Over the week CommSec released its latest ‘State of the States’ economic ranking – an assessment of the economic performance of the states and territories. As you would expect, there was the customary mixed reaction across the country. States and territories at the top of the economic ranking list were quick to highlight the findings, while those economies at the bottom of the list sought to downplay or criticise the results.
Of course, performance assessments are done all the time. Actors, sports people and even financial firms are awarded on their performances. And there is always a mix of elation or disappointment that greets the results.
For listed companies, performance assessments are hardly new. Sharemarket analysts are constantly assessing the performances of individual companies. Those companies on the end of ‘buy’ recommendations are quick to highlight the results while those companies facing ‘sell’ recommendations put forward arguments and evidence in the hope of changing judgements.
And then there is the sharemarket itself. Every day all manner of investors are making judgements on individual companies – not just an assessment on the current performance but also a view about future conditions. Each investor will have a different way of doing their assessment. And when it comes to looking at performances of economies, clearly there are different approaches.
We took the view that current economic conditions should be compared with some baseline or ‘normal’ position. So what we did was to compare economic variables with decade averages. We could have chosen five year averages or three year averages, but generally decade averages are chosen as a gauge of ‘normality’. For instance, the Reserve Bank will look at economic growth or inflation over the decade.
So for instance, we looked at the latest result on retail trade and then compared that with the average level of spending over the previous decade. Then we looked at how each state or territory performed on that variable and gave rankings on the results.
Certainly you can’t look at economic performance on annual growth rates. A year ago the performance may have been dreadful so the latest growth rate looks great. But the actual level of activity may still be very weak. Of course, you can’t just look at size as a measure of performance. For instance, NSW would always come out on top on economic activity whereas Western Australia would get top ranking on population growth.
All economies, companies and individuals benefit from performance rankings. You are never going to always come out on top, and there are always areas to work on to improve your ranking next time.
The week ahead
Both the Australian and US economic calendars are sparsely populated in the coming week. On the home front, the consumer is front and centre with data on consumer sentiment and car sales. And in the US, it’s the housing market that hogs the limelight.
In Australia, TD Securities and the Melbourne Institute release the monthly inflation gauge on Monday, imports data is issued on Tuesday while Westpac and the Melbourne Institute produce the consumer sentiment survey results on Wednesday. And on Thursday the Bureau of Statistics will issue seasonally adjusted estimates of motor vehicle sales.
As we noted last week, the monthly inflation gauge is worth keeping an eye on. Inflation has effectively gone nowhere over the past four months, and if the trend continues into December then the Reserve Bank may be tempted to leave rate settings alone next month – although given the strong job market, probably not.
The imports data covers December – so it is one of the timeliest readings of spending in the economy. The main complication is the stronger Aussie dollar – a key factor restraining import prices and therefore the value of goods brought in from abroad. Imports have fallen 18% over the past year – a record annual decline.
Consumer confidence probably stabilised in January after falling for two straight months. A higher Aussie dollar tends to make consumers happy as does discounting by retailers. The only real negative at present is the fact that petrol prices have been creeping up – but probably not to levels that would worry too many people yet.
And the Bureau of Statistics will recast the latest car sales figures to take account of seasonal influences. We expect that sales rose 3% in seasonally adjusted terms to 20-month highs.
In the US, financial markets are closed on Monday for Martin Luther King Junior Day. The November capital inflows data is released on Tuesday with producer prices and housing starts on Wednesday. Rounding out the week is the leading index and the Philadelphia Fed index on Thursday.
Inflation isn’t a great concern for investors at present so the data on business inflation (producer prices) shouldn’t have a great influence on markets. Economists expect that the core rate (excludes food and energy) rose by 0.2% in December and by 1.1% over the year.
Of the other indicators, housing starts are expected to be little changed in December on the November result. But the good news is that another solid increase is tipped for the leading index with a 0.7% lift expected in December after a 0.9% rise the previous month.
In China a raft of key economic indicators will be released on Thursday that will certainly have Australian investors standing to attention. Economic growth (GDP) figures are released together with the consumer price index (inflation), industrial production, fixed investment and retail sales.
Sharemarket
The US profit-reporting season continues in the coming week. On Tuesday, Citigroup releases its results before the start of trade while IBM releases earnings after the closing bell. On Wednesday, Bank of America, Morgan Stanley, State Street, US Bancorp and Wells Fargo report before the bell, with eBay issuing results after trade closes. On Thursday, Goldman Sachs reports before the start of sharemarket trade with American Express, Advanced Micro Devices and Google reporting after the closing bell. And on Friday both General Electric and McDonalds report earnings before trade gets underway.
Back in October last year the market capitalisation of the banking sector hit record highs. And while market cap has eased 5% since, it is still a remarkable performance when you consider that the broader market needs to rise another 18% to reach the high set in November 2007. The other interesting point is that ANZ briefly passed NAB as the third biggest bank just before Christmas and the two banks are now broadly equal.
Interest rates, currencies & commodities
One thing that stood out on financial markets over both 2008 and 2009 was the marked increase in volatility. For instance, the Aussie dollar traded over a US38 cent range in 2008 and then a US31.5 cent range in 2009. Generally if the currency moves by more than US12 cents in the year, then it is regarded as a ‘big’ year. But while the Aussie dollar tracked over a wide range in the last two years, the previous two years were relatively quiet.
Of course the volatility wasn’t just limited to the currency. Even the normally quiet bond market has been livelier. In 2008, Australian 10-year bonds tracked a range of 3 percentage points (pp) and by 2.1pp in 2009. In each of the previous three years fluctuations in 10-year bond yields were 0.8-0.9pp.
Generally ‘big’ years for volatility tend to be followed by quieter periods, so that is certainly something to watch over 2010. If economies settle, so will financial markets, making it harder for traders to make money. Usually financial firms try to find other ways of making money in less volatile times. But that can lead to problems if those investments or strategies aren’t well thought out – as we have seen with US sub-prime lending.
While it’s good news that the global economy is recovering, one cautionary tale for the resources sector is the phenomenal level of base metal inventories on the London exchange – up 344% over the past two years.
Craig James is chief economist at CommSec.
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