CPI in the quarter was the price of petrol, unchanged on average over the period after falls in October, November and December. Discounting by retailers and falls in audio visual equipment prices also capped the overall gain in the CPI. However, seasonal increases in holiday travel costs and higher food prices were key drivers of the CPI during the quarter.

Of the other indicators slated for release in the coming week, new car sales probably fell by about 1% in seasonally adjusted terms in December after a rise of 2.2% in November. Still, that's hardly a weak result. The previously released industry figures show that 79,277 new cars were sold in December 2005, a record for that month. And in 2005 as a whole, 988,618 new cars were sold. Given the plethora of new models slated for release in 2006, the magic million mark will soon be broken.

In the US, the economic data schedule in the coming week is uncharacteristically thin. The index of leading economic indicators begins the week, followed by data on existing home sales on Wednesday, durable goods orders on Thursday and GDP (economic growth) and new homes sales figures on Friday. Most interest will be in the advance estimate of economic growth for the December quarter.

I estimate that the US economy grew at a 3% annualised pace in the quarter, well down from 4.1% in the September quarter. But despite the result being restrained by hurricane-related influences, it will still only be marginally short of the longer-run average growth rate of 3.3%. The inflation estimate will be scrutinised ahead of the Federal Reserve Board's next rate-setting meeting on January 30.

The other US indicators for December should reveal an economy running at a firm but sustainable pace. The index of leading indicators probably rose by 0.2%, durable good orders likely rose by 1% while both existing and new home sales are tipped to have eased modestly in the month (existing 6.85 million, new 1.23 million).

The US earnings season moves into full swing in the coming week with 119 of the S&P 500 companies scheduled to release their results. Of note, American Express, Ford and Texas Instruments report on Monday; 3M, Du Pont, Johnson & Johnson and Sun Microsystems on Tuesday; Colgate Palmolive and Xerox on Wednesday; and AT&T, Honeywell and Microsoft on Thursday.

On the domestic calendar, the main interest will be in production reports from mining and energy companies for the December quarter. Macarthur Coal reports its results on Monday; BHP Billiton, Oxiana and Oil Search on Tuesday; and Santos, Excel Coal and Perseverance Corp on Wednesday.

On currencies, ask four currency analysts their "fair value" estimates for the Australian dollar and you're likely to get four opinions. But history suggests that a "normal" level of the Australian dollar is about US75¢ '” essentially where it is at the moment. Over the 22-year history of the floating exchange rate, the dollar has averaged US70.75¢. But included in that span of time was the relatively abnormal period of the tech boom/bust and September 11 terrorist attacks, essentially covering 1998–2003.

In the heady days of the tech boom, Australia was considered a technology backwater, resulting in the Aussie dollar falling as low as US47.73¢. But from 1983 to 1997, the dollar averaged just over US75¢. And over the past two years, the Aussie dollar has averaged just under US75¢. The bottom line is that there are reasonable grounds for investors to assume it will hold in a range a few cents either side of US75¢ over 2006.