Company Profits

Company Profits dropped 2% in Q1 figures released yesterday show. This was less than the market expected (although NAB had it spot on) and is leading to a forecast for Q1 GDP of -0.3%. This ads to other soft data giving the RBA extra pause room and reducing the likelihood of a tightening next month.

The Current Account for the March Qtr is due today with a forecast of -0.2 from NAB .A negative outcome would confirm a negative result in tomorrow’s National Accounts. Other figures today include Govt spending, RP Data House Price series and Building approvals. These numbers will be given close scrutiny to see if recent flat results are forming a trend.

In Europe overnight nervousness continued in relation to what Greece’s next move is. Bond margins continued to move higher against the German Bond and the IMF is due to report later this week on Greece’s bailout.

Financial Claims Scheme Recommendations

On Friday, Treasury released recommendations by the Council of Financial Regulators (APRA, ASIC, RBA and Treasury) in regards to the $1m cap on deposits. The Council has recommended that they eventually reduce the cap to between $100k - $250k, however the short-term notice has meant that a transitional period will be needed. It has been suggested that deposits should be covered if they have started before the cut-off
date, and will be covered to a maximum period of 12 months thereafter.

The highlight this week will be GDP for Q1, where we are expecting a slight fall due to the floods and cyclone earlier in the year.

Private Capital Expenditure for Q1

New private capital expenditure (CAPEX) was stronger than expected in Q1, rising by 3.4% (2.5% consensus). As expected, growth within the resource sector is the driving force behind the expenditure, which is set to grow around $51b this year, depending on how quickly projects can be developed.

No Local data today.

RBA Speech

Ric battellino – Deputy Governor RBA – spoke this morning and highlighted the subdued credit grow the system is currently experiencing as well as the hesitancy of households to increase their indebtedness. The implication here is that while the housing sector has been far more resilient than other parts of the world it is unlikely to put upward pressure on economic growth. The RBA welcomes the fact that the household sector will have a period to consolidate their balance sheets. They expect credit growth to be in the single digits over the next few years. This growth will be matched by domestic deposit growth, reducing the reliance on international wholesale markets.

OECD
Overnight the OECD didn’t change growth forecasts but highlighted a number of downside risks in world growth coming from areas such as China and debt worries.

Overnight Data

No local data yesterday, however the overnight session got off to a solid start with German GDP coming in at 1.5% in Q1, as expected. The German IFO, an index of business confidence, was stronger than expected in May at 114.2, above the 113.7 median.

There was mixed data out of the US. New home sales rose 7.3% in April, in line with the median, however the Richmond Fed manufacturing index fell to -6 in May (median +9). There were also some dovish comments from Fed speakers during the session, as high oil prices and prolonged financial market turmoil were cited as negative impacts on the US economy.

The countdown begins to next Wednesday’s GDP figure today, as Construction Work Done for Q1 will be released.

Debt Fears Resurfacing

Debt fears in Europe have surfaced again on the back of Fitch downgrading Greece by three notches. Greece’s Finance Minister reaffirmed planes to sell part holdings in several Government assets in order to repay some of the outstanding debt. Fitch has also revised Belgium’s outlook to negative, from stable, which continued to widen credit spreads as risk appetite diminished.

There will be no key data in Australia today.

Further European Downgrades

It was a negative session for global markets on Friday night, as debt concerns in Europe continue to arise. Fitch downgraded Greece by three notches, while S&P placed a negative outlook on Italy’s sovereign debt.

It will be a quite week locally on the data front, with Construction Work Done, New Private Capital and CapEx to be released.

Average Weekly Earnings

Average weekly earnings for Australia were released yesterday, showing that earnings had risen by 1% in Q1. The result was widely expected, as there had already been a plethora of data in this area that had been released recently. The RBA will take little notice of this statistic.

Japan recorded a much weaker than expected Q1 GDP yesterday, with output reducing by 0.9%. Business was evidently hit by the quake/tsunami disaster, which saw industrial production fall by 15.5% in March alone.

No Local data to be released today.

Wage Price, Consumer Sentiment, Skilled Vacancies and Downgrade.

The Wage price index for the first quarter of 2011 grew by a lower than consensus 0.8% (3.8%yoy), below the market forecast of 1.1% (3.9%yoy). Wages by State were consistent with a two-speed economy, with WA recording the highest growth at 4.1%yoy, while NSW, Victoria and Queensland only grew at 3.9%yoy.

The Westpac-Melbourne Institute consumer sentiment, also released yesterday, showed an easing of 1.3% for May. Despite the fact the figure still remains higher than the long run average, the expectation of higher rates appears to be hampering consumers.

The Federal Government DEWR Skilled vacancies, which measures newspaper ads, declined by 12.4% (seasonally adjusted) in May. This is the largest decline since January and points to a flatter employment outlook after last years upsurge.

Moody’s downgraded the Big 4 Banks yesterday, with long term debt lowered from Aa1 to Aa2. Although the move was widely expected, it does highlight that the Banks need to focus more on domestic funding rather than wholesale markets. The move brings Moody’s in line with S&P.

Second tier data to be released today, with Average Weekly Earnings for Q1 to be released.

RBA Board Minutes

Released yesterday, the RBA Board minutes revealed no increased anxiety to lift rates at the June meting. They did refer to the fact that rates would have to lift ‘at some point’, however these were the same words used in the April minutes. Considering that the RBA has not changed their ‘at some point’ stance, they may require a little more convincing before pulling the trigger. Given the fact that the market still hasn’t fully
priced in the medium term hikes (in our view), every meeting moving forward will be ‘live’, however to assume that a June rise is a done deal would be preemptive.

The data watchers will be kept busy today, as the W-MI Consumer sentiment for May will be released, along with DEWR Skilled Vacancies (May) and the Wage Price Index for Q1. Wages will be the one to watch, as the index has the greatest potential to shift RBA rate rise expectations.

Housing Finance

A little bit of pressure has been taken off the RBA with Housing Finance approvals dropping 1.5% in March after a 4.7% fall in February. The decline was due to a 1.8% fall in finance for established dwellings, while finance for construction fell 1.1%. Finance for new dwellings rose 2.4%, but this component is only 4% of total housing finance.
After a recovery in finance approvals in the second half of 2010, there has now been
a clear pullback after the November interest rate rise and the falls in house prices have dented confidence in the housing sector. House prices fell in Q1 while housing credit growth was up just 0.4% in March, so it’s going to be a tough period for housing as we get closer to another interest rate rise from the RBA.

In other data, motor vehicle sales also reflect a degree of household caution as they fell 3.5% in April and are down 8.4%yoy.

Employment Report for April

The Employment report for April that was released yesterday surprised on the downside, as 22,000 Jobs were lost, after a forecast of +17,000. Full time jobs were the hardest hit, falling by 49,000 while 27,000 part time jobs were created. The unemployment rate remained at 4.9% as participation eased slightly. Despite the fact that these results are seasonally adjusted, the adjustment process was complicated by the latest Easter in 43 years, in conjunction with the ANZAC holiday that coincided. Despite the fall, it is our view that this will do very little to influence the RBA’s view on when the next tightening will be. October last year saw the RBA hike despite a fall in Jobs the previous month (September) and unemployment rose from 5.8% from 5.7%. We are thinking that there is a 50% chance of a move in July, and a 50bp rise in the cash rate
before year-end.

China tightened their bank reserve requirement to 21% overnight to try and slow inflation.

US retail sales were 0.5% higher for April, slightly below the 0.6% forecast.

No scheduled events in Australia today.

Federal Budget

The Australian Federal Budget released last night would be best described as neutral, as the promised ‘tough budget’ never materialized. There will be a forecasted $22.6bn (1.5% of GDP) deficit in the year ahead, with the economy planned to go into surplus around 2013/14 on the back of increased revenue. Given that the terms of trade is at a 140 year high, the current fiscal stance would be described as expansionary, and will do little to change the RBA’s view that a rate hike is imminent. There were some positive initiatives that will help cope with the strains of the mining boom and dealing with the multi-speed economy, with programs introduced that will improve training and the availability of suitable labour. Bill Evans, Chief Economist at Westpac, is still expecting a rate rise in June. He explained that when the current QE program in the US ends (June 11), the $USD will appreciate against the $AUD, placing further pressure on inflation.

Australia’s trade balance moved back into surplus in March, to the tune of $1.7bn. This was driven by the bounce back in coal exports that were heavily affected during the Queensland floods.

Today will see the focus shift to China, where there will be a plethora of data released.

NAB Business Survey

The NAB Business Survey for April was released yesterday, and it showed that Business Conditions have slightly eased. Despite this, conditions still remain above average and are consistent with acceleration and growth within the economy. The survey also pointed out that the multi-speed economy is still prevalent, with the mining sector in a boom phase, while other sectors, such as manufacturing, are still trying to recover.
ANZ Job Ads for April rose by 1%, continuing the solid and on-going labour demand.
There is currently plenty of talk around the markets that there is a high probability of a hike at the June RBA meeting. Some economists are now expecting two rises before year-end, which would move the cash rate to 5.25%.

Today will see Wayne Swan deliver the Budget before the parliament for the financial year ahead.

RBA’s Quarterly Statement on Monetary Policy

The RBA’s Quarterly Statement on Monetary Policy, released last Friday, showed that the board has raised their underlying inflation forecasts. The statement noted that further tightening in monetary policy would be needed in order to keep price rises within the 2-3% target band for the medium term. It appears that strong mining activity and the corresponding boost in incomes from the high terms of trade will increase growth to above trend levels. As a result, the labour market will remain tight, with the unemployment rate expected to fall to around 4.25%, placing pressure on wages. In summary, it is clear that the RBA are concerned about inflation, even with two rate rises forecasted before 2013. Look for a rise in the cash rate within the next three months.

The Senate released its report on Friday into "Competition Within The Banking Sector". One of the areas it was looking into was the $1 million cap for the so called 'deposit guarantee' or Financial Claims Scheme. The conclusion of the inquiry, in true politician form, was to have another inquiry. US Non-farm payrolls for April rose higher than expected on Friday, with 244k new jobs created (185k expected).

It will be a busy week ahead with the Federal Budget to be released on Tuesday night, followed by April’s labour force report on Thursday. The week will be kicked off with NAB’s Business Survey today.

Retail Trade Numbers

Retail trade fell by 0.5% in March, considerably below the expected +0.5%. The high savings rate appears to be hitting the retail sector hard as households are still spending conservatively. Retail volumes for the March Quarter were flat, which was also a disappointing result. The soft result may provide the RBA with some breathing room, as commentators were starting to look at August for the next rise in the cash rate.

Total building approvals rose 9.1% in March, after a 5% decline in February. Private apartment approvals rose 26% (mainly in Vic), however private housing fell 0.8%, the fourth fall in the last 5 months. Higher interest rates and a lack of investor demand continue to impact the industry.

Today in Australia, the RBA will release their Quarterly Statement on Monetary Policy, with the focus to be on the new forecasts for inflation. The Senate Economics Committee will be releasing their report on Competition Within the Banking Sector this afternoon, where we are expecting an announcement in regards to the government guarantee on $1m deposits.

Portugal Bailout Package

Portugal has agreed to a $US116B financial bailout package with the European Union and International Monetary Fund. The caretaker prime minister has agreed to slash the countries budget deficit to 5.9% of GDP in 2011, with the aim of lowering it to 3% in 2013.

Retail sales for March will be released today, and we are expecting a modest increase of 0.5%. The RBA will keep a close eye on the figure, as the high savings rate, along with the AUD, is the only thing keeping the cash rate on hold.

Chinese Data

It was a quite day locally yesterday, however China released their inflation report for April, which was again higher than expected. Inflation rose by 5.3%yoy, above the forecasted 5.2% and despite the fact that industrial production was lower than anticipated. Retail sales were also lower, slowing to 17.1%yoy from 17.4% the previous month. Overall, it is still troubling to see inflation so high, albeit slowing, as demand and production slow. As a result, we are expecting further tightening from China to come.

Inflation was also the talk in Europe overnight. German inflation came in higher than expected, and the Bank of England gave an inflation warning on the back of their quantitative easing program.

Employment is due in Australia today, where the market will be expecting a median gain of 17k new jobs. If the figure comes in higher than expected, the markets will most likely price in a rate hike for June.

Cash Remains at 4.75%

The RBA left the cash rate unchanged yesterday at 4.75%, as expected, however the accompanying statement appeared to have a slightly more hawkish sentiment. The RBA has acknowledged that there is an upside risk to inflation, as the statement mentioned that CPI would be close to target over the year ahead. The Board also conceded that the downtrend in underlying inflation had ceased, and that longer-term inflation would increase if economic conditions evolved as expected. The caution that consumers and
households are showing is allowing the RBA to remain on hold for the time being, however every meeting moving forward will be deemed as ‘live’.

India increased their cash rate by 50bp to 7.25%.

Today in Australia will see April services PMI and March HIA new home sales.

House Prices Fall

Australian house prices fell 1.7% for the first quarter of 2011, accounting for a 0.2%yoy decline. The TD Securities – Melbourne Institute CPI gauge rose 0.3%/3.6% in April, which was slower than the rise we saw in March. It appears that food prices have retreated after the increase we saw in the aftermath of the floods, however health services, overseas travel, rents and fuel were all higher.

NAB’s Quarterly SME (Small to Medium Enterprises) Business Survey for the March Quarter showed that business confidence rose as the worst of the flood impacts receded. It was promising to see that confidence more than offset the decline seen in the previous quarter, as SME confidence is now moving closer to the confidence seen in larger businesses. Despite the level of confidence, it still appears that business conditions are wavering, as soft cash flows were widely reported.

The RBA Board meets today, with the most likely result being a no change in the monetary policy setting. There will be plenty of interest surrounding the accompanying statement, as the market will be looking for any indications of a rise at coming meetings.

RBA Credit

RBA Credit in March gained some momentum, rising by 0.6% for the month, however it is still well below the high levels of credit seen before the GFC. Personal and business credit saw the gains attributing to the overall increase in the figure, as housing finance still remains subdued.

House prices remained flat in March, according to the RP Data-Rismark Home price release on Friday.

Eurozone CPI rose to 2.8%yoy in April, slightly higher than the 2.6%yoy seen in March.
The RBA will meet tomorrow, and are expected to remain on hold. Today will see TD Securities inflation for April and the Australian Bureau of Statistics will release House Prices for Q1.