Australian Markets Weekly

Fairly quiet week for scheduled data and events in Australia but more action overseas, particularly in the US where the Federal Reserve will end their bond buying or quantitative easing programme


Modest releveraging underway. Business caution easing?

Fairly quiet week for scheduled data and events in Australia but more action overseas, particularly in the US where the Federal Reserve will end their bond buying or quantitative easing programme – more on this below.

One piece of interesting local data will be Friday’s private sector credit data for September. Overall credit growth has been edging higher over the past year or so and total credit grew 5.1% yoy to August. We expect growth improved to 5.2% in September.

Now 5% growth in private sector credit is very modest relative to the 10-15% growth rates we saw through the 1990’s and mid 2000’s. But it’s noteworthy that because Australia’s nominal economy has grown at such a slow pace over the past few years (mainly due to falling commodity prices), we are starting to see a small increase in the economies aggregate leverage.

While the aggregate story is benign, and remains consistent with low interest rates and moderate economic growth, there are telling differences in the detail. Mortgage demand is firmer – particularly from investors – meanwhile businesses are still fairly cautious about borrowing.

Housing and mortgage borrowing solid

To August 2014, total mortgage credit was grew 6.7% yoy made up of investor housing credit running at 9.2% and owner-occupier at 5.4%. We expect those yoy% growth rates rose further in September. Moreover, judging from RP Housing Data for the weekend just past, mortgage credit growth probably rose further in the current month of October.

RP Data suggests Sydney prices were up +0.2% in the week and +11.2% YTD (11.0% previous) and Melbourne up +0.1% for week and 8.5% YTD (8.4% previous). Auction clearance very solid – Sydney up to 78.1% and Melbourne up to 70.6%.

For now it seems few are listening to recent RBA/APRA warnings about the sharp growth in mortgage demand from investors. On this, speaking in recent weeks various RBA officials continue to imply that some modest macroprudential measures will be deployed in the months ahead. We are still waiting for the detail.

Business borrowing still modest and below late 2009 levels

While mortgage borrowing has been brisk the same cannot be said about business borrowing. The low point for business borrowing was mid-2011 and since then credit has grown very modestly. Even with this growth over the past three years, total business borrowing in August 2014 was below the November 2008 peak – the Nov 2008 peak was perhaps a little artificial as companies that were then closed out of debt capital markets were forced to borrow from their banks.

Prospects for business lending improving

For some time now business has been cautious about both their Capital Expenditure and hiring plans. There are several factors behind this conservation but the key one I expect has been soft growth in revenue. When asked what the biggest constraint on their profitability was in last week’s Q3 NAB Business Survey, 51% of firms cited a lack of demand. I expect some other factors adding to business caution include: business model uncertainty due to disruptive technologies and globalisation, Government policy uncertainty, and increased regulation.

The good news is that even with this general level of caution forward indicators suggest that business lending may be picking up.

A reasonable forecast from this relationship would be that business credit, which is currently growing near 3% yoy, should be growing near 4-5% in the next 12-18 months.

Now business credit growing at 4-5% yoy would hardly be a “boom” in the historical sense. As well, 4-5% growth would be putting very little upside pressure on interest rates. Even so, the prospect of firms expanding both their Capex plans and borrowings would be signs of a modestly improving economy.

Week Ahead – Fed to end QE

As noted, a fairly quiet week for data and events in Australia. Data highlight to be Friday’s credit data. There are also several supplementary Q3 NAB Business Surveys including for Agribusiness (Tuesday), Commercial Property (Wednesday), and the SME and ASX 300 Surveys (Thursday).

Speaking this evening will be Luci Ellis, the RBA’s Head of Financial Stability, on a panel discussing Australian housing and urbanisation. Wouldn’t expect too much new here. RBA firmly on hold and we are mostly waiting for detail on
mooted macroprudential tools.

Offshore, the Fed meeting – Thursday morning 5.00 AEST – will be the centrepiece this week. As noted earlier, the Fed will end QE3 but they will want to emphasise to markets and businesses that interest rate increases are not imminent. They have done this recently by saying in their Statement that they expect to maintain the fed funds rate near zero “for a considerable time after the asset purchase program ends” We expect that phraseology will remain, particularly given inflation readings remain benign. NAB expects the first Fed rate to come in the middle of 2015.

The RBNZ has a rate decision on Thursday morning (no change expected) while Thursday night’s Euro-zone CPI will draw a lot of interest given deflation is the region’s predominant threat.

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