Australian Economy Continues to "Moderate"

From the latest central bank minutes:

Members noted that the news received on domestic activity over the month was consistent with Australian economic growth being below trend in the June quarter. 

Indicators of household consumption had suggested continued moderate conditions overall. Motor vehicle sales grew in the June quarter, but had fallen in July. Retail sales data showed that spending was flat in real terms in the June quarter and liaison pointed to only modest growth more recently. Consumer sentiment had declined since earlier in the year to be close to average levels. Overall, the softer run of recent indicators of consumption was consistent with the somewhat subdued conditions in the labour market. The unemployment rate rose a bit further in June, to 5.7 per cent, while trend employment growth had declined a little over the past few months. 

Retail sales have been soft the last few months:

And the unemployment rate has been ticking up:

In contrast, conditions in the housing sector had continued to improve. Auction clearance rates remained high and dwelling prices had increased further in recent months. A number of indicators were pointing to a further recovery in dwelling investment, consistent with the low level of interest rates. Residential building approvals, especially for detached housing, had increased in the June quarter and loan approvals were at their highest level in over three years. 

The total number of dwelling unit commitments is increasing 

Members did, nevertheless, note that dwelling investment had thus far experienced a muted recovery relative to past cyclical upturns.
Survey measures of business conditions had remained below average and members noted an apparent reluctance on the part of businesses to take on new risks. Non-mining business investment remained subdued and a range of indicators suggested that this was likely to persist in the near term. Mining investment had been at a high level although it looked set to decline over coming years. Consistent with this, imports of capital goods had declined from the high levels in the previous year. 

Conclusion: overall, this is an economy that is clearly slowing.  There are no signs of a hard landing, but instead continued weak growth.

Let's take a look at the Australian ETF

At the beginning of March, we see a sell-off that takes prices all the way down to the 61.8% Fib level, or a loss of about 20% from peak to trough.  Since then, prices have rebounded, trading between the 61.8% and 38.2% Fib level.  Also note the upward resistance provided by the 200 day EMA, indicating we're probably in a bear market.

But the weekly chart shows the most recent sell-off has not made a significant dent in the long-term trend of the ETF, which is still up.  This tells us that traders (at least so far) see a slowdown and overall economic re-balancing rather than an outright contraction.

The Australian dollar started to drop in April as the Reserve Bank of Australia started to cut rates.  Overall, the currency has fallen about 15% from peak to trough.  Prices have fallen through two key support areas (one an ~94 and the second at ~91) and are now consolidating losses by trading between ~89 and ~93.

Market/Economic Analysis: Australia Stabilizing At Slower Growth Levels

Let's start with with this chart of overall Australian GDP:

The annual growth rate peaked at 4.3% five quarters ago and has been falling ever since.  Remember that ultimately Australia is going through a re-balancing; as China reorients its economy to one driven more by consumer demand rather than export growth, countries that sent raw materials to China's manufacturers will also see slower growth.  Australia has been a prime economic beneficiary of China's boom and is therefore having to readjust.

First note that interest rates in Australia are still quite high relative to other countries.  The RBA of Australia lowered interest rates last Spring to 2.75% in an attempt to increase growth, but they still have a great deal of room overall (they lowered rates to 2.5% which is not reflected on this chart).

From the latest central bank minutes:

The national accounts for the March quarter were released the day after the June Board meeting and confirmed the Bank's expectation that GDP had continued to grow at a pace a bit below trend in recent quarters. Members noted that consumption was weaker than had been implied by the relatively strong pick-up in retail sales in the March quarter, while business investment declined and dwelling investment was flat. Exports increased further in the quarter, particularly resources, while imports fell sharply in line with the decline in mining investment. 

This has been the case with Australia for the last year: below trend growth.  This is to be expected as the economy reorients itself.

Survey-based measures of business conditions improved in May, but were still a little below long-run average levels. Over the past few months, measures of sentiment had improved for some industries, including construction and business services, and declined slightly for other industries, most notably mining and manufacturing. While the volume of resources exports had risen further, and was expected to continue to grow with the addition of new capacity for bulk commodities, the decline in commodity prices over the past year or so had weighed on the resources sector. Members noted that while mining investment remained at a high level, planning and development work related to future projects had declined significantly since the previous year. Even so, given the considerable volume of firmly committed work, mining investment was likely to remain high for some quarters. 

Members were briefed that the Bank's liaison suggested that the near-term outlook for non-mining business investment remained modest, in line with a range of other indicators and survey measures. At the same time, however, the depreciation of the exchange rate over the past two months was expected to provide more supportive conditions for the tradable sector. 

Labour market conditions remained somewhat subdued. While changes in employment had been volatile from month to month, year-ended growth, at a little over 1 per cent, continued to be below population growth. Overall, unemployment had been on a gradual upward trend over the past year or so, even though the unemployment rate ticked down to 5.5 per cent in May. Average hours worked declined further in May and were at a two-year low. Over the past few months, employment growth had been strongest in New South Wales and South Australia. Employment had been flat to declining in Queensland and Western Australia, consistent with a decline in demand associated with mining-related activity in those states. Forward-looking indicators of labour demand implied only modest growth in employment in the months ahead.

The comments above still point to an economy that is changing its basic composition.  While investment from raw materials firms is still strong, there is a every indication that investment will drop in the near future.  This weakness is bleeding through to other parts of the economy, leading to "modest" growth overall.

The greatest concern is the rising unemployment rate, which has increased from 5.2% last June to 5.7% in the most recent report.  This has led to a moderate reading in consumer confidence, which, while positive, is just barely so.

It has also contributed to weaker retail sales over the last 12 months.  These stalled in the 2H12 and have just barely grown over the last three months.  

It is this slow pace of economic growth that led the Reserve Bank of Australia to drop interest rates 25 basis points this week:

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.5 per cent, effective 7 August 2013.  

.....

In Australia, the economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher. Recent data confirm that inflation has been consistent with the medium-term target. With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the recent depreciation of the exchange rate.

Let's turn to the Australian ETFs.

The Australian ETF strating dropping in May, eventually hitting the 38.2% Fib level (from the June-May rally) for support.  Now prices are consolidating between the 38.2% and 61.8% fib level.  The overall magnitude of the drop from peak to trough was a little over 20%.  The move also brought prices below the 200 day EMA.

The Australian dollar ETF has also fallen about 17% and is currently right below key long-term support levels.  Prices are also below the 200 week EMA with all the shorter EMAs moving lower.  The underlying technicals are also weak, with a negative MACD and CMF reading.

Going forward, there is little to suggest a pick-up in economic activity.  The real threat to the economy is from the downside as the re-balancing weighs on growth.

 

Market/Economic Analysis: Australia

While I've previously been bearish on Australia, my position is now changing to neutral.  There are two reasons for this change.  First, the ETF has already fallen 20%, which is a bug move for an economy that is still printing decent GDP growth.  Second, the LEIs have now printed a positive number for four straight months.  This is from the latest Conference Board release:

The Conference Board LEI for Australia increased in April for a fourth consecutive month, with money supply and stock prices making the largest positive contributions. Between October 2012 and April 2013, the leading economic index increased 0.7 percent (about a 1.5 percent annual rate), up from a decline of 0.4 percent (about a -0.8 percent annual rate) during the previous six months. Additionally, the strengths among the leading indicators have remained more widespread than the weaknesses in recent months.

Here is a copy of the components:

In general, we see a positive contribution from most components over the last 4-5 months with two exceptions: building approvals and the sales to inventory ratio.  All other points are doing well.  Let's now turn to the CEIs:

Like the LEIs, the CEIs are now printing mostly positive numbers.

Here's the assessment of the economy from the latest meeting minutes of the central bank:

Exports had grown further in the March quarter. Resources exports, particularly of bulk commodities, had grown strongly over the past year, while services exports had resumed growth more recently. 

Available information indicated that business investment had declined in the March quarter. According to the latest ABS capital expenditure survey, the decline had been in both the mining and non-mining sectors. The fall in capital imports since the beginning of the year was consistent with a decline in investment in the first quarter, although recent data showed that capital imports had bounced back somewhat in April.

According to the ABS survey of firms' capital expenditure plans, non-mining investment was expected to show moderate growth over the next year or so. While the survey also continued to imply further growth in mining investment, in the past actual annual capital expenditure by mining companies had often differed by a wide margin from their forecasts as reflected in the ABS survey. Based on public statements by mining companies and information from the Bank's liaison, it seemed likely that mining investment was near its peak but would probably remain at a high level for the next year or so. However, members observed that there was considerable uncertainty about mining investment beyond that period. In particular, changes in production and exports of energy commodities in other countries were making it more difficult to assess the potential for new projects in the gas sector in Australia. Overall, conditions in the business sector remained somewhat subdued, with survey measures for all industries at, or below, average levels.

Household spending appeared to have picked up early in 2013, after having slowed late in 2012 and having been supported by higher asset prices. In the March quarter, growth of retail sales volumes was strong across most categories, amid a decline in retail prices. Liaison suggested that the pace of retail spending might have eased somewhat more recently, while measures of consumer confidence fell back to around average levels in May.

Members observed that the effects of low interest rates had been evident in a range of housing market indicators. Building approvals for both higher-density and detached dwellings had increased over recent months. The Bank's liaison contacts were generally becoming more positive about the outlook for dwelling investment. Also, loan approvals had grown more strongly in recent months, including for new housing, and auction clearance rates were well above average in Sydney and had picked up to be a bit above average in Melbourne. While measures of dwelling prices had been relatively flat over recent months, they were still higher than the previous year.

Labour market conditions remained somewhat subdued. The monthly employment data continued to be volatile, with a large increase in employment in April following a sizeable decrease in March. Looking through this volatility, employment growth had not been as fast as growth of the labour force, which had led to the unemployment rate drifting higher over the past year, to 5½ per cent. Job advertisements had stabilised earlier in the year, but had edged down in recent months. Overall, leading indicators of employment pointed to continued moderate employment growth.

The wage price index had increased by 0.7 per cent in the March quarter, a little less than had been expected, and year-ended wage growth was below the average of the past decade. The easing in wage growth had been broad based across industries and states, with notable declines in areas related to the mining sector. While the decline in the pace of wage growth in recent quarters had been most pronounced in the private sector, growth in public sector wages continued to slow in the March quarter and remained relatively subdued, consistent with ongoing fiscal restraint.

What we see in general is a business sector split between natural resource and non-natural resource sectors.  The former is in flux as a result of the Chinese re-balancing, while the latter is OK.  Consumers are still spending thanks to the wealth effect of higher asset prices.  The Central Bank also has room to lower rates further if needed.

Let's turn to a few Australian ETFs, starting with the equity markets.

Prices have dropped almost 20%, from their high of 28.15 to yesterday's close of 22.60/  Prices are now below the 200 day EMA; they've brought the shorter EMAs with them.  Also note the slight increase in volume and negative MACD and CMF.  Prices are right at the 38.2% Fib reading from the June-May rally.

Like the equity markets, the Aussie dollar has also dropped sharply, falling about 12.66%.  Like the equity market, the technicals are very negative.  However, prices have made a 100% retracement from their May move last year, indicating this might be the end of the sell-off.

More Bad News for Australia

I'm bearish on Australia.  The latest auto sales news does not increase my confidence:

• Trend estimates: The May 2013 trend estimate (93 439) has decreased by 0.6% when compared with April 2013.
• Seasonally adjusted estimates: The May 2013 seasonally adjusted estimate (93 209) has increased by 27 units when compared with April 2013.

Moreover, the trend has been declining for six months.

Click the link to see the accompanying chart; it's not a pretty sight.

Australia Keeps Rates Steady

The Australian Central Bank kept rates at 2.75% in their latest policy announcement:

At its meeting today, the Board decided to leave the cash rate unchanged at 2.75 per cent. 

.....

 In Australia, growth over the past year has been a bit below trend. The outlook published by the Bank last month is for a similar performance in the near term and recent data are consistent with this. The unemployment rate has edged higher over the past year and growth in labour costs has moderated. Inflation has been consistent with the medium-term target and is expected to remain so over the next one to two years. 

The easing in monetary policy over the past 18 months has supported interest-sensitive areas of spending and has been reflected in portfolio shifts by savers and higher asset values. Further effects can be expected over time. The pace of borrowing has thus far remained relatively subdued, though recently there have been some signs of increased demand for finance by households. The exchange rate has depreciated since the previous Board meeting, although, as the Board has noted for some time, it remains high considering the decline in export prices that has taken place over the past year and a half. 

I'm bearish on Australia and the above comments don't change my mind.  Growth is slowing a bit.  My guess is the central bank is keeping their powder dry in the event they need to add further fuel to the fire.

Let's take a look at the relevant ETFs while we're here.

There are three important developments on the weekly chart.  First, prices have broken the trend of the rally started in the spring of 2012.  Since this break, prices have fallen to a Fib fan level for technical support.  Most importantly, the weekly MACD has given a sell signal. 

The daily chart shows the the exact same developments, but adds the further issue of prices now being below the 200 day EMA,

Market Analysis: Australia -- Are We At A Short-Term Peak?

Consider the following from the latest Conference Board's LEIs of Australia:

The Conference Board LEI for Australia increased slightly in January after declining in the previous two months. Stock prices and money supply made the largest positive contributions to the index this month. Despite the small gain in January, the leading economic index continued on a downward trend, falling 1.0 percent (about a -1.9 percent annual rate) between July 2012 and January 2013, slightly steeper than the decrease of 0.8 percent (about a -1.6 percent annual rate) during the previous six months. Moreover, the weaknesses among the leading indicators have remained more widespread than the strengths in recent months.

Let's look in detail at the numbers:

Looking at the trend, first notice how the LEIs have printed 5 negative months over the last 7.  And the month to month increases aren't that strong.   In addition, the 6 month percentage change numbers have all been negative for the last 7 readings.  Finally, notice that the coincident indicators are have been decreasing from 1.1 in the January to July period to 0.0% over the last two six month periods.

The above chart shows the contributions to the LEI readings over the last six months.  I've circled all the negative readings -- of which there are a large number.  In fact, only the growth in money supply and share prices have contributed positively to Australian growth over the last six month.  Most of the other indicators have subtracted from growth.

As a result:

The LEIs have been decreasing and the conincident indicators are leveling off.

In addition, let's take a look at the latest Minutes from the Central Bank of Australia's last meeting:

With the national accounts scheduled for release the day after the Board meeting, members noted that information to hand at the meeting suggested that the pace of output growth in the December quarter had been around trend. Coal and iron ore exports had grown strongly in the quarter, and most components of domestic demand were estimated to have recorded moderate growth. 

While mining investment was reported to have grown further in the December quarter, it still appeared that mining investment as a share of GDP was approaching its peak and mining firms remained focused on containing costs. The gradual shift away from investment towards production and exports in the period ahead was expected to lead to some reduction in the demand for labour in the resources sector. 

Investment outside the mining sector was estimated to have declined in the December quarter. However, there were indications that it would pick up in 2013/14, although this was expected to be modest, as business surveys of investment intentions and capacity utilisation were at below-average levels and liaison suggested that some firms were investing only to cover depreciation. Consistent with this, non-residential building approvals remained low and office vacancy rates had risen over recent quarters, reflecting softening demand for office space. Members noted that business profits had declined a little and business debt had been growing at a moderate pace of about 4 per cent per annum. 


Members observed that dwelling construction activity had picked up further in the December quarter. Forward-looking indicators such as building approvals pointed to further growth in construction in the months ahead. The increase in approvals had been geographically widespread and the Bank's liaison with builders also suggested there had been an improvement in buyer interest in some states. Overall, recent housing market developments pointed to a further moderate increase in dwelling construction in the period ahead.


Indicators of consumption had been mixed but, overall, growth appeared to have been only modest in the December quarter. The value of retail spending was unchanged over the December quarter, although figures released during the meeting indicated that spending had increased in January, which was consistent with liaison contacts reporting stronger retail spending in early 2013. Motor vehicle sales to households were flat in February but remained at a robust level, while measures of consumer sentiment had increased further over recent months, to be a bit above their long-run average levels.


Members noted that conditions in the labour market remained subdued. The unemployment rate in January was steady at 5.4 per cent, but the rate of growth of employment remained modest, the trend in total hours worked remained flat and the participation rate had declined a little further. While leading indicators of labour demand were down from earlier levels, they remained consistent with modest employment growth in the near term.


As expected, the year-ended pace of wage growth continued to slow, with the wage price index increasing by 3.4 per cent over the year to the December quarter. This slowing had been broad-based across states and industries, and was particularly pronounced in the household services and retail sectors. Information from liaison and business surveys was consistent with private sector wage growth on a quarterly basis remaining around current rates over the period ahead.

Overall, there's growth, but it's slowing.  Outside of replacing goods to cover for depreciation, business investment is down.  Non-residential investment is declining.  While retail sales are OK, they're not robust.  Most importantly, there is a potential slowing of the labor market: job growth is lackluster; total hours worked was lackluster and the participation rate had declined.

And then there is this analysis from their latest interest rate decision announcement:

In Australia, growth was close to trend over 2012, led by very large increases in capital spending in the resources sector, while some other sectors experienced weaker conditions. Looking ahead, the peak in resource investment is drawing close. There will, therefore, be more scope for some other areas of demand to strengthen. 

Recent information suggests that moderate growth in private consumption spending is occurring, though a return to the very strong growth of some years ago is unlikely. While the near-term outlook for investment outside the resources sector is relatively subdued, a modest increase is likely to begin over the next year. Dwelling investment is slowly increasing, with rising dwelling prices and high rental yields. Exports of natural resources are strengthening. Public spending, in contrast, is forecast to be constrained.

The above quick summation gives us more of the same: the investment boom in raw materials is drawing to a close.  While the bank is hopeful that something will take its place, they don't mention a specific industrial area that will take its place.  They do mention dwelling investment, but the jury is still out as to whether or not that will take the place of resource investment.

And finally, there is this article from the Financial Times regarding Australia's need to re-balance it's economy.

Let's take this data and apply it to the Australian ETF:

On the daily chart, we see two trend lines.  The one that started in mid-November has clearly been broken.   However, the one that started in last June is still good.  Prices are tangled in the 10 and 20 day EMA -- both of which are also moving sideways.  The 50 day EMA looks like it will be the next technical support level.  Additionally, momentum is dropping and prices are losing their overall strength.  However, there is still a fair amount of money moving into the market.

The weekly chart shows that prices are forming a downward triangle on decreasing momentum on declining volume.  There are two ways to read this. The bullish read is that the triangle represents a downward consolidation of the ETF.  However, consider that interpretation in light of the weakening LEI picture.  When the fundamental information is read into the data, this is looking more and more like a temporary top.