The Week Ahead

Rates, jobs and prices

An interesting week is in prospect, dominated by the Reserve Bank Board meeting and September jobs data.

The week kicks off on a somewhat disjointed note on Monday. In NSW, Queensland, the ACT and South Australia there are public holidays. But the sharemarket is open while the monthly inflation gauge and job advertisement figures are released. Inflation is well contained but the job market is picking up.

On Tuesday, the Reserve Bank Board meets and it is ‘London-to-a-brick’ that interest rates will be left unchanged for a 14^th month (15 months of rates at 2.50 per cent). However, the accompanying statement is likely to be somewhat different from the September decision. Over the past month, domestic and global economic conditions have shifted – particularly when it comes to commodity prices and the Aussie dollar. But we don’t believe that the Reserve Bank will change its interest rate stability rhetoric – at least not this month.

The Bureau of Statistics (ABS) releases statistics on tourist arrivals and departures on Tuesday together with longer-run migration data.

On Thursday, the monthly employment data is issued for September. And to say that recent data has been volatile borders on under-statement. In August, employment presumably rose by a record 121,000 and the jobless rate fell from 6.4 per cent to 6.1 per cent, after lifting from 6.1 per cent to 6.4 per cent in July.

In September, we expect that jobs fell by around 10,000 while the jobless rate was probably stable at 6.1 per cent. But in the current environment, the trend estimates are probably a better guide to what’s going on, rather than the seasonally-adjusted figures.

On Thursday, Reserve Bank Head of Financial Stability Luci Ellis delivers a speech. And on Friday Assistant Governor Malcolm Edey participates on a panel.

And on Friday, housing finance data is released. Data from the Bankers Association suggests that the number of owner-occupier loans rose by 0.1 per cent in August while the value of all loans fell 3.2 per cent. Clearly the focus will remain on the strength of investor loans compared with owner-occupiers (that is, those buying homes to live in rather than as an investment).

Overseas: A quiet week in prospect

It is one of those rare weeks: few ‘top shelf’ indicators for release in the US; and holidays dominating in China. But it is a big week for the US Federal Reserve with an appearance by the Chair, minutes of the last policymaking committee and no fewer than 13 speeches planned by Federal Reserve governors and presidents.

The week kicks off on Monday with the Federal Reserve chair, Janet Yellen, to address the Financial Stability Oversight Council. On Tuesday, the usual weekly chain store sales data is released in the US together with consumer credit data, the JOLTS job openings series and IBD Economic Optimism index. On Wednesday, the weekly report on mortgage transactions – purchases and refinancing – is released.

Also on Wednesday, minutes of the last Federal Reserve policymaking committee meeting (FOMC) will be released. Investors hope that the minutes can provide some broad hints on when rate hikes will begin.

On Thursday, the weekly data on claims for unemployment insurance is issued together with wholesale sales/inventories figures and the September monthly retail spending figures from the International Council of Shopping Centres (ICSC). On Friday, data on import and export prices is released.

In China, the only data of note is the HSBC Services Purchasing Managers’ index for September released on Wednesday. The August reading stood at 54.1 – putting it comfortably above the 50 reading that separates expansion from contraction. Lending and money supply data are scheduled anytime over the October 10-15 period.

Revision to Sharemarket Forecasts

In light of recent developments, CommSec is revising down its forecasts for the ASX 200 & All Ordinaries indexes. We now expect the key share indexes to be between 5,500-5,600 points by the end of the year and 5,900-6,000 points by mid-2015.

Certainly the broader Australian sharemarket is well supported by solid earnings and strong company balance sheets. And valuations remain favourable with the historic price-earnings ratio sitting at 12.81 – the lowest since May/June 2013, and before that, the lowest PE ratio since late 2012.

But a weaker Australian dollar has recently prompted some overseas investors to book profits. An easing in Chinese production growth and weaker commodity prices have also weighed on investor sentiment more generally. It is probably fair to say that domestic and foreign investors have also been more attracted to the local housing market rather than the sharemarket.

Looking ahead, the Australian economy is expected to lift over the coming year, underpinned by low interest rates and record home construction. The lower Aussie dollar will also provide a boost for local businesses. Further, the Chinese economy should continue to expand by 7.0-7.5 per cent, with solid volume growth expected for commodities. The US economy will continue to heal, with the Federal Reserve inching closer to lifting interest rates.

Investors should also remain attracted to yields on offer across the sharemarket – notably bank stocks – especially in relation to low domestic interest rates and prospects of slower home prices and a softening of rental yields.