Attention is fast shifting to 2010 with most questions focussing on the likely health of the US economy.
Unfortunately this focus on the US is a legacy from the past when that economy mattered more to Australia, and indeed mattered more to the world as a whole. But many investors are still concerned that if the US economy doesn’t kick along, neither will its sharemarket, in turn constraining the Australian sharemarket.
Certainly the US economy is far less important to Australia than in the past. The US takes just over 5% of our exports, half that of a decade ago and the lowest share in records going back more than 20 years. Similarly the US accounts for just over 8% of total two-way trade, again close to record lows.
The Reserve Bank has done its best to highlight the reduced importance of the US economy to Australia but with varying success. Each time the Reserve Bank Board meets, the accompanying statement focuses on what is happening in China, and on Asia more broadly. And this focus has been maintained in all its publications and commentaries.
But while investors are probably getting the message that China, and Asia generally, are more important to Australia, the nagging worry is about knock-on effects. The worry is that if the US turns down again then this will negatively affect our key Asian trading partners.
Well, Reserve Bank Deputy Governor Ric Battellino has taken aim at those concerns in his most recent speech. Battellino says that “we should not lose sight of the fact that most of the growth in the larger Asian economies comes from their own domestic demand”. That is, most growth has come from consumer and business spending.
For instance the Reserve Bank has calculated that the Chinese economy has grown on average by 9.7% a year over the past decade, with 8.7 percentage points of the growth coming from domestic demand. In contrast net exports only contributed 1.1 percentage points to the growth rate. As well as showing that the Chinese economy is not beholden to the US, the data should also further erode the myth that its economy is driven by exports.
Only one of the Asian countries was more dependent on exports over the past decade than domestic demand – Taiwan, where 2.3 percentage points of the 3.8% average rate of economic growth came from net exports.
Actually at the other end of the scale is India where all economic growth over the past decade was derived from domestic demand – net exports provided a modest drag on growth.
The week ahead
A bumper week lies ahead. Not only are there around a dozen key indicators or surveys to be released but the Reserve Bank Board meets for the final time in 2009 to decide interest rate settings. Yes, it’s a lot closer to Christmas than you thought!
The Reserve Bank has never lifted rates for three consecutive months in a row. The RBA has certainly cut rates three months in a row – in early 2001 when the US went into recession, and in late 2008/early 2009 when seemingly the world was going to end. But another rate hike is on the cards.
Cash rates remain at historically low levels and our economy is continuing to improve. But on the other side of the equation, the slump in manufacturing investment would also be weighing on Board members’ minds. And then there is the uncertainty about how the economy will fare once the first home owners boost and small business tax break come to an end. We are tipping a rate hike, but not with a high degree of certainty.
In terms of the economic data, most interest will be the latest retail trade figures on Thursday. Retail spending fell by 0.2% in September and retailers have told the Reserve Bank that conditions were mixed over September and October. So we are expecting a modest 0.5% rebound in sales during October. Investors will get some guidance earlier in the week with the Commonwealth Bank releasing a new Business Sales indicator on Monday, tracking credit and debit card transactions.
Of the other economic data, on Monday the RP Data-Rismark house price report is released, together with private sector credit, the TD Securities inflation gauge and Bureau of Statistics Business Indicators publication. The Business Indicators report includes data on sales, inventories and corporate profits.
As well as the Reserve Bank Board meeting on Tuesday, October figures on building approvals will be released together with the Performance of Manufacturing index and government finance statistics.
On Thursday the Performance of Services index is released while Bureau of Statistics will issue June quarter population data.
It’s taken some time for the information to take hold, but more people realise that Australia’s population is growing at the fastest rate in 40 years and that it’s unlikely to slow appreciably in coming years. More people, means more houses and spending, so rising population growth has key implications for all businesses.
In the US the spotlight will be clearly focussed on the monthly employment (non-farm payrolls) data on Friday.
The job market is clearly improving as shown by new claims for unemployment insurance hitting 14-month lows.
And US economists believe that improvement will be reflected in Friday’s job figures. Economists believe that payrolls will contract by 140,000 in November, the best reading since July 2008 and a darn sight better than the 741,000 slide in jobs in January. Unemployment is tipped to remain stable at 10.2%, but any improvement would be warmly greeted by investors.
Other indicators over the week include construction spending, the ISM manufacturing index and car sales on Tuesday. On Wednesday the Federal Reserve releases its Beige Book while the ADP employment index is released. The ISM services index and productivity figures are released on Thursday with factory orders on Friday.
On Thursday hearings are held on the nomination of Federal Reserve chief Ben Bernanke for a second term.
Sharemarket
What a difference a year makes. On 18 separate days in October last year the sharemarket either rose or fell by more than 1%. Unsurprisingly that was the most volatile month for at least 15 years. And it didn’t improve much in November when there were 17 high volatility days.
But fast forward to the present day and a different picture emerges. In November so far, the Australian sharemarket has experienced just six of these high volatility days. And while the month is not yet over, the total is only a little above the long-run average of five days.
The more settled environment hasn’t just been confined to Australia. In the US, the so-called ‘fear gauge’ – the Vix, or volatility gauge – has fallen to 15-month lows.
While volatility may be important for traders to make money, for businesses and consumers more broadly, a more settled sharemarket makes for better decision-making.
Interest rates
Following the release of the business investment figures, financial market participants downgraded the prospects of a rate hike on Tuesday. Before the data, pricing suggested that there was a 76% chance of a rate hike, but that was downgraded to 67% after the data was digested by the markets.
CommSec believes that the pricing is about right, but perhaps the chances are a little lower at around 60%.
Currencies & commodities
If you are looking for a good short-term predictor for the Australian dollar, US equity markets remain a good guide.
Since the sharemarket bottomed in early March, the correlation between the US Dow Jones and the Aussie dollar has been very precise. That is the correlation ratio stands at 0.94 where a ratio of 1.0 would indicate that the two move in lock step.
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.
