The Week Ahead

The Week Ahead

Busy week on the domestic calendar

In Australia in the coming week there is a clutch of ‘top tier' economic data and a Reserve Bank Board meeting. In the US, employment figures take centre stage. And in China, manufacturing and trade data are released on Monday and Saturday respectively.

In Australia, the week kicks off on Monday with a focus on the housing sector: both building approvals and the RP Data CoreLogic home price index are slated for release. In addition the monthly inflation gauge and job advertisements series are issued.

Home prices probably rose by a robust 1.2 per cent in October after an outsized 4.2 per cent gain in the prior four months. More focus will be on the recent strength across regional capital cities, with Adelaide leading the gains over the past two months. The building approvals data is arguably more important than the house price figures, as it serves as a leading indicator for home and commercial building. The problem is that the data is ‘lumpy', especially “other” dwelling approvals – like apartments. Encouragingly approvals are up almost 15 per cent on a year ago.

In terms of other data, the monthly inflation gauge is produced by TD Securities and the Melbourne Institute and is an accurate and timely indicator of inflationary pressures. The job ads series has been a good gauge on the strength of the job market, but its influence has waned with more direct hiring techniques used by businesses and job seekers. Still, encouragingly advertisements have lifted 7.6 per cent in the past four months.

 On Tuesday the Reserve Bank Board meets. It is also a holiday in Victoria for Melbourne Cup Day – for many the start of the festive period and with key implications for the hospitality industries. The Reserve Bank won't touch interest rates but there may be a repeat of recent views on the housing market and the Aussie dollar.

 Also on Tuesday the Australian Bureau of Statistics (ABS) issues September trade and retail sales data. In August, the trade accounts were in deficit by $787 million. In fact trade deficits have been the norm for the past five months and a similar story is likely in the latest result. It will be interesting to see if there is evidence that the lower Aussie dollar is starting to have a beneficial impact on exports.

The retail trade data is due on the same day for the September month and September quarter. The importance of the latter is that detail on prices and volumes is expected. We expect that retail trade rose 0.5 per cent in September. In real terms, spending grew by 3.1 per cent in the 2013/14 financial year – the best annual growth in six years. Positive real wage growth and lower petrol prices will support future spending.

On Wednesday the Federal Chamber of Automotive Industries releases October data on new car sales – one of the timeliest monthly indicators – and the Performance of Services index is also issued.

On Thursday the ABS will release the October employment estimates. The economy is showing signs of healthier economic activity and the labour market is the last key hurdle facing Reserve Bank officials before a change in monetary policy language and rhetoric could be made. While the unemployment rate has edged higher in recent months, a 6.1 per cent jobless rate is still well below the long term historical average of 7 per cent. We expect that employment rose by around 15,000 in October with the jobless rate around 6 per cent.

And on Friday the Reserve Bank issues its quarterly Statement on Monetary Policy. Given recent comments from the Central Bank, there is likely to be more detailed discussion about home prices and the Australian dollar.

Overseas: Spotlight on US Employment and Chinese Trade

There is the usual bevy of economic indicators for release in the US with employment statistics dominating the headlines later in the week. In addition, data on manufacturing activity in China is released on Monday (purchasing manager indexes) and Chinese trade data is scheduled for Saturday.

 In the US, the ISM manufacturing index, auto sales and construction spending data are released on Monday. The manufacturing gauge is tipped to ease from 56.6 to 56.5 in October – well above the 50 line that separates expansion from contraction. Construction spending is expected to have lifted by 0.6 per cent in September.

On Tuesday August data on factory orders and international trade will be published with the ISM New York index. On Wednesday the ADP national employment index is released together with the ISM services sector gauge. Economists tip a 220,000 lift in private jobs – a precursor to Friday's official job report.

On Thursday, the Challenger job layoff data is released together with labour costs and productivity and the usual weekly figures on claims for unemployment insurance.

And on Friday in the US, the pivotal non-farm payrolls or employment data is released. The Federal Reserve has ended monetary stimulus, and the one key metric that has given it confidence in recent months has been the ongoing improvement in the labour market. Economists expect that around 230,000 jobs were created in October – a healthy result. The jobless rate is expected to be steady near 5.9 per cent.

In China, the purchasing manager readings are due on Monday while the trade data is released on Saturday.

Interest rates, currencies and shares

Will interest rates be cut again this cycle? Financial markets haven't given up hope, with the overnight indexed swap market pricing in an 18 per cent chance of a 25 basis point rate cut over the next year. But the general consensus is that rates are on hold over the medium term.

The economy is on a solid footing and remains fundamentally sound. However the Reserve Bank essentially needs time to disentangle the various parts of the economy and it may seek to buy time by using macro-prudential tools to ease some of the heat from the housing market. As a result we have decided to push back the timing of any RBA rate rises to August 2015. When the process begins we still believe that a return to “neutral” settings will be the initial objective. And we continue to see neutral as a cash rate of 3.5 per cent.