Maxim Monthly Market Insights - July 2015

  • The Australian economy has many headwinds but employment is NOT one of them. That means the economy is not as weak as many believe.

  • It’s been a volatile few weeks in markets with troubles in Greece and the Chinese stock market. Things may be settling but there are troubling implications for global markets and the Australian economy

  • But the outlook is still for positive, if below trend Australian growth.

  • Weak confidence but strong employment - Australia

july_2015_-_maxim_monthly_market_insights_2_image_1.jpgThe Hunter unemployment rate is above 8%. That poses challenges for the local economy. That’s because high unemployment undermines confidence and spending.
But across Australia the unemployment rate is just 6%. More importantly there are now more Australian’s working than ever before. Indeed 11,768,553 Australian’s were working in June. That’s up 7,300 on the month before.
That’s important in terms of economic activity because more people are in work than ever before. Leaving aside the ABS statistical quirks, the trend is clear and enduring. More people working means more people spending and that equals more money circulating throughout the economy.

 

july_2015_-_maxim_monthly_market_insights_2_image_2.jpgSo why is consumer confidence so weak.

After reaching an 8 month high in late June consumer confidence hit a 12 month low in July in the middle of the Shanghai stock collapse and Greek bailout talks, referendum, no deal then agreement. You can see the moves in the chart beside.
ANZ chief economist Warren Hogan wrote when confidence collapsed that, “while most of the decline in confidence in the past week is likely the result of international factors, it nevertheless reveals the underlying fragility in Australian household perceptions of the economic environment. Ongoing weakness in wage growth and recent soft retail sales data highlight the cautious approach to financial matters on the part of most Australians at present.”
That is certainly true. Australian consumers are fragile. Who wouldn’t be given the debt burden so many have taken on to get their foot on the property ladder. But, the antidote to negative sentiment, through time, is incomes and a feeling of job security. At the moment with the unemployment rate still relatively elevated at 6% Australians are not feeling as confident in their employment as they could. Equally as Hogan points out the lack of wage growth is a shock to most Australian workers. But as the total employment picture improves and more Australians are working the outlook should brighten.

 

It’s the Chinese economy not the stock market crash that hurts Australia

july_2015_-_maxim_monthly_market_insights_2_image_4.jpgUS rates to rise this year => Aussie dollar fall
US Fed Chair Janet Yellen, her deputy Stanley Fischer, her protégé San Francisco Fed President John Williams and many other Fed officials continue to warn that the FOMC will begin raising rates this year.
With the Greek issue almost settled and with the Chinese stock market rout so far contained the impediments to rate hikes are gone and Yellen’s warning that:
"I expect it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.”
Current expectations are that the first hike in rates is just 2 months away with September 17 the most likely date. That will help the UADUSD fall.
FOMC rate hikes should push AUDUSD lower

This time last year the Shanghai Composite index was trading in a 2,000-2,200 range. It was from this level that one of the modern day great bull markets, and then bubble was launched. By the beginning of 2015 stock prices were trading at 3,400 for a gain of more than 50%. By June 11 the composite index peaked at 5,176 close to 3,000 points or around 136% higher than where it was less than 12 months ago.
But, a month later stocks had crashed, Chinese authorities intervened, a huge number of stocks were suspended, authorities effectively banned any substantial stock holders from selling, cancelled IPOs and threatened to prosecute ‘malicious’ sellers. It was certainly unorthodox by Western market standards, but, so far, it’s worked.
But while authorities might have rescued the stock market from itself that doesn’t mean the Chinese economy, and by extension Australia, is out of the woods. That’s the view of Patrick Chovanec, chief strategist at Silvercrest Asset Management, and Adjunct Professor at Columbia University’s School of International and Public Affairs who told the ABC’s ‘PM’ program that:
“China’s stock market bubble and the crash is really more of a symptom than the cause of China’s economic troubles. It does complicate matters a little bit but China’s economy has already, for much more deep-seated reasons, been running into some serious headwinds and growth has slowed significantly.
We saw it reflected in the price of iron ore, the price of oil, the price of copper – all these things that China was importing to drive investment has seriously tapered off, but the stock market was ignoring that and blissfully ignoring it until reality caught up.”
Chovanec wonders if “Australia can kind of shift gears and benefit from the shift that China is going to make in the coming years towards a more consumer driven economy.” The answer of course is yes. And that makes the recent signing of the Chinese Australia Free trade Agreement (ChAFTA) super important. With its focus on the total Chinese Australia economic relationship and with the Australian service sector getting greater access to do business in China, Australia might be able to make this very important Chinese trade transition.

Tying it all together: Australia’s economic transition is occurring with a lower Aussie dollar, and consumer spending doing their job. Employment remains strong and business confidence and conditions have improved. The Australian economy is stronger than many credit.

Prepared by Greg McKenna on behalf of Maxim Accounting - June 2015

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