Flood Update

New estimates on the Queensland floods disaster have indicated that the economic damage may not be as bad as first predicted. Initial estimates had predicted that inflation would be around 0.75% higher for the first quarter of 2011, bringing total inflation to 1.6%. However, the Treasurer’s speech last Friday predicted that only a 0.25% increase in inflation is likely for the first quarter, bringing total inflation to 1.1%. Rises in fresh fruit and food prices also appear to be not as bad as initially thought.

GDP estimates from the Treasures speech last Friday have also revealed that the total affect on GDP has been revised down to 0.5%, from 0.75%. The Queensland Coal production industry still appears to be the area hardest hit, with the sector affected not likely to move into full production until after March.

U.S GDP numbers released on Friday came in below expectations, with GDP printing 3.2%yoy for Q4 2010. Although it was below the estimated 3.5%, it was higher than the 2.4% in Q3, with consumption and investment also rising.

The focus today in Australia will be the January TD-MI CPI Gauge, to be released at 10.30 this morning. This will be the first true indicator of how the flooding has affected food prices in the first part of January.

Soft CPI

The CPI figure (Q4) released on Tuesday came in lower than expected, falling to just 0.4% for the quarter. Significantly below the expected 0.7%, the drop means that inflation has fallen comfortably into the RBA’s inflation bracket, back to 2.7%.

Following the recent floods, the soft CPI report will buy the RBA same time to assess the economy over the coming period. As the flood rebuilding efforts begin to take place, we will be able to get a better indication of the true wage and price pressures in the economy. We still maintain the view the RBA’s next move will be a tightening, however it is very hard to ascertain when that move will be.

There is no news for Australia today.

Producer Price Index

Produce Price index numbers for Q4 2010 were released yesterday, and came in softer than expected. Prices rose by 0.1% for the quarter, significantly below the 0.5% forecast. Although domestically generated prices continue to rise, the high Australian dollar continues to keep import prices down.

Today in Australia, the December quarter CPI is due to be released. NAB is expecting 0.8% rise for the quarter, which will account for a 3.1% annual headline inflation rate. Despite this forecast, there have been some downsides risks to this prediction materialise, including yesterday’s weak PPI numbers.

The IMF will release their World Growth forecasts for 2011 tonight. The 2011 estimate from the IMF last October was 4.2%, however we are expecting tonight’s prediction to rise to around 4.75%.

Terms of Trade Released

Data released last Friday saw import prices fall for the final quarter of 2010 by 3.8%. This may give some relief to consumers, as prices in other areas are likely to rise as a result of the Queensland floods. Export prices were also lower, down by 8.1% for the quarter.

A big week in the markets ahead, with the Q4 Consumer Price Index to be released on Tuesday. NAB is predicting a 0.8% rise in headline CPI, which will account for 3.1%yoy. Although it is unlikely we will see a rate rise next week, the CPI figure may give some direction as to when we may see the RBA raise the cash rate.

The Q4 Producer Price Index is released today, and the general consensus is for a 0.3% rise.

China Data

Figures released yesterday for China came in stronger than expected, highlighted by Q4 GDP growth, which rose 9.8% (year on year). This was significantly above Q3 ‘s 9.6% (year on year), and continues to demonstrate China’s relentless growth. In other positive news, China’s Q4 inflation number came in lower than expected, at 4.6% (year on year), significantly lower than the 5.1% seen in Q3. It seems to be that the more fearful concerns that China would have to adopt much tighter monetary policy setting in order to continue their growth may be a little overdone. At this stage, we believe there is a good chance China is still on a sustainable growth path.

The Westpac Melbourne Institute consumer inflationary expectations came in higher yesterday, with the median expected inflation rate jumping from 2.8% to 4.4%. This is an obvious reaction to the Queensland flood prices, as it has been well published that food prices are going to rise in the short to medium term.

Today in Australia, import and export data is due for Q4, ahead of producer prices on Monday and CPI on Tuesday.

Consumer Confidence

Consumer confidence numbers from the Westpac Melbourne Institute fell by 5.7% in early January, on the back of the Queensland floods disaster. The largest fall in the survey was the outlook for the economy in the year ahead, which fell by 15.7%. Despite the most recent figure falling significantly, overall sentiment still remains above average.

Skilled vacancies continued their decline, falling by 4.6% for the month of January. With all of the negativity surrounding Australia at the moment, it is hard to read the true value of this number. Look for the ANZ Job Ads release out next month to gain a more accurate reflection of current job creation.

Today is Australia will see the Westpac Melbourne Institute consumer inflation expectations released, however all of the attention today will be placed on China. Our biggest trading partner is releasing a plethora of data for Q4, including GDP, CPI, PPI, Retail Sales, Industrial production and Fixed Asset Investment.

TD-MI Inflation Gauge

The TD-MI Inflation Gauge (Dec) released yesterday rose by 2%, after a 4% increase the previous month. The biggest contributors to inflation were the rises in automotive fuel, fruit and vegetables, and holiday travel and accommodation. The fruit and vegetable prices will be closely watched in the months ahead as the impact of the Queensland floods will materialise, and we would expect a sharp jump in prices for January.

In terms of overall inflation, the surveys trimmed mean measure (a proxy for the RBA’s underlying rate) rose 0.3% in December, the same as November. Momentum in this area has slightly increased in recent months, after either a no change or 0.1% monthly rises between June and September last year. Enlighten of this, these numbers still don’t suggest the RBA will be in anymore of a hurry to increase rates.

Motor vehicle sales came in relatively flat yesterday, with just a 0.8% rise for the month of December. Car sales have essentially remained flat over the past six months as business and consumer confidence has been subdued.

There are no scheduled events for Australia today.

Economic Update of the Queensland Floods

With Queensland’s floods spreading to Brisbane’s CBD, estimates of the economic affects of the damage have significantly increased. Many businesses have been forced to close and many people have been unable to get to work (or have had more important priorities to deal with, including keeping their families
safe and securing their property).

It now appears that the negative affects of the floods will be larger than first expected, with estimates now predicting a 1% loss of GDP output. The major contributors to this downgrade appear to be the disruption to the coal industry, and the loss of production in South East Queensland (Brisbane).

News from last Friday saw China further tighten their monetary policy setting, as the central bank raised the required deposit reserve ratio by 0.5%. This brings the overall ratio to 19%, and continues the trend of China’s attempts on several fronts to contain inflation.

It will be a quite week ahead in the markets with only second tier data due in Australia.

December Employment Data

Employment numbers released yesterday came in lower than expected, despite the fact that unemployment dropped to 5%. There were only 2,300 (1700 full time, 600 part time) jobs created in December, which was well below the market forecast of 25,000. As mentioned, the unemployment rate fell from 5.2% to 5%, however the participation rate also dropped to 65.8%, from 66% in November.

There were 364,000 jobs created in 2010, and at the current level of employment we would generally see calls for the RBA to hike, sooner rather than later. However the current circumstances still dictate that the RBA is likely to remain on hold for some time yet.

Today in Australia there are no scheduled events to take note of.

Housing Finance Approvals

Housing finance approvals for the month of November came in higher yesterday, rising by 1.2%. This continues the trend that started in the second half of 2010, after a period of steady interest rates. The rate rise in November will likely see the trend slow in 2011, with other indicators including new home sales and house prices coming in soft after the hike.

Today in Australia will see the December labour market figures released.

ANZ Job Ads

ANZ Job ads released yesterday were up 2% for the month of December, accounting for a rise of 27% for the year 2010. Newspaper ads in 2010 were down 13%, however Internet ads were 31% higher. We have seen over the last few months that there may be some signs of moderation of labour demand ahead, which will point to slower employment growth. This may be good news for the RBA, as a plunge in unemployment may lead to inflationary wage pressures.

Australia’s Trade Balance narrowed to $1.925bn (surplus) for the month of November, below the forecast of $2.05bn. Exports remained flat, however imports rose by 3% as the high AUD is making overseas purchases more attractive.

Today in Australia will see housing finance approvals released.

Retail Trade Numbers

Retail Trade figures released yesterday rose a modest 0.3% in November, after a 0.8% fall in October. This amounts to a total of just 1.3% over the past four quarters. The pace of sales growth has slowed on the back of the Government pulling back on fiscal stimulus, which boosted Retail Sales in 2009. The strong labour market has still not translated into stronger spending habits, however we would look for it to do so in 2011.

In Australia today, ANZ Job Ads for December will be released.

US Non-farm Payrolls

No news locally from last Friday, however there was some important data from the United States. US Non-farm payrolls for the month of December rose 113k, and although it was positive, it was well below market expectations. Unemployment fell to 9.4% from 9.8%, however the participation rate fell 0.2%. These soft numbers further outline the problems the US labour market is experiencing, and it may take 5 years for these conditions to normalise.

There will be some important numbers released this week in Australia, with Labour Force data released on Thursday being the most significant. Retail Sales are to be released tomorrow and ANZ Job Ads (Today) may provide an update on current labour conditions.

FOMC Minutes

There was no news locally yesterday, however last night saw the release of the US FOMC Minutes from the December 14 meeting. The meeting saw no change to monetary policy, with the current program of asset repurchasing (Quantitative Easing) remaining unchanged. The FOMC is still expecting slow growth moving into the new year with unemployment still hovering around 10%, along with the US fiscal position and European debt issues.

HIA new home sales are released in Australia today.

Floods

The most recent floods in Queensland are set to have a significant economic impact. GDP will most likely be lower in the near term to an estimated 0.1%, as a loss of output, particularly in the Queensland coalfields will take place. Inflation is also likely to be higher; with prices on fresh food and vegetables rising, possibly pushing headline CPI 0.75pps higher.

It is not likely that we will see higher interest rates as a result of higher prices. Several commentators are still predicting two further rises before the year-end, pushing the cash rate to 5.25%.

China Raises Cash Rate

China announced on Christmas day that they would raise interest rates by 25bps, after also tightening the same amount last October. Rising inflationary pressure and concern the Chinese economy is overheating appear to be the issues the Peoples Bank of China are concerned about. It must be noted that it is important for Australia that China continues to expand at a steady rate and continue driving the commodities boom.

The AUD has traded well above parity over the past several weeks, and it has been consistently steady above the 1.01 mark. As we move closer to the February rates decision, the high dollar appears to be one factor keeping inflation in check, decreasing a chance of a tightening.

A quite week in the markets ahead with no releases that should cause to many sleepless nights.