Sunday, May 10, 2009

Australian & New Zealand Weekly : RBA's Revised Forecasts Make a Strong Case for Rate Cuts, But Not Yet

Week beginning 11 May 2009

  • RBA's revised forecasts make strong case for rate cuts, but not yet.
  • Budget '09: Pre-emptive stimulus and recession = huge deficit.
  • NZ: jobs and other data building a case for RBNZ pause in June.
  • US trade, retail, inflation and industrial production data previewed.
  • Key economic & financial forecasts

The Reserve Bank formally lowered its 2009 growth forecast in the May 2009 Statement on Monetary Policy from ½% in its February Statement, to -1% in today's Statement. For 2010, it also lowered the forecast from 2½% to 2%.

Our estimates of the implied quarterly growth profile which the Bank is now adopting have: March quarter -0.5%; June quarter -0.35%; September quarter -0.4%; December quarter +0.2%. Growth in the first half of 2010 is estimated at 0.6%.

In the previous forecasts, growth was implied to be estimated at 0.1% per quarter in the March quarter to September quarters; 0.2% in the December quarter; and 0.9% over the first half of 2010.

So, the Bank would now be expecting both the June and September quarters to be negative compared to negligible growth in their February forecasts. For us, the question is, given that there is still some available flexibility on monetary policy, do they expect to weather three consecutive negative quarters without taking some further insurance. Certainly if the strength of the recovery was considered to be excessive in the first half of 2010, then the Bank would be reluctant to cut rates, even if it was experiencing negative growth through the remainder of 2009. However, the strength of the recovery which the Bank is implying in its forecasts is very tepid, and would definitely not preclude rate cuts if there is further slippage in the June and September quarters.

Our assessment of that profile is that the Bank would certainly see a decent case for further cutting rates if this string of negative quarters does occur through 2009. With such a modest pace of 'recovery' the risk of overstimulus seems slight. It appears to us that the Bank's forecasts are entirely consistent with further rate cuts, and any assessment by the Bank that the risks to this profile have moved to the downside would see a fairly quick response.

However, the tone of this Statement indicates that at least for the next couple of months the Bank is likely to remain on hold to assess whether the current fairly gloomy growth profile might in fact turn out to be a bit better. Our view of the growth outlook is similar to the Bank's assessment, so we expect that when the data confirms this continuing contraction, particularly in the labour markets and business investment, there will be scope for the Bank to continue to cut.

Despite this substantial revision to the growth forecast, the tone of the Statement was reasonably positive. Certainly the risks associated with the global economy continue to be highlighted, but the key observation appears to be: "there are reasonable grounds to expect that a recovery [in the Australian economy] will begin by the end of the year, provided global conditions continue to stabilise. The recovery, however, is likely to be gradual at first, largely reflecting developments abroad, where growth is forecast to be below trend for some time."

In discussing the risks to this outlook, the Bank highlighted two major risks to the downside. These are firstly, bad news emerging about the European and US financial systems, which would cause a further increase in risk aversion. The Bank noted that scope for policy makers to continue to address further weakness would be constrained by large fiscal deficits and zero interest rates. The second risk was if the recent signs of recovery in China were not durable.

On the upside, there was some possibility that firms would respond more positively to recent signs of stabilisation by upscaling investment plans - unlikely in our view.

The tone of the Statement was tentatively positive - "signs that activity in housing will pick up in the second half"; "recent indicators of business confidence suggest some improvement"; "consumer confidence remains substantially higher in Australia than in many other countries" - although the Bank does note that "household wealth has seen a major decline" and "households have become more concerned about the prospect of unemployment".

The substantial weakness which we have seen in the forward indicators of jobs growth is played down somewhat, with "a further decline in employment over the months ahead" - that could easily have been worded much more strongly given the excessive weakness in these indicators. We would note that the labour market charts in the Statement include yesterday's April upside surprise in employment.

So from our perspective, we were encouraged by the profile of the revised forecasts, however, we were somewhat discouraged by the moderately confident tone of the words. The one set of words however that gave us encouragement that, contrary to market pricing, the Bank will be cutting rates further was the final paragraph, which clearly stated "In assessing whether further reductions are appropriate over the period ahead, the Board will continue to monitor the implications of both economic and financial developments for prospects of a sustainable recovery in the Australian economy." That contrasted with the last Statement which did not specifically refer to "further reductions" and in our view indicates that the issue of cutting rates will dominate the agenda of every Board meeting for some time.

Budget 2009: Pre-emptive Stimulus and Recession to Result in Huge Deficit

The Australian Federal budget was persistently well in surplus during the recent years of healthy economic growth and rising incomes. Moreover, the government was in a net asset position.

That stellar budget position provided the Federal Government with considerable scope to respond to the current economic recession and the associated fall in the terms of trade which is now hitting incomes.

That policy flexibility has been utilised - arguably to its full extent. The budget is now in deficit and significantly so.

Treasurer Swan delivers his second budget on Tuesday, 12th May. The centre piece of the budget will be phase 3 of the fiscal stimulus - major infrastructure projects.

The May 2009 Budget will also include other new spending measures, including: welfare (a lift in pensions), education and training, and defence. The personal income tax cuts promised in the 2007 election are already factored into the budget numbers.

Beyond the May 2009 Budget the scope for further fiscal stimulus measures appears to be limited.

A surplus of $19.7bn was expected for 2009/10 back in the May 2008 Budget. However, a deficit of $55bn (4.7% of GDP) now looks likely. That reflects a $49bn deterioration because of the weaker economic environment, $21bn in new policies announced since the last budget and an expected net $5bn in measures to be unveiled on Budget night.

We expect the deficit to widen to $67bn, 5½% of GDP, in 2010/11, as the economy expands at a sub-par pace. That assumes that any new initiatives in the 2010 Budget would be funded by offsetting savings. With a federal election timed for later in 2010 the traditional stimulatory ”election budget” is unlikely to be an option for the Federal government.

The Budget papers will set out the Government's intention to return the budget to surplus in the out years .While it will not be credible for the government to argue that growth will be above trend in either 2009/10 or 2010/11 it is reasonable to assume above trend growth for at least a few years thereafter will occur as there will be ample excess capacity to accommodate the expected cyclical recovery in demand. The government is likely to assume up to five years of above trend growth which will eventually see the budget back in surplus as long as government spending is forecast to grow at a significantly slower pace than the overall economy. The Government has indicated that they expect the budget to be back in surplus in 2015/16.

Government net debt is set to rise significantly. Net debt could peak at around $200bn in 2015 (13% of GDP). That is a turnaround from a net asset position of $42.9bn. Gross bond issuance will rise sharply, with the prospect of around $61bn of issuance in 2009/10 and the total bond supply likely to reach around $200bn by June 2011.

Australia: Data Wrap

Apr TD-MI inflation gauge

  • The TD-Melbourne Institute inflation gauge was steady in April (+0.03% to two decimals) following a 0.1% fall previously. Sources of higher prices cited included health (annual increase in private health insurance premiums), holiday travel and accommodation, and house purchase costs. These were offset by price falls for fruit and vegetables, transportation and rents. Annual growth in the gauge fell to 2.1%yr from 2.6%yr previously, the lowest since May 2005.
  • The report noted that apparently dwelling rents fell by 2%mth, to be down around 3% over the past two months. Whilst we agree that rental growth is easing, we highly doubt that the pool of all rents is falling outright. We estimate that even if new lease agreements are being renegotiated at lower rents, this would only affect around 5% of the total pool of all rents. We have long been concerned about the inflation gauge's methodology in this area and suspect it is placing too much emphasis on rental agreements settled in the month.
  • As it stands, with the flat April inflation gauge, 3mth growth fell to 0.61% from 1.33% previously, the lowest since January, although it is higher than the -0.07% 3mth pace seen three months prior in January. As an early Q2 signal for headline inflation, this suggests a higher headline inflation quarterly pace in Q2 than the low 0.1%qtr seen in Q1. However, we must caution that the gauge's predictive ability for headline inflation was well wide of the mark in Q1. The near steady monthly gauge over the last two month does however reinforce our view that the relatively 'high' underlying inflation pace in Q1 was related to largely one-off New Year price pressures in January and February, as retailers attempted to recoup some of Q4's strong import price pressures at a time when households received significant fiscal hand outs.

Apr ANZ job ads

  • Newspaper job ads rose 3.1% in April after a 6.6% fall previously, their first rise since September 2008. However, internet job ads fell 8.1% dragging total job ads down 7.5%, their 12th consecutive fall. With job ads a flow variable but employment a stock, it makes more sense to look at trends in the level of total job ads as a predictor of future jobs growth. Total job ads as deviation from trend - a reasonable 7-month lead for annual jobs growth - is now at its weakest since December 1991 and approaching the 1990-91 recession lows. It indicates annual jobs growth deteriorating to -1.5%yr by end 2009.

Q1 house price index

  • House prices declined 2.2% in the first quarter of 2009 according to the official ABS measure, a much weaker result than had been suggested by private sector measures. Prices have now fallen 6.7% from their peak in 2008Q1. All major capital cities recorded declines in Q1, but there were particularly large falls for Perth (-3.6%qtr, -10.1%yr), Sydney (-2.9%qtr, -7.3%yr) and Melbourne (-2.3%qtr, -6.7%yr).
  • The Perth fall was foreshadowed by private sector measures, but the results for Sydney and Melbourne were much weaker; published private estimates for Q1 had ranged from basically flat to 2%+ rises for Q1. We suspect the ABS measure may be picking up more of the price weakness evident in the upper-end of the Sydney and Melbourne housing markets. The ABS house price data is labelled "preliminary" and thus subject to revision.

Mar dwelling approvals

  • Dwelling approvals rose another 3.5% in March after an 8% jump in Feb. The gain was above market expectations of a 2.3% rise. The mix was again disappointing though with the recovery in private house approvals (+2.7%mth) still muted. Apartments rose 2.7% after a sharp 29.3%mth 'pop' in Feb. A 36%mth jump in public approvals also lifted the March result.
  • The rise was broadly based with all states except WA (-1.9%mth) recording gains in private house approvals (NSW: +4.2%; Vic: +1.2%; Qld: +4.7%).
  • Trend declines in the value of renovation and non-res approvals have moderated, albeit from extreme 'free-fall' rates in late 2008. Both are still trending lower.
  • The March result provides further confirmation of the upturn in dwelling construction activity signalled by earlier rises in housing finance approvals. However, the sluggish recovery to date, particularly in the private sector houses component, and the weakness of renovation approvals suggest activity will remain weak well into 2009H2.

RBA policy announcement

  • The Reserve Bank Board decided to leave rates on hold at 3.00% at its May meeting.
  • It's assessment of the economic health of the global economy improved somewhat: whereas in April, the Statement refered to "tentative signs of stabilisation in several countries", this time the Governor referred to "further signs of stabilisation in several countries". In particular, the Governor has strengthened his assessment of the Chinese economy, noting that it has "picked up speed". However, the view on global financial markets was not strengthened, and the view on credit seems to have deteriorated somewhat with specific concerns about declining business credit.
  • A new message was introduced In the final paragraph: "The Board will monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery in economic activity". One could interpret that as questioning whether policy is working, particularly given the earlier observations on business credit and the muted response (10bp by three banks, and zero by one for prime variable mortgages) to the 25bp cut in April. However, we prefer to accept that a central bank would never assess policy as being ineffective, with the channels of lowering the bank bill rate, and therefore the funding costs of some businesses and banks being a channel that is still working smoothly.
  • Consequently, we are comfortable to maintain our view that there will be further rate cuts over the course of 2009, although we expect that the Bank will choose to extend the pause to June before moving more aggressively later in the year. We expect that a more aggressive move will more than proportionally increase the impact of monetary policy on economic activity.

Q1 real retail sales

  • Monthly retail sales rebounded strongly in March rising 2.2% after a 2% fall in Feb. The bounce was well above market expectations of a 0.5% gain.
  • Real retail sales rose 1% for Q1 as a whole after a downwardly revised 0.6% gain in Q4 (market was picking +0.8%qtr). Nominal sales growth was very strong at 2.5%qtr vs 1.6% in Q4. However, much of this reflected higher prices with the retail trade deflator surging 1.5% - the biggest quarterly rise since 1990 (excluding the GST introduction period).
  • All store categories recorded higher sales in March, led by strong bounces in department stores (+13.2%mth after a 9.8% slump in Feb) and clothing (+6.4%mth). It was a more mixed result for sales volumes over the quarter as a whole, with strong rises for clothing (+3.7%qtr) and cafes & restaurants (+3%qtr, after basically two years of flat or falling sales), solid gains for food (+1.3%qtr), 'other' retail (+1.2%qtr) and dept stores (+0.7%qtr), but a notable weakening in household goods (-2.1%qtr).
  • The stronger than expected retail result adds about 0.2ppts to our view on Q1 consumer spending with a rise of about 0.6%qtr now estimated. However, we suspect the bulk of this is a timing effect with more of the fiscal boost to spending falling into Q1 than we had originally assessed. As such, there is likely to be a bigger 'payback' as the policy boost wanes later in the year.

Mar international trade balance

  • The trade surplus was higher than expected in March at $2498mn, a $746mn improvement from a revised $1752mn previously (was $2109mn). The consensus forecast was a surplus of $1850mn.
  • Exports were more resilient than expected, led by further strength in rural volumes and a rebound in iron ore volumes, adding weight to evidence of rebounding Chinese demand. Nevertheless, exports remain in a downtrend, with particularly weak non-rural trends despite the March resilience. Total exports rose 0.1%, but trend growth was -1.5%mth, the 5th straight fall.
  • Imports saw their 4th consecutive decline, down 3.2%. Consumption good imports rose 14.7% but have been volatile of late and remained in a downtrend (-1.5%mth). Capital goods fell 11.8% led by aircraft, with trend growth -1.8%mth.
  • Despite the export resilience in March, we calculate that Q1 export volumes fell 3.9%qtr. But with goods import volumes plunging 8.7%qtr, we estimate total import volumes fell 7.5%qtr. This gives a net exports GDP contribution of +1.0ppts for Q1 (vs +1.5ppts in Q4).

Apr labour market

  • Employment surprised massively on the upside in April with a rise of 27.3k jobs (consensus -25k, Westpac forecast -18k, top of the range -10k) after a fall of 37.2k previously. Full-time jobs bounced 49.1k after a 39.4k fall in March, and a 50.3k fall in Feb.
  • However, it must be remembered that this is very noisy data, based on a sample of only 0.24% of the population. The 95% confidence interval for the April monthly movement was -33.3k to +87.9k, i.e. the seasonally adjusted 'real world' change in employment in April could have been as weak as -33.3k (or conversely as strong as +87.9k). This is why we often emphasise a need to focus on the trends in this data which smooth out the noisy volatility.
  • In the April data, these trends continued to deteriorate despite the seasonally adjusted strength. Total trend employment fell 4.3k after a revised 3.6k fall previously, its 5th month of decline, and trend annual jobs growth fell to +0.26%yr from +0.43%yr previously, the weakest since June 1993.
  • The participation rate fell to 65.4% from 65.5%, amplifying the impact of the jobs gain on the unemployment rate, which fell to 5.4% from 5.7% previously. But again, looking through the volatility, the trend unemployment rate still continued to rise, to 5.5% from 5.4% previously and up from 4.1% a year ago.
  • The April labour market data is strongly at odds with the consistently bearish signals coming from all the lead indicators of jobs growth: job ads, business surveys, and lagged demand growth. These all remain consistent with our view of a deterioration in annual jobs growth and the unemployment rate rising above 7.5%. Nevertheless, the relatively mild (vs US economy) deterioration in the labour market official data to date supports our view that the RBA is likely to leave rates on hold until 2009H2.

Round-up of local data released last week

Date Release Previous Latest Mkt f/c
Mon 4 Apr TD-MI inflation gauge -0.1% flat -
Apr ANZ job ads -8.5% -7.5% -
Q1 house price index -0.8% -2.2% flat
Tue 5 Mar dwelling approvals 7.8% 3.5% 2.3%
RBA policy announcement 3.0% 3.0% 3.0%
Wed 6 Mar retail sales (seas adj) -2.0% 2.2% 0.5%
Q1 real retail sales 0.6% 1.0% 0.8%
Mar international trade balance, AUDbn 1.8 2.5 1.85
Thu 7 Apr employment chg -37.2k 27.3k -25k
Apr unemployment rate 5.7% 5.4% 5.9%
Fri 8 RBA Statement on Monetary Policy - - -

New Zealand: Week ahead & Data Wrap


This week has seen swap rates climb above their pre OCR announcement levels, while the NZD has soared more than 3 cents. Some of this is attributable to the swathe of NZ labour market data released last week, which, on the whole, was not as weak as it might have been. However, the main factor has been an ongoing gravitation towards risk in international sentiment. We believe the surge of optimism is due to run out of puff soon, but picking the timing is fraught.

The Quarterly Employment Survey (Monday) showed that private sector average hourly earnings rose 1.1% in Q1, a little above our forecast (0.7%). QES hours paid give a hint about the state of economic activity in the first quarter. The 0.4% fall followed on from a 1.4% drop in Q4, and is consistent with our current Q1 GDP pick of -1.0% (but given the volatility of this series, a wide range of outcomes would be!).

The Q1 Labour Cost Index data (Wednesday) were bang on our, market, and RBNZ expectations and confirmed what we already knew - the weaker labour market is feeding through into slower wage growth. The 0.6% quarterly increase in private sector all salary and wage rates, the RBNZ's preferred measure, follows increases of 0.7%, 0.8%, 1.1% and 0.7% in the past year. We expect annual wage growth to slow from the current 3.1% pace to 2.2% by the end of the year, and to reach a low of 1.8% mid-2010.

The Q1 Household Labour Force Survey on Thursday was the most important data of the week. It came in better than we or the market expected, with an unemployment rate of 5.0% (up from 4.7% in Q4). The data suggested an orderly unwind is underway in the labour market, with our fears of a more severe correction allayed for the time being.

Employment fell 1.1% over the quarter, representing a loss of 24,000 jobs. This is an ugly number but it was not unexpected given the odd 0.6% rise in Q4. What is more striking is that there are currently more people in employment than prior to the recession (up 0.6% or 12,000), a remarkable achievement.

Relative to our expectations, the key source of surprise was the labour force participation rate. In recent quarters we have seen extreme volatility around this number, and this quarter was no exception. Participation fully unwound the increase from the December quarter and then some, dropping from 69.2% to 68.4%. That helped to contain the rise in the unemployment rate to 5.0%.

By region, Auckland continues to bear the brunt of the employment downturn with significant job losses over the past year. By age group, nearly all the decline has been in the group 15-24 years - those with least experience. It is also notable that participation has in fact increased amongst the over 55’s in the past year. This perhaps reflects that this is the demographic group most exposed to the wealth hit from the decline in equities and house prices.

Although the labour market has been remarkably resilient to date, we expect layoffs in depressed industries to intensify over the remainder of 2009 (particularly in construction, retail, manufacturing, and agriculture), while vacancies in labour-shortage industries (e.g., health and education) dry up. That view is consistent with a wide range of indicators suggesting employment will turn down in earnest over the course of this year. We expect employment to decline by around 3.5% in 2009 (a loss of 80,000 jobs including 2009Q1). Assuming further modest falls in participation that will see the unemployment rate reach just over 7% by the end of the year.

The RBNZ's forecast was for a rise in the unemployment rate to 5.2%, so these data were on the stronger side of their expectations. However, the wage data released earlier will have allayed any fears of wage inflation. As such, we don’t believe the RBNZ will view the labour market as a barrier to keeping the OCR low for a long period. That said, the better than expected result, together with other recent data showing signs of improvement, are beginning to build a strong case for the RBNZ to pause in June.

Next week brings mostly second-tier data. Electronic card transactions (Monday), the first indicator of April retail sales, are expected to be flat. April food prices are released on Tuesday; we expect annual food price inflation to ease off in 2009. Finally, on Friday, retail sales are released for both the March quarter (real) and the March month (nominal). We expect real sales fell 1.3% in Q1, dragged down by a sharp drop in car sales (ex-auto sales are expected to show a modest rise of 0.5%). Looking at the March month, credit card data point to a sharp fall in nominal sales, while the broader electronic transaction (includes eftpos cards) data suggest a modest rise. We forecast a 0.5% increase.

We are also likely to receive REINZ data for house sales and prices in April. House sales surged in March as historically low mortgage rates enticed buyers back into the market - anecdotally, investor demand in particular has been strong. Sales are likely to have risen further in April, with prices holding steady. We expect a modest 5% fall in house prices over this year. Low borrowing rates and rising net migration are helping to underpin demand, but mounting job losses are likely to weigh on the market in coming months.

Round-up of local data released last week

Date Release Previous Latest
Mon 4 May Q1 QES private sector ord time 0.8% 1.1%
Tue 5 May Apr ANZ commodity price 1.0% 2.5%
Wed 6 May Q1 labour cost index private ord time 0.7% 0.5%
Thu 7 May Q1 HLFS employment 0.6% -1.1%
Q1 HLFS unemployment 4.7% 5.0%

Data Previews

Aus Mar housing finance

May 12, Last: 0.4%, WBC f/c: 5.5%

Mkt f/c: 4.5%, Range: 1.0% to 7.0%

  • Housing finance has rebounded sharply in response to very low interest rates and the boost to the First Home Buyer scheme. We're forecasting a strong 5.5% rise in March.
  • The RBA acted aggressively at its first meeting this year, cutting rates by 1.0% on February 4. That saw standard bank variable mortgage rates tumble 1.0% to just 5.85% - the lowest since 1968!
  • The strength is now in upgraders. Lending to this segment rose by 3.4% in February and by 10% so far this year.
  • By contrast, momentum appears to be slowing in the First Home Buyer segment after a sharp burst, with an increase of only 2.0% in February. The rise in the first home buyer segment has been 66% over the last six months.

Aus Federal Budget 2009

May 12, WBC f/c 2009/10: -50bn

Mkt f/c: -58.5bn, Range: -80bn to -50bn

  • The budget recorded a $19.7bn surplus (1.7% of GDP) in 2007/08 and there was $42.9bn (3.8% of GDP) in net assets. That stellar starting point enabled the Government to respond aggressively to the unfolding economic recession.
  • We expect the budget deficit to be $30bn (2.5% of GDP) in 2008/09, widening to $55bn (4.7% of GDP) in 2009/10. Last May the 2009/10 budget position was expected to be a surplus of $19.7bn. This $75bn deterioration reflects the combined impact of discretionary policy and a slump in revenue because of the weaker economic backdrop.
  • The Government is likely to forecast real GDP to contract by 0.75% in 2009/10 (downgraded from 3.0% last May) and for nominal GDP to contract by 2.5% (downgraded from 4.25%). Unemployment is set to rise to 8.2% by June 2010. For more detail see our budget preview piece of last Thursday.

NZ Apr REINZ house prices %yr

May 11-15, Last: -4.0%

  • House sales surged in March as historically low mortgage rates enticed buyers back into the market - anecdotally, investor demand in particular has been strong. Prices have been fairly steady in recent months, and in March were down just 4% on a year ago.
  • Data from a major real estate agency in the Auckland region suggest that the housing market not only withstood the sharp rise in mortgage rates through March, but gained further momentum in April. Sales rose 33% in seasonally adjusted terms, though prices remained broadly unchanged.
  • We expect a modest 5% fall in house prices over this year. Low borrowing rates and rising net migration are helping to underpin demand, but mounting job losses are likely to weigh on the market in coming months.

NZ Q1 real retail sales

May 15, Last: -0.6%, WBC f/c: -1.3%

  • Total retail sales in the month of March are expected to show a lift of 0.5%. Motor vehicle sales have been extremely weak over the past year, but a moderate bounce is expected in the month following a lift in car registrations.
  • Credit card data points to a sharp fall in retail sales over the month, while the broader electronic transaction (includes eftpos cards) data suggest a modest rise.
  • Over the quarter, we estimate the volume of car sales fell around 10%. This is expected to drag total sales down by 1.3%. Less spending on cars and lower petrol prices leaves more money to spend elsewhere. We expect core sales volumes to show a modest rise of 0.5% over the quarter.

US Mar trade deficit to widen again

May 12 , Last: -$26bn, WBC f/c: -$28bn

  • The trade deficit has more than halved from around $60bn per month in mid 2008 to $26bn in Feb, as Americans have pared back import consumption, and the oil price has fallen by twothirds. These factors have more than offset falling exports.
  • In March, we expect to see the first widening in the deficit since July last year. Feb's 1.6% export gain looks to have been a one-off although ports, survey and shipments data hint that the export downtrend is slowing. A decent month for Boeing export deliveries should help limit the scale of export retracement.
  • But available evidence also points to the imports unwind mitigating somewhat. And in March, import prices rose while export prices were weaker. These factors point to a steeper fall in exports than in imports, sufficient to widen the deficit back to $28bn.

US Apr retail to post another auto-driven decline

May 13, Last: -1.2%, WBC f/c: -0.2%

  • Retail sales collapsed in Q3 and Q4 last year, reflecting plunging auto sales, weak core spending and - more favourably - falling gasoline prices. But earlier this year, sales seemed to find a base, at least until March when a surprise fall in auto sales, renewed decline in gasoline prices and subdued retailing elsewhere pulled the total down by 1.1%
  • The auto industry reported a 6% fall in April sales, but because the 9% jump they reported for March translated into a 2% fall in the retail report, we don't expect autos to be that big a drag in April. Weekly retail reports suggest there were some pockets of activity during the month. Department of Energy data suggest gasoline prices edged just marginally higher.
  • Tying these factors together, we expect a small fall in total retail sales, but modest gains ex autos and ex autos & gas.

US Apr inflation indicators

May 14, PPI headline Last: -1.2%, WBC f/c: 0.4%

May 15, CPI headline Last: -0.1%, WBC f/c: 0.1%

  • Tumbling energy prices were the main driver of sharply lower inflation across a range of measures since the middle of 2008.
  • The headline PPI peaked at 9.9%yr in July 2008 but turned negative in Dec and was down -3.5%yr in March. The monthly PPI fell from Aug to Dec last year, bounced slightly, then resumed its decline in March. In April, a slight upswing in energy prices is likely to prevent a further fall in the PPI, and the core rate, flat in Mar, should also see some renewed but modest upside. Our 0.4% PPI rise would see the annual rate edge up to -3.3%yr.
  • The annual CPI finally turned negative in March, reaching -0.4%yr thanks to falling energy prices more than offsetting the persistent 0.2% core gain and pulling the monthly CPI down 0.1%. Slightly higher gasoline prices and milder 0.1% core pressures will lift the CPI 0.1% in Apr, for a -0.5%yr ann rate.

US Apr industrial production to drop again

May 15, Last: -1.5%, WBC f/c: -0.8%

  • Industrial production posted declines of between 1.2% and 2.2% between November and March, which along with steep falls earlier in 2008 delivered the sharpest slide in factory output in over 30 years.
  • Indications ahead of the April result, however, suggest that the pace of industrial contraction may be moderating. All of the regional factory surveys and the national factory ISM showed stronger production readings last month, and the downtrend in factory orders appears to be abating.
  • Unfortunately this month we don't yet have the benefit of the April payrolls report which includes details of factory jobs and hours worked, but based on what we do know, we expect the pace of IP contraction to roughly halve to -0.8%.

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