March 10, 2015

Australian Markets Weekly: Onshoring and US rate rise proximate

Covers the implications of Friday’s stronger-than-expected US non-farm payrolls, previews important Australian Labour Market data and reports on increasing anecdotes that the lower $A is beginning to boost the domestic economy through onshoring.

This week’s Australian Markets Weekly:

  • Covers the implications of Friday’s stronger-than-expected US non-farm payrolls:
  • Previews important Australian Labour Market data this week;
  • Reports on increasing anecdotes that the lower $A is beginning to boost the domestic economy through onshoring; and
  • Summarises a recent marketing trip to Tasmania, which revealed interesting trends being experienced by businesses in that state (and presumably in the rest of the country too). NAB’s February Business Survey (out Tuesday) will provide an economy-wide update on business trends.

US interest rate rise growing more proximate

Australian and global markets are likely to continue to be influenced in the early part of this week and the months ahead by the implications of the stronger than expected US labour market data for February released on Friday night. Increasingly, the US labour market data suggests the US economy has moved into a self-sustaining growth phase. This increases the likelihood that the Fed will commence raising rates in June and drop “patient” from its guidance at the March 17/18 FOMC meeting. Required repricing of the path of US short rates is likely to continue to place further upward pressure on the US$, downward pressure on the $A and upward pressure on US (and likely) Australian longer-dated borrowing costs. The extent of the upward pressure on term borrowing costs will depend on the extent to which currencies adjust – a much stronger US$ could moderate the rise in US term yields, while the influence of European and Japanese quantitative easing could also moderate the rise in US and Australian term yields.

What to watch in Australia

In Australian data this week, the key focus will be on the NAB Business Survey on Tuesday and a suite of labour market indicators. ANZ and SEEK each release their job ads figures ahead of Thursday’s official data for February on unemployment and employment growth (ANZ +0.9% m/m in February, the ninth consecutive monthly increase). In particular in the NAB survey it will be interesting to see if the reported weakness in January’s survey in capacity utilisation and business conditions in South Australia and manufacturing is sustained or largely reversed. After a big rise in job advertising in January for the SEEK data and the 1.3% rise in ANZ job ads in January, it will be interesting to see the extent to which advertising in the Australian labour market continues to recover, predominantly driven by the NSW and Victorian economies, in spite of weak advertising trends in WA and QLD. The SEEK data and NAB survey will also provide one of the first reads on the impact of the February rate cut on the economy and business confidence and also the potential impact of the unexpected QLD election result on the QLD economy.

The February labour market release is the Australian data point with the greatest ability to affect market pricing for future RBA moves. With the market currently pricing two further 25bps interest rate cuts by the end of 2015, the market interpreted January’s labour data quite negatively, focusing on the reported rise in the unemployment rate from 6.1% to 6.4%, rather than the fact that:

  • Trend employment growth rose to 15,000 per month; and
  • The trend rise in the number unemployed slowed to 3,600 per month, the slowest rate of increase for quite some time.

RBA, NAB and market expectations for a 6.5% – 6.7% peak for the unemployment rate could be challenged by any further signs of a tentative levelling off in the unemployment rate at around 6.3% (particularly the second rate cut that is currently priced). It’s also likely that the data will show considerably stronger full-time employment growth following the very strange 30,000 fall in full-time employment recorded in January in NSW.

While a further rate cut in the next few months looks likely, pricing for a second cut is vulnerable to stronger than expected labour market data. It is also getting more noticeable, the number of anecdotes suggesting the lower $A is now boosting the economy with anecdotes of onshoring now occurring in a number of sectors. It is likely the RBA will pick up these anecdotes in its business liaison programme which should give it cause for caution. It’s possible the RBA is repeating (in the opposite way) the policy mistake it made in 2008, when it arguably overtightened on the back of strength in the mining sector (as the non-mining sector began to slow). Now, there seems a risk the Bank may be over-easing, as weakness in mining investment and the terms of trade mask an emerging recovery in the non-mining sectors.

Tasmanian marketing trip – feedback from businesses

I held enjoyable lunches with NAB’s business banking clients in Hobart and Launceston late last week. Encouragingly (as a Tasmanian) it is pleasing to report that business confidence in general is very positive about the outlook for the Tasmanian economy. This sentiment accords with various macro indicators which suggest Tasmania is enjoying perhaps the strongest business conditions of any state. A few anecdotes were of interest as potentially relevant for Australia as a whole:

  • The lower $A is boosting tourism, with US$ destinations seen as considerably more expensive now;
  • Chinese investment and Chinese tourism remain strong positives for the Tasmanian economy;
  • Housing construction is recovering – in fact, with a number of major commercial projects also occurring, there are concerns of insufficient builders and tradesfolk to undertake the work;
  • Importers are reporting that prices are going to rise sharply in the second half of this year as they adjust prices for the sharply lower $A;
  • Confidence among primary producers, especially dairy, is very high; andant
  • The main negative issue was strong criticism of a number of local councils: a number of projects had been cancelled or risked being so, due to what was seen as excessive planning processes.

Overall, the business community was very confident in the Tasmanian economy (a very different picture to 18 months ago) and was generally positive about the (new) Hodgman government. There was general agreement that it would be good if the government could serve for a number of terms.

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