Australian Markets Weekly: 27 February 2017

Thinking about some of the challenges facing Australian policy makers – and arguably consumers – at the present time, the slow growth in wages looms large.

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Key points:

  • Wages grew by just 0.5% q/q in the December quarter, with the annual pace of wages running at 1.9% y/y. When adjusted for inflation, there has been no growth in real wages since 2014. Low growth in wages has important implications for economic growth helping contribute to both the subdued pace of household consumption recently and likely better employment outcomes than otherwise.
  • Will wages growth turn around? We delve into our own NAB Business survey to see what businesses are saying about their wages bill. The data reveals the quarterly rate of wages is growing at 1% in NSW and Vic (annualizes to 4%), while the weakness in wages is occurring in WA and QLD. The most recent data however points to a stabilisation in the wages bill in WA and QLD with a tentative tick-up off low levels. This narrative is also being picked up in average advertised salaries on SEEK, which have ticked higher in QLD and WA, while Vic and NSW continue mild trend increases.
  • The past week has been fairly muted in terms of market moves. This week could see more volatility with a number of key events. Domestically the focus will be on Q4 GDP figures Wednesday and then on the Trade Balance on Thursday. Internationally the market is awaiting Trump’s “phenomenal” tax plan, some details of which may emerge at his address to Congress on Tuesday. It is also a very heavy data week with the key watchpoints being the US Manufacturing ISM and PCE Deflator Wednesday, the Chinese Manufacturing and Non-Manufacturing PMIs also Wednesday, and a speech by the US Fed Chair on Friday.
  • Contained within are our FX strategy team’s revised forecasts for most G10 currency pairs for Q1 2017 through Q3, while leaving their year-end forecast largely intact. The forecast revisions are driven in large part by the contention that the US dollar is set to further struggle in coming months on a loss of confidence in the passage of meaningful fiscal policy changes before much later in the year, the pull-back in US bond yields, and an assumption the Fed waits until June until hiking rates. We now see the AUD/USD at 0.77 at end of Q1, 0.75 in Q2, 0.73 in Q3 and 0.70 in Q4.
  • For full analysis, download report:

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