Data on retail spending is published every month, but it is the quarterly estimates that provide the most valuable insights. Not only are these estimates less volatile than the monthly numbers, but detailed figures are provided on the volume of goods actually purchased as well as price changes.
Actually it is the price changes, or the measures of retail inflation, that really stand out in the latest September quarter figures. The actual volume of goods purchased in the quarter fell by 0.4% but the value of the goods sold fell even further, down 0.6%.
That means that prices went backwards in the September quarter – deflation – with prices falling by 0.2% after a 0.1% increase in the June quarter.
That was the first drop in retail prices in five years with annual inflation easing from 3.2% to 2.3%. But more importantly the annualised rate of inflation for the past six months was -0.2 %. While this wouldn’t be lost on the boffins at the Reserve Bank, it certainly wasn’t picked up by the host of private sector economists.
No matter where you look, it is clear that inflation is largely non-existent. That is why the Reserve Bank is only cautiously lifting rates, and why it may very well sit out the December board meeting.
The biggest fall in prices in the quarter occurred in food retailing (down 0.8%) but there was also deflation in a raft of other groups. For instance prices for toys, games and entertainment media fell by 1.1%, prices of shoes fell by 3.4%, and pharmaceutical goods were cheaper by 0.8%.
So what did we buy in the latest quarter? Well it is clear that we were preoccupied with food. Spending at supermarkets rose by 1.2% while takeaway food sales were up by 3.8%. But spending in most of the other retail categories fell. The combination of discounting and government stimulus caused people to spend up big in the June quarter and as a result Aussie consumers took a breather over the September quarter.
One area that has been consistently weak is newspaper and books, with spending falling in real terms in each of the past four quarters to be down a record 16.3% on a year ago. Spending on hardware and garden supplies also fell 3.7% over the past year with sales at butchers, bakers and fruit and veg shops down 3.4%. In contrast, real spending at liquor stores is up 12.9% on a year ago with takeaway food sales up 10.6% and pharmacies up 8.4%.
Overall, retail trade fell by 0.4% in real terms in the September quarter, but after a 1.9% surge in sales in the June quarter – the biggest in two years. Putting the two quarters together the 0.8% average growth is broadly in line with longer five-year average. So there are few ominous warnings from the drop in sales over the quarter. The $64 question is where spending goes from here. But as evidenced by the surge in car sales in October, lower prices plus increased job security should equal a good Christmas for retailers.
The week ahead
Another busy week lies ahead for investors with six key economic indicators to be released in addition to two talks by Reserve Bank officials. It’s touch and go whether the Reserve Bank will lift rates again at the December meeting, but there should be a lot more clarity once Friday rolls around.
On Monday the Olivier and ANZ job advertisement surveys will be released together with housing finance data. And Reserve Bank Assistant Governor Philip Lowe is a panel discussant at a conference. On Tuesday the NAB business survey is released while the head of domestic markets at the Reserve Bank, John Broadbent, delivers a speech. On Wednesday consumer confidence and lending finance figures are released while the monthly job report is issued on Thursday.
The September figures on job advertisements were clearly encouraging with both the Olivier and ANZ surveys recording gains of around 4% for the second straight month. A third consecutive gain in job ads would cause more analysts to revise down their estimates for the peak in the jobless rate.
We believe that the jobless rate is close to peaking, if it hasn’t already. Certainly all eyes will be on Thursday’s job figures. In September, more than 40,000 jobs were created with the unemployment rate fell from 5.8% to 5.7%. The result was clearly a surprise because there is usually a lag between job advertisements and employment. So further gains in employment look to be in the pipeline in coming months.
We expect that employment lifted by 10,000 in October. If the participation rate didn’t change then the jobless rate may have edged up from 5.7% to 5.9%. But overall a peak in the jobless rate somewhere around 6% appears likely.
In terms of the lending figures, new home loans may have lifted by 5% in September as first home buyers sought to lock in purchases before the phase down of the Government grant. The key question is whether consumers and businesses also sought to lock in new loans in September ahead of a prospective rate increase.
Of the other data, business conditions and confidence were probably little changed in October while consumer confidence probably eased a touch in response to the latest rate hike.
In the US, the economic cupboard is largely empty. The September trade figures are released on Friday, but the data doesn’t have the same attraction for investors as in the past. A trade deficit around US$31.5 billion is expected after a US$30.7 billion shortfall in August. And consumer sentiment (also Friday) may have edged slightly higher in November, lifting from 70.6 to 71.5.
Certainly the focus will be on the Federal Reserve over the week with five speeches by key officials scheduled.
Sharemarket
There are just eight weeks until the end of the year, so a recap is in order. Currently the broad All Ordinaries index has risen by just over 23% since the start of the year with the ASX 200 up 21%. If the sharemarket didn’t budge for the next eight weeks, it would be the best year for the sharemarket since 2006. Indeed the All Ords will just need to lift 2% to post the best gain in four years, and rise just over 4% to notch up the strongest gain in 15 years.
Just six of 570 stocks – the four major banks plus BHP Billiton and Rio Tinto – have accounted for 57% of the gains in the All Ords. Add in Wesfarmers, Woodside Petroleum and Macquarie Bank and 67% of the broader market gains would have been covered.
Only six of the 20 sectors are lower now than at the start of the year, the weakest being telecoms, down 14%. The standout sector has been retailing, up 82% over 2009, followed by banks, up 52%. Within retailing, JB Hi-Fi is up 114%, followed by David Jones, up 64% and Harvey Norman up 50%.
Interest rates
The Reserve Bank has never lifted cash rates three months in a row. And while this is only the fourth tightening cycle, there are good reasons for the Reserve Bank strategy. Simply it gets down to giving policy the chance to work. If the Reserve Bank just lifted rates month after month, it wouldn’t know until much too late whether it had gone too far in lifting rates.
We believe the Reserve Bank should follow its tried and tested approach and leave rate settings unchanged in December. The Reserve Bank is already well ahead of other central banks, there are still all manner of risks in the global economy and the high Australian dollar will work to slow the economy and keep inflation low. At this stage the economy was probably flat in the September quarter – in fact it may have gone backwards slightly – even more reason for caution on interest rates.
Currencies & commodities
Consolidation appears the key theme on financial markets. In the sharemarket, key indices lifted 6% in early October before retreating 6%. And now equity markets are trading sideways. The same trend appears in place on the currency market. The Aussie dollar has held between US89-93 cents over the past month and the currency has shown no tendency to break out of the range in the past week.
Craig James is chief economist at CommSec.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
