Business & Finance

Market Update, Week Starting June 4th

Source: Commonwealth Securities - June 3rd, 2001

DOMESTIC MARKETS

The coming week may finally see Australia shaking the monkey off its back. Ever since data showed the economy went backwards in the December quarter, speculation has centred on recession. The accepted definition of recession is two consecutive quarters of economic contraction. Economists from Commonwealth Securities believe that the monkey will be shaken loose with the economy growing again in the March quarter.

The March quarter figures on economic growth or GDP are due Wednesday. Comsec economists estimate that the economy posted modest growth of 0.3%, underpinned by firmer household consumption and net exports. Looking at income components, employment, wages and profits posted gains in the March quarter and further pointed to a growing economy.

The GDP data shares centre stage in the coming week with current account data (Monday), Reserve Bank Board meeting (Tuesday) and employment (Thursday). Also of importance is data on inventories and job ads also due on Monday and housing finance on Thursday.

Courtesy of a trade surplus, the current account deficit is expected to have fallen to a 3½ year low of $4.6 billion in the March quarter. Accompanying the current account data are figures on net foreign debt for end March ($308 billion expected) and the contribution of net exports to GDP in the March quarter (+0.2 percentage points expected).

The Reserve Bank Board is not expected to change monetary settings when it meets on Tuesday. Monetary policy is already stimulatory and aided by a low Australian dollar, government spending, firm sharemarket and upcoming tax cuts. A rate cut is still possible in coming months but the Reserve Bank has the luxury at present to sit on the sidelines.

If interest rates are to fall further, employment will play a crucial role. We expect employment fell by 10,000 in May, but with less people looking for work, the unemployment rate could edge back from 6.8% to 6.7%. A modest fall in jobs is consistent with the absence of large announced lay-offs by major businesses.

Data for release on Thursday is expected to confirm that recovery in the housing industry is firmly underway. Expectations suggest that housing finance commitments rose 7% in April after a 10.2% gain in March.

INTERNATIONAL MARKETS

In the week ahead there is no key US market-moving data slated for release. However the scheduled data releases are likely to add to the case for another US rate cut. The data releases are the purchasing managers' index for non-manufacturing (Monday), factory orders and revised productivity numbers (both Tuesday).

The purchasing managers' index for non-manufacturing is expected to remain below the 50 mark in May, indicating continued contraction. This index typically produces little market reaction, unlike its counterpart for manufacturing.

Factory orders and productivity numbers are released on Tuesday and both releases are unlikely to give much new information on the US economy. Factory orders are expected to post a fall of 2.8% in April, influenced by the slowdown in business spending. Also, the sharp 5% fall in durable good orders in April suggests that factory orders were weak in the month.

In terms of US productivity, revised numbers for the first quarter will be released on Tuesday. The preliminary estimate reported a fall of 0.1% in productivity in the first quarter, the first fall since 1995. The preliminary GDP report released in late May indicates that productivity will be revised lower. A revision to a 0.4% fall in the March quarter is expected. The fall in productivity pushes inflationary pressures upwards. While slower economic activity is putting downward pressure on inflation, energy prices are high and the labour market is still relatively tight.

Elsewhere, the Bank of England (BoE) and the European Central Bank (ECB) have meetings in the week ahead. The BoE meets Tuesday and Wednesday but no change in rate settings is expected. The ECB meets Thursday and will find that they are stuck between a rock and a hard place. Growth in the European Monetary Union (EMU) is clearly slowing but inflationary pressures are also rising (on the back of higher food and energy prices and a weakening euro).

Other international events and releases of note include the UK election (Thursday), New Zealand retail trade (Thursday), Germany factory orders and employment (Thursday) and EMU GDP (Friday).