Business & Finance

Market Update, Week Starting June 11th

Source: Commonwealth Securities - June 10th, 2001

DOMESTIC MARKETS

When long-term pessimists start changing their colours, warning bells should start ringing. The Australian economy has not turned from ugly duckling to swan overnight as numerous black feathers still remain. The cancer affecting technology companies together with high profile corporate failures threaten a new round of negative momentum. Further, the US economy is likely to remain sluggish for the remainder of 2001. Certainly, prospects for the Australian economy are brighter, but we should not downplay the risks.

The coming week is largely bereft of market-moving data or events. Financial markets will turn to the packed US data release schedule for direction. Domestically, consumer sentiment figures are due Wednesday with inflationary expectations on Thursday.

Consumer sentiment is likely to have made a strong improvement in June on the back of a rebound in economic growth, stable currency and reduced recession talk. In May, the ComSec Gloom Gauge recorded only 327 mentions of 'recession' in Australian newspapers, well down from the peak of 859 mentions in March. ComSec analysts expect the index of consumer sentiment to have risen to around the 100 mark in June from 94.4 recorded in May.

The inflationary expectations data now has less clout, but the Reserve Bank continues to monitor the series closely. An easing of expected inflation below 4.5% would give the Reserve Bank confidence to take cash rates to a lower floor rate than in past interest rate cycles. The index of inflationary expectations stood at 4.6% in May.

INTERNATIONAL MARKETS

A packed week of economic data is scheduled in the US arena. Collectively the US economic data in the week ahead will help provide greater direction on the US economy. Thus, helping determine the next move in US interest rates. The US Federal Reserve next meets on 26 and 27 June and there is expected to be a quarter percent rate cut is on the cards. But the week first kicks off with the focus on Japan. Japanese GDP data for the first quarter is released Monday. Expectations are that the economy slowed in the first quarter, posting 0.4% growth after recording 0.7% growth in fourth quarter 2000. But the risk is for a lower GDP outcome, with the economy continuing to be lacklustre.

Mid-week, the focus moves to the US with retail sales and the Beige Book released Wednesday.

Market analysts from ComSec have stated their expectation that retail sales rose for a second consecutive month in May. Aggressive rate cuts, strong gains on the sharemarkets during May, higher confidence levels and higher worker earnings are likely to have encouraged greater spending by consumers. However, falling employment and continued uncertainty over the economic recovery would have restrained the extent of gains in retail trade. Headline retail sales are predicted to have risen 0.3% and retail sales, excluding autos, rose 0.4% in May.

The Beige Book provides an economic summary of the Federal Reserve districts. The report is important in gauging a number of economic conditions across the country. Key aspects of the report that the market will be focussing on include the state of manufacturing, employment and inflation risks. The report is likely to paint a picture of an economy that remains sluggish, but is recovering.

On Thursday and Friday the US has slated inflation indicators for release. On Thursday the producer prices index is released, which is an indicator of inflation in the production pipeline. With energy prices recording a firm gain in May, producer prices are expected to have risen 0.4% in May. Core producer prices, which excludes energy prices, likely rose by a tame 0.2%. Gains in energy prices also would have influenced consumer price inflation in May. Analysts expect headline consumer prices rose 0.4% and consumer prices, excluding food and energy, rose 0.2%. Together these inflation reports are unlikely to deter the Federal Reserve from cutting interest rates further. The Federal Reserve rhetoric in recent times has tried to drive home to markets that inflation is not a concern.

US industrial production is also out Friday. ComSec expects industrial production contracted 0.3% in May. Manufacturing is one of the weakest links in the US economy and all indications are that this sector remains frail.

In NZ, the economic calendar lists for release trade (Monday), overseas trade indices (Tuesday), job advertisements (Wednesday), manufacturing sales (Thursday) and food prices (Thursday).