March 30, 2015

Australian Markets Weekly – Building boom continues plus Revised forecast path of US Fed Funds rate

NAB’s Australian economy forecast of 2.9% GDP growth over the course of 2015, picking up to 3.3% growth through 2016 encompasses 11.2% growth in dwelling investment through this year, and 6.9% forecast through 2016.

Building boom continues 

  • Continued foreign interest in the local real estate market: still lofty prices and more development planned
  • Dwelling investment still on track to contribute ½% point to growth through this year and next
  • Busy week for housing data: solid house prices in March (mainly Sydney and Melbourne); will Feb building approvals beat expectations again? RBA credit also due with focus on housing. International trade data for February also due
  • Treasurer launches Tax Reform Discussion Paper
  • NAB revises down Fed funds rate forecasts (see other attachment)
  • Offshore this week: China’s official PMIs; US non-farm payrolls report

Sport and real estate are usually two of the first topics for discussion on Monday mornings. Australia’s resounding defeat of NZ in yesterday’s Cricket World Cup is all over the press as you’d expect and top of mind this morning. Commiserations this morning to the Black Caps and their supporters. The Kiwi cricket team had their best World Cup, only stumbling in the final match in the face of a stellar bowling attack. A big congrats to the Australian cricket team that played superlative cricket just at the right time, bringing Australia’s World Cup win to five.

But it’s the stories of continued foreign interest in the local real estate market that has this writer’s professional attention this morning in a week populated with key data on Australia’s housing market. The press has examples of ever-lofty prices being still paid for particular properties together with new apartment developments that is getting more press coverage at the start of this week.

What caught this writer’s eye in the local press this morning was a story of a new apartment/ hotel development in suburban Box Hill. (Box Hill is 20km from the CBD for those interstate readers not that familiar with Melbourne’s suburban geography). Development approval has been given for Melbourne’s tallest suburban high-rise comprising a 36- and 26-story dual tower development, the press reporting that the local Council is expected to soon approve this 115m twin towers development. If approved, there’s another sizeable addition to Victorian apartment building approvals in April a trend that’s already apparent through the ABS data to January.

Such new developments are adding to an already enlarged pipeline of residential dwelling approvals with another monthly update coming in the ABS’s release of February Building Approvals this Wednesday. National approvals rose very strongly in January and while some monthly payback is tipped, stories such as the above can only add support to the view that dwelling investment will be playing its part to support the economy and employment growth in 2015 and 2016. Be mindful too that for the past four months, building approvals have been consistently stronger than expected, the consensus of economists’ expectations underestimating the further rise in approvals.

NAB’s Australian economy forecast of 2.9% GDP growth over the course of 2015, picking up to 3.3% growth through 2016 encompasses 11.2% growth in dwelling investment through this year, and 6.9% forecast through 2016. Such growth contributes 0.5% points to growth through this year and 0.4% through 2016.

Allied to the building approvals data for February, this week also sees release of the March month house price report from CoreLogic RP Data.

This past weekend’s report revealed a further 0.2% rise for the five capitals (the monthly report also includes the remaining three state/territory capitals), bringing the movement over the past month to a still hefty 1.2%, a similar figure likely in Wednesday’s monthly report.

Sydney is still leading out front with prices up an estimated 2.7% for March, bringing the year to date rise for Sydney to 5.7%. Melbourne prices, while down 0.2% in the latest week have risen 0.6% in net terms through the past month and a cumulative 3.5% so far this year. Other capital city prices have been mixed-to-lower this year, testimony to the disjointed nature of capital city dwelling price developments.

Ahead of the house prices and building approvals data on Wednesday comes HIA new home sales are released tomorrow as well as the RBA credit data, both for February.

Tax Reform Paper

Tax reform is also getting plenty of airplay today, Federal Treasurer Hockey this morning releasing a Tax Discussion Paper (you can see it here) that forms the basis for another review and reform of Australia’s tax system, with a Government’s stated goal to deliver “lower, simpler and fairer taxes” through a “comprehensive and transparent national conversation between the community and the Government”.

The process now is that this discussion paper opens the door for submissions from any interested parties with views outlined in an options (green) paper due in the second half of 2015, before “Government then sets out its reform proposals in a white paper, and takes them to the next election in 2016”. Submissions are due by Monday 1 June 2015.

Revised US rate views

Also enclosed with the Weekly is a paper from our US economy specialist Tony Kelly outlining a revised Federal Reserve rate forecast track. NAB expects that while the first increase in the fed funds rate is still expected in June, the risk of it being later has risen.

More importantly than the start date NAB has revised its fed funds rate projections to have a slower rate of increase in 2015 and 2016, and we expect the tightening cycle to end lower at 3.50% (3.75% previously).

More on this week key releases

It’s been a quiet couple of weeks, but now the local data flow heats up ahead of the RBA Meeting on 7 April. Private credit growth is being released tomorrow and we look for a 0.5% increase in February, after the solid 0.6% growth in January.

January growth had been driven by slightly stronger business credit growth (+0.8% m/m and 5.5% y/y), but in February the focus will remain on the housing story. Overall housing credit increased 0.6% in January and 7.1%yoy, with owner-occupied housing credit up 0.5% (5.7%yoy) and investor lending up 0.8% (for annual growth of 10.1% which APRA has guided should not be exceeded).

Meanwhile, as for the detail of building approvals data on Wednesday are forecast to ease 3% in February after the 7.9% rise in January, which had been boosted by a 19.6% surge in approvals to build apartments (mainly in QLD and SA). Approvals for houses also recorded a second consecutive slight uptick in January (+0.4% m/m). As we outlined above, don’t be surprised if this release again surprises on the strong side.

Along with the CoreLogic RP Data house price report for March comes NAB’s Consumer Anxiety Report on Wednesday, while on Thursday the NAB’s Online Retail Index for February is due, ahead of the retail sales data on 7 April.

February international trade is released on Thursday, where we expect to see a large increase in the deficit. From -$980m in January, we expect to see a 2% rise in imports, and a 1% fall in exports, leading to a bigger deficit of -$1800m.

China PMI and US payrolls due

For China, after the downside surprise on the flash HSBC manufacturing PMI this week, the official manufacturing and non-manufacturing PMIs on Wednesday will be noteworthy. The official manufacturing index is seen slipping to 49.7 from 49.9 in February (the HSBC version, recall, fell to 49.2 from 50.7). The final HSBC manufacturing PMI will be out Wednesday and their Services reading on Friday.

For the US, it’s the usual ultra-keen market interest in the monthly US employment data, out on Good Friday, and complicated by the fact that a number of markets will be closed, potentially adding to market volatility in those markets that are open. As well as headline non-farm payroll employment (expected at +250K) and the unemployment rate (expected to be unchanged at 5.5%), there will also be keen interest in the average hourly earnings component, seen rising by 0.2% (and consistent with annual growth being steady at 2.0%).

After what seems like an endless stream of FOMC speakers, we are due to hear from a few more in the coming week, the most interesting will be those we haven’t heard from since the FOMC such as George (non-voter, hawk) and of course Janet Yellen speaking early this Saturday morning local time (06:45 AEDT), though the clear message on the rates outlook from here speech on Friday is, as my colleague Ray Attrill has noted is S-L-O-W. Her speech comes after the release of the March payrolls report.

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