THE BIG PICTURE: What’s keeping us gloomy

The latest consumer sentiment figures were released this week and it’s fair to say that we are hardly a positive bunch at present. Pessimists outnumber optimists on almost all criteria and across almost demographic groups.

Recently the Reserve Bank Governor commented that foreigners seem to have a more positive view on our economy than we do, and it’s hard to disagree with that view based on the latest data.

So what’s going on? Well, firstly we could question the veracity of the survey – is it accurately reporting the mood of the nation? Certainly it is important to realise that just 1,200 of Australia’s eight million households are surveyed. So we shouldn’t get too hung up on the month-to-month changes – especially when assessing the results for more detailed demographic groups. Further the consumer sentiment results don’t line up well with monthly economic trends.

Still, the same survey has been running since the early 1970s, so clearly it does offer value as a broad, big picture gauge of the consumer psyche.

The latest results show that consumer sentiment fell by 1.6% in April to a reading of 94.5. A reading below 100 means that there are around 5% more pessimists than optimists, but we don’t know how many people are actually ambivalent. It may be that most believe that conditions are broadly unchanged with just a small number holding a negative view of the world. We also don’t know how strongly people hold their views. It may be that a small majority are actually only mildly negative on how the economy and their finances are at present and where they are headed in the future.

In the latest survey it is interesting that consumer views are most negative on their own finances compared with a year ago, with the index reading of 65.2 the lowest since the global financial crisis reading of 63.7 in July 2008 and the recession levels of 20 years ago. Given that food prices are little changed or lower than a year ago and interest rates have fallen, this suggests that people are largely worried by the higher cost of petrol as well as utility fees such as electricity, gas and water.

All this doesn’t sound overly cheery for consumer-dependent businesses like retailers, but there is a silver lining: the Reserve Bank is another step closer to cutting interest rates.

The week ahead

The “inflation-reporting” season gets underway on Friday in Australia with data on import and export prices. Apart from those figures, main interest is in the release of Reserve Bank Board minutes on Tuesday. In the US, “top shelf” indicators like retail sales and industrial production are scheduled. In addition, the “profit reporting” or earnings season cranks up a notch.

On Monday, data on new lending is released. Given that this data covers all forms of lending – housing, personal, commercial and lease loans – it’s amazing that the figures don’t get more attention from economists. If economists are supposed to be explaining what is going on in the economy, then clearly finance figures warrant attention. At present new lending commitments are barely growing, with businesses and consumers seeming to prefer to use their own funds, rather than debt, to finance new purchases.

On Tuesday the Reserve Bank releases minutes of the April 3 Board meeting. Clearly these minutes will be closely analysed given the surprise “easing bias” adopted by Board members at the meeting.

On the same day, the Australian Bureau of Statistics (ABS) issues data on car sales. The industry estimates for March car sales have already been released, with figures showing that 97,616 new vehicles were sold in the month, up 3.9% on a year ago and underpinned by record sales of sports utility or four wheel drive vehicles. The Bureau of Statistics data will recast these estimates in seasonally adjusted and trend terms.

Also on Tuesday the ABS will issue data on government finance for the past financial year.

On Wednesday the ABS issues final figures on building activity for the December quarter including inflation-adjusted figures on construction activity – clearly for the data aficionados.

On Thursday the March data on merchandise imports (imports of goods) are released – a timely indicator of spending across the economy. And on the same day, detailed figures on the job market are issued.

And on Friday, the March quarter figures on import and export prices are issued. The two key influences on trade prices are movements in oil prices and changes in the Australian dollar. However the data is useful in tracking prices of imported goods – a key issue for domestic inflation.

In the US, the week kicks off with the March data on retail sales. Despite unemployment still at relatively high levels, consumers are still spending. Economists tip a 0.4% lift in sales after a 1.1% increase in February. And excluding autos, sales are tipped to have lifted by 0.6% after a 0.9% rise in February sales. On the same day, data on business inventories and capital flows are released alongside the NAHB housing market index and Empire State manufacturing gauge.

On Tuesday data on industrial production and housing starts are released. Production is tipped to have rebounded in March, up 0.5% after the flat February result. And housing starts are expected to have remained near a 700,000 annual rate in March. If the results meets estimates and retail sales data similarly is close to market forecasts then US investors should be encouraged.

On Thursday, the usual weekly data on unemployment claims is released alongside existing home sales data, the leading indicators publication and Philadelphia Federal Reserve index. Economists tip a modest 0.1% increase in home sales, 0.3% lift in the leading index and slight improvement in the Philly Fed index. As noted above, these are hardly indicators suggesting a stalled economy.

Sharemarket, interest rates, currencies and commodities

The US profit reporting season cranks up a notch in the coming week with a bevy of household names expected to release their quarterly earnings results.

On Monday, 12 companies are listed to report including Charles Schwab and Citigroup. On Tuesday, there are 36 companies listed to report including Coca Cola, Goldman Sachs, US Bancorp, IBM, Intel and Yahoo!

On Wednesday, 71 companies are listed by to issue profit results. Amongst companies to report are Bank of NY, Halliburton, American Express, Texas Instruments and YUM! Brands. On Thursday, the biggest day of the season so far will occur with 125 companies to report. Included are Bank of America, Morgan Stanley, Verizon, Advanced Micro Devices, Microsoft and E*Trade. And on Friday, General Electric and McDonalds are amongst 13 companies to issue earnings results.

Analysts are only tipping earnings growth of 1% from Standard & Poor’s 500 companies this season. Still, earnings guidance has been surprisingly positive with 60% of companies upgrading estimates since the start of April. And Alcoa kicked off the earnings season with a solid result, surprisingly reporting a profit of nine cents a share when analysts had tipped a loss of four cents a share. The risk is that earnings expectations are actually too low, leaving the risk of upward surprises.

In terms of interest rates, keep a watch on super-low Australian bond yields with 10-year yields back near 50-year lows. Low bond yields represent opportunities for businesses in terms of attractive swap rates and opportunities for fixed-loan housing borrowers.

Craig James is the chief economist at CommSec.


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